<PAGE>
Dated: May 28, 1998
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
Interactive Magic, Inc.
(Exact name of small business issuer as specified in its charter)
<TABLE>
<CAPTION>
North Carolina 7372 52-1884776
<S> <C> <C>
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
215 Southport Drive, Suite 1000
Morrisville, North Carolina 27560
(919) 461-0722
(Address and telephone number of principal executive offices)
215 Southport Drive, Suite 1000
Morrisville, North Carolina 27560
(919) 461-0722
(Address of principal place of business or intended principal place of
business)
J. W. STEALEY
Chairman and Chief Executive Officer
Interactive Magic, Inc.
215 Southport Drive, Suite 1000
Morrisville, North Carolina 27560
(919) 461-0722
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------
Copies to:
<TABLE>
<S> <C>
GERALD F. ROACH, ESQ. ROBERT J. MITTMAN, ESQ.
BYRON B. KIRKLAND, ESQ. TENZER GREENBLATT LLP
SMITH, ANDERSON, BLOUNT, 405 Lexington Avenue
DORSETT, MITCHELL & JERNIGAN, L.L.P. New York, New York 10174
2500 First Union Capitol Center Telephone: (212) 885-5000
Raleigh, North Carolina 27601 Facsimile: (212) 885-5001
Telephone: (919) 821-1220
Facsimile: (919) 821-6800
</TABLE>
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this registration statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Title of each class Proposed maximum Proposed maximum Amount of
of securities to be Amount to be aggregate offering aggregate offering registration
registered registered (1) price per share price fee
<S> <C> <C> <C> <C>
Common Stock,
$.10 par value..... 3,220,000 $ 10.00 $ 32,200,000.00 $ 9,499.00
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Includes 420,000 shares which the Representatives have the option to
purchase from the Company to cover over-allotments, if any.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
(A redherring appears on the left hand side of this page, rotated 90 degrees.
Text follows.)
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with
the Securities and Exchange Commission. These securities may not be sold
nor may offers to buy be accepted prior to the time the registration
statement becomes effective. This prospectus shall not constitute an offer
to sell or the solicitation of an offer to buy nor shall there be any sale
of these securities in any State in which such offer, solicitation or sale
would be unlawful prior to registration or qualification under the
securities laws of any such State.
PRELIMINARY PROSPECTUS DATED MAY 28, 1998
SUBJECT TO COMPLETION
2,800,000 Shares
(Interactive Magic logo)
Common Stock
Prior to the offering, there has been no public market for the Common
Stock of Interactive Magic, Inc. (the "Company") and there can be no assurance
that any such market will develop. It is anticipated that the Common Stock will
be quoted on the Nasdaq National Market under the symbol "IMGK." It is
currently estimated that the initial public offering price per share will be
between $8.00 and $10.00. For a discussion of the factors considered in
determining the initial public offering price, see "Underwriting."
---------------
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK
AND IMMEDIATE AND SUBSTANTIAL DILUTION. SEE "RISK FACTORS" COMMENCING ON PAGE 7
AND "DILUTION" ON PAGE 17 OF THIS PROSPECTUS FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Price Underwriting Proceeds
to Discounts and to
Public Commissions (1) Company (2)
<S> <C> <C> <C>
Per Share ......... $ $ $
Total (3) ......... $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Does not include additional compensation to be received by BlueStone
Capital Partners, L.P. ("BlueStone") and Ferris, Baker Watts,
Incorporated, as representatives of the several Underwriters (the
"Representatives"), in the form of warrants to purchase up to 280,000
shares of Common Stock (the "Representatives' Warrants"). The Company has
also agreed to indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses of the offering payable by the Company, estimated
at $900,000.
(3) The Company has granted the Representatives an option, exercisable within
45 days of the date of this Prospectus, to purchase up to 420,000
additional shares of Common Stock, on the same terms as set forth above,
solely for the purpose of covering over-allotments, if any. If the
Representatives' over-allotment option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions and Proceeds to
Company will be $ , $ and $ , respectively. See
"Underwriting."
The shares of Common Stock are being offered, subject to prior sale, when,
as and if delivered to and accepted by the Underwriters and subject to approval
of certain legal matters by counsel and to certain other conditions. The
Underwriters reserve the right to withdraw, cancel or modify the offering and
to reject any order in whole or in part. It is expected that delivery of the
certificates representing the shares of Common Stock will be made against
payment therefor at the offices of BlueStone Capital Partners, L.P., 575 Fifth
Avenue, New York, New York 10017, on or about , 1998.
BlueStone Capital Partners, L.P. Ferris, Baker Watts, Incorporated
The date of this Prospectus is , 1998.
<PAGE>
Following the Prospectus cover page is a fold-out two page color layout
depicting CD-ROM box cover art for certain of the Company's products:
iF22
iF22 Persian Gulf version 5.0
iPanzer 44
Apache
Hind
The Great Battles of Alexander
Liberation Day
Capitalism Plus
Seven Kingdoms Ancient Adversaries
Industry Giant
iF-16
The Great Battles of Hannibal
American Civil War
iMA2 Abrams
Semper Fi
Air Warrior II
The Great Battles of Caesar
On the foldover leaf, directly inside the front cover, is color artwork
illustrating two aircraft in a simulated battle over land and ocean representing
the Company's WARBIRDS product with the words "WarBirds" and "Worldwide
MEGAplayer Gaming"
Directly beneath the artwork are the following legends:
AVAILABLE INFORMATION
As of the date of this Prospectus, the Company will become subject to the
reporting requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and, in accordance therewith, will file reports, proxy
statements and other information with the Securities and Exchange Commission
(the "Commission"). The Company intends to furnish its shareholders with annual
reports containing audited financial statements and such other periodic reports
as the Company deems appropriate or as may be required by law.
----------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
WHICH STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE COMMON
STOCK, INCLUDING PLACING STABILIZING BIDS OR EFFECTING PURCHASES OF COMMON
STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and
consolidated financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Each prospective investor is urged to read this
Prospectus in its entirety. In this Prospectus, the term "Company" includes
Interactive Magic, Inc., its Maryland predecessor and its three subsidiaries.
Unless otherwise indicated, the information in this Prospectus, including per
share data and information relating to the number of shares outstanding, (i)
other than the historical financial statements, gives retroactive effect to the
conversion of the Class A and B common stock and Series A, B and C preferred
stock of the Company into Common Stock and the exercise of options for the
purchase of 363,750 shares of Common Stock (the "Recapitalization Options")
and warrants for the purchase of 516,769 shares of Common Stock (the
"Recapitalization Warrants") on or prior to the consummation of this offering
(the "Recapitalization"), (ii) gives retroactive effect to the one-for-two
reverse split of the Common Stock to be effected in June 1998 in connection
with the Company's reincorporation in North Carolina, and (iii) assumes no
exercise of the Representatives' over-allotment option to purchase up to
420,000 additional shares of Common Stock. See "Description of Securities --
Recapitalization," "Underwriting" and Note 14 of Notes to Consolidated
Financial Statements.
Interactive Magic, I-Magic, the Interactive Magic logo and Star Rangers
are registered trademarks of the Company. WarBirds, MEGAplayer, MEGAvoice,
iM1A2 Abrams, Hind, Seven Kingdoms, DEMON, Malkari and UltraFighters are
trademarks of the Company. Other trademarks appearing herein are trademarks of
their respective owners.
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors."
The Company
Interactive Magic, Inc. (the "Company") develops, publishes and distributes
interactive, real-time, 3D entertainment software, focusing on simulation and
strategy games for CD-ROM and online/Internet use. Since inception, the Company
has published 26 titles on CD-ROM which have been distributed through more than
15,000 retail outlets in over 30 countries. Additionally, the Company's initial
online product, WARBIRDS, a World War II air combat simulation game, has
generated sales of over 1.4 million hours of online game time to players in more
than 70 countries. Since its first product offering in August 1995, the Company
has been recognized each year with awards or critical acclaim from industry
associations and publications, including PC Games, PC Today, Computer Gaming
World, Power Play, PC Gamer, Computer Games Strategy Plus and the Software
Publisher's Association ("SPA"). Since such time, the Company's net revenues
have also grown to $16,502,000 and $4,913,000 for the year ended December 31,
1997 and the three months ended March 31, 1998, respectively. The Company seeks
to benefit from leveraging its development, marketing and technological synergy
across its dual distribution channels.
Most of the Company's CD-ROM products are designed so that users can play
them both as single-player and multiplayer (up to 16 players) games and include
various levels of difficulty so that both novice and experienced players can
enjoy the Company's games. APACHE, the Company's first published CD-ROM
product, is an air-combat simulation of the AH-64D Apache Longbow Helicopter
for players of all experience levels. APACHE received two Codie Award
nominations from the SPA and was named "Best Simulation of 1995" by both PC
Gamer magazine and Strategy Plus magazine. CAPITALISM, the Company's highly
acclaimed business strategy and simulation CD-ROM game, gives players resources
with which to build a global financial empire and was a runner-up to APACHE as
PC Gamer magazine's "Best Simulation of 1995." SEVEN KINGDOMS, one of the
Company's newest strategy CD-ROM games, presents players with a special
challenge of real-time action and strategy set in a medieval fantasy world of
monsters, gods and opposing cultures and was named "Strategy Game of the Year"
by Germany's PC Power Play magazine. iF-22, the Company's internally
developed flight simulation game, and iF-22 PERSIAN GULF, the Company's recently
released sequel, each incorporate the Company's DEMON advanced 3D graphics and
terrain technology. By focusing on delivering highly playable, entertaining
games with high quality graphics, the Company believes it has built strong brand
recognition and consumer loyalty among game enthusiasts. The Company intends to
build upon this loyalty by selectively creating franchise titles through the
publication of sequels and add-ons to existing games, as it has done with its
three-game Great Battles series, GREAT BATTLES OF ALEXANDER, GREAT BATTLES OF
HANNIBAL and GREAT BATTLES OF CAESAR.
3
<PAGE>
WARBIRDS, the Company's first commercial online product, was named "Online
Game of the Year" for the past two years by PC Games magazine and is recognized
as one of the world's leading real-time large-scale (hundreds of players)
multiplayer online games. Players from around the world can access WARBIRDS via
the Internet to simultaneously fly missions in a single campaign and, to date,
there have been as many as 350 such WARBIRDS players online at one time. The
incorporation of 3D rolling terrain graphics, the Company's MEGAvoice
technology, which allows groups of up to four online players to engage in
real-time voice communication, and the Company's MEGAplayer technology, which
minimizes the effect of Internet delays (latency), all add to the realism of
the WARBIRDS playing experience. The Company charges subscription fees for
online play plus additional fees for hours played beyond the subscription
allocation. Users can enter and exit the ongoing game 24 hours a day, seven
days a week, enabling the Company to receive recurring revenues. To encourage
such recurring play, the Company promotes the development of "communities" of
regular WARBIRDS flyers who participate in special promotional events such as
squadron conferences, conventions and competitions around the world. The
Company is seeking to increase revenues from its online business by developing
additional real-time large-scale multiplayer games based on other military,
futuristic/space and action-oriented simulation games. Currently, the Company
has two new online products, FIGHTER OPS and RAIDER WARS, which have undergone
beta testing on the Company's online service, and two new products,
ULTRA-FIGHTERS and MALKARI, which are intended to be playable both as CD-ROM
products and as large-scale multiplayer online products and are in the final
stages of development. All of these products are scheduled for release in 1998.
In addition, the Company is seeking to broaden its user base by negotiating
with several major providers of online services in North America, Germany, the
United Kingdom, Japan and Brazil for rights to distribute the Company's online
products. The Company anticipates that, if finalized, such arrangements would
allow subscribers of a particular online service access to play the Company's
online games at an hourly rate, in exchange for which the Company would receive
a royalty.
The Company is led by an experienced management team and key employees
with substantial expertise in the interactive entertainment software and
computer game industries as well as experience in client-server technology, 3D
graphics, large networking systems and U.S. Department of Defense weapons and
testing systems. The Company's Chairman, J.W. Stealey, founded MicroProse,
Inc., one of the early leaders in producing simulation and strategy
entertainment software, which was subsequently acquired by Spectrum Holobyte,
Inc., now known as MicroProse, Inc. See "Management" and "Business -- Product
Development."
The Company's objective is to become one of the world's leading providers
of CD-ROM and real-time large-scale multiplayer online simulation and strategy
games. Key elements of the Company's strategy are to: increase online recurring
revenue, focus on simulation and strategy games, expand brand recognition,
manage risk through internal and external product development, expand its
worldwide distribution network, leverage core proprietary technologies and
expand operations through strategic acquisitions. See "Business -- Strategy."
The Interactive Digital Software Association ("IDSA") reported that retail
sales of interactive entertainment software in North America reached $3.7
billion in 1996 and were projected to increase to $5.3 billion in 1997 and $8
billion in 2000. Worldwide entertainment software sales were estimated by IDSA
to have exceeded $10 billion in 1996, roughly divided evenly among the United
States, Europe and Asia. A 1997 Forrester Research report estimates that more
than 6.9 million consumers in the United States are currently playing games
over the Internet, generating revenues of $127 million in 1997, and projects
that 18 million consumers will generate $1.6 billion in revenues in 2001. The
Company believes that the continued availability of lower-cost high performance
multimedia personal computers ("PCs") and modems will continue to contribute to
the increase in PC ownership and thereby expand the use of the Internet and
online services for entertainment purposes.
The Company has sales professionals in North America, the United Kingdom
and Germany and expects to increase its marketing and sales staff in these
locations and expand its offices geographically where appropriate.
Additionally, the Company contracts with distribution agencies in Japan,
Singapore, South America, Korea, South Africa and Australia and its products
are sold by retailers such as CompUSA, Wal-Mart and Best Buy in North America
and Karstadt, Dixon's and PC World in Europe.
The Company was incorporated under the laws of the State of Maryland on
June 16, 1994 under the name SP Enterprises, Inc. and changed its name to
Interactive Magic, Inc. in March 1996. In June 1998, the Company reincorporated
in North Carolina. The Company's corporate headquarters are located in the
Research Triangle Park area at 215 Southport Drive, Suite 1000, Morrisville,
North Carolina 27560, and its telephone number is (919) 461-0722.
4
<PAGE>
The Offering
Common Stock offered............... 2,800,000 shares
Common Stock to be outstanding after the
offering.......................... 9,593,699 shares(1)
Use of Proceeds.................... Repayment of indebtedness, sales and
marketing, product development, equipment
purchases, expansion of international
operations, research and development, and
working capital and general corporate
purposes, including possible acquisitions.
See "Use of Proceeds."
Risk Factors....................... The securities offered hereby involve a
high degree of risk and immediate
substantial dilution. See "Risk Factors"
and "Dilution."
Proposed Nasdaq National
Market symbol..................... "IMGK"
- ------------
(1) Does not include: (i) 1,708,045 shares of Common Stock reserved for
issuance upon the exercise of stock options remaining outstanding
following the Recapitalization, and 1,300,000 shares of Common Stock
reserved for issuance upon the exercise of options available for future
grant, under the Company's stock option and purchase plans (collectively,
the "Plans"); (ii) 449,554 shares of Common Stock reserved for issuance
upon the exercise of warrants remaining outstanding following the
Recapitalization; and (iii) 280,000 shares of Common Stock reserved for
issuance upon the exercise of the Representatives' Warrants. See
"Management -- Stock Option Plans," "Description of Securities --
Warrants" and "Underwriting."
Summary Consolidated Financial Information
(Dollars in thousands, except for per share data)
Set forth below is certain summary financial information for the periods
and as of the dates indicated. This information is derived from, and should be
read in conjunction with, the consolidated financial statements of the Company,
including the notes thereto, appearing elsewhere in this Prospectus.
Consolidated Statement of Operations Data:
<TABLE>
<CAPTION>
Three Months Ended March
Year Ended December 31, 31,
----------------------------------------- -------------------------
1995 1996 1997 1997 1998
----------- ----------- ------------- --------- -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net revenues ................................. $ 4,121 $ 6,057 $ 16,502 $3,957 $ 4,913
Cost of revenues ............................. 1,669 2,393 6,349 1,415 1,877
Gross profit ................................. 2,452 3,664 10,153 2,542 3,036
Operating expenses:
Sales and marketing ......................... 2,335 5,008 6,760 1,642 1,667
Product development ......................... 1,518 3,788 3,878 859 1,103
General and administrative .................. 828 1,451 1,941 598 449
Total operating expenses ..................... 4,681 10,247 12,579 3,099 3,219
Operating loss ............................... (2,229) (6,583) (2,426) (557) (183)
Interest expense ............................. 175 606 1,675 300 307
Net loss ..................................... (2,451) (7,200) (4,298) (825) (618)
Pro forma net loss per share (1)(2) .......... $ (0.68) $ (0.10)
Number of shares used in computing
pro forma net loss per share (1)(2) ......... 6,343,080 6,484,506
</TABLE>
(footnotes on following page)
5
<PAGE>
Consolidated Balance Sheet Data:
<TABLE>
<CAPTION>
December 31, 1997 March 31, 1998 (unaudited)
------------------- ---------------------------------------------------
Pro Forma
Actual Pro Forma (2) As Adjusted (2)(3)
----------- --------------- -------------------
<S> <C> <C> <C> <C>
Working capital (deficiency) ........... $ (1,933) $ 799 $ 899 $17,765
Total assets ........................... 7,747 9,211 9,311 24,677
Long-term debt (4) ..................... 7,229 4,661 4,661 --
Total liabilities ...................... 16,646 12,970 12,651 5,481
Redeemable preferred stock ............. -- 600 -- --
Shareholders' equity (deficit) ......... (8,899) (4,359) (3,340) 19,196
</TABLE>
- ------------
(1) See Note 3 of Notes to Consolidated Financial Statements for an explanation
of the number of shares used in computing pro forma net loss per share.
(2) Gives retroactive effect to the Recapitalization, including the $10,335
paid to the Company in connection with the exercise of the
Recapitalization Warrants, as well as cash proceeds of $90,000 paid to the
Company, and the forgiveness of $318,750 of the Company's accrued
interest expense, in connection with the exercise of the Recapitalization
Options. See "Description of Securities -- Recapitalization," "Certain
Transactions" and Notes 3 and 14 of Notes to Consolidated Financial
Statements.
(3) Adjusted to give retroactive effect to the sale of the 2,800,000 shares of
Common Stock offered hereby at an assumed offering price of $9.00 per
share (the mid-point of the currently anticipated range of the initial
public offering price) and the anticipated application of the estimated
net proceeds therefrom, including for the repayment of indebtedness. See
"Use of Proceeds."
(4) Includes long-term debt, less current portion, and notes payable to
related parties.
6
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. In addition to the other information in this Prospectus,
prospective investors should carefully consider the following risk factors in
evaluating the Company and its business before purchasing shares of the Common
Stock offered hereby.
Limited Relevant Operating History; Historical Losses
The Company began operations in June 1994 and shipped its first CD-ROM
simulation and strategy game for PCs in August 1995 and released its first, and
to date only, large-scale multiplayer real-time simulation game on the Internet
in December 1995. Consequently, the Company has a limited relevant operating
history upon which an evaluation of its prospects can be made. Such prospects
must be considered in light of the risks, expenses and difficulties frequently
encountered in connection with the operation and expansion of a new business
and commercialization of new products, particularly those associated with the
rapidly evolving interactive entertainment software industry, which is
characterized by an increasing number of market entrants, intense competition,
substantial capital requirements and a high failure rate. In addition, the
Company has experienced significant losses in each of its formative years,
resulting primarily from overhead and other costs incurred in the development
and growth of the Company, including losses of approximately $7,200,000,
$4,298,000 and $618,000 for the years ended December 31, 1996 and 1997 and the
three months ended March 31, 1998, respectively, resulting in an accumulated
deficit of approximately $14,828,000 at March 31, 1998. Moreover, the Company
expects to incur substantial up-front expenditures and operating costs in
connection with the expansion of its marketing efforts and product lines, which
may result in significant losses for the foreseeable future. There can be no
assurance that the Company will be able to successfully implement its growth
and business strategies, that its revenues will continue to increase or that it
will ever be able to achieve or sustain profitable operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Consolidated Financial Statements.
Significant Capital Requirements; Negative Cash Flow; Possible Need for
Additional Financing
The Company's capital requirements have been and will continue to be
significant, and, to date, its cash requirements have been exceeding its cash
flow from operations. Since inception, the Company has raised capital of
approximately $16,014,000 (excluding bank debt, of which there is currently
outstanding approximately $4,300,000 principal amount), of which $7,070,000
represents debt securities ($2,000,000 of which has been repaid) and $8,944,000
represents equity securities. The Company has been dependent on these private
financings to fund a portion of its capital requirements. In addition, based on
the Company's current product development plans, the Company's capital
requirements are expected to increase. As a result, the Company is dependent
upon the proceeds of this offering to complete the development of its currently
proposed products and fund its business strategies. Although the Company
anticipates, based on its currently proposed plans and assumptions relating to
its operations (including assumptions regarding the progress and timing of its
new product development efforts), that the net proceeds of this offering,
together with anticipated revenues from operations, availability under the
Company's bank lines of credit and cash and cash equivalents, will be sufficient
to fund the Company's operations and capital requirements for at least 12 months
following the consummation of this offering, there can be no assurance that such
funds will not be expended prior thereto due to unanticipated changes in
economic conditions or other unforeseen circumstances. In the event the
Company's plans change or its assumptions change or prove to be inaccurate, the
Company would be required to seek additional financing sooner than currently
anticipated. The Company has no current arrangements with respect to, or
potential sources of, any additional financing, and it is not anticipated that
existing shareholders will provide any portion of the Company's future financing
requirements. Consequently, there can be no assurance that any additional
financing will be available to the Company when needed, on commercially
reasonable terms, or at all. Any inability to obtain additional financing when
needed would require the Company to delay or scale back its product development
and marketing programs, which could have a material adverse effect on the
Company. In addition, any additional equity financing may involve substantial
dilution to the interests of the Company's then existing shareholders. See "Use
of Proceeds" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Fluctuations in Quarterly Operating Results; Uncertainty of Future Results
The Company's quarterly operating results have fluctuated significantly in
the past and will likely fluctuate significantly in the future depending on a
variety of factors, several of which are not in the Company's control.
7
<PAGE>
Such factors include the demand for the Company's products and the products of
its competitors, the size and rate of growth of the interactive entertainment
software market, development and promotional expenses related to the
introduction of new products or enhancements, the degree of market acceptance
for the Company's new product introductions and enhancements, the timing of
orders from significant customers, delays in shipment, the level of price
competition, changes in computing platforms, the nature and magnitude of
product returns, order cancellations, software defects and other quality
problems, the length of product life cycles, the percentage of the Company's
sales related to international sales and changes in personnel. Products are
generally shipped as orders are received, and, accordingly, the Company
operates with little backlog. Net revenues in any quarter are, therefore,
substantially dependent on orders booked and shipped in that quarter. A
significant portion of the Company's operating expenses is relatively fixed,
and planned expenditures are primarily based on expectations regarding future
sales; as a result, operating results in any given quarter would be
disproportionately adversely affected by a decrease in sales or a failure to
meet the Company's sales expectations. Operating results for future periods are
subject to numerous uncertainties, and there can be no assurance that the
Company will become profitable or sustain profitability on an annual or
quarterly basis. Based on the foregoing, the Company believes that
period-to-period comparisons of operating results should not be relied upon as
indicative of future results. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Short CD-ROM Product Life Cycles; Dependence On a Limited Number of Products
The market for interactive CD-ROM software games is characterized by short
product life cycles and frequent introduction of new products, most of which do
not achieve sustained market acceptance or do not generate a sufficient level
of sales to offset the costs associated with product development. Generally,
the majority of sales of new products occur within the first six months
following their release. The Company's success will depend upon development of
new, commercially successful products and upon its ability to replace revenues
from products at the later stages of their life cycles. The Company believes
that competition in the interactive entertainment software market requires the
development of higher quality, distinctive products that incorporate
increasingly sophisticated effects and the need to support product releases
with increased marketing, all of which results in higher development,
acquisition and marketing costs. To date, the Company has derived a significant
portion of its revenues from a limited number of software products released
each year, and many of these products have substantial development or
acquisition costs and marketing budgets. Due to this dependence on a limited
number of products, the Company may be adversely affected if one or more of its
principal products fails to achieve anticipated results. During the years ended
December 31, 1996 and 1997, two titles and three titles accounted for
approximately 56.0% and 55.8%, respectively, of the Company's consolidated net
shipments after factoring in product returns. There can be no assurance that
the Company will not remain dependent upon non-recurring sales of a limited
number of products for a substantial portion of its revenues or that any
products introduced by the Company will be commercially viable or have life
cycles sufficient to permit the Company to recoup the development, marketing
and other costs associated with their development. Failure to continuously
introduce new, commercially successful products would have a material adverse
effect on the Company. See "Business -- Products."
Lengthy Development Cycle; Product Development Risks
The Company's success depends on the timely introduction of successful new
products. The development of new interactive entertainment software products is
lengthy, expensive and uncertain, and a product's development typically
requires six to 24 months to complete from the time a new concept is approved.
In addition, product development of online products continues for the life of
the product. Many of the Company's proposed products are in early stages of
development, and the Company will be required to commit considerable time,
effort and resources to complete development of its currently proposed
products. The Company has, in the past, experienced significant delays in the
introduction of certain new products and there will likely be delays in
developing and introducing new products in the future. In addition, because
many of the Company's products are developed for it by third parties, the
Company cannot always control the timing of their introduction. While the
Company maintains production arrangements with its third-party developers,
provides them with certain software tool kits to promote quality control and
monitors their progress, there can be no assurance that delays in the work
performed by third parties or poor quality of such work will not result in
product delays. Unanticipated delays, expenses, technical problems or
difficulties could cause the Company to miss an important selling season with a
corresponding negative impact on revenues and net income or result in
abandonment or material change in product commercialization.
8
<PAGE>
There can be no assurance that the Company will be able to successfully develop
any new products on a timely basis or that technical or other problems will not
occur which would result in increased costs or material delays. In addition,
software products as complex as those offered by the Company may contain
undetected errors when first introduced. Despite extensive product testing, the
Company has, in the past, released products with defects and has discovered
software errors in certain of its product offerings after their introduction.
In particular, the personal computer hardware environment is characterized by a
wide variety of non-standard peripherals (such as sound cards and graphics
cards) and configurations that make pre-release testing for programming or
compatibility errors very difficult and time-consuming. There can be no
assurance that, despite testing by the Company, errors will not be found in new
products or releases after commencement of commercial shipments. Remedying such
errors may delay the Company's plans, cause it to incur additional costs and
adversely affect its reputation. See "Business -- Technology" and "Business --
Product Development."
Industry Factors; Changing Consumer Preferences; Uncertainty of Market
Acceptance
The level of demand and market acceptance for the Company's newly
introduced products is subject to a high degree of uncertainty. Software
acquisition and development costs, as well as promotion and marketing expenses,
royalties and third-party participations payable to software developers,
creative personnel, musicians and others, which reduce potential revenues
derived from software sales, have increased significantly in recent years. The
Company's future operating results will depend on numerous factors beyond its
control, including the popularity, price and timing of new entertainment
software products being released and distributed, international, national,
regional and local economic conditions (particularly economic conditions
adversely affecting discretionary consumer spending), changes in consumer
demographics, the availability of other forms of entertainment, critical
reviews and public tastes and preferences, all of which change rapidly and
cannot be predicted. The Company's ability to plan for product development and
promotional activities will be significantly affected by its ability to
anticipate and respond to relatively rapid changes in consumer tastes and
preferences, particularly those of the consumers, primarily males over age 25
with annual household incomes of $50,000 or more, comprising the Company's
principal target market. A decline in the popularity of software games or in
the interactive entertainment software industry generally or in particular
market segments could adversely affect the Company's business and prospects. In
addition, the success of the Company's strategy to capitalize on online games
will depend in part upon market acceptance of online games and a "pay-for-play"
model. Online game play is a new and evolving concept, and it is difficult to
assess or predict with any assurance the size of the market for online games or
its prospects for growth. There can be no assurance that a viable market for
online games will develop, that the Company will be successful in developing
additional products for online use or that the Company's products for this
market will achieve widespread market acceptance. See "Business -- Industry
Overview" and "Business -- Distribution."
Infrastructure Risks of Online Game Play
The development of a robust market for online games will depend on several
factors that are outside the Company's control, including the development and
maintenance of an industry infrastructure for providing consumer access to
online games. There can be no assurance that the infrastructure, including a
reliable network foundation, and timely development of complementary products,
such as high-speed modems, necessary to make local or wide area networks or the
Internet a viable medium for use of real-time large-scale multiplayer
simulation and strategy games will be developed, or, if developed, that such
networks will become a viable medium for use of multiplayer simulation and
strategy games. In addition, hardware restrictions, such as bandwidth (amount
of data capable of transmission at a single time) and latency (delays
introduced by the network), which limit use of content via local and wide area
networks, may inhibit such networks from becoming a viable medium for delivery
of multiplayer simulation and strategy games. If the necessary infrastructure
or complementary products are not developed, or if such networks do not become
a viable medium for delivery of multiplayer simulation and strategy games, the
Company's business, operating results and financial condition may be materially
adversely affected. See "Business -- Industry Overview" and "Business --
Technology."
Changes in Technology and Industry Standards
The interactive entertainment software industry is undergoing rapid
changes, including evolving industry standards, frequent new platform
introductions and changes in consumer requirements and preferences. The
introduction of new technologies, technologies that support multiplayer games
and new media formats such as online delivery
9
<PAGE>
and digital video disks, could render the Company's previously released
products obsolete or unmarketable. The development cycle for products utilizing
new operating systems, microprocessors or formats may be significantly longer
than the Company's current development cycle for products on existing operating
systems, microprocessors and formats and may require the Company to invest
resources in products that may not become profitable. There can be no assurance
that the mix of the Company's future product offerings will keep pace with
technological changes or satisfy evolving consumer preferences or that the
Company will be successful in developing and marketing products for any future
operating system or format. Failure to develop and introduce new products and
product enhancements in a timely fashion could result in significant product
returns and inventory obsolescence and could have a material adverse effect on
the Company's business, operating results and financial condition.
The overall market for the Internet is characterized by rapidly changing
technology, evolving industry standards, emerging competition and frequent
product and service introductions. There can be no assurance that the Company
can successfully identify new product opportunities for Internet use and
develop and bring such new products to market in a timely manner, or that
products or technologies developed by others will not render the Company's
products or technology obsolete. The Company also is at risk to fundamental
changes in the way Internet connectivity services are delivered. Currently,
Internet services are accessed primarily by computers and are delivered by
telephone lines. If the Internet becomes accessible by screen-based telephones,
television or other consumer electronic devices, or becomes deliverable through
other means such as coaxial cable or wireless transmission, the Company may
have to develop new technology or modify its existing technology to accommodate
these developments. The Company's pursuit of such technological advances may
require substantial time and expense, and there can be no assurance that the
Company will succeed in adapting its products to alternate access devices and
conduits. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business -- Products" and "Business -- Technology."
Intense Competition; Competition for Shelf Space
The interactive entertainment software industry is intensely and
increasingly competitive. Industry competition is based primarily upon product
quality and features, the compatibility of products with popular platforms,
access to distribution channels (including access to retail shelf space),
marketing effectiveness, reliability and ease of use, price and the quality of
user support services. Many of the companies with which the Company currently
competes or may compete against in the future have greater financial,
technical, marketing, sales and customer support and other resources than the
Company and have established reputations for success in the development,
licensing and sale of their products and technology. Current and future
competitors with greater financial resources than the Company may be able to
carry larger inventories, undertake more extensive marketing campaigns, adopt
more aggressive pricing policies and make higher offers or guarantees to third
party software developers and licensors than the Company. As competition
increases, significant price competition, increased production costs and
reduced profit margins may result. There can be no assurance that the Company
will be able to compete successfully against current or future competitors or
that competitive pressures faced by the Company will not have a material
adverse effect on its future operations.
Retailers of the Company's CD-ROM products typically have a limited amount
of shelf space and promotional resources, and there is intense competition
among entertainment software producers for adequate levels of desirable shelf
space and promotional support from retailers. As the number of entertainment
software products has increased, the competition for shelf space has
intensified, resulting in greater leverage for retailers and distributors in
negotiating terms of sale, including price discounts, marketing and display
fees and product return policies. The Company's CD-ROM products constitute a
relatively small percentage of any retailer's sales volume, and there can be no
assurance that retailers will continue to purchase the Company's products or
provide the Company's products with adequate levels of shelf space and
promotional support. See "Business -- Distribution" and "Business --
Competition."
Ability to Manage and Sustain Growth; Risks Associated with Future Acquisitions
The Company intends to use a portion of the proceeds of this offering to
implement the next phase of its business strategy in an effort to expand its
current level of operations and grow the Company's business. In addition to its
internal growth strategies, the Company intends to evaluate, on an ongoing
basis, potential acquisitions of, or investments in, other software publishers
or developers, distributors or other businesses which the Company believes will
complement or enhance its existing business. The success of such strategy thus
will depend upon,
10
<PAGE>
among other things, the Company's ability to hire and retain skilled
management, marketing, technical and other personnel and to successfully manage
its growth (which also will require it to develop and improve upon its
operational, management and financial systems and controls in order to properly
monitor its expanded operations, control its costs and maintain effective
quality controls). There can be no assurance that the Company will be able to
expand its operations or that it will be able to effectively manage any such
expansion or anticipate and satisfy all of the changing demands and
requirements that growth will impose upon its operations. In addition,
acquisitions involve numerous additional risks, including difficulties in the
assimilation of the operations and products of the acquired companies, the
expenses incurred in connection with the acquisition and subsequent
assimilation of operations and products, the diversion of management's
attention from other business concerns and the potential loss of key employees
of the acquired company. Acquisitions of foreign companies also may involve the
additional risks of assimilating differences in foreign business practices and
overcoming language barriers. If the Company consummates any acquisition in the
future, there can be no assurance that the Company will be able to integrate
the acquired operations successfully, and any inability to do so could
adversely affect the Company's business. See "Use of Proceeds."
In addition, while the Company will explore acquisitions of businesses and
assets that it believes are compatible with its business strategy and regularly
evaluates possible acquisition opportunities, as of the date of this
Prospectus, the Company has no current agreements, commitments, understandings
or arrangements with respect to any potential acquisition. Consequently, there
is no basis for investors in this offering to evaluate, prior to their
investment in the Company, the specific merits or risks of any potential
acquisition that the Company may undertake following the consummation of the
offering. Moreover, under North Carolina law, various forms of business
combinations can be effected without shareholder approval; accordingly,
investors in this offering will, in some instances, neither receive nor
otherwise have the opportunity to evaluate any financial or other information
which may be made available to the Company in the future in connection with any
acquisition and must rely entirely upon the ability of management in selecting,
structuring and consummating acquisitions that are consistent with the
Company's business objectives. Although the Company will endeavor to evaluate
the risks inherent in a particular acquisition, there can be no assurance that
the Company will properly ascertain or assess all significant risk factors
prior to consummating any acquisition.
Dependence on Third-Party Software Developers
The Company relies on third-party software developers for the development
of a significant number of its products. Due primarily to increased demand for
quality interactive entertainment software programs, the Company's payment of
advances and guaranteed royalties to such independent software developers has
increased and may continue to increase. There can be no assurance that the
sales of products associated with such royalties will be sufficient to cover
the amount of the Company's prepayment expenditures. Moreover, as independent
developers are in high demand, there can be no assurance that such developers,
including those that have developed products for the Company in the past, will
be available to develop products for the Company in the future. The failure to
obtain or renew product development agreements with such developers could have
a material adverse effect on the Company's future operations. In addition, many
independent developers have limited financial resources, which also could
expose the Company to the risk that such developers may go out of business
prior to completing a project. See "Business -- Product Development -- External
Development."
Dependence on Third-Party Distribution Channels
The Company currently sells its CD-ROM software products primarily through
software distributors and to major computer and software retailing
organizations. Sales of CD-ROM games to a limited number of distributors and
retailers constitute a substantial majority of the Company's net revenues. For
the year ended December 31, 1996, sales of products to two distributors, Tech
Data Corp. ("Tech Data") and Navarre Corporation ("Navarre"), accounted for
approximately 26.5% and 11.3%, respectively, of the Company's net revenues. For
the year ended December 31, 1997, sales of products to Tech Data and
Electronics Boutique, Inc. accounted for 19.0% and 10.0% of the Company's net
revenues, respectively.
Certain mass market retailers have established exclusive buying
relationships under which such retailers will buy consumer software only from
one intermediary. In such instances, the price or other terms on which the
Company sells to such retailers may be adversely affected by the terms imposed
by such intermediary, or the Company may be unable to sell to such retailers on
terms which the Company deems acceptable. There can
11
<PAGE>
be no assurance that the Company's relationships with its current distributors
and retailers will continue or that the Company will be able to find other
means to market and distribute its CD-ROM products. The loss of, or a
significant reduction in sales attributable to, any of the Company's principal
distributors or retailers, in the absence of comparable new relationships or
the development of independent means of marketing and distributing its CD-ROM
games, could have a material adverse effect on the Company's revenues and
operating results. In addition, the Company maintains a reserve for
uncollectible receivables that it believes to be adequate, but the actual
reserve maintained may not be sufficient in every circumstance. A payment
default by a significant customer could have a material adverse effect on the
Company's business, operating results and financial condition. The Company also
intends to expand the distribution of its online products by seeking out
relationships with third-party providers of online or Internet services in the
United States and abroad. There can be no assurance that the Company will
successfully negotiate relationships with providers of online or Internet
services or, if completed, that such arrangements will generate significant
revenues. The Company could be materially adversely affected if the cost to the
Company of any proposed online or Internet distributor relationship exceeds
expectations or if the Company incurs significant costs in anticipation of the
arrangement and the arrangement is delayed or abandoned. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Results of Operations" and "Business -- Distribution."
Risk of Product Returns
The Company accepts product returns or provides markdowns or other credits
in the event that customers hold excess inventory of the Company's products.
The Company also accepts returns of defective, damaged or shelf-worn products
at any time. At the time of product shipment, the Company establishes reserves
for stock-balancing, price protection and returns of defective, damaged and
shelf-worn products, based on historical return rates, retailer inventories of
the Company's products and other factors. Although the Company maintains
reserves which it believes to be adequate, if market acceptance is not
achieved, the Company could be forced to accept substantial product returns to
maintain favorable relationships with retailers and access to distribution
channels. There can be no assurance that actual returns to the Company will not
exceed the reserves established. Product returns that exceed the Company's
reserves could materially and adversely affect the Company's operating results.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operation."
Dependence on Key Personnel
The Company's success depends to a significant extent on the performance
and continued service of its senior management and certain key employees.
Competition for highly skilled employees with technical, management, marketing,
sales, product development and other specialized training is intense, and there
can be no assurance that the Company will be successful in attracting or
retaining such personnel. Specifically, the Company may experience increased
costs in order to attract and retain skilled employees. Although the Company
generally enters into term employment agreements with its senior management,
there can be no assurance that such employees or any other employees will not
leave the Company or compete against the Company. The Company's failure to
attract or retain qualified employees could have a material adverse effect on
the Company's business, operating results and financial condition. See
"Management."
Limited Protection of Proprietary Information
The Company regards its software technology as proprietary and holds
copyrights on its internally developed products, manuals, advertising and other
materials and maintains trademark rights in the Company name, the Interactive
Magic logo and the names of products owned by the Company. The Company does not
acquire the copyrights for works developed by third parties under license which
the Company publishes. Although the Company has applied for a patent on its
MEGAplayer technology that enables its online products to function more
effectively on the Internet, there can be no assurance that a patent will be
issued by the United States Patent and Trademark Office. While the Company
relies on a combination of trademark, trade secret, copyright and other
proprietary rights laws, license agreements, employee and third-party
non-disclosure agreements and other methods to establish and protect its
proprietary rights, there can be no assurance that the steps taken by the
Company will be adequate to prevent misappropriation of the technology or
independent development by others of software products with features based
upon, or otherwise similar to, those of the Company's products. To license its
products to end users, the Company primarily relies on "shrink wrap" licenses
that are not signed by the end-user and, therefore, may be unenforceable under
the laws of certain jurisdictions. In addition, effective copyright and trade
secret
12
<PAGE>
protection may be unavailable or limited in certain foreign countries, and the
global nature of certain wide area networks, particularly the Internet, makes
it virtually impossible to control the ultimate destination of the Company's
products. Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or
to obtain and use information that the Company regards as proprietary.
Unauthorized copying is common within the software industry, and if a
significant amount of unauthorized copying of the Company's products were to
occur, the Company's business, operating results and financial condition could
be adversely affected. As the number of software products in the industry
increases and the functionality of these products further overlaps, software
developers may become increasingly subject to infringement claims. There can be
no assurance that third parties will not assert infringement claims against the
Company in the future with respect to current or future products. As is common
in the industry, from time to time, the Company receives notices from third
parties claiming infringement of intellectual property rights of such parties.
The Company investigates these claims and responds as it deems appropriate.
Litigation may be necessary in the future to enforce the Company's intellectual
property rights, to protect the Company's trade secrets, to determine the
validity and scope of the proprietary rights of others, or to defend against
claims of infringement or invalidity. Any such litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on the Company. See "Business -- Intellectual Property and Other
Proprietary Rights."
Risks Related to International Revenues and Operations
The Company distributes its products in over 30 countries worldwide and
maintains sales offices in the United Kingdom and Germany in addition to its
facilities and operations in the United States. International sales and
licensing (excluding online revenue) accounted for 23% and 37% of the Company's
net revenues in 1996 and 1997, respectively. International sales and operations
of CD-ROM products are subject to inherent risks, including fluctuations in
exchange rates, the impact of possible recessionary environments in economies
outside the United States, the costs of transferring and localizing products
for foreign markets, longer accounts receivable collection periods and
difficulty in collection of accounts receivable, unexpected changes in
regulatory requirements, tariffs and other barriers, difficulties and costs of
staffing and managing foreign offices and potential political and economic
instability. Revenues and expenses from the Company's foreign operations
generally are denominated in local currencies, and, as a result, exchange rate
fluctuations between such local currencies and the U.S. dollar will subject the
Company to currency translation risk from the reported results of its foreign
operations. The Company intends to continue to expand its direct and indirect
sales and marketing activities worldwide; however, there can be no assurance
that the Company will be able to maintain or increase international market
demand for its products or that these or other factors will not have a material
adverse effect on the Company's future international sales and, consequently,
on the Company's operating results. See "Business -- Distribution."
Manufacturing Risks
The production of the Company's published products for retail sale
involves duplicating software programs onto CD-ROM disks, printing user manuals
and product packaging materials and packaging finished products. The foregoing
activities are performed for the Company by third-party vendors in accordance
with the Company's specifications. While these services are available from
multiple parties and at multiple sites, there can be no assurance that an
interruption in the manufacture of the Company's products will not occur and,
if it does occur, that it could be remedied without undue delay. In addition,
the Company must compete for CD-ROM duplication services with its competitors,
as well as publishers of music and video CDs. While the Company engages in
ongoing efforts to ensure an adequate and timely supply of CD-ROMs, there can
be no assurance that the future supply of CD-ROMs will be sufficient to meet
the Company's requirements. The Company must place advance orders for finished
goods based on forecasts of the sales volume of the product; there can be no
assurance that the Company's forecasts will prove accurate, and any resulting
over-production or under-production of the Company's CD-ROM products could have
a material adverse effect on the Company. See "Business -- Production and
Manufacturing."
Outstanding Indebtedness; Consequences of Default and Covenants Under Lines of
Credit
Following this offering, the Company intends to continue to maintain its
line of credit of up to $5,000,000 with Greyrock Business Credit, a division of
NationsCredit Commercial Corporation ("Greyrock"). Amounts borrowed under this
credit line bear interest at prime (as adjusted monthly) plus 2% per year. The
credit line remains in effect until April 30, 1999, after which time it
automatically renews unless either party gives notice of termination. To date,
the Company has borrowed $1,300,000 under this line, which will remain
outstanding
13
<PAGE>
after this offering. The Company also will continue to have $1,057,000 (based
on amounts outstanding at March 31, 1998) outstanding under its lines of credit
with Branch Banking & Trust Company ("BB&T"), which bears interest at BB&T's
prime rate per annum. In addition, the Company will continue to owe $77,060 and
$72,446 to J. W. Stealey and Robert L. Pickens, respectively, for accrued
interest through March 31, 1998 on prior loans converted to capital stock in
1998. The Company's ability to meet its debt service obligations will depend on
the Company's future operations, which are subject to prevailing industry
conditions and other factors, many of which are beyond the Company's control.
Because indebtedness under the Company's lines of credit bear interest at rates
that fluctuate with prevailing interest rates, increases in such prevailing
rates would increase the Company's interest payment obligations and could
adversely affect the Company's financial condition and results of operations.
Furthermore, the Company's indebtedness under its line of credit with Greyrock
is secured by substantially all of the Company's assets, as well as the assets
of its wholly-owned subsidiary, iMagic Online Corporation. In the event of a
violation by the Company of any of its loan covenants or any other default by
the Company on its obligations relating to its indebtedness, Greyrock could
declare such indebtedness to be immediately due and payable and, in certain
cases, Greyrock could then foreclose on the pledged collateral. Although the
Company expects that it will be in compliance with all of its loan covenants
upon the consummation of this offering, there can be no assurance that the
Company will be able to maintain such compliance in the future. A default
relating to the Company's indebtedness, in the absence of a waiver, could have
a material adverse effect upon the Company's business and financial condition.
Moreover, to the extent that the accounts receivable, inventory and
intellectual property of the Company (excluding its foreign subsidiaries)
continue to be pledged to secure its outstanding indebtedness under the credit
facility, such assets will not be available to secure additional indebtedness,
which may affect the Company's ability to borrow in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Certain Transactions" and Notes 4 and 14 of Notes to Consolidated
Financial Statements.
Substantial Use of Proceeds to Repay Indebtedness; Proceeds Used to Benefit
Related Parties; Broad Discretion in Application of Proceeds
The Company has allocated approximately $7,170,000 of the net proceeds of
this offering to repay outstanding indebtedness. Accordingly, such proceeds
will not be available to fund future growth of the Company. The indebtedness to
be repaid includes, among other things, $870,000 payable to Laura M. Stealey,
the former spouse of J. W. Stealey, the Chairman of the Company, as well as
$1,500,000 payable to BB&T, each of which is guaranteed by J. W. Stealey. The
Company also will pay $117,175, $371,404 and $111,421 to Laura M. Stealey, J.
W. Stealey and Robert L. Pickens, respectively, in payment of certain interest
accrued in connection with their loans to the Company. In addition,
approximately $9,066,000 (40.2%) of the estimated net proceeds of this offering
has been allocated to working capital and general corporate purposes, thus
management will have broad discretion as to the application of such proceeds.
The Company also intends to use $400,000 of the net proceeds to fulfill its
obligations under a marketing agreement with General Capital, an affiliate of
Vertical Financial Holdings, a principal shareholder of the Company. See "Use
of Proceeds" and "Certain Transactions."
Concentration of Ownership
Following completion of this offering, the Company's executive officers
will own beneficially approximately 32% of the outstanding shares of Common
Stock, and the Company's non-executive directors and their affiliated entities
together will beneficially own approximately 29% of the outstanding shares of
Common Stock. Accordingly, such persons will be in position to influence the
election of the Company's directors and the outcome of corporate actions
requiring shareholder approval. The concentration of ownership may have the
effect of delaying or preventing a change in control of the Company. See
"Management," "Principal Shareholders" and "Description of Securities."
Absence of Prior Market; Possible Volatility of Stock Price
Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active trading market will
develop or be sustained after this offering. The initial public offering price
will be determined through negotiations between the Company and the
Underwriters and may not represent prices which will prevail in the trading
market. The market price of the Company's Common Stock could be subject to wide
fluctuations in response to variations in quarterly operating results and other
factors, such as announcements of new products by the Company or its
competitors and failures to meet or exceed the expectations of securities
analysts or investors or other events. Furthermore, the stock market has
experienced
14
<PAGE>
significant price and volume fluctuations that have particularly affected the
market prices of many high technology companies and that have often been
unrelated or disproportionate to the operating performance of such companies.
These market fluctuations, as well as economic conditions generally and in the
entertainment software industry specifically, may have an adverse effect on the
market price of the Company's Common Stock. There can be no assurance that the
market price of the Common Stock will not decline below the initial public
offering price. See "Underwriting."
Immediate and Substantial Dilution to Investors in this Offering
Investors in this offering will experience immediate and substantial
dilution in the net tangible book value of their shares of Common Stock. After
giving effect to this offering and the use of the net proceeds therefrom and to
the Recapitalization, the Company's net tangible book value as of March 31,
1998 would have been $19,196,336 or $2.00 per share (based on an assumed
offering price of $9.00 per share, the midpoint of the currently anticipated
range of the initial public offering price). This represents an immediate
dilution in net tangible book value of $7.00 (77.8%) per share. See "Dilution."
Dividends
The Company has never paid any cash dividends on its Common Stock and does
not anticipate paying cash dividends in the foreseeable future as it intends to
retain any net income for use in connection with the expansion of its business.
See "Dividend Policy."
Shares Eligible for Future Sale; Registration Rights
Sales of substantial amounts of Common Stock in the public market after
this offering could adversely affect prevailing market prices for the Common
Stock. Upon completion of this offering, the Company will have 9,593,699 shares
of Common Stock outstanding. Of these shares, the 2,800,000 shares offered
hereby will be freely tradable without restrictions or further registration
under the Securities Act of 1933, as amended (the "Securities Act"), except for
any shares purchased by "affiliates" of the Company, as that term is defined in
Rule 144 under the Securities Act, which will be subject to the resale
limitations imposed by Rule 144. All of the remaining 6,793,699 shares of
Common Stock outstanding will be "restricted securities" within the meaning of
Rule 144. Of such restricted securities, 3,218,114 shares are subject to
certain registration rights, and the Company has granted the Representatives
demand and piggyback registration rights with respect to the shares of Common
Stock issuable upon exercise of the Representatives' Warrants. In addition,
77,648 shares of Common Stock underlying outstanding warrants are subject to
certain registration rights. No prediction can be made as to the effect, if
any, that sales of such securities or the availability of such securities for
sale will have on the market prices prevailing from time to time. While
security holders, including the Company's officers and directors, beneficially
owning approximately 90% of the Company's currently outstanding Common Stock
have agreed not to sell or otherwise dispose of any shares of Common Stock or
exercise any registration rights for a period of nine months following the date
of this Prospectus without the Representatives' prior written consent, the
possibility that a substantial number of the Company's securities may be sold
in the public market may adversely affect prevailing market prices for the
Common Stock and could impair the Company's ability to raise capital through
the sale of its equity securities. See "Description of Securities," "Shares
Eligible For Future Sale" and "Underwriting."
Year 2000 Compliance
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept entries to distinguish 21st century dates from 20th century
dates. As a result, in less than two years, computer systems and software used
by many companies may need to be upgraded to comply with such Year 2000
requirements. The Company believes that its products, which are self-contained
software programs that run independently of external systems, will not be
significantly affected by Year 2000 issues. The Company is currently in the
process of investigating whether its internal accounting systems and other
operational systems will be affected by the Year 2000 issue. In addition, the
Company is assessing the readiness of third-party customers and suppliers for
the Year 2000 issue. There can be no assurance that these third parties will
timely convert their systems or that their systems will not have an adverse
effect on the Company, or that Year 2000 issues or the cost of addressing them
will not have a material impact on the
15
<PAGE>
Company's financial statements, business or operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Limited Lead Underwriting Experience
Although BlueStone has engaged in the investment banking business since
its formation as a broker-dealer in March 1996, and its principals have had
extensive experience in the underwriting of securities in their capacities with
other broker-dealers, this offering constitutes one of the first public
offerings for which BlueStone has acted as lead underwriter. See
"Underwriting."
Forward-Looking Information May Prove Inaccurate
This Prospectus contains various forward-looking statements that are based
on the Company's beliefs as well as assumptions made by and information
currently available to the Company. When used in this Prospectus, the words
"believe," "expect," "anticipate," "estimate" and similar expressions are
intended to identify forward-looking statements. The accuracy of such
forward-looking statements are subject to certain risks, uncertainties and
assumptions, including those identified above under "Risk Factors." Should one
or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, estimated, or projected. The Company cautions potential purchasers
not to place undue reliance on any such forward-looking statements.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,800,000 shares of
Common Stock offered hereby are estimated to be approximately $22,536,000
($26,051,400 if the Representatives' over-allotment option is exercised in
full), assuming an initial public offering price of $9.00 per share (the
midpoint of the currently anticipated range of the initial public offering
price) and after deducting the underwriting discount and estimated offering
expenses payable by the Company.
The Company intends to use approximately $7,170,000 of the net proceeds to
repay indebtedness of the Company including $1,500,000 outstanding under the
Company's revolving line of credit with BB&T, which bears interest at BB&T's
prime rate per annum, as adjusted daily; $3,000,000 outstanding under the
Company's promissory note to Petra Capital, LLC ("Petra"), due March 24, 2002,
which bears interest at 13.5% per annum; $870,000 principal amount, plus
$117,175 in accrued interest, outstanding under the Company's line of credit
from Laura M. Stealey, which terminates January 1, 1999 and bears interest at
10% per annum; $1,200,000 outstanding under the Company's promissory note to
Oberlin Capital, L.P. ("Oberlin"), due August 30, 2002, which bears interest at
11% per annum through September 30, 1998, after which time the interest rate
increases; and $371,404 and $111,421 of the amounts owed to J.W. Stealey and
Robert L. Pickens, respectively, for accrued interest on prior loans that were
converted into capital stock in 1998. The Company used the proceeds of the
Petra promissory note and the Oberlin promissory note to fund inventory and
receivables, advance royalties and certain product development and other
infrastructure expenses. See "Certain Transactions."
The Company anticipates using an aggregate of approximately $6,300,000 of
the net proceeds for marketing and promotions, investments in external
development to provide the Company with future products, expansion of
international operations by hiring additional marketing staff and expanding the
infrastructure for online delivery in Europe, growth of internal research and
development, in part by adding new developers to fill out product teams, and
purchases of computer hardware and software to accommodate growth in research
and development. In addition, the Company also intends to use $400,000 of this
amount to fulfill its obligations under a marketing agreement with General
Capital, an affiliate of Vertical Financial Holdings, a principal shareholder
of the Company. See "Principal Shareholders" and "Certain Transactions."
The Company intends to use the balance of the net proceeds and any
proceeds from the exercise of the Representatives' over-allotment option for
working capital and general corporate purposes, including possible
acquisitions. The Company is not currently a party to any commitments or
agreements with respect to any acquisitions, and there can be no assurance that
any future acquisitions will be consummated. Pending such uses, the Company
intends to invest the net proceeds from the offering in short-term, investment
grade, interest-bearing securities.
16
<PAGE>
Although the allocation of the net proceeds set forth above represents the
Company's best estimates based on its proposed plans and assumptions relating
to its operations and growth strategy and on general economic conditions, the
amounts actually expended for the above purposes may vary significantly
depending upon numerous factors, including development and promotional expenses
related to the introduction of new products, the progress and timing of its new
product development efforts, changes in technology and the availability of
desirable acquisition opportunities. The Company believes that the proceeds of
this offering, together with anticipated revenues from operations, availability
under the Company's bank lines of credit, and cash and cash equivalents, will
be sufficient to satisfy its contemplated cash requirements for at least 12
months following the consummation of this offering. In the event that the
Company's plans change (due to changes in market conditions, competitive
factors or new opportunities that may become available in the future), its
assumptions change or prove to be inaccurate or if the proceeds of this
offering or cash flows prove to be insufficient to implement its business plans
(due to unanticipated expenses, technical difficulities or otherwise), the
Company could, however, be required to seek additional financing prior to such
time. There can be no assurance that the proceeds of this offering will be
sufficient to permit the Company to implement its business plans, that any
assumptions relating to the implementation of such plans will prove to be
accurate or that any additional financing would be available to the Company on
commercially reasonable terms, or at all.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock. The Company does not anticipate paying any cash dividends in the
foreseeable future and intends to retain future earnings for the development
and expansion of its business. In addition, certain of the Company's loan
agreements prohibit the payment or declaration of cash dividends.
DILUTION
The difference between the initial public offering price per share of
Common Stock and the net tangible book value per share of Common Stock after
this offering constitutes the dilution to investors in this offering. Net
tangible book value per share on any given date is determined by dividing the
net tangible book value of the Company (total tangible assets less total
liabilities) on such date by the number of then outstanding shares of Common
Stock.
At March 31, 1998, net tangible book deficit of the Company was
$(4,358,749), or $(0.95) per share of Common Stock. After giving retroactive
effect to the Recapitalization (see "Description of Securities --
Recapitalization"), the pro forma net tangible book deficit of the Company at
March 31, 1998 would have been $(3,339,664), or $(0.49) per share. After also
giving effect to the sale of the 2,800,000 shares of Common Stock offered
hereby at an assumed price of $9.00 per share (the midpoint of the currently
anticipated range of the initial public offering price) and the receipt and
anticipated application of the estimated net proceeds therefrom, including for
the repayment of certain outstanding indebtedness, the as adjusted net tangible
book value of the Company at March 31, 1998 would have been $19,196,336, or
$2.00 per share, representing an immediate increase in net tangible book value
of $2.49 per share to existing shareholders and an immediate dilution of $7.00
(77.8%) per share to investors in this offering. If the initial public offering
price is higher or lower, the dilution to new investors will be, respectively,
greater or less.
The following table illustrates the foregoing information with respect to
dilution to new investors on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price ............................. $ 9.00
Net tangible book deficit before Recapitalization ................ $ (0.95)
Increase attributable to Recapitalization ........................ 0.46
-------
Pro forma net tangible book deficit before the offering .......... $ (0.49)
Increase attributable to investors in the offering ............... 2.49
-------
Adjusted net tangible book value after the offering ............... 2.00
-------
Dilution to investors in the offering ............................. $ 7.00
=======
</TABLE>
17
<PAGE>
The following table sets forth, with respect to existing shareholders and
the investors in this offering, a comparison of the number of shares of Common
Stock as of March 31, 1998 (giving retroactive effect to the Recapitalization)
purchased from the Company, the percentage ownership of such shares, the
aggregate consideration paid, the percentage of total consideration paid, and
the average price paid per share.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
----------------------- -------------------------- Average Price
Number Percent Amount Percent Per Share
----------- --------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
Existing shareholders ......... 6,793,699 70.8% $11,117,342 30.6% $ 1.64
New investors ................. 2,800,000 29.2 25,200,000 69.4 $ 9.00(1)
--------- ----- ----------- -----
Total ........................ 9,593,699 100.0% $36,317,342 100.0%
========= ===== =========== =====
</TABLE>
- ------------
(1) Based on the midpoint of the currently anticipated range of the initial
public offering price.
The foregoing tables assume no exercise of the Representatives'
over-allotment option. If such option is exercised in full, the new investors
will have paid $28,980,000 (based on an assumed price of $9.00 per share, the
midpoint of the currently anticipated range of the initial public offering
price) for 3,220,000 shares of Common Stock representing approximately 72.3% of
the total consideration for 32.2% of the total number of shares outstanding. In
addition, computations set forth in the above tables exclude (i) 1,708,045
shares of Common Stock reserved for issuance upon the exercise of options
remaining outstanding after the Recapitalization, at a weighted average
exercise price of $2.54 per share, and 1,300,000 shares of Common Stock
reserved for issuance upon the exercise of options available for future grant,
under the Plans, (ii) 449,554 shares of Common Stock reserved for issuance upon
exercise of warrants remaining outstanding after the Recapitalization at a
weighted average exercise price of $4.39 and (iii) 280,000 shares of Common
Stock reserved for issuance upon the exercise of the Representatives' Warrants.
See "Management -- Stock Option Plans," "Description of Securities -- Warrants"
and "Underwriting."
18
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of March 31, 1998, (i) on an actual basis, (ii) on a pro forma basis
giving effect to the Recapitalization (see "Description of Securities --
Recapitalization") and (iii) as further adjusted to give effect to the sale by
the Company of the 2,800,000 shares of Common Stock offered hereby at an
assumed price of $9.00 per share (the midpoint of the currently anticipated
range of the initial public offering price) and the anticipated application of
the estimated net proceeds therefrom. This table should be read in conjunction
with the consolidated financial statements, including the notes thereto,
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
March 31, 1998 (Unaudited)
------------------------------------------------------
Pro Forma
Actual Pro Forma as Adjusted
---------------- ---------------- ----------------
<S> <C> <C> <C>
Long-term debt:
Long-term debt less current portion.............................. $ 3,791,000 $ 3,791,000 $ --
Notes payable to related parties ................................ 870,000 870,000 --
------------- ------------- -------------
Total long-term debt .......................................... 4,661,000 4,661,000 --
------------- ------------- -------------
Series C Redeemable Convertible Preferred Stock, $.10 par
value; 132,744 shares issued and outstanding (actual) ........... 600,000 -- --
------------- ------------- -------------
Shareholders' equity (deficit):
Series A Convertible Preferred Stock, $.10 par value;
82,634 shares authorized, issued and outstanding (actual) ..... 8,263 -- --
Series B Convertible Preferred Stock, $.10 par value;
778,746 shares authorized, issued and outstanding (actual) 77,875 -- --
Class A Common Stock, $.10 par value; 30,000,000 shares
authorized, 3,145,696 shares issued and outstanding
(actual) ...................................................... 314,570 -- --
Class B Common Stock, $.10 par value; 20,000,000 shares
authorized, 457,853 shares issued and outstanding (actual) 45,785 -- --
Common Stock, $.10 par value; 50,000,000 shares
authorized, 6,793,699 shares issued and outstanding (pro
forma) and 9,593,699 shares issued and outstanding (as
adjusted) (1) ................................................. -- 679,370 959,370
Additional paid in capital ...................................... 10,101,771 10,887,979 33,143,979
Cumulative currency translation adjustment ...................... (78,724) (78,724) (78,724)
Accumulated deficit ............................................. (14,828,289) (14,828,289) (14,828,289)
------------- ------------- -------------
Total shareholders' equity (deficit) .......................... (4,358,749) (3,339,664) 19,196,336
------------- ------------- -------------
Total capitalization ......................................... $ 902,251 $ 1,321,336 $ 19,196,336
============= ============= =============
</TABLE>
- ------------
(1) Does not include (i) 1,708,045 shares reserved for issuance upon the
exercise of stock options remaining outstanding following the
Recapitalization, and 1,300,000 shares of Common Stock reserved for
issuance upon the exercise of options available for future grant, under
the Plans; (ii) 449,554 shares of Common Stock reserved for issuance upon
exercise of warrants remaining outstanding following the Recapitalization;
and (iii) 280,000 shares of Common Stock reserved for issuance upon
exercise of the Representatives' Warrants. See "Management -- Stock Option
Plans," "Description of Securities -- Warrants" and "Underwriting."
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in thousands, except per share data)
The following selected consolidated financial data as of and for each of
the three years in the period ended December 31, 1997 are derived from the
audited consolidated financial statements of the Company included elsewhere
herein, which statements have been audited by Ernst & Young LLP, independent
auditors, whose report is included elsewhere herein. The consolidated financial
data of the Company as of March 31, 1997 and 1998 and for the three months then
ended are derived from the unaudited consolidated financial statements of the
Company included in this Prospectus and were prepared by management of the
Company on the same basis as the audited consolidated financial statements
included elsewhere in this Prospectus and, in the opinion of the Company,
include all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the information set forth therein. The results for
the three months ended March 31, 1998 are not necessarily indicative of the
results to be expected for the full fiscal year ending December 31, 1998. The
following information should be read in conjunction with the consolidated
financial statements of the Company, including the notes thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
Consolidated Statement of Operations Data:
<TABLE>
<CAPTION>
Three Months Ended March
Year Ended December 31, 31,
---------------------------------------- --------------------------
1995 1996 1997 1997 1998
----------- ----------- ------------ ---------- -------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net revenues:
CD-ROM product sales .................... $ 3,950 $ 4,852 $ 14,067 $ 3,399 $ 4,057
Online sales ............................ 6 733 1,615 357 358
Royalties and licenses .................. 165 472 820 201 498
-------- -------- ---------- ------- ----------
Total net revenues .................... 4,121 6,057 16,502 3,957 4,913
Cost of revenues:
Cost of products sold ................... 790 1,349 3,715 766 968
Royalties and amortized software
costs ................................. 879 1,044 2,634 649 909
-------- -------- ---------- ------- ----------
Total cost of revenues ................ 1,669 2,393 6,349 1,415 1,877
Gross profit ............................. 2,452 3,664 10,153 2,542 3,036
Operating expenses:
Sales and marketing ..................... 2,335 5,008 6,760 1,642 1,667
Product development ..................... 1,518 3,788 3,878 859 1,103
General and administrative .............. 828 1,451 1,941 598 449
-------- -------- ---------- ------- ----------
Total operating expenses ................. 4,681 10,247 12,579 3,099 3,219
-------- -------- ---------- ------- ----------
Operating loss ........................... (2,229) (6,583) (2,426) (557) (183)
Other expense ............................ 175 606 1,905 299 307
-------- -------- ---------- ------- ----------
Loss before income taxes ................. (2,404) (7,189) (4,331) (856) (490)
Income tax (expense) benefit ............. (47) (11) 33 31 128
-------- -------- ---------- ------- ----------
Net loss ................................. $ (2,451) $ (7,200) $ (4,298) $ (825) $ (618)
======== ======== ========== ======= ==========
Pro forma net loss per share (1) ......... $ (0.68) $ (0.10)
Number of shares used in
computing pro forma net loss per
share (1) ............................... 6,343,080 6,484,506
</TABLE>
(footnotes on following page)
20
<PAGE>
Consolidated Balance Sheet Data:
<TABLE>
<CAPTION>
December 31, 1997 March 31, 1998
------------------- ---------------
(unaudited)
<S> <C> <C>
Working capital (deficiency) ........... $ (1,933) $ 799
Total assets ........................... 7,747 9,211
Long-term debt (2) ..................... 7,229 4,661
Total liabilities ...................... 16,646 12,970
Redeemable preferred stock ............. -- 600
Stockholders' equity (deficit) ......... (8,899) (4,359)
</TABLE>
- ------------
(1) See Note 3 of Notes to Consolidated Financial Statements for an explanation
of the number of shares used in computing pro forma net loss per share.
(2) Includes long-term debt, less current portion, and notes payable to related
parties.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company develops, publishes and distributes interactive real-time 3D
simulation and strategy entertainment software. The Company generates revenues
primarily from delivering its CD-ROM products for retail sale through its
worldwide distribution network and from subscription and hourly fees for play
of its online product. The Company also generates revenues from licensing its
CD-ROM products to OEMs, distributors outside of North America and other third
parties. Since inception, the Company has published 26 CD-ROM products which
have been distributed through more than 15,000 retail outlets in over 30
countries. Additionally, the Company has sold over 1.4 million hours of online
game time over the Internet to players in more than 70 countries.
From the commencement of operations on June 16, 1994 through December 31,
1994, the Company was in a development stage. During this period, the Company
was engaged primarily in recruiting personnel, establishing a corporate
headquarters, designing products to be developed internally and licensing
products from external developers for future publication. The Company published
four CD-ROM products during its first full year of operation in 1995. To expand
international distribution of its CD-ROM products, the Company established
sales and marketing operations in the United Kingdom and Germany in 1996. In
1996, the Company published five CD-ROM products.
In April 1997, the Company acquired ICI, a leader in the development and
delivery of interactive large-scale multiplayer real-time online games. The
Company exchanged 655,696 shares of the Company's Common Stock for all of the
outstanding shares of ICI. This transaction was accounted for as a pooling of
interests; accordingly, the Company restated all historical financial data to
include the historical financial data of ICI. In connection with the ICI
acquisition, the Company acquired ICI's WARBIRDS product and the associated
MEGAplayer technology for which a patent application has been filed. In 1997,
the Company published 11 CD-ROM products while developing new products
incorporating the technology acquired from ICI.
The Company recognizes net revenues from the sale of CD-ROM products at
the time of product shipment. Net revenues from CD-ROM product sales are
reflected after the deduction of what management believes to be an appropriate
allowance for returns and price protection. Revenue from usage of its online
product is recognized at the time the game is played and is based upon actual
usage by the customer on an hourly basis. Revenues from licenses to OEMs,
international distributors and other third parties are recognized when earned
under the terms of the relevant agreements. Subject to certain limitations, the
Company accepts product returns and provides price protection on certain unsold
merchandise. With respect to license agreements that provide customers the
right to multiple copies in exchange for guaranteed amounts, net revenues are
recognized upon delivery of the product master or the first copy. Per copy
royalties on sales that exceed the guarantee are recognized as earned.
The Company's internal product development costs incurred prior to
establishing technological feasibility are expensed in accordance with the
Financial Accounting Standards Board Statement of Financial Accounting
Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to be
Sold, Leased or Otherwise Marketed." In accordance with SFAS No. 86, the Company
capitalizes product development costs subsequent to establishing technological
feasibility and amortizes previously capitalized product development costs by
using: (i) the revenue curve method; or (ii) the straight-line method over the
estimated economic life of the product, which typically ranges from six months
to two years.
In addition to the internal development of products, the Company enters
into publishing agreements with third-party developers pursuant to which the
Company typically advances royalties before the product is published. After
product release, the Company expenses advance royalties based on product sales
and pays the developer incremental royalties after the advance royalties have
been fully expensed. The Company also incurs internal costs related to product
development by third parties, including costs related to supervising the
development process for quality assurance and developing technology for
incorporation into third-party products. The Company typically expenses these
costs as a product development expense.
The Company believes that an increasing percentage of its revenues will be
generated by real-time large-scale multiplayer online games. However, the
extent and timing of revenues generated by online games are uncertain because
this market is emerging and depends upon a number of variables, including the
availability of an infrastructure
22
<PAGE>
for providing local access to wide area networks with acceptable response times
and consumer acceptance of such networks as a medium for playing multi-user
simulation and strategy games.
The Company has experienced significant losses in each of its formative
years, resulting primarily from overhead and other costs incurred in the
development and growth of the Company. Moreover, the Company expects to incur
substantial up-front expenditures and operating costs in connection with the
expansion of its marketing efforts and product lines, which may result in
significant losses for the foreseeable future. There can be no assurance that
the Company will be able to successfully implement its growth and business
strategies, that its revenues will continue to increase in the future or that
it will be able to achieve or sustain profitable operations.
Results of Operations
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31,
1997
Net revenues. Net revenues increased by 24.2% from $3,957,000 for the
three months ended March 31, 1997 to $4,913,000 for the three months ended
March 31, 1998. The increase was attributable to increases in net revenues from
CD-ROM product sales, licensing agreements with third parties and royalties
paid by international distributors on foreign sales of certain of the Company's
CD-ROM products. Revenue attributable to the Company's online service remained
relatively constant from $357,000 in the three months ended March 31, 1997 to
$358,000 in the three months ended March 31, 1998. During 1997, the Company
focused on building the infrastructure for delivery of additional games and
developing those games.
Cost of revenues. Cost of revenues consists of cost of products sold
(including cost of Internet access) and royalties and amortization of
capitalized software development costs. Cost of revenues increased by 32.7%
from $1,415,000 for the three months ended March 31, 1997 to $1,877,000 for the
three months ended March 31, 1998. Cost of products sold increased by 26.4%
from $766,000 to $968,000 over the two periods due to an increase in the number
of units sold. Royalties and amortized costs increased 40.1% from $649,000 to
$909,000 over the two periods primarily due to the increase in the amortization
of capitalized development costs associated with a greater percentage of sales
attributable to internally developed products. As a percentage of net revenues,
cost of revenues increased from 35.8% to 38.2% over the two periods, primarily
because in the 1998 period, the Company generated greater unit sales of
products carrying lower wholesale prices and an increase in internally
developed products.
Gross profit. Due to the increase in the number of CD-ROM units sold,
gross profit increased by 19.4% from $2,542,000 for the three months ended
March 31, 1997 to $3,036,000 for the three months ended March 31, 1998. Gross
margin declined from 64.2% to 61.8% over the two periods due to a change in
product mix and increased amortization of software development costs.
Sales and marketing. Sales and marketing expenses increased by 1.5% from
$1,642,000 for the three months ended March 31, 1997 to $1,667,000 for the
three months ended March 31, 1998. As a percentage of net revenue, sales and
marketing expenses decreased from 41.5% to 33.9% over the two periods due to a
decrease in market development expenditures relating to product positioning in
retail stores. In addition, an increasing percentage of the Company's revenues
was generated from online sales, royalties and licenses during the 1998 period,
which have less associated sales and marketing expenses than CD-ROM product
sales.
Product development. Product development expenses increased by 28.4% from
$859,000 for the three months ended March 31, 1997 to $1,103,000 for the three
months ended March 31, 1998. As a percentage of net revenues, product
development expenses increased from 21.7% to 22.5% over the two periods due to
the hiring of additional game designers, artists, programmers and developers.
The increase in product development expenses was partially offset by an
increase in the amount of capitalized product development expenses. The Company
capitalized $255,000 (22.9% of gross product development costs) for the three
months ended March 31, 1997 and $583,000 (34.6% of gross product development
costs) for the three months ended March 31, 1998.
General and administrative. General and administrative expenses decreased
by 24.9% from $598,000 for the three months ended March 31, 1997 to $449,000
for the three months ended March 31, 1998. As a percentage of net revenues,
general and administrative expenses decreased from 15.1% to 9.1% over the two
periods primarily because the Company incurred certain one-time expenses during
the 1997 period for new employee recruitment fees and the acquisition of ICI.
23
<PAGE>
Other expense. Other expense, comprised primarily of interest expense,
increased by 2.7% from $299,000 for the three months ended March 31, 1997 to
$307,000 for the three months ended March 31, 1998.
Income tax (expense) benefit. The Company recorded a $31,000 tax benefit
for the three months ended March 31, 1997 and recorded $128,000 of income tax
expense for the three months ended March 31, 1998. The Company reported a tax
benefit in 1997 due to a refund from a net operating loss carryforward. The
Company recorded income tax expense in the first quarter of 1998 because its
United Kingdom subsidiary generated taxable income during such period. The
Company recorded a valuation allowance of $5,486,000 for the full amount of its
deferred income tax assets as of March 31, 1998 in accordance with SFAS No.
109, "Accounting for Income Taxes." This allowance is composed primarily of
domestic net operating loss carryforwards that expire beginning in 2011. Use of
these net operating loss carryforwards may be subject to limitations in the
event of significant changes in stock ownership of the Company.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net revenues. The Company's net revenues increased by 172.4% from
$6,057,000 in 1996 to $16,502,000 in 1997. The increase was attributable to
increased sales of CD-ROM products, online usage, and revenues from royalties
and licenses paid by third parties. In 1997, the Company released more products
which sold on average a greater number of units per product. Net revenues from
the Company's WARBIRDS online product increased by 120.3% from $733,000 in 1996
to $1,615,000 in 1997, due to an increase in the number of subscribers.
Revenues from licenses to OEMs, international distributors and other third
parties increased by 73.7% from $472,000 in 1996 to $820,000 in 1997, primarily
because the Company granted licenses on more products from its expanded product
library.
Cost of revenues. Cost of revenues increased by 165.3% from $2,393,000 in
1996 to $6,349,000 in 1997. Cost of products sold increased by 175.4% over the
two periods from $1,349,000 to $3,715,000, due to (i) the costs of
manufacturing, duplicating, assembling, packaging and shipping a greater number
of CD-ROM products and (ii) an increase in the cost of Internet access
resulting from added capacity to handle the greater number of subscribers.
Royalties and amortized software costs increased by 152.3% from $1,044,000 in
1996 to $2,634,000 in 1997 primarily because the Company published more
third-party-developed products in 1997. As a percentage of net revenues, cost
of revenues decreased from 39.5% to 38.5% over the two periods primarily
because of the economies of scale associated with larger production runs
created by higher total unit sales.
Gross profit. Gross profit increased by 177.1% from $3,664,000 in 1996 to
$10,153,000 in 1997 primarily due to the sale of more CD-ROM products and
increased revenue from the Company's online product and license arrangements in
1997. As a percentage of net revenues, gross profit increased from 60.5% in
1996 to 61.5% in 1997 primarily because the products released by the Company in
1997 achieved higher average unit sales than the products released in 1996 due
to the success of the Company's iF-22 product.
Sales and marketing. Sales and marketing expenses increased 35.0% from
$5,008,000 in 1996 to $6,760,000 in 1997 primarily due to the release of more
products and the associated expenses required to market, promote and sell the
products, including additional personnel expenses. As a percentage of net
revenues, sales and marketing expenses decreased from 82.7% to 41.0% over the
two periods because, during a portion of 1996, the Company paid fees to an
independent sales organization based upon the number of units of CD-ROM
products sold while concurrently incurring expenses related to the development
of an internal sales organization. In addition, the Company incurred expenses
in 1996 to establish its international distribution network and sales
operations in the United Kingdom and Germany.
Product development. Product development expenses increased by 2.4% from
$3,788,000 in 1996 to $3,878,000 in 1997 primarily due to the hiring of
additional game designers, artists, programmers and developers. The Company
capitalized $79,000 (2.0% of gross product development costs) in 1996 and
$849,000 (18.0% of gross product development costs) in 1997. As a percentage of
net revenues, product development expenses decreased from 62.5% to 23.5% over
the two periods.
General and administrative. General and administrative expenses increased
by 33.8% from $1,451,000 in 1996 to $1,941,000 in 1997 primarily due to
increases in staff, hiring costs, ICI acquisition expenses and debt financing
expenses. As a percentage of net revenues, general and administrative expenses
decreased from 24.0% to 11.8% primarily due to a higher sales volume.
24
<PAGE>
Other expense. Other expense, comprised primarily of interest expense,
increased by 214.4% from $606,000 in 1996 to $1,905,000 in 1997 because the
Company incurred $5,161,000 of additional debt during 1997 to fund increases in
inventory and receivables, certain product development, advance royalties and
other infrastructure expenses.
Income tax (expense) benefit. Income tax expense was $11,000 in 1996, and
the Company recorded a $33,000 tax benefit in 1997. The Company recorded income
tax expense in 1996 despite the Company's consolidated operating loss because
of income taxes paid by the Company's subsidiary in the United Kingdom which
reported taxable income. The Company has recorded a valuation allowance of
$5,304,000 for the full amount of its deferred income tax assets as of December
31, 1997 in accordance with SFAS No. 109.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net revenues. The Company's net revenues increased 47.0% from $4,121,000
in 1995 to $6,057,000 in 1996 due to increased sales of CD-ROM products, sales
of online product and royalties paid by third parties. Revenues from the
Company's online product increased from $6,000 in 1995 to $733,000 in 1996
because 1996 was the first year in which the Company had an online product
available for an entire year. The Company introduced its first online product,
WARBIRDS, in December 1995. Revenues from licenses to OEMs, international
distributors and other third parties increased by 186.1% from $165,000 in 1995
to $472,000 in 1996 primarily because the Company had more products to license.
Cost of revenues. Cost of revenues increased by 43.4% from $1,669,000 in
1995 to $2,393,000 in 1996. Cost of products sold increased by 70.8% from
$790,000 in 1995 to $1,349,000 in 1996 due to an increase in the total number
of units of CD-ROM products sold. Royalties and amortized costs increased by
18.8% from $879,000 in 1995 to $1,044,000 in 1996 because of increases in the
total number of products developed by third parties and published by the
Company in 1996. Also, the Company amortized or wrote off previously
capitalized product development costs of $69,000 in 1995 and $147,000 in 1996.
As a percentage of net revenues, cost of revenues decreased from 40.5% in 1995
to 39.5% in 1996 primarily because the cost of revenues generated by sales of
online products and licenses to OEMs, international distributors and other
third parties is significantly less than the cost of revenues generated by
sales of CD-ROM products. Revenues generated by these sources increased from
4.1% of net revenues in 1995 to 19.9% of net revenues in 1996.
Gross profit. Gross profit increased by 49.4% from $2,452,000 in 1995 to
$3,664,000 in 1996. As a percentage of net revenues, gross profit increased
from 59.5% to 60.5% primarily because the cost of revenues associated with the
sales of its online product and licenses to OEMs, international distributors
and other third parties is significantly less than the cost of revenues
generated by sales of CD-ROM products, and the revenues generated by those
sources increased from 4.1% of net revenues in 1995 to 19.9% of net revenues in
1996.
Sales and marketing. Sales and marketing expenses increased by 114.5% from
$2,335,000 in 1995 to $5,008,000 in 1996 primarily due to expenses related to
building an internal sales organization, while concurrently paying an
independent sales organization to sell the Company's products, as well as a
higher number of product releases. Sales and marketing expenses also increased
because the Company incurred expenses in 1996 to establish its international
distribution network, which included the costs associated with establishing
operating subsidiaries in the United Kingdom and Germany. As a percentage of
net revenues, sales and marketing expenses increased from 56.7% in 1995 to
82.7% in 1996.
Product development. Product development expenses increased by 149.5% from
$1,518,000 in 1995 to $3,788,000 in 1996 primarily because the Company hired
additional game designers, artists, programmers and developers with experience
developing technology used in online content delivery, 3D graphics and
artificial intelligence. As a percentage of net revenues, product development
expenses increased from 36.8% in 1995 to 62.5% in 1996. The Company capitalized
$289,000 (16.0% of gross product development costs) in 1995 and $79,000 (2.0%
of gross product development costs) in 1996.
General and administrative. General and administrative expenses increased
by 75.2% from $828,000 in 1995 to $1,451,000 in 1996 primarily because the
Company incurred professional fees to implement and test an automated
accounting system, added administrative personnel, established the Company's
United Kingdom operations and relocated its headquarters to a larger facility.
As a percentage of net revenues, general and administrative
25
<PAGE>
expenses increased from 20.1% in 1995 to 24.0% in 1996 because the Company was
investing in its infrastructure to handle the anticipated growth in revenues.
Other expense. Other expense, comprised primarily of interest expense,
increased 246.3% from $175,000 in 1995 to $606,000 in 1996 because the Company
incurred $6,451,000 in additional debt during 1996 to fund certain product
development, advance royalties and other infrastructure expenses.
Income tax (expense) benefit. Income tax expense was $47,000 in 1995 and
$11,000 in 1996. The Company recorded income tax expense despite the Company's
consolidated operating loss because of income taxes paid by the Company's
subsidiary in the United Kingdom which reported taxable income in each year. The
Company has recorded a valuation allowance of $3,472,000 for the full amount of
its deferred income tax assets as of December 31, 1996 in accordance with SFAS
No. 109.
Liquidity and Capital Resources
The Company's capital requirements have been and will continue to be
significant, and, to date, its cash requirements have exceeded its cash flow
from operations. The Company historically has satisfied cash requirements
through borrowings, the sale of equity securities, customer advances and
capital lease financings.
Net cash used in operating activities was $2,205,000 for 1995, $6,641,000
for 1996 and $3,773,000 for 1997. The Company had a $799,000 working capital
surplus as of March 31, 1998.
Net cash used in investing activities for the purchase of property and
equipment and software development costs was $972,000 during 1995. Net cash
used in investing activities for the purchase of property and equipment, other
investments (of which $120,000 was written off in 1997) and software development
costs was $762,000 in 1996. Net cash used in investing activities for the
purchase of property and equipment and software development costs was $1,231,000
during 1997 and $634,000 in the three months ended March 31, 1998.
The Company funded its operations during 1997 through the issuance of a
subordinated note to Petra on March 24, 1997 in the amount of $3,000,000,
borrowings of $500,000 from notes payable issued to related parties, borrowings
of $469,000 under its line of credit with BB&T and the issuance of a junior
subordinated debenture to Oberlin on September 29, 1997 in the amount of
$1,200,000. On February 4, 1998, the Company raised $3,500,000 in connection
with the sale of its Series B Preferred Stock.
The Company has a $2,750,000 revolving line of credit with BB&T which is
secured by the personal guaranty of the Company's principal shareholder. The
principal balance outstanding is payable on demand with interest payable
monthly at prime. At March 31, 1998, the Company had $2,461,000 in borrowings
against this line of credit. The Company also has a $150,000 equipment line of
credit with BB&T which is secured by certain of the Company's property and
equipment. The principal balance outstanding is payable on demand with interest
payable monthly at prime. At March 31, 1998, the Company had a balance
outstanding of $96,000 under this $150,000 line of credit. See "Certain
Transactions."
On April 30, 1998, the Company established a one-year $5,000,000 revolving
line of credit with Greyrock. Borrowings under this line of credit accrue
interest at prime plus 2%. Borrowings on the Greyrock line of credit are
limited to the lesser of $5,000,000 or 65% of the Company's outstanding
eligible domestic receivables and are collateralized by accounts receivable,
inventory and intellectual property of the Company (excluding its foreign
subsidiaries). As of May 1, 1998, borrowings on the line were $1,300,000, which
amounts were used by the Company to extinguish certain existing debt and
provide additional working capital.
The Company intends to use proceeds from this offering to repay the
$4,200,000 due to Petra and Oberlin, $1,500,000 of the amount outstanding under
its $2,750,000 revolving line of credit with BB&T, the $870,000 principal
amount, plus $117,175 accrued interest, outstanding under the Company's line of
credit from Laura M. Stealey, and $371,404 and $111,421 of the interest owed to
J.W. Stealey and Robert L. Pickens, respectively, for accrued interest on prior
loans that were converted by them into capital stock of the Company in 1998.
See "Certain Transactions."
The Company's future liquidity and capital requirements will depend upon
numerous factors, including the costs and timing of expansion of research and
product development efforts and the success of these efforts, the costs and
timing of expansion of sales and marketing activities, the extent to which the
Company's existing and
26
<PAGE>
new products gain market acceptance, competing technological and market
developments, the costs involved in maintaining and enforcing patent claims and
other intellectual property rights, available borrowings under line of credit
arrangements and other factors. The Company is dependent upon the proceeds of
this offering to complete the development of its currently proposed products
and fund its business strategies. Although the Company anticipates, based on
its currently proposed plans and assumptions relating to its operations
(including assumptions regarding the progress and timing of its new product
development efforts), that the net proceeds of this offering, together with
anticipated revenues from operations, availability under the Company's bank
lines of credit and cash and cash equivalents, will be sufficient to fund the
Company's operations and capital requirements for at least 12 months following
the consummation of this offering, there can be no assurance that such funds
will not be expended prior thereto due to unanticipated changes in economic
conditions or other unforeseen circumstances. In the event the Company's plans
change or its assumptions change or prove to be inaccurate, the Company could
be required to seek additional financing sooner than currently anticipated. The
Company has no current arrangements with respect to, or potential sources of,
any additional financing, and it is not anticipated that existing shareholders
will provide any portion of the Company's future financing requirements.
Consequently, there can be no assurance that any additional financing will be
available to the Company when needed, on commercially reasonable terms, or at
all. Any inability to obtain additional financing when needed would require the
Company to delay or scale back its product development and marketing programs,
which could have a material adverse effect on the Company. In addition, any
additional equity financing may involve substantial dilution to the interests
of the Company's then existing shareholders.
The Company's forecast of the period of time through which its financial
resources will be adequate to support its operations is a forward-looking
statement that involves risks and uncertainties, and actual results could vary.
The factors described in the preceding paragraph and in the Risk Factors
section of this document will impact the Company's future capital requirements
and the adequacy of its available funds.
Fluctuations in Operating Results
The Company's quarterly operating results have fluctuated significantly in
the past and will likely fluctuate significantly in the future depending on a
variety of factors, several of which are not in the Company's control. Such
factors include the demand for the Company's products and the products of its
competitors, the size and rate of growth of the interactive entertainment
software market, development and promotional expenses related to the
introduction of new products or enhancements, the degree of market acceptance
for the Company's new product introductions and enhancements, the timing of
orders from significant customers, delays in shipment, the level of price
competition, changes in computing platforms, the nature and magnitude of
product returns, order cancellations, software defects and other quality
problems, the length of product life cycles, the percentage of the Company's
sales related to international sales and changes in personnel. Based on the
foregoing, the Company believes that period to period comparisons of operating
results should not be relied upon as indicative of future results.
Income Taxes and Conversion from Subchapter S to Subchapter C Corporation
From the Company's inception in June 1994 through October 1995, the
Company operated under the provisions of Subchapter S of the Internal Revenue
Code of 1986, as amended (the "Code"), and consequently, was not subject to
federal income tax. On October 31, 1995, the Company terminated its Subchapter
S election and began operation under the provisions of Subchapter C of the
Code.
Impact of Adoption of New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." In addition, the American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
97-2, "Software Revenue Recognition, SOP 98-4, Deferral of the Effective Date
of a Provision of SOP 97-2, Software Revenue Recognition' and SOP 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." SFAS Nos. 130 and 131 and SOP 97-2 and 98-4 are effective for
fiscal years beginning after December 15, 1997. SOP 98-1 is effective for
fiscal years beginning after December 15, 1998. The Company does not believe
that adoption of these standards will have a material impact on the Company's
results of operations.
27
<PAGE>
Year 2000 Issue
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept entries to distinguish 21st century dates from 20th century
dates. The inability to recognize or properly treat the Year 2000 may cause the
Company's systems and applications to process critical financial and
operational information incorrectly. The Company continues to assess the impact
of the Year 2000 issue on its reporting system and operations. In addition, the
Company is assessing the readiness of its customers and suppliers for the Year
2000 issue; however, there can be no assurance that these third parties will
timely convert their systems or that their systems will not have an adverse
effect on the Company. While uncertainty exists concerning the potential
effects associated with such compliance, the Company does not believe that Year
2000 compliance will result in a material adverse effect on its financial
condition or results of operations.
28
<PAGE>
BUSINESS
General
The Company develops, publishes and distributes interactive real-time 3D
entertainment software, focusing on simulation and strategy games for CD-ROM
and online/Internet use. Since inception, the Company has published 26 titles
on CD-ROM that have been distributed through more than 15,000 retail outlets in
over 30 countries. Additionally, the Company's initial online product,
WARBIRDS, a World War II air combat simulation game, has generated sales of
over 1.4 million hours of online game time to players in more than 70
countries. Since its first product offering in August 1995, the Company has
been recognized each year with awards or critical acclaim from industry
associations and publications, including PC Games, PC Today, Computer Gaming
World, Power Play, PC Gamer, Computer Games Strategy Plus and the SPA. Since
such time, the Company's net revenues have also grown to $16,502,000 and
$4,913,000 for the year ended December 31, 1997 and the three months ended
March 31, 1998, respectively. The Company seeks to benefit from leveraging its
development, marketing and technological synergy across its dual distribution
channels.
Industry Overview
Background
The interactive entertainment software market is composed of software
primarily created for use on PCs and software created for video game consoles,
such as the Sony Playstation and Nintendo 64 entertainment systems. IDSA
reported that retail sales of interactive entertainment software in North
America reached $3.7 billion in 1996 and were projected to increase to $5.3
billion in 1997 and $8 billion in 2000. Worldwide entertainment software sales
were estimated by IDSA to have exceeded $10 billion in 1996, roughly divided
evenly among the United States, Europe and Asia. According to IDSA, market
penetration exceeded 40% of households in the United States in 1997, and PC
owners are increasing their purchases of game software. The Company believes
that the availability of lower-cost high performance multimedia PCs and modems
has contributed to and is expected to contribute to the increase in PC
ownership and thereby expand the use of the Internet and online services for
entertainment purposes.
Market for PC Simulation and Strategy CD-ROM Products
PC Data, an industry research firm, estimated that 1997 retail sales of PC
games were approximately $1.3 billion in North America. The simulation and
strategy segments had unit sales increases of 46.7% and 15.7%, respectively,
over 1996 sales. In 1997, simulation and strategy games represented
approximately 34.9% of the North American market for PC games. Simulation and
strategy products require sophisticated 3D graphics capabilities, advanced
artificial intelligence technology and significant research abilities to model
real-life military situations, historical scenarios or other strategy and
simulation subjects. In a simulation game, the player, acting as a pilot,
commander, captain or driver, controls a vehicle such as a plane, submarine,
ship or tank. A strategy game establishes the player as manager of a given set
of resources who must produce maximum results through discriminating use of
limited resources. The Company believes that the simulation and strategy
product market has a loyal domestic and international following of enthusiasts
who generally purchase multiple products throughout the year. According to a
market study conducted on behalf of the publisher of Computer Gaming World, a
leading industry magazine, the typical user of computer games is a male age 30
with an annual household income of $60,000. The Company believes that these
users are also prime candidates to participate in online games, as they tend to
be early adopters of new technology and equipment.
Market for Online Games
A 1997 Forrester Research report estimates that more than 6.9 million
consumers in the United States are currently playing games over the Internet,
generating revenues of $127 million in 1997, and projects that 18 million
consumers will generate $1.6 billion in revenues in 2001. These revenues
encompass direct pay-for-play online game play, online CD-ROM sales,
advertising and sponsorships. The emerging popularity of online games is
evidenced by the recent appearance of dedicated game networks, such as Mplayer,
America Online's Game Channel, Microsoft's Internet Gaming Zone, Kesmai's
Gamestorm, Total Entertainment Network and the Company's pay-for-play service,
iMagic Online. While a number of multiplayer games are available over the
Internet, generally only four, eight, or 16 players can play simultaneously
with or against each other. By contrast, large-scale multiplayer games permit a
significantly greater number of simultaneous players (frequently hundreds).
29
<PAGE>
The Company's Market Position
The Company believes it is well-positioned to capitalize on the emerging
market for online large-scale multiplayer games by leveraging its experience in
the growing market for high-quality strategy and simulation products on CD-ROM.
To date, five of the Company's titles have been nominated or selected as either
simulation or strategy game of the year by major industry magazines. In April
1997, the Company acquired ICI, which was among the first to introduce a
real-time large-scale multiplayer game on the Internet, permitting hundreds of
players to play simultaneously with or against each other, when it released its
WARBIRDS simulation game in 1995. WARBIRDS has been named best online game for
1996 and 1997 by PC Games magazine.
Strategy
The Company's objective is to become one of the world's leading providers
of CD-ROM and real-time large-scale multiplayer online simulation and strategy
games. Key elements of the Company's strategy are to:
Increase online recurring revenue. The Company was among the first to
enter the emerging market for real-time large-scale multiplayer online games.
The Company intends to leverage its experience in online games to strengthen
its position as a leading content provider by developing and delivering
sophisticated real-time large-scale multiplayer simulation games through its
online service on a subscription basis, plus additional fees for hours played
beyond the subscription allocation, and thereby increase the Company's
recurring revenues. In addition, the Company intends to leverage the marketing
resources of third parties and broaden its user base by partnering with
selected Internet service providers, online service providers and foreign
licensees to distribute its online products.
Focus on simulation and strategy games and expand brand recognition. The
Company focuses primarily on the simulation and strategy markets. The Company
intends to capitalize on management's extensive experience and knowledge of
these particular markets and on the favorable demographic profile of simulation
and strategy enthusiasts. The Company believes the typical user of its products
is a male over age 25 with sufficient disposable income to buy the latest
games. By focusing on delivering highly playable, entertaining games with high
quality graphics, the Company believes it has built strong brand recognition
and consumer loyalty among game enthusiasts. The Company intends to build upon
this loyalty by selectively creating franchise titles through publication of
sequels and add-ons to existing games.
Manage risk through internal and external product development. The Company
believes that using both internal and external development sources and keeping
the product development pipeline full assists in managing risk, maximizing
creativity and ensuring the consistent release of future products. Toward that
end, the Company currently works with 11 external development teams, which
complement the Company's internal development efforts. External development
teams provide leverage in that full development expenses generally are not
absorbed by the Company, advance royalties are fixed and development cycles
that may result in late delivery of a particular product do not affect the
delivery of other products planned for release. The Company intends to remain a
"value added" publisher of externally developed titles, ensuring product
quality by providing independent developers with access to its technology,
software tools and libraries, software design assistance, product design advice
and other services. In doing so, the Company intends to control the cost of
product development and spread the risk of product development across a number
of titles.
Expand worldwide distribution network. The Company currently sells its
CD-ROM products through leading software distributors and retailers in North
America and abroad. The Company intends to increase penetration within the
channels that can enhance the distribution of its CD-ROM products to its core
customer base worldwide, including computer and software retailers, consumer
electronics retailers and mass merchandisers. The Company currently distributes
its online products via the Internet through its iMagic Online game service and
intends to expand its distribution through relationships with third-party
providers of online and Internet services, both in the United States and
abroad. Maintaining strong and focused distribution channels enhances the
Company's ability to attract and retain employees and external development
partners.
Leverage core technologies. The Company maintains a dedicated research and
development staff which focuses on developing core technologies that can be
applied across multiple titles. The Company has filed a patent application with
respect to its MEGAplayer technology, which is a method of and system for
minimizing the effect of time latency in multiplayer electronic games played on
interconnected computers. The Company
30
<PAGE>
has developed graphics engines, game engines and communication technologies
which can be used in a number of different games in a cost-effective manner.
Specifically, the Company has five core technologies which it currently employs
to maximize efficiencies and cost effectiveness across its product line: (1)
MEGAplayer -- an architecture for enhancing Internet game play; (2) DEMON -- 3D
terrain optimization model; (3) TALON -- a dynamic mission generation system;
(4) MEGAvoice -- real-time voice communication technology; and (5) iMOL/SDK --
a software toolkit to provide a common interface among various communication
protocols for online game play. See " -- Technology."
Expand operations through strategic acquisitions. The Company intends to
expand its operations through strategic acquisitions as potential opportunities
become available. While the Company is not engaged in any acquisition
negotiations at present, potential targets may include other interactive
entertainment software publishers, game developers or distributors,
particularly distributors with international networks.
Products
General
The Company's products consist of sophisticated real-time, 3D simulation
and strategy games that are available on CD-ROM or, for its online products,
accessed on iMagic Online, the Company's online game service. To date, the
Company has published 27 products, one of which is a real-time large-scale
multiplayer online game, and has two additional real-time large-scale
multiplayer online games in the pre-release testing stage. Over one quarter of
these products have won awards or achieved other critical acclaim from industry
publications, including PC Games, PC Today, Computer Gaming World, Power Play,
PC Gamer and Computer Games Strategy Plus. The Company intends to expand the
distribution of its online large-scale multiplayer games through third-party
providers of online and Internet services to access a broader market base of
subscribers. Most of the Company's CD-ROM products are designed for play as
both single-player and multiplayer (up to 16 players) games and include various
levels of difficulty, so that both novice and experienced players can enjoy the
Company's games.
Simulation Products
A simulation product puts the player in control of a vehicle, such as a
helicopter, tank, or airplane, and allows the player to conduct missions in a
replicated real-world environment. These products are characterized by the
authenticity of the simulated vehicle, reproduction of enhanced performance
criteria and a realistic perspective using real-time rendered 3D graphics,
providing the player with a 360- view of the external environment. For example,
iF-22 utilizes the Company's proprietary DEMON 3D terrain technology, which can
incorporate thousands of square miles of satellite photography for a realistic
depiction of actual terrain. The Company's simulation titles are listed below,
followed by a brief description of several of the Company's most popular
simulation titles.
Simulation Products
<TABLE>
<CAPTION>
Title Release Date
- -------------------------------------------
<S> <C>
APACHE August 1995
- -------------------------------------------
STAR RANGERS November 1995
- -------------------------------------------
WARBIRDS December 1995
- -------------------------------------------
HIND September 1996
- -------------------------------------------
AIR WARRIOR II February 1997
- -------------------------------------------
iM1A2 ABRAMS March 1997
- -------------------------------------------
iF-22 July 1997
- -------------------------------------------
iF-16 September 1997
- -------------------------------------------
AIR WARRIOR III December 1997
- -------------------------------------------
iF-22 PERSIAN GULF March 1998
- -------------------------------------------
iPANZER 44 March 1998
- -------------------------------------------
</TABLE>
31
<PAGE>
WARBIRDS, the Company's first online product offering, recreates World War
II air combat. WARBIRDS, named "Online Game of the Year" for both 1996 and 1997
by PC Games magazine, allows hundreds of players from around the world to
simultaneously fly air combat missions in a single campaign. After logging on
to iMagic Online, players choose to fly for one of four teams, select an
airplane from an array of 50 historically accurate bombers or fighters and
choose a role as a pilot, gunner or bomber. Individual combatants then engage
in dogfights or fly bombing missions over enemy territories, with the outcome
of each individual mission affecting the outcome of the overall campaign. For
example, successfully destroying the air defenses of and landing on an enemy's
airfield results in a country capturing that airfield. Airfields can be lost
and recaptured, providing a strategic as well as a tactical aspect to WARBIRDS.
Game play is broken up into three-week campaigns with a dogfighting and bombing
"ace" named for each campaign. A campaign starts with a limited array of planes
and more advanced planes become available as the campaign progresses to
incorporate the effect of technological advances. 3D rolling terrain graphics,
as well as the incorporation of the Company's MEGAvoice technology, which
provides real-time voice communications with groups of up to four game
participants, add to the realism of WARBIRDS. Through its proprietary
MEGAplayer technology, the Company is able to deliver via the Internet the full
3D graphics and action of WARBIRDS in real time to large numbers of players who
can enter the game 24 hours a day, seven days a week.
APACHE was the Company's first published product. APACHE is an air-combat
simulation of the AH-64D Apache Longbow Helicopter for players of all
experience levels. APACHE uses 3D visual technology optimized to provide
low-altitude detail and clarity and includes a multiplayer networking feature
to permit up to eight players and two teams to engage in simultaneous combat.
Since its release in August 1995, the Company has sold more than 175,000 copies
of APACHE. APACHE received two Codie Award nominations from the SPA and was
named "Best Simulation of 1995" by both PC Gamer magazine and Strategy Plus
magazine.
iM1A2 ABRAMS simulates the U.S. Army's main battle tank, the M1A2 Abrams.
The user is able to command a platoon of four tanks, or an entire company,
including other vehicles, artillery helicopters and artillery in a variety of
battles or campaigns of linked battles set in the Persian Gulf, the Balkans and
the former Soviet Ukraine against the latest Russian equipment. iM1A2 ABRAMS
uses advanced 3D graphics technology and contains multiple difficulty levels.
iPANZER 44 is the recently released follow-up to iM1A2 ABRAMS, allowing players
to command World War II Russian, American and German tanks. iPANZER 44 takes
advantage of Microsoft's Direct 3D technology to allow support for many 3D
graphic accelerator cards.
iF-22 is an internally developed simulation of the U.S. Air Force's newest
air-superiority fighter. The player is able to command a squadron of four F-22
aircraft executing single missions or protracted campaigns. iF-22 incorporates
the Company's DEMON advanced 3D graphics and terrain technology, multiple
difficulty levels, multiple flight models and a multiplayer option. Released in
July 1997, sales of iF-22 have exceeded 150,000 units to date. iF-22 PERSIAN
GULF, the recently released sequel to iF-22, includes the Company's TALON
(Total Air & Land Operations Network) campaign system, which generates new
mission assignments each time the game is played. The iF-22 PERSIAN GULF release
is compatible with computers equipped with Intel's new AGP (Advanced Graphics
Port) technology.
Strategy Products
A strategy product requires the player to achieve maximum results through
management of a specific set of resources. The Company produces sophisticated
strategy games that include historical military scenarios, empire building and
tactical strategy products. The Company's existing strategy products generally
are characterized by historically accurate databases and advanced artificial
intelligence. Strategy games generally have lower initial shipment quantities
but generally sustain prices longer and maintain longer shelf-lives than
simulation products. Strategy games also can utilize the same core components
across a number of different products, which facilitates the creation of a
franchise, such as the Company's three-game Great Battles series, GREAT BATTLES
OF ALEXANDER, GREAT BATTLES OF HANNIBAL and GREAT BATTLES OF CAESAR. The
Company's strategy titles are listed below, followed by a brief description of
several of the Company's strategy titles.
32
<PAGE>
Strategy Products
<TABLE>
<CAPTION>
Title Release Date
- -------------------------------------------------------------
<S> <C>
EXPLORATION September 1995
- -------------------------------------------------------------
CAPITALISM October 1995
- -------------------------------------------------------------
AMERICAN CIVIL WAR June 1996
- -------------------------------------------------------------
BRUCE JENNER'S WORLD CLASS DECATHLON July 1996
- -------------------------------------------------------------
DESTINY September 1996
- -------------------------------------------------------------
HARPOON CLASSIC '97 November 1996
- -------------------------------------------------------------
FALLEN HAVEN March 1997
- -------------------------------------------------------------
CAPITALISM PLUS May 1997
- -------------------------------------------------------------
GREAT BATTLES OF ALEXANDER June 1997
- -------------------------------------------------------------
WAR, INC. September 1997
- -------------------------------------------------------------
SEVEN KINGDOMS November 1997
- -------------------------------------------------------------
GREAT BATTLES OF HANNIBAL November 1997
- -------------------------------------------------------------
SEMPER FI February 1998
- -------------------------------------------------------------
GREAT BATTLES OF CAESAR March 1998
- -------------------------------------------------------------
LIBERATION DAY March 1998
- -------------------------------------------------------------
INDUSTRY GIANT April 1998
- -------------------------------------------------------------
</TABLE>
CAPITALISM, the Company's highly acclaimed business strategy and
simulation product, was a runner-up to APACHE as the "Best Simulation" of 1996
by PC Gamer magazine. CAPITALISM gives the player resources with which to build
a global financial empire. CAPITALISM sold in excess of 100,000 units by the
end of 1997. CAPITALISM PLUS, an update of CAPITALISM, includes a new
interface, improved graphics, maps and a soundtrack. A second sequel to
CAPITALISM is planned for release in 1999.
AMERICAN CIVIL WAR, the Company's highly acclaimed strategic Civil War
battle simulation, covers the entire Civil War from the opening guns of Bull
Run to the final surrender of the army of Northern Virginia. This strategy
product allows players to command forces from either side, recruit troops,
build ships, form armies, corps and fleets. AMERICAN CIVIL WAR includes an
historically accurate database featuring over 125 Union and Confederate
commanders.
SEVEN KINGDOMS, one of the Company's newest strategy games, has won
various awards, including "Strategy Game of the Year" by Germany's PC Power
Play magazine. SEVEN KINGDOMS presents players with a special challenge of
real-time action and strategy set in a medieval fantasy world of monsters, gods
and opposing cultures. Two sequels to SEVEN KINGDOMS are planned, with the
first scheduled for release in 1998.
Future Products
The Company has 19 products in development for release over the next 18
months, including five internally-developed products and 14 under contract with
external developers. Two of these products, FIGHTER OPS and RAIDER WARS, are
online games which have undergone beta testing on the Company's online service.
There can be no assurance that, if introduced, such products will achieve
market acceptance or generate significant revenues. A significant delay in the
introduction of, or the presence of a defect in, one or more of such titles or
other new products or the failure of such titles to generate significant
revenues could have a material adverse effect on the success of such titles and
on the Company's business, operating results and financial condition. The
Company plans to develop certain of its future products both as CD-ROM games
and large-scale multiplayer online products. The Company believes that a
carefully planned release date on both delivery platforms can increase sales of
the product. ULTRAFIGHTERS and MALKARI, each of which is intended to be
playable both as a CD-ROM product and as a large-scale multiplayer online
product, are scheduled for release in 1998. There can be no assurance that such
products will be released on schedule for either delivery platform or that the
release of such titles on either CD-ROM or online will achieve market
acceptance or generate significant revenues for the Company. In
33
<PAGE>
addition, the Company intends to offer its online products to third-party
providers of online and Internet services and licensees to reach a larger
audience. There can be no assurance that satisfactory arrangements with other
distributors and licensees can be negotiated, or that its online products will
be successful or generate significant revenues for the Company.
Distribution
The Company uses a dual channel distribution strategy by delivering its
CD-ROM products for retail sale through its worldwide distribution network and
its online games via the Internet.
Distribution of CD-ROM Products
The Company's CD-ROM products are distributed in over 30 countries through
more than 15,000 retail outlets. In North America, the Company sells its
products both through distributors and directly to large retailers. The Company
maintains distribution relationships with seven major distributors, including
Navarre, Tech Data, Merisel, Inc., Guillemot, GT Interactive Software
Corporation and Beamscope Canada, Inc. The Company's products are sold by many
of the larger retailers, such as Wal-Mart, Best Buy and CompUSA in North America
and Karstadt, Dixon's and PC World in Europe. Although such retailers may
purchase the Company's products through distributors, the Company believes that
it is important to maintain favorable relationships with the retailers in order
to promote the visibility of its products. The Company's products constitute a
relatively small percentage of a retailer's sales volume, however, and there can
be no assurance that retailers will continue to purchase the Company's products
or provide the Company's products with adequate levels of shelf space and
promotional support. For the year ended December 31, 1997, sales to the
Company's distributors accounted for approximately 65% of the Company's net
revenues. In 1996, Tech Data and Navarre accounted for 27% and 11%,
respectively, of the Company's net revenues; in 1997, Tech Data and Electronics
Boutique, Inc. accounted for 19% and 10%, respectively, of the Company's net
revenues; and in the three months ended March 31, 1998, Navarre, Guillemot, Tech
Data and Electronics Boutique, Inc. accounted for 15%, 16%, 12% and 10%,
respectively, of the Company's net revenues.
Simulation and strategy products have a large international following.
Accordingly, the Company has established wholly-owned subsidiaries in the
United Kingdom and Germany which serve the European market. Approximately
one-third of the Company's sales are generated in the European marketplace. In
addition, the Company contracts with distribution agencies in Japan, Singapore,
South America, Korea, South Africa and Australia. In certain territories
(Spain, Italy and France, for example) the Company may elect to license its
products to a local publisher in exchange for guaranteed volume requirements
and a committed royalty.
Alternate distribution channels such as direct mail to consumers, direct
ordering through a toll-free phone number and the Company's web site and
OEM/bundling arrangements, account for less than 6% of the Company's net
revenues.
Distribution of Online Games
The Company currently delivers its online games via iMagic Online, the
Company's online game service. The Company's host software runs on a UNIX-based
system and to date has been operated on Sun workstations and Pentium-based
systems. Reliability is enhanced by RAID systems for data storage, access to
the Internet via multiple T-1 lines from various providers and software
backups.
The Company emphasizes sophisticated online games for which users pay a
subscription fee, plus additional hourly fees for time played beyond the
subscription allocation. The Company believes that with the continued
proliferation of Internet usage, providers of online and Internet services will
become an increasingly important channel for global distribution of its
real-time large-scale multiplayer games. The Company presently has one game
available on a pay-for-play basis on its online game service with plans to add
four additional games in the next 12 months. Currently, the Company is
negotiating with several major providers of online and Internet services in
North America, Germany, the United Kingdom, Japan, and Brazil for rights to
distribute certain of the Company's online products. There can be no assurance
that the Company will successfully negotiate relationships with providers of
online and Internet services or, if completed, that such arrangements will
generate significant revenues. The Company could be materially adversely
affected if the cost to the Company of any proposed online distributor
relationship exceeds expectations or if the Company incurs significant costs in
anticipation of the arrangement and the arrangement is delayed or abandoned.
34
<PAGE>
The Company seeks to leverage its CD-ROM sales by including the front-end
software for its online products (currently WARBIRDS) in its CD-ROM releases.
Customers can download the program from the iMagic Online web site or access it
from the CD-ROM distributed by the Company. To play online, users subscribe for
a fixed number of hours on a monthly basis and may pay to play additional hours
beyond the level included in the subscription agreement. The software can be
played alone offline or head-to-head against another player at no charge. Game
play from WARBIRDS has now exceeded 1.4 million paid hours. The Company has
additional online products in development and intends to continue to update its
existing and future online games in order to continue the flow of recurring
revenue from this distribution channel. There can be no assurance that the
Company will be able to develop new products or enhancements to existing online
products, or that such products or enhancements will be successful or continue
to produce recurring revenues.
Marketing
The Company pursues different marketing strategies for its CD-ROM game
sales and online game sales, while seeking to capitalize on the synergy of the
two strategies.
CD-ROM Game Sales
The Company believes that marketing and product positioning are critical
factors to the success of its retail games and focuses much of its effort on
the creation of market awareness surrounding its upcoming product releases. The
Company utilizes a wide range of consumer marketing techniques to position its
products. These techniques include online marketing on the Company's web site,
placement of demonstration versions on Internet game sites, print and web
advertising, distribution of demonstration disks and appearances at industry
trade shows.
The Company supports its retail products through market development funds.
These funds are used primarily for in-store promotions, point-of-purchase
displays and other advertising and promotional techniques coordinated with the
Company's retail partners. The Company maintains a database of existing and
potential customers through reader response cards and buyer registration cards
for use in direct marketing efforts.
Online Game Sales
The Company's online marketing focuses on strategies for increasing
recurring revenues from the current customer base while recruiting new
customers. The Company seeks to increase revenues from the current customer
base through community building programs, such as regular e-mail updates to
subscribers, training programs and sponsorship of online events, contests and
conventions attended by subscribers. For example, the Company is promoting the
development of "communities" of regular WARBIRDS flyers who participate in
special promotional events, such as squadron conferences, conventions and
competitions around the world. To date, over 100 of these informal squadrons or
communities exist. In addition, the Company is committed to providing extensive
technical support to its customers. The Company believes that as a result of
these efforts, it has developed significant customer loyalty, encouraging long
term customer game play.
The Company seeks to attract new customers by increasing its Internet
presence through a targeted marketing plan. This plan includes an Internet
advertising campaign, an Internet-based public relations campaign, and special
promotions with key industry partners, such as web sites and specialized
magazines. In addition, the Company intends to increase its visibility and that
of its products by seeking to establish relationships with third party
providers of Internet and online services.
Marketing Synergy
The Company continually seeks to develop the synergy of its retail and
online marketing strategies, a key component of which is building a common
brand awareness. The Company has developed brand awareness through the success
of its award-winning releases, the reputation and visibility of the Company's
Chairman (including his past experience in the interactive entertainment
software industry), its focus on simulation and strategy products, the easily
recognizable color-block design of its product packaging and its distinctive
corporate logo. Other marketing synergy includes cross-promotion of its games
at retail and online. On the retail side, this includes bundling the software
for WARBIRDS and other large-scale multiplayer games on CD-ROMs of retail
product releases. The Company is developing a web-based lobby service to match
up players of its CD-ROM games to participate in multiplayer (up to 16 players)
games. By bringing these players to its web site, the Company intends to use
this opportunity to market its online and other retail games.
35
<PAGE>
As of March 31, 1998, the Company's marketing and sales staff included 30
employees in four offices located in the Research Triangle Park area, North
Carolina; Grapevine, Texas; Bracknell, United Kingdom; and Guetersloh, Germany.
The Company expects to increase its marketing and sales staff in these
locations and expand its offices geographically where appropriate.
Technology
The Company focuses on developing technologies that can be applied across
the Company's product line or shared among similar types of products.
The Company has filed a patent application on its MEGAplayer technology,
which addresses problems inherent in high and variable latency networks such as
the Internet. The Company's online games allow more than 250 simultaneous
Internet users to play in a single arena with less "warping." Warping occurs
when other players appear to jump or "warp" across the computer screen instead
of moving smoothly. The Company believes that its technology allows a player to
enjoy a more realistic experience, which greatly enhances game play. The
Company intends to incorporate MEGAplayer technology in future real-time online
products.
The Company also has developed its MEGAvoice technology, which allows
groups of up to four players to engage in real-time voice communication over
the Internet while playing the Company's simulations. This technology utilizes
bandwidth efficiently while limiting any impact on simultaneous game play.
The Company's proprietary 3D graphics engine, DEMON, is a highly
optimized, real-time terrain rendering system for use in the development of
flight simulation and other 3D products. DEMON, utilizing satellite photography
and matching real world elevation data, produces strikingly authentic views
with near-realistic depiction of mountains, rivers, forests, fields, cities,
roads and other terrain features, just as a pilot would see if he or she were
actually flying over that area of the world. DEMON, in conjunction with other
proprietary data processing tools, is capable of handling large amounts of
data, such as the 80,000 square miles of terrain present in a single combat
theater in the iF-22 product. The engine was jointly developed with Numerical
Design Limited ("NDL"). The Company owns the code for DEMON, however, NDL has
retained rights to use the code in non-competitive markets, subject to the
payment of royalties to the Company. The Company intends to continually upgrade
this technology to add new features that will become available as a result of
rapidly changing hardware technology.
TALON is a dynamic mission generation system that enhances the replay
value of the Company's simulation games. TALON generates new mission
assignments each time the game is played. The Company believes that the TALON
system adds significant value to its products when compared to games with a
limited number of static missions.
The Company has developed a proprietary software toolkit to provide
interfaces that will allow online game play across different communications
protocols, such as varying local area networks and wide area networks. This
toolkit is intended to facilitate the communications capabilities of games,
freeing the product developers' time to focus on content. The Company intends
to update and supplement this toolkit as technology changes.
Product Development
General
The Company seeks to publish high quality content developed by both
internal and external sources. By releasing a variety of products and keeping
the product development pipeline full, the Company seeks to spread its risk and
development costs across a number of products, rather than focusing all of its
development efforts and funds on a single product or a small group of products
in an effort to produce the next blockbuster title. The Company anticipates
that in the next 18 months, approximately one-third of the Company's products
will be internally developed.
External Development
The Company typically enters into development agreements with external
software developers around the world. These development agreements generally
include an up-front payment as an advance on future royalties owed as well as
certain milestone payments and bonus or penalty clauses for early and late
product delivery, respectively. The Company generally pays a royalty of 15% to
25% of the Company's net revenues from sales
36
<PAGE>
of the licensed product. Most contracts include exclusive worldwide
distribution rights. The Company currently has 11 strategic relationships with
external developers from around the world.
The Company is continuously evaluating product proposals submitted by
third-party developers and may enter into contracts with such third parties for
one or more products. For example, in March 1998, the Company signed a
five-year development agreement with Enlight Software, developer of CAPITALISM,
CAPITALISM PLUS, and SEVEN KINGDOMS, the Company's best-selling strategy games.
The agreement calls for the development of at least three major new projects
and four upgrades to existing products. The Company will have exclusive
worldwide distribution rights to games developed under this agreement.
The Company considers itself to be a "value-added" publisher of products
developed by third parties, as the Company routinely provides developers with
software tools and libraries, software design assistance, product design and
other services to ensure the quality of the licensed products. The Company's
internal development staff closely monitors the progress of external developers
to ensure the quality of the licensed products, including all final testing
prior to a product's release.
Internal Development
Internally developed products use a combination of proprietary and
licensed software technology. The Company also supplements its in-house
development capabilities with third-party music composition, technical writing
services and select technical consulting. As of March 31, 1998, the Company's
research and development staff consisted of 79 employees. The Company believes
it has recruited talented employees with significant experience in the computer
game industry and complementary industries. The Company's development team
includes professionals experienced in client-server technology, 3D graphics,
imaging, video and audio technology, large networking systems and U.S.
Department of Defense weapons and testing systems.
The Product Development Process
The development cycle for new products ranges from six to 24 months and,
for online products, continues for the life of the products. Consequently, the
Company believes that discipline is critical to management of the software
development process and requires both internal and external development efforts
to adhere to a scheduled process. Generally, each new internally developed
product begins as a brief design document proposed by the Company's internal
development staff. Following management approval, the product's designer drafts
a detailed product design specification, programmers develop the software
design and create a schedule based on that design, and artists develop
storyboards and the art production schedule. The Company then develops the
overall project schedule and budget, including a scheduled release date and a
marketing and sales plan. The Company typically reviews externally developed
products in various stages of development, and, once the Company has selected
and contracted for a product, the Company's product development staff then
manages the product development process with the external developer in a manner
similar to the Company's internal development process.
Throughout the development phase of each product, whether internally or
externally developed, the Company implements a number of quality control
procedures. The software is carefully designed, implemented and tested by the
programmers, followed by frequent testing releases. Each product is played and
critiqued by the Company's in-house playtest staff and other Company employees.
Products are then submitted to groups of up to 50 external playtesters. This
product test process reduces implementation defects and provides design and
playability feedback in a timely manner for incorporation into the finished
product.
The introduction of new products is subject to the inherent risks of
development delays. Many of the Company's products are in early stages of
development, and the Company will be required to commit considerable time,
effort and resources to complete development of its currently proposed
products. The Company has, in the past, experienced significant delays in the
introduction of certain new products and there will likely be delays in
developing and introducing new products in the future. In addition, because
many of the Company's products are developed for it by third parties, the
Company cannot always control the timing of their introduction. While the
Company maintains production arrangements with its third-party developers,
provides them with certain software toolkits to promote quality control and
monitors their progress, there can be no assurance that delays in the work
performed by third parties or poor quality of such work will not result in
product delays.
37
<PAGE>
Production and Manufacturing
The Company contracts with independent fulfillment vendors to produce,
ship and manage inventory of the Company's CD-ROM products, including returns.
For each published product, the Company prepares a master software disk,
artwork, camera-ready user manual and collateral materials which are sent to
such fulfillment vendors for duplication, assembly and packaging. The Company
inspects randomly selected copies of finished products prior to authorization
of shipment. Upon Company approval, the fulfillment vendor ships the finished
goods directly to the distribution channels specified by the Company via a
purchase order. The Company maintains relationships with several fulfillment
vendors to ensure access to supply and competitive pricing.
Competition
The interactive entertainment software market is intensely and
increasingly competitive. The market is characterized by the continual
introduction of new software products and technologies. The ability to compete
successfully depends primarily on the ability to develop and market high
quality products, access to distribution channels, including retail shelf
space, the availability and quality of support services for the products and
price. The Company believes that it competes favorably with respect to each of
these factors. In addition, the Company believes that online games represent an
important emerging segment of the interactive entertainment software market.
While other companies currently offer online games, few companies offer
real-time large-scale multiplayer simulation games via the Internet.
At present, the Company competes primarily against other companies
offering high-end simulation and strategy products. In particular, the
Company's competitors for its CD-ROM products include NovaLogic, Inc.,
Electronic Arts, Inc., MicroProse, Inc., Interplay Entertainment Corp.,
Activision, Inc. and Cendant Corp. (formerly CUC/Sierra On-Line). The Company
also competes with companies providing online games, including Kesmai
Corporation, VR1 Inc., Simutronics Corporation and NovaLogic, Inc. Many of the
Company's existing and future competitors have greater financial, technical,
marketing, sales and customer support resources, as well as greater name
recognition and better access to consumers, than the Company. There can be no
assurance that the Company will respond effectively to market or technological
changes or compete successfully in the future.
Intellectual Property and Other Proprietary Rights
The Company holds copyrights on its products, manuals, advertising and
other materials and has received federal trademark protection for the Company
name, the form of the Company logo and the names of certain products published
by the Company. The Company does not acquire the copyrights for works developed
by third parties under license that the Company publishes. The Company has
applied for a patent on its MEGAplayer technology that enables its online
products to function more effectively on the Internet. There can be no
assurance that the patent application for the Company's MEGAplayer technology
will result in the issuance of a patent with the United States Patent and
Trademark Office.
The Company has received registrations with respect to the following
trademarks: Interactive Magic, I-Magic, the Interactive Magic logo and Star
Rangers, and has applied for trademark registrations with respect to iM1A2
Abrams and Hind. The Company relies on common law to protect its other
trademarks. The Company believes that registered and common law trademarks and
common law copyrights are important, but are less significant to the Company's
success than factors such as the knowledge, ability and experience of the
Company's personnel, research and development, name recognition and product
quality.
The Company has developed proprietary technologies in the areas of 3D
graphics and client/server architecture. The Company protects its proprietary
technologies through various security practices. Each employee must sign a
confidentiality agreement which includes a provision that grants the Company
ownership of all intellectual property. As an additional protective measure,
only a limited number of development personnel have access to the source code
for the Company's software. While the Company relies on a combination of
trademark, trade secret, copyright and other proprietary rights laws, license
agreements, employee and third-party non-disclosure agreements and other
methods to establish and protect its proprietary rights, there can be no
assurance that the steps taken by the Company will be adequate to prevent
misappropriation of the technology or independent development by others of
software products with features based upon, or otherwise similar to, those of
the Company's products. To license its products to end users, the Company
primarily relies on "shrink wrap" licenses that are not signed by the end-user
and, therefore, may be unenforceable under the laws of certain jurisdictions.
In addition,
38
<PAGE>
effective copyright and trade secret protection may be unavailable or limited
in certain foreign countries, and the global nature of certain wide area
networks, particularly the Internet, makes it virtually impossible to control
the ultimate destination of the Company's products. Despite the Company's
efforts to protect its proprietary rights, unauthorized parties may attempt to
copy aspects of the Company's products or to obtain and use information that
the Company regards as proprietary. Unauthorized copying is common within the
software industry, and if a significant amount of unauthorized copying of the
Company's products were to occur, the Company's business, operating results or
financial condition could be adversely affected. As the number of software
products in the industry increases and the functionality of these products
further overlaps, software developers may become increasingly subject to
infringement claims. There can be no assurance that third parties will not
assert infringement claims against the Company in the future with respect to
current or future products. As is common in the industry, from time to time,
the Company receives notices from third parties claiming infringement of
intellectual property rights of such parties. The Company investigates these
claims and responds as it deems appropriate. Litigation may be necessary in the
future to enforce the Company's intellectual property rights, to protect the
Company's trade secrets, to determine the validity and scope of the proprietary
rights of others, or to defend against claims of infringement or invalidity.
Any such litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on the Company's business,
operating results or financial condition.
Employees
As of March 31, 1998, the Company employed 121 people, including 72 on a
full-time basis and 7 on a part-time basis in research and development, 30 on a
full-time basis in sales and marketing and 12 on a full-time basis in finance
and administration. Competition for highly skilled employees with technical,
management, marketing, sales, product development and other specialized
training is intense. There can be no assurance that the Company will be
successful in attracting and retaining such personnel. The Company and its
employees are not parties to any collective bargaining agreements. The Company
believes that its relations with its employees are good.
Properties
The Company leases 18,452 square feet of office space in the Research
Triangle Park area, North Carolina, which it uses as its principal executive
offices. The Company leases 4,895 square feet of office space in Grapevine,
Texas as a regional development office. The Company also leases 1,520 square
feet of office space in Bracknell, United Kingdom, and 1,500 square feet of
office space in Guetersloh, Germany, for the Company's foreign operations. The
Company believes that its existing facilities are adequate to meet its current
needs and that suitable additional or substitute space will be available as
needed to accommodate any expansion of operations.
39
<PAGE>
MANAGEMENT
Directors and Executive Officers
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- -------------------------------------- ----- ------------------------------------------------------------------
<S> <C> <C>
J. W. Stealey(2) .................... 50 Chairman of the Board of Directors and Chief Executive Officer
Robert L. Pickens ................... 51 President and Chief Operating Officer
Joseph Rutledge ..................... 46 Senior Vice President -- Development
Raymond Rutledge .................... 56 Vice President -- Licensing
Joseph R. Mannes .................... 39 Vice President and General Manager, Online Games
William H. Marks(3) ................. 46 Chief Financial Officer, Vice President -- Finance, Secretary and
Treasurer
David H. Kestel(2) .................. 65 Director
J. Nicholas England(1) .............. 50 Director
W. Joseph McClelland(1)(2) .......... 52 Director
Avi Suriel(1) ....................... 38 Director
</TABLE>
- ------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
(3) Mr. Marks will join the Company prior to the date of this Prospectus.
J. W. Stealey has been Chairman of the Board of Directors and Chief
Executive Officer of the Company since January 1995. Previously, he was
founder, Chairman and Chief Executive Officer of MicroProse, Inc., a leading
developer and publisher of flight simulation and strategy software titles from
1982 to 1993. Prior to 1982, Mr. Stealey was Group Director of Business
Development of General Instruments. Prior to joining General Instruments
Corporation, Mr. Stealey held management consulting positions with Cresap,
McCormick and Paget and McKinsey & Co. in New York, New York. Mr. Stealey
earned a B.S. degree in Aeronautical Engineering from the United States Air
Force Academy. After graduation from the Academy, Mr. Stealey spent six years
as an operational pilot in the United States Air Force. Mr. Stealey also
received an M.B.A. in finance and strategic management from the Wharton School
of Business of the University of Pennsylvania.
Robert L. Pickens has been President and Chief Operating Officer of the
Company since its incorporation in May 1994. From 1986 to 1994, Mr. Pickens was
President and Chief Executive Officer of Washington Aluminum Company, where he
was responsible for the operations and business administration of its five
divisions. From 1970 to 1986, Mr. Pickens held various operations and sales
positions at Kaiser Aluminum and Chemical Corporation, including managing
Kaiser Aluminum and Chemical Corp.'s Carbon Division. Mr. Pickens earned a B.A.
degree in Psychology from Davidson College. Mr. Pickens has completed extensive
M.B.A. work and is a candidate for a master's degree in Applied Behavioral
Science at Johns Hopkins University.
Joseph Rutledge has been Senior Vice President of Development for the
Company since September 1994. Mr. Rutledge oversees the Company's internal
software development activities. Prior to joining the Company, Mr. Rutledge
founded and operated JR Associates, a private software consulting company which
designed multimedia and "edutainment" products. From 1978 to 1994, Mr. Rutledge
served as a technical systems consultant for Honeywell Inc., McDonnell Douglas
Corp. and other defense technology companies. Mr. Rutledge is a graduate of the
University of Pittsburgh with a B.S. degree in Mathematics. Mr. Rutledge is the
brother of Raymond Rutledge.
Raymond Rutledge has served as the Company's Vice President of Licensing
since February 1995. Mr. Rutledge oversees product development from external
sources. From 1993 to 1995, Mr. Rutledge served as Vice President of
Development for MicroProse, Inc., where he was responsible for overseeing
development of hit releases such as F-15 Strike Eagle III, F-14 Fleet Defender,
1942 Pacific Air War and Ultimate Football. From 1988 to 1992, Mr. Rutledge
served as Executive Vice President of RJO Enterprises, Inc., a systems
engineering and software company. Mr. Rutledge graduated from the University of
Pittsburgh with a B.S. degree in Electrical Engineering. He also earned a
master's degree in Computer Science from Adelphi University. Mr. Rutledge is
the brother of Joseph Rutledge.
40
<PAGE>
Joseph R. Mannes has served as Vice President and General Manager, Online
Games for the Company since April 1997, when it acquired ICI. From 1996 until
1997, Mr. Mannes served as a Director, Chief Financial Officer, Secretary and
Treasurer of ICI. From 1987 to 1996, Mr. Mannes was First Vice President in the
Corporate Finance Department of Rauscher Pierce Refsnes, Inc., a Dallas, Texas
investment bank. From 1982 to 1987, he served as an Assistant Vice President at
the First National Bank of Boston, where he worked as a commercial lender in
both the Special Industry Group and the High Technology Group. Mr. Mannes
received an A.B. degree in Philosophy and French from Dartmouth College and
graduated with an M.B.A. degree in Accounting and Finance from the Wharton
School of Business of the University of Pennsylvania. Mr. Mannes is a Chartered
Financial Analyst.
William H. Marks has been appointed Chief Financial Officer, Vice
President -- Finance, Secretary and Treasurer of the Company effective June 1,
1998. Mr. Marks served as Executive Vice President and Chief Financial Officer
since May 1996, and served as Senior Vice President -- Finance and Accounting,
from June 1995 to May 1996, of Fleer/SkyBox International, a subsidiary of
Marvel Entertainment Group, Inc. in Mt. Laurel, New Jersey. From 1990 to 1995,
Mr. Marks served as Controller of SkyBox International Inc. (a subsidiary of
Brooke Group Ltd.) in Durham, North Carolina. From 1981 to 1990, Mr. Marks
served as Senior Manager of Coopers & Lybrand L.L.P. in Richmond, Virginia and
Raleigh, North Carolina. Mr. Marks received a B.S. in Accounting from Virginia
Commonwealth University in 1978 and completed various courses in Masters of
Taxation there in 1984-1985.
David H. Kestel, CLU, has served as a Director of the Company since
February 1997. Since 1992, Mr. Kestel has served as President of The Kestel
Group, Inc., an estate planning, executive compensation and employee benefits
company based in Potomac, Maryland. From 1978 to 1992, he worked at Blue Cross
and Blue Shield of the National Capital Area, most recently as Senior Vice
President, Marketing, and served as President of two domestic life insurance
companies and two offshore reinsurance companies. Mr. Kestel received a B.B.A.
and an M.B.A. from the University of Michigan. Mr. Kestel is a Member,
Chartered Life Underwriter.
J. Nicholas England has served as a Director of the Company since February
1997. Since 1993, Mr. England has been a Research Professor in the Department
of Computer Science at the University of North Carolina at Chapel Hill. From
1987 to 1993, he worked as Director of Product Development for advanced
graphics, imaging and visualization hardware and software for Sun Microsystems,
Inc. Previously, Mr. England founded two computer graphics companies. Mr.
England is a Director of Numerical Design Limited in Chapel Hill, North
Carolina, a private software company. He received a B.S. in Electrical
Engineering from North Carolina State University.
W. Joseph McClelland has served as a Director of the Company since
February 1997. Since 1990, Mr. McClelland has been Vice President and a Member
of the Board of GEC-Marconi Defense Systems Inc., an Arlington, Virginia-based
subsidiary of GEC-Marconi Ltd., which produces and sells electronic warfare
equipment to government customers. From 1988 to 1990, he was Director,
Avionics, Armament and Electronic Combat, at the HQ United States Air Force
Systems Command at Andrews Air Force Base in Maryland, where he supervised
headquarters staff and provided corporate oversight of advanced programs. From
1986 to 1988, he was Director, United States Air Force Research and Development
Liaison Office in London, England, where he initiated and managed U.S./U.K.
cooperative research and development programs. Mr. McClelland received a B.S.
in Engineering Mechanics and Mathematics from the United States Air Force
Academy. He received an M.S. in Applied Mechanics from the University of Utah.
Mr. McClelland is a graduate of the United States Air Force Test Pilot School.
Avi Suriel has served as a Director of the Company since February 1998.
Since 1996, Mr. Suriel has been a Director of Vertical Financial Holdings, a
European-based merchant banking firm focusing primarily on investments in the
high technology industry. From 1993 to 1996, Mr. Suriel was a Director in the
Investment Banking Division of Salomon Smith Barney. From 1990 to 1993, he was
a Senior Associate in the Fixed Income Division at Morgan Stanley & Co.
Incorporated. From 1988 to 1990, he was a Research Analyst in the Fixed Income
Division at Merrill Lynch, Pierce, Fenner & Smith. Mr. Suriel also provides
consulting services as a principal of Suriel Financial Consulting, which he
founded. Mr. Suriel received a B.A. degree in Economics and International
Relations from Hebrew University, Israel, and an M.B.A. in Finance from Fordham
University.
All directors currently hold office until the next annual meeting of
shareholders or until their successors have been duly elected and qualified.
Executive officers are elected by, and serve at the discretion of, the Board of
Directors.
41
<PAGE>
The Company has obtained key man life insurance on the life of Mr. Stealey
in the amount of $4,200,000.
Key Employees
Douglas Kubel has been Vice President of Engineering and Technology of the
Company since October 1994. Mr. Kubel manages the development of 3D graphics
and audio technology and is responsible for incorporating hardware and software
technologies into the Company's planning processes. From 1987 to 1994, Mr.
Kubel was a Senior Software Manager for imaging, video, audio and visualization
for Sun Microsystems, Inc., where he developed 3D graphics software for
photorealistic rendering and computer-aided design. Mr. Kubel served as a
Software Engineer for General Electric from 1985 to 1987. Mr. Kubel graduated
summa cum laude from North Carolina State University where he earned a B.S.
degree in Electrical Engineering. He later graduated from the Program for
Technology Managers at the Kenan-Flagler School of Business at the University
of North Carolina.
Dale Addink has been Vice President Development, Online Games, since April
1997, when the Company acquired ICI. Mr. Addink serves as the lead developer of
online games. From 1995 to 1997, Mr. Addink was President of ICI, which he
co-founded in 1995. Mr. Addink served as Senior Project Engineer at Rapistan
Demag Corp., a manufacturer of software for industrial electrical controls,
from 1994 to 1995. From 1988 to 1994, Mr. Addink operated a consulting company
through which he developed industrial control systems. Mr. Addink received a
B.A. degree in Math and Computer Science from the University of Northern Iowa.
Committees of the Board of Directors
The Board of Directors has established two standing committees, the Audit
Committee and the Compensation Committee. The Audit Committee recommends the
appointment of auditors and reviews the results and scope of the audit and
other services provided by the Company's independent auditors. The Compensation
Committee is responsible for the approval of compensation arrangements for the
officers of the Company, the review of the Company's compensation plans and
policies and the administration of the Company's employee benefit plans.
Directors' Compensation
The Company reimburses each director for out-of-pocket expenses incurred
in connection with the rendering of services as a director. The Company has
granted warrants to purchase 25,000 shares of Common Stock to each non-officer
director at an exercise price equal to fair market value at the date of grant.
In addition, the Company has granted warrants to purchase an additional 500
shares to each director at an exercise price equal to fair market value at the
date of grant as compensation for each Board meeting attended. In addition,
directors are eligible to participate in the Company's 1998 Stock Plan. See
"Management -- Stock Option Plans."
Executive Compensation
The following tables show annual and long-term compensation paid or
accrued by the Company for services rendered for the year ended December 31,
1997 by the Company's Chief Executive Officer and the Company's other executive
officers whose salary and bonus exceeded $100,000 in the most recent fiscal
year.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
---------------------------------------
Other Annual All Other
Name and Principal Position Year Salary Compensation Compensation
- ----------------------------------------------------- ------ ----------- ---------------- ---------------
<S> <C> <C> <C> <C>
J. W. Stealey ...................................... 1997 $160,000 $ 25,380(1) $ --
Chairman of the Board and Chief Executive Officer
Robert L. Pickens .................................. 1997 $114,000 (2) $ 3,833(3)
President and Chief Operating Officer
William J. Kaluza .................................. 1997 $120,000 (2) $ --
Chief Financial Officer, Treasurer and Secretary(4)
</TABLE>
- ------------
(1) Includes $16,832 in payments for an automobile used by Mr. Stealey and
$8,548 in club dues.
(2) Perquisites and other personal benefits did not exceed the lesser of
$50,000 or 10% of salary compensation for the named executive officers.
42
<PAGE>
(3) Represents payments for term life insurance of which certain family members
of Mr. Pickens are beneficiaries.
(4) Mr. Kaluza has resigned from the Company for personal reasons effective May
21, 1998.
Aggregated Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Unexercised Options at Fiscal In-The-Money
Year-End Options at Fiscal Year-End (1)
------------------------------- ------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- --------------------------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C>
J. W. Stealey ............. 206,250 293,750 $1,031,250 $1,468,750
Robert L. Pickens ......... 70,813 106,688 354,065 533,440
William J. Kaluza ......... 42,188 107,813 168,752 431,252
</TABLE>
- ------------
(1) The value of the options is based upon the difference between the exercise
price per share and the estimated fair market value per share at December
31, 1997, as determined by the Board of Directors, multiplied by the
number of shares subject to the option.
Employment Agreements
The Company is party to an employment agreement with each of the named
executive officers. The Company entered into employment agreements with J. W.
Stealey, Robert L. Pickens and William J. Kaluza, effective January 3, 1995,
January 3, 1995 and March 25, 1996, respectively. Mr. Kaluza has resigned from
the Company for personal reasons effective May 21, 1998. Each of Mr. Stealey's
and Mr. Pickens' employment agreements has an initial term of three years that
automatically renews for an additional one year term beginning on the second
anniversary of the effective date unless either party provides written notice
of intent not to extend the term for an additional year. During the term of
employment, the parties may terminate the employment for any reason upon
notice.
If the termination is for any reason other than voluntary termination by
the employee or by the Company for cause, the Company will make the following
payments to the employee: (i) any unpaid base compensation for services
performed prior to the date of termination, (ii) the amount of any accrued
annual vacation pay and other accrued but unpaid benefits and (iii) an amount
as liquidated damages equal to twice the amount of the employee's (A) annual
base salary then in effect; (B) any earned incentive compensation due but
unpaid; and (C) such incentive compensation as would have been earned from
January 1 of the year of termination through the date of termination pursuant
to performance criteria established by the Board of Directors. With respect to
Mr. Pickens, the Company's failure to extend his employment agreement for an
additional year on an anniversary of the effective date will constitute a
termination by the Company without cause.
If the termination is voluntary by the employee or by the Company for
cause, the Company will pay the employee (i) any unpaid compensation for
services performed prior to the date of termination, (ii) the amount of any
accrued annual vacation pay and (iii) such incentive compensation as would have
been earned from January 1 of the year of termination through the date of
termination pursuant to performance criteria established by the Board of
Directors. Voluntary termination does not include termination by the employee
as a result of (i) a material change in the employee's duties, responsibilities
or authority, including the sale or other disposition of a substantial part of
the business of the Company that would decrease the scope of the employee's
position, (ii) failure to obtain the assumption of the obligation to perform
the agreement by any successor, (iii) breach of the employment agreement by the
Company or (iv) relocation of the employee's office to a location more than
fifty (50) miles from the employee's residence or the Company's principal
offices.
The employment agreements each include a non-competition provision,
effective during the term of the employment agreement and for a period of one
year (two years for Mr. Stealey) following termination of employment, pursuant
to which the employee cannot compete with the Company within 250 miles of any
location at which the Company maintains its principal administrative
headquarters by becoming interested, directly or indirectly, as a partner,
officer, director, stockholder, advisor, employee or in any other capacity with
any competitive business engaged in the design, manufacture or sale of games
used on personal computers. The employment agreements each prohibit disclosure
of any confidential information about the Company.
43
<PAGE>
Stock Option Plans
1995 Employees' Incentive Stock Option Plans
Effective January 2, 1995, the Company adopted two employee incentive
stock option plans (the "1995 Plans"). One plan provided for the granting of
options to purchase Class A Common Stock which was voting stock, and one plan
provided for the granting of options to purchase Class B Common Stock which was
non-voting. In connection with the Recapitalization, all options to purchase
shares of Class A Common Stock and Class B Common Stock under the 1995 Plans
will be automatically converted into options to purchase Common Stock. The 1995
Plans are intended as incentives to induce key employees of the Company to
remain in the employ of the Company or of any subsidiary of the Company, and to
encourage such employees to own stock in the Company. This purpose is carried
out by granting options to purchase shares of Common Stock. The Company may
grant incentive stock options ("ISOs") within the meaning of Section 422 of the
Code to eligible participants under the 1995 Plans. The exercise price of an
ISO may not be less than 100% of the fair market value of the underlying shares
at the time the ISO is granted. An ISO granted must be exercised in whole or in
part from time to time within 10 years from date of grant, or such shorter time
as specified by the Board of Directors. The aggregate fair market value of the
stock for which a participant may exercise incentive options during any
calendar year may not exceed $100,000. The Company reserved 2,875,000 shares of
Common Stock for issuance upon the exercise of stock options granted pursuant
to the 1995 Plans, which number may be adjusted to reflect any stock dividend,
stock split, share combination or recapitalization.
The 1995 Plans are administered by the Board of Directors. The Board has
the authority to administer the 1995 Plans and determine, among other things,
the interpretation of any provisions of the 1995 Plans, the eligible employees
who are to be granted stock options, the number of shares which may be issued
and the option exercise price.
Incentive Stock Options. As of the date of this Prospectus (giving effect
to the Recapitalization), the Company had outstanding incentive options to
purchase 1,194,295 shares of Common Stock of which options to purchase 570,202
shares were currently exercisable, at exercise prices ranging from $1.00 to
$6.00 per share. Incentive stock options vest over time with 20% being first
exercisable during the second year after the date of grant with an additional
5% vesting each calendar quarter thereafter. Incentive stock options generally
may only be exercised if the participant has been employed by the Company
continuously for at least one year as of the last day of the first 12-month
period following the date of option grant. The option is only exercisable if
the participant is employed by the Company and for limited periods of time
after the participant's termination of employment. If the participant ceases to
be employed on account of termination by the Company for cause or resignation
(other than retirement as defined in the option agreement), the right to
exercise any unexercised portion of the option terminates. If the participant
is terminated by the Company without cause, the participant shall be entitled
to purchase, within three months, option shares equal to an additional 25% of
the participant's option shares that were not exercisable as of the termination
date. The option becomes immediately and fully exercisable in the event of a
change in control. A change in control shall occur if, during any period of 12
consecutive calendar months, any individual who, at the beginning of such
period, holds a majority of the Company's issued and outstanding shares of
voting stock ceases for any reason to hold a majority of shares; provided,
however, it shall not be deemed to be a change in control if the individual
ceases to hold a majority of shares because of either the issuance or other
transfer of Company voting stock to a director, officer, employee or previous
shareholder of the Company or the issuance of voting stock in connection with a
financing so long as the individual continues to own at least 20% of the
Company's outstanding voting stock and remains an executive officer or
director.
Performance Incentive Stock Options. As of the date of this Prospectus
(giving effect to the Recapitalization), the Company had outstanding
performance incentive stock options to purchase 501,250 shares of Common Stock,
151,938 of which were currently exercisable, at exercise prices ranging from
$1.00 to $2.00 per share. The performance incentive stock options are
exercisable during the period commencing from March 31, 1997 and ending March
31, 2005. Performance options vest upon the earlier of the Company's
achievement of certain performance standards or seven years from the date of
grant. Options are exercisable only in the event the participant is employed by
the Company and for limited periods of time after the participant's termination
of employment. If the participant ceases to be an employee on account of
resignation (other than retirement as defined in the option agreement) or
termination for cause, the right to exercise any unexercised portion of the
option shall terminate. The option becomes immediately and fully exercisable as
of a change in control date. A change in control shall occur if, during any
period of 12 consecutive calendar months, any individual who, at the beginning
of such period, holds
44
<PAGE>
a majority of the Company's issued and outstanding shares of voting stock,
ceases for any reason to hold such a majority of outstanding shares.
1998 Stock Plan. The Company's 1998 Stock Plan (the "Plan") was adopted by
the Board of Directors and approved by the shareholders of the Company in May
1998. The Company anticipates that no future grants will be made under the 1995
Plans after the effective date of the Plan. A total of 800,000 shares of Common
Stock have been reserved for issuance under the Plan. The Plan provides for
grants to employees of the Company of ISOs. In addition, the Plan provides for
grants of nonqualified stock options and stock purchase rights to employees,
directors and consultants of the Company. The Plan is administered by the Board
of Directors or by a committee appointed by the Board. The administrator
determines the terms of options and stock purchase rights granted, including
the exercise price and the number of shares subject to the option or stock
purchase right. The exercise price of incentive stock options granted under the
Plan must be at least equal to the fair market value of the Company's Common
Stock on the date of grant. The maximum term of options granted under the Plan
is 10 years. As of the date of this Prospectus, there were no outstanding
options under the Plan.
In the event of a merger of the Company with or into another corporation,
all outstanding options may be assumed or equivalent options substituted by the
successor corporation. If the successor corporation does not assume or
substitute for outstanding options, such options will automatically become
fully vested and exercisable.
1998 Employee Stock Purchase Plan. The Company's 1998 Employee Stock
Purchase Plan (the "Purchase Plan") was adopted by the Company's Board of
Directors and approved by the Company's shareholders in May 1998. The Purchase
Plan is intended to qualify under Section 423 of the Code. The Company has
reserved 500,000 shares of Common Stock for issuance under the Purchase Plan.
Under the Purchase Plan, an eligible employee may purchase shares of Common
Stock from the Company at the end of a six-month offering period through
payroll deductions of up to 10% of his or her base compensation (excluding
bonuses, overtime and sales commissions) not to exceed $25,000 per year, at a
price per share equal to 85% of the fair market value of a share of the
Company's Common Stock on the last day of the offering period. The maximum
number of shares that an employee may purchase in any offering period is 2,500
shares. Each six-month offering period will commence the first day on which the
national stock exchanges and the Nasdaq National Market are open for trading on
or after May 1 and November 1 of each year, except that the first offering
period will begin on the date of the Company's initial public offering and will
end on October 31, 1998. In the event of a merger or asset sale, the offering
period then in progress will be shortened so that the stock purchases will
occur before the date of the merger or sale. Any employee who is customarily
employed for at least 20 hours per week and more than five months per calendar
year and who is employed on or before the commencement date of an offering
period is eligible to participate in the Purchase Plan. As of the date of this
Prospectus, there were no outstanding options under the Purchase Plan.
Compensation Committee Interlocks and Insider Participation
Since the Company began doing business in June 1994, all matters
concerning executive compensation have been addressed by the entire Board of
Directors. Messrs. Stealey and Pickens are executive officers of the Company
and prior to 1997 constituted the entire Board of Directors. On May 6, 1998,
the Company established a Compensation Committee which is responsible for the
approval of compensation arrangements for the officers of the Company, the
review of the Company's compensation plans and the administration of the
Company's employee benefit plans.
Limitation of Liability and Indemnification Matters
As permitted by North Carolina law, Article IX of the Company's Articles
of Incorporation provides for the limitation of the personal liability of
directors for monetary damages for breach of duty as a director provided that
the limitation of liability does not apply to (i) acts or omissions not made in
good faith that the director at the time of such breach knew or believed were
in conflict with the best interests of the corporation; (ii) any liability
under the North Carolina Business Corporation Act for unlawful distributions;
(iii) any transaction from which the director derived an improper personal
benefit or (iv) acts or omissions occurring prior to the date the provision
became effective.
The North Carolina Business Corporation Act also contains provisions
prescribing the extent to which present or former directors, officers, or
employees of a corporation shall or may be indemnified against liabilities
which
45
<PAGE>
they may incur in those capacities. Under those provisions, the availability or
requirement of indemnification or reimbursement of expenses is dependent upon
numerous factors, including whether the action is brought by the corporation or
by outsiders and the extent to which the potential indemnitee is successful in
his defense. The statute also permits a corporation to purchase and maintain
insurance on behalf of its directors and officers against liabilities which
they may incur in their capacities as such, whether or not the corporation
would have the power to indemnify them under other provisions of the statute.
As permitted by North Carolina law, Article IX of the Bylaws of the
Company provides for the indemnification of directors and officers, employees
or agents of the Company within the limitations permitted by North Carolina
law. It is the position of the Commission that indemnification for liability
arising out of violations of the federal securities laws is against public
policy and is unenforceable.
PRINCIPAL SHAREHOLDERS
The following table sets forth as of May 22, 1998 (giving retroactive
effect to the Recapitalization, see "Description of Securities --
Recapitalization"), and as adjusted to reflect the sale of the 2,800,000 shares
offered hereby, certain information known to the Company concerning the
beneficial ownership of the Common Stock by (i) each person known by the
Company to own beneficially more than five percent of the outstanding Common
Stock, (ii) each director of the Company, (iii) each officer of the Company
named in the Summary Compensation Table and (iv) all directors and executive
officers as a group. Unless otherwise indicated, each person has sole voting
and investment power with respect to the shares beneficially owned by such
person.
<TABLE>
<CAPTION>
Number of Shares Percentage of Outstanding
Name and Address Beneficially Owned (2) Shares Beneficially Owned (2)
of Beneficial Owner (1) ------------------------ -----------------------------------
Before Offering After Offering
----------------- ---------------
<S> <C> <C> <C>
J. W. Stealey ........................... 2,676,452 (3) 38.0% 27.2%
Robert L. Pickens ....................... 287,401 (4) 4.2% 3.0%
William J. Kaluza ....................... 107,938 (5) 1.6% 1.1%
J. Nicholas England ..................... 13,500 (6) * *
David H. Kestel ......................... 613,500 (7) 9.0% 6.4%
W. Joseph McClelland .................... 13,500 (6) * *
Avi Suriel .............................. 2,058,149 (8) 30.2% 21.4%
Vertical Financial Holdings (9) ......... 2,045,649 (10) 30.1% 21.3%
Pampero Limited (9) ..................... 460,271 (11) 6.8% 4.8%
Ludwig Ruppert (9) ...................... 460,271 (11) 6.8% 4.8%
All directors and executive officers as
a group (10 persons) .................... 6,067,458 (12) 81.1% 59.0%
</TABLE>
- ------------
*Less than one percent
(1) The address of each beneficial owner listed is the address of the Company
unless otherwise provided.
(2) Based on 6,793,699 shares of Common Stock outstanding prior to this
offering and 9,593,699 shares of Common Stock outstanding immediately
after this offering. Pursuant to the rules of the Commission, certain
shares of the Company's Common Stock that a person has the right to
acquire within 60 days of the date hereof pursuant to the exercise of
stock options or warrants are deemed to be outstanding for the purpose of
computing the percentage ownership of such person but are not deemed
outstanding for the purpose of computing the percentage ownership of any
other person.
(3) Includes 236,389 shares subject to warrants exercisable within 60 days of
May 22, 1998, and 12,500 shares subject to options exercisable within 60
days of May 22, 1998. Excludes 600,000 shares held in a trust for Mr.
Stealey's children over which Mr. Kestel is the trustee. Mr. Stealey has
neither voting power nor dispositive power over the shares held in the
trust. Mr. Stealey disclaims beneficial ownership of the shares held in
the trust.
(4) Includes 13,845 shares subject to warrants exercisable within 60 days of
May 22, 1998, and 49,813 shares subject to options exercisable within 60
days of May 22, 1998.
46
<PAGE>
(5) Includes 42,938 shares subject to stock options exercisable within 60 days
of May 22, 1998.
(6) Includes 13,500 shares subject to warrants exercisable within 60 days of
May 22, 1998.
(7) Includes 13,500 shares subject to warrants exercisable within 60 days of
May 22, 1998. Also includes 600,000 shares held in a trust for Mr.
Stealey's children over which Mr. Kestel is the trustee. Mr. Kestel has
sole voting power and dispositive power over the shares held in the trust.
Mr. Kestel disclaims beneficial ownership of the shares held in the trust.
(8) Includes 146,117 shares owned by Suriel Financial Consulting, of which Mr.
Suriel is the founder and a principal. Also includes 12,500 shares subject
to warrants exercisable within 60 days of May 22, 1998 and 1,899,532
shares of Common Stock beneficially owned by Vertical Financial Holdings.
Vertical Financial Holdings has voting power over the shares owned by
Suriel Financial Consulting pursuant to a proxy agreement. Mr. Suriel is a
Director of Vertical Financial Holdings. Mr. Suriel disclaims beneficial
ownership of shares beneficially owned by Vertical Financial Holdings.
(9) The address of the beneficial owner is c/o Vertical Financial Holdings,
Hambrechtikerstrasse 61, CH-8640 Rapperswil, Switzerland.
(10) Includes 1,647,478 shares owned by the other investors in the Company's
Series B Preferred Stock financing over which Vertical Financial Holdings
has voting power pursuant to a proxy agreement.
(11) Vertical Financial Holdings has voting power over these shares pursuant to
a proxy agreement.
(12) Includes 303,234 shares subject to warrants exercisable within 60 days of
May 22, 1998 and 388,130 shares subject to options exercisable within 60
days of May 22, 1998.
CERTAIN TRANSACTIONS
The Company, Mr. Stealey and Mr. Pickens are parties to a January 3, 1995
Stock Purchase and Stockholder Agreement (the "Co-Sale Agreement"). The Co-Sale
Agreement grants Mr. Pickens a co-sale right to participate in any transfer of
shares of Common Stock by Mr. Stealey on the same terms and conditions as
offered to the third party by Mr. Stealey. The co-sale right entitles Mr.
Pickens to participate in such transfer in the same proportion to the number of
shares to be sold by Mr. Stealey that the number of shares of Common Stock
owned by Mr. Pickens prior to the transfer bears to the number of shares of
Common Stock owned by Mr. Stealey prior to the transfer.
The Company has also entered into a marketing agreement, dated January 3,
1995, with Mr. Stealey, pursuant to which Mr. Stealey makes his T-28 Trojan
aircraft and his services as a pilot available to the Company in consideration
for which the Company pays all of the expenses to store, operate and maintain
such aircraft and to maintain Mr. Stealey's pilot license.
On March 6, 1995, the Company issued a demand Promissory Note to Mr.
Pickens in the principal amount of $600,000 at an annual interest rate of 12%,
which increased to 14% on June 30, 1996 because the balance thereunder exceeded
$400,000 on that date. In consideration of this loan, the Company issued
warrants to Mr. Pickens to purchase 13,845 shares of Common Stock at an
exercise price of $1.00 per share. In connection with the Company's Series B
Preferred Stock financing, Mr. Pickens, on February 4, 1998, converted the
outstanding principal of $600,000 into 132,744 shares of Series C Preferred
Stock, which shares will be converted into 132,744 shares of Common Stock in
connection with the Recapitalization. Also in connection with the
Recapitalization, Mr. Pickens has forgiven $50,000 of the accrued interest
outstanding in connection with this loan in payment of the $1.00 per share
exercise price of his 50,000 Recapitalization Options. The Company has agreed
to pay Mr. Pickens $111,421 of the remaining $183,864 in accrued interest due
to him under this loan upon the consummation, and out of the proceeds, of this
offering.
On April 11, 1995, the Company entered into a joint development agreement
with NDL for the development of the Company's DEMON technology. J. Nicholas
England, a director of the Company, is a director of NDL. To date, the Company
has paid $322,500 to NDL for the rights to the technology which includes
amounts paid pursuant to a royalty of 1% of net sales based on products that
incorporate the DEMON technology.
On December 4, 1995, the Company entered into a leasehold agreement with
Southport Business Park Limited Partnership ("Southport") for the Company's
principal executive offices located at 215 Southport Drive in Morrisville,
47
<PAGE>
North Carolina. The term of the lease is for a period of five years commencing
April 1, 1996 at a monthly rent of $13,962, subject to adjustment in certain
circumstances. J. W. Stealey has executed a personal guarantee in favor of
Southport in connection with the leasehold agreement.
Since the Company's inception, Mr. Stealey has executed several personal
guaranties and pledges of personal collateral in favor of BB&T, one of the
Company's primary bank creditors, in connection with revolving and term loans
extended by BB&T to the Company. On January 24, 1997, the Company issued a
$2,500,000 Promissory Note to BB&T secured by Mr. Stealey's guarantee and
pledge of collateral. The January 24, 1997 note has been paid in full, and Mr.
Stealey's guarantee and pledge in respect thereof have been extinguished. On
August 25, 1997, the Company issued a $2,750,000 Promissory Note to BB&T
secured by Mr. Stealey's guarantee and pledge of collateral in replacement of
the January 24, 1997 note. On November 25, 1997, the Company issued a $250,000
Promissory Note to BB&T secured by Mr. Stealey's guarantee and pledge of
collateral. The November 25, 1997 note has been paid in full, and Mr. Stealey's
guarantee and pledge in respect thereof have been extinguished. On March 27,
1998, the Company issued a $250,000 Promissory Note to BB&T secured by Mr.
Stealey's guarantee and pledge of collateral. In connection with his guaranties
to BB&T, the Company is obligated to pay Mr. Stealey a fee equal to 6% per
annum of the indebtedness borrowed. As of March 31, 1998, the Company owed Mr.
Stealey an aggregate of $210,284 in consideration of his guaranties to BB&T.
On May 20, 1996, the Company issued a Promissory Note to Mr. Stealey in
the principal amount of $1,000,000, payable on November 17, 1996, with interest
at the annual rate of 15%, increasing to 17% if the Company did not repay Mr.
Stealey by November 17, 1996. In connection with this loan, the Company issued
warrants to Mr. Stealey to purchase 25,000 shares of Common Stock at a price of
$2.00 per share. Under the original terms of the note, if the note was not
repaid by November 17, 1996, the Company was obligated to issue additional
warrants to Mr. Stealey to purchase 25,000 shares of Common Stock per 180 days
prorated over the time until repayment occurred. On March 20, 1997, in
connection with a loan to the Company made by Petra, Mr. Stealey waived his
right under the note to accrue additional warrants after November 16, 1997. On
February 4, 1998, in connection with the Company's Series B Preferred Stock
financing, Mr. Stealey converted the $1,000,000 principal outstanding under the
May 20, 1996 note into 221,239 shares of Common Stock. In connection with the
Recapitalization, Mr. Stealey has forgiven $268,750 of the accrued interest
outstanding under this note in payment of the $1.00 per share exercise price of
his 268,750 Recapitalization Options. The Company remains obligated to pay Mr.
Stealey approximately $3,451 in interest that accrued under this note through
February 4, 1998.
On July 10, 1996, the Company issued a Promissory Note to Mr. Stealey in
the principal amount of $1,000,000, payable on January 6, 1997, with interest
at the annual rate of 15%, increasing to 17% if the Company did not repay Mr.
Stealey by January 6, 1997. In connection with this loan, the Company issued
warrants to Mr. Stealey to purchase 50,000 shares of Common Stock at a price of
$6.00 per share. Under the original terms of the note, if the note was not
repaid by January 6, 1997, the Company was obligated to issue additional
warrants to Mr. Stealey to purchase 250,000 shares of Common Stock per 180 days
prorated over the time until repayment occurred. On March 20, 1997, in
connection with a loan to the Company by Petra, Mr. Stealey waived his right
under the note to accrue additional warrants after January 6, 1998. On February
4, 1998, in connection with the Company's Series B Preferred Stock financing,
Mr. Stealey converted the $1,000,000 principal outstanding under the July 10,
1996 note into 221,239 shares of Common Stock. The Company remains obligated to
pay Mr. Stealey approximately $234,729 in interest that accrued under this note
through February 4, 1998.
The Company has agreed to pay Mr. Stealey $371,404 of the remaining
$448,464 in accrued interest due to him as of March 31, 1998 in connection with
his loans and guaranties upon the consummation, and out of the proceeds, of
this offering.
The Company has borrowed approximately $870,000 from Laura M. Stealey, the
former wife of Mr. Stealey, under a $1,000,000 credit line established by Ms.
Stealey in favor of the Company, which is guaranteed by Mr. Stealey, pursuant
to a Letter Agreement dated October 31, 1996. In consideration of the credit
line, the Company granted to Ms. Stealey a warrant exercisable for 14,948
shares of Common Stock at a purchase price of $5.82 per share. On March 24,
1997, in connection with a loan to the Company by Petra, Ms. Stealey waived her
right to convert debt under the credit line into shares of the Company's Common
Stock. The Company has agreed to repay the entire principal amount, plus the
$117,175 in accrued interest thereon through March 31, 1998, of this credit
line upon the consummation, and out of the proceeds, of this offering.
48
<PAGE>
On February 4, 1998, Vertical Financial Holdings, Suriel Financial
Consulting and several other investors purchased an aggregate of 778,746 shares
of the Company's Series B Preferred Stock for $3,500,000. Mr. Suriel, a
director of the Company, is a Director of Vertical Financial Holdings and
founder and a principal of Suriel Financial Consulting. All of the Series B
Preferred Stock investors have signed a proxy agreement with Vertical Financial
Holdings granting Vertical Financial Holdings voting rights with respect to
their shares. In connection with the Recapitalization, the 778,746 shares of
Series B Preferred Stock will convert into 2,045,649 shares of Common Stock.
The Company and General Capital, an affiliate of Vertical Financial
Holdings, have also signed a Marketing Agreement dated February 4, 1998,
pursuant to which the Company is obligated to pay $400,000 to General Capital
for marketing services when the Company's shareholders' equity equals or
exceeds $5,000,000. The Company will satisfy such obligation upon the
consummation, and out of the proceeds, of this offering.
DESCRIPTION OF SECURITIES
Recapitalization
On May 26, 1998, the shareholders of the Company approved the
reincorporation of the Company, a Maryland corporation, in North Carolina by
adopting and approving an agreement and plan of merger pursuant to which the
Company will merge with and into a wholly-owned subsidiary incorporated in
North Carolina to effect the reincorporation.
In addition, the shareholders of the Company have agreed to the
effectuation of the following Recapitalization of the Company on or prior to
the consummation of this offering: (i) Oberlin and Petra have agreed to
exercise their warrants (the "Recapitalization Warrants") for the purchase of
208,946 and 307,823 shares of Class A Common Stock, respectively, for cash
proceeds to the Company of $10,335; (ii) Messrs. Stealey, Pickens and Kaluza
have exercised certain of their stock options (the "Recapitalization Options")
for the purchase of 268,750 shares of Class A Common Stock, 50,000 shares of
Class B Common Stock and 45,000 shares of Class B Common Stock, respectively,
through the forgiveness of $268,750 of accrued interest expense, the
forgiveness of $50,000 of accrued interest expense and a cash payment of
$90,000, respectively; and (iii) all 3,931,215 shares of Class A Common Stock
(voting) and 601,457 shares of Class B Common Stock (non-voting) of the
Company, including the shares issued in connection with (i) and (ii) above,
will be exchanged for 4,532,672 shares of Common Stock, the 82,634 shares of
Series A Convertible Preferred Stock will be converted into 82,634 shares of
Common Stock, the 778,746 shares of Series B Convertible Preferred Stock will
be converted into 2,045,649 shares of Common Stock and the 132,744 shares of
Series C Convertible Preferred Stock will be converted into 132,744 shares of
Common Stock. Once converted, all shares of Preferred Stock will be cancelled
and will return to the status of authorized but unissued shares of the
Company's Preferred Stock. Shares of authorized but unissued, or previously
issued and subsequently cancelled, Preferred Stock may be issued without
shareholder approval for any general corporate purpose, including acquisitions.
Common Stock
As of the date of this Prospectus, the Company has authorized 50,000,000
shares of Common Stock, $.10 par value per share. As of the date of this
Prospectus (giving effect to the Recapitalization), 6,793,699 shares of Common
Stock were issued and outstanding and held of record by 99 shareholders.
Holders of Common Stock are entitled to one vote for each share held on matters
which are submitted to a vote of shareholders and are not entitled to
cumulative voting in the election of directors. Subject to any preferential
rights of holders of Preferred Stock, holders of Common Stock are entitled to
receive dividends, if any, as declared from time to time by the Board of
Directors out of assets legally available for such purpose. On liquidation,
holders of Common Stock are entitled to a pro rata portion of all assets
available for distribution after payment of creditors and the liquidation
preference of any outstanding shares of Preferred Stock. Holders of Common
Stock have no preemptive rights or other rights to subscribe for additional
shares. All outstanding shares of Common Stock are, and the shares offered
hereby will be, upon issuance, validly issued, fully paid and non-assessable.
Preferred Stock
As of the date of this Prospectus, the Company has authorized 25,000,000
shares of Preferred Stock, $.10 par value per share. The Company may issue
shares of Preferred Stock in one or more series as may be determined
49
<PAGE>
by the Company's Board of Directors, who may establish, from time to time, the
number of shares to be included in each series, may fix the designation,
powers, preferences and rights of the shares of each such series and any
qualifications, limitations or restrictions thereof, and may increase or
decrease the number of shares of any such series without any further vote or
action by the shareholders. Any Preferred Stock so issued by the Board of
Directors may rank senior to the Common Stock with respect to the payment of
dividends or upon liquidation, dissolution or winding up of the Company, or
both. In addition, any such shares of Preferred Stock may have class or series
voting rights. Under certain circumstances, the issuance of Preferred Stock or
the existence of the unissued Preferred Stock may tend to discourage or render
more difficult a merger or other change in control of the Company.
Warrants
As of the date of this Prospectus (giving effect to the Recapitalization),
there were outstanding warrants to purchase an aggregate of 449,554 shares of
Common Stock at a weighted average price of $4.39 per share.
Certain Articles of Incorporation and Bylaws Provisions Having Potential
Anti-Takeover Effects
General
A number of provisions of the Company's Articles of Incorporation and
Bylaws address matters of corporate governance and the rights of shareholders.
The following summary of such provisions is not intended to be complete and is
qualified in all respects by the Company's Articles of Incorporation and
Bylaws. Certain of these provisions, as well as the ability of the Board of
Directors to issue shares of Preferred Stock and to set the voting rights,
preferences and other terms thereof, may delay or prevent takeover attempts not
first approved by the Board of Directors (including takeovers which certain
shareholders may deem to be in their best interests). These provisions also
could delay or frustrate the removal of incumbent directors or the assumption
of control by shareholders.
Classification of Board of Directors
The Board of Directors currently consists of five members. The Articles of
Incorporation provide that if the size of the Board increases to nine or more
members, the Board of Directors of the Company will be divided into three
classes as nearly equal in number as possible. The directors of each class will
serve a term of three years. As a result of a classification of the Board of
Directors, approximately one-third of the members of the Board of Directors
will be elected each year, and two annual meetings will be required for the
Company's shareholders to change a majority of the members constituting the
Board of Directors.
Nomination and Removal of Directors; Filling Vacancies
The Company's Bylaws provide that nominations to the Board of Directors
may only be made by the Board of Directors, a nominating committee of the Board
or by any shareholder entitled to vote in elections of directors who complies
with certain notice procedures. In addition, the Articles of Incorporation and
Bylaws provide that a director may be removed by the shareholders only upon the
affirmative vote of the holders of two-thirds of the voting power of all shares
of capital stock entitled to vote generally in the election of directors, and
the Bylaws specify that vacancies on the Board of Directors may be filled only
by the Board of Directors. The purpose of these provisions is to prevent a
majority shareholder from circumventing the classified board system by removing
directors and filling the vacancies with new individuals selected by that
shareholder. Accordingly, these provisions may have the effect of impeding
efforts to gain control of the Board by anyone who obtains a controlling
interest in the Company's Common Stock.
Amendment of Articles of Incorporation
The Articles of Incorporation of the Company provide that amendments to
the Articles of Incorporation may be adopted only upon the affirmative vote of
the holders of at least two-thirds of the voting power of all shares of capital
stock of the Company entitled to vote thereon. However, if such amendment has
received the prior approval by an affirmative vote of a majority of
Disinterested Directors, as defined below, then the affirmative vote of the
holders of at least a majority of the voting power of all shares of capital
stock of the Company entitled to vote thereon, or such greater percentage
approval as required by North Carolina law, is sufficient to adopt such
amendment. A Disinterested Director is defined as any member of the Board of
Directors who is unaffiliated with, and not a nominee of, a Control Person, as
defined below, and was a member of the Board of
50
<PAGE>
Directors prior to the time a Control Person became such, and any successor of
a Disinterested Director who is unaffiliated with, and not a nominee of, a
Control Person, who is recommended to succeed a Disinterested Director by a
majority of Disinterested Directors then on the Board of Directors. A Control
Person is defined as any corporation, person, group, or other entity, which
together with its affiliates, prior to a Business Combination, as defined
below, beneficially owns 10% or more of the shares of any class of equity or
convertible securities of the Company, and any affiliate of any such
corporation, person, group, or other entity; provided, however, any
corporation, person, group or other entity which, together with its affiliates,
prior to May 31, 1998 beneficially owned 10% or more of the shares of any class
of equity or convertible securities of the Company, and any affiliate of any
such party is not considered to be a Control Person.
Amendment of Bylaws
Subject to certain restrictions described below, either the Board of
Directors or the shareholders of the Company may amend the Company's Bylaws.
The Board of Directors may amend the Bylaws and adopt new Bylaws except that:
(i) a bylaw adopted or amended by the shareholders may not be readopted,
amended, or repealed by the Board of Directors if neither the Articles of
Incorporation nor a bylaw adopted by the shareholders authorizes the Board of
Directors to adopt, amend, or repeal that particular bylaw or the Bylaws
generally; (ii) a bylaw that fixes a greater quorum or voting requirement for
the Board of Directors may not be adopted by the Board of Directors by a vote
of less than a majority of the directors then in office and may not itself be
amended by a quorum or vote of directors less than the quorum or vote therein
prescribed or prescribed by a bylaw adopted or amended by the shareholders; and
(iii) if a bylaw fixing a greater quorum or voting requirement for the Board of
Directors is originally adopted by the shareholders, it may be amended or
repealed only by the shareholders, unless the Bylaws permit amendment or repeal
by the Board of Directors. The shareholders of the Company generally may adopt,
amend, or repeal the Bylaws upon the affirmative vote of the holders of
two-thirds of the voting power of all shares of capital stock entitled to vote
thereon.
Supermajority Vote Requirement
The Articles of Incorporation of the Company provide that, unless
otherwise more restrictively required by applicable law, any Business
Combination, as defined below, must be approved by a majority of a quorum of
the Board of Directors and must receive the level of shareholder approval, if
any, as follows: (i) to the extent shareholder approval is otherwise required
by law, by an affirmative vote of the shareholders holding at least a majority
of the shares of capital stock of the Company entitled to vote thereon,
provided that such Business Combination has been approved by an affirmative
vote of at least two-thirds of the full Board of Directors before such Business
Combination is submitted for approval to the shareholders or (ii) by an
affirmative vote of the shareholders holding at least two-thirds of the shares
of capital stock of the Company entitled to vote thereon provided that such
Business Combination has been approved by an affirmative vote of at least a
majority of a quorum of the Board of Directors (but less than two-thirds of the
full Board of Directors). In addition, if the Business Combination is approved
by the affirmative vote of the shareholders holding at least two-thirds of the
shares of Common Stock entitled to vote and by a majority of a quorum of the
Board of Directors but less than two-thirds of the full Board of Directors, the
Business Combination must grant to shareholders not voting to approve the
Business Combination certain "fair price" rights.
The Company's Articles of Incorporation define a Business Combination as
(i) any merger or consolidation of the Company into any other corporation,
person, group, or other entity where the Company is not the surviving or
resulting entity; (ii) any merger or consolidation of the Company with or into
any Control Person or with any corporation, person, group or other entity where
the merger or consolidation is proposed by or on behalf of a Control Person;
(iii) any sale, lease, exchange, or other disposition of all or substantially
all of the assets of the Company; (iv) any sale, lease, exchange, or other
disposition of more than 10% of the total assets of the Company to a Control
Person; (v) the issuance of any securities of the Company to a Control Person;
(vi) the acquisition by the Company of any securities of a Control Person
unless such acquisition begins prior to the person becoming a Control Person or
is an attempt to prevent the Control Person from obtaining greater control of
the Company; (vii) the acquisition by the Company of all or substantially all
of the assets of any Control Person or any entity where the acquisition is
proposed by or on behalf of a Control Person; (viii) the adoption of any plan
or proposal for the liquidation or dissolution of the Company which is proposed
by or on behalf of a Control Person; (ix) any reclassification of securities or
recapitalization of the Company which has the effect of increasing the
proportionate share of the outstanding shares of any class of equity or
convertible securities of the Company which is beneficially
51
<PAGE>
owned or controlled by a Control Person; (x) any of the above transactions
which are between the Company and any of its subsidiaries and which are
proposed by or on behalf of any Control Person; or (xi) any agreement, plan,
contract, or other arrangement providing for any of the above transactions.
The requirement of a supermajority vote of shareholders to approve certain
business transactions, as described above, may discourage a change in control
of the Company by allowing shareholders holding less than a majority of the
shares of Common Stock to prevent a transaction favored by shareholders holding
a majority of such shares. Also, in some circumstances, the Board of Directors
could cause a two-thirds vote to be required to approve a transaction thereby
enabling management to retain control over the affairs of the Company and their
positions with the Company.
Fair Price Provision
The "fair price" provision of the Company's Articles of Incorporation
applies to Business Combinations that have not received the approval of
two-thirds of the full Board of Directors and only to shareholders who vote
against such Business Combinations and who elect to sell their shares to the
Company for cash at their fair price. This "fair price" provision requires that
the consideration for such shares be paid in cash by the Company and that the
price per share be at least equal to the greater of the following:
(i) The highest price per share paid for the Company's Common Stock during
the four years immediately preceding the Business Combination vote by any
shareholder who beneficially owned five percent or more of the Company's
Common Stock and who votes in favor of the Business Combination;
(ii) The cash value of the highest price per share previously offered
pursuant to a tender offer to the shareholders of the Company within the four
years immediately preceding the Business Combination vote; or
(iii) The highest price per share, including commissions and fees, paid by a
Control Person in acquiring any of its holdings of the Company's Common
Stock.
The fair price provision is intended to prevent some of the potential
inequities of two-step takeover attempts by encouraging negotiations with the
Company. However, some shareholders may find the fair price provision
disadvantageous to the extent it discourages changes in control in which
shareholders might receive for at least some of their shares a substantial
premium above the market price at the time an acquisition transaction is made.
The Company is not aware of any pending or threatened effort to acquire
control of the Company or to change management. The Board of Directors does not
presently intend to propose any additional anti-takeover provisions.
Constituencies
The Company's Articles of Incorporation expressly authorize the Board of
Directors of the Company, any committee of the Board of Directors, or any
individual director in determining what is in the best interest of the Company
and its shareholders, to consider, in addition to the long-term and short-term
interests of the shareholders, the social and economic effects of the matter to
be considered on the Company and its subsidiaries, their employees, clients,
creditors, and the communities in which the Company and its subsidiaries
operate or are located. When evaluating a business combination or a proposal by
another person to make a business combination or a tender offer or any other
proposal relating to a potential change in control of the Company, the Board of
Directors may consider such matters as (i) the business and financial condition
and earnings prospects of the acquiring person, and the possible effect of such
condition upon the Company and its subsidiaries and the communities in which
the Company and its subsidiaries operate, (ii) the competence, experience, and
integrity of the acquiring person and its management and (iii) the prospects
for successful conclusion of the business combination, offer or proposal. The
consideration of any of the above factors is completely discretionary with the
Company's Board of Directors. The constituency provision of the Company's
Articles of Incorporation may discourage or make more difficult certain
acquisition proposals or business combinations and therefore, may adversely
affect the ability of shareholders to benefit from certain transactions opposed
by the Company's Board of Directors.
Special Meetings of Shareholders
The Company's Bylaws provide that special meetings of shareholders may be
called only by the Board of Directors, the Chairman of the Board, the President
or holders of 20% or more of the voting power of the outstanding
52
<PAGE>
shares of the Company. As a result, this provision would prevent shareholders
owning less than 20% of the voting power of the outstanding Common Stock from
compelling shareholder consideration of any proposal (such as a proposal for a
Business Combination) over the opposition of the Company's Board of Directors.
Shareholder Proposals
The Company's Bylaws provide that shareholders who desire to bring any
business before a meeting of shareholders must follow specified procedures,
including advance written notice to the Company. The shareholder proposal
provision may make it more difficult for shareholder proposals to be considered
at shareholder meetings.
Transfer Agent
The Company's transfer agent and registrar for its Common Stock is
Wachovia Bank and Trust Company, 301 North Church Street, 2nd Floor,
Winston-Salem, North Carolina 27102.
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of this offering, the Company will have 9,593,699 shares
of Common Stock outstanding (10,013,699 shares if the Representatives'
over-allotment option is exercised in full), of which the 2,800,000 shares
offered hereby will be freely tradable without restriction or further
registration under the Securities Act, except for any shares purchased by
"affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act, which will be subject to the resale limitations imposed by Rule
144, as described below. The remaining 6,793,699 shares of Common Stock
outstanding will be "restricted securities" within the meaning of Rule 144.
Approximately 3,606,955 shares of the restricted securities will be eligible
for sale in the public market in accordance with Rule 144 or Rule 701 under the
Securities Act beginning 90 days after the date of this Prospectus; 2,323,504
of these shares are subject to the lock-up agreements described below (the
"Lock-Up Agreements"). The remaining 3,186,744 restricted securities will not
be eligible for resale under Rule 144 until after the expiration of a one-year
holding period (or for such shorter period as any amendments to Rule 144 shall
provide) from the date such restricted securities were acquired from the
Company or an affiliate, and may be resold in the public market only in
compliance with the registration requirements of the Securities Act or pursuant
to a valid exemption therefrom.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated), including a person who may be
deemed an "affiliate" of the Company, who has beneficially owned restricted
securities for at least one year may sell a number of shares within any
three-month period which does not exceed the greater of (i) 1% of the then
outstanding shares of the Company's Common Stock (approximately 95,936 shares
after this offering) or (ii) the average weekly trading volume in the Company's
Common Stock in the four calendar weeks immediately preceding such sale. Sales
under Rule 144 also are subject to certain requirements as to the manner of
sale, notice and the availability of current public information about the
Company. A person who is not an affiliate of the issuer, has not been an
affiliate within three months prior to the sale and has owned the restricted
securities for at least two years is entitled to sell such shares under Rule
144(k) without regard to any of the limitations described above.
Beginning 90 days after the date of this Prospectus, certain shares issued
or issuable upon the exercise of options granted by the Company or acquired
pursuant to the 1995 Plans prior to the date of this Prospectus also will be
eligible for sale in the public market pursuant to Rule 701 under the
Securities Act. In general, Rule 701 permits resales of shares issued pursuant
to certain compensatory benefit plans and contracts commencing 90 days after
the issuer becomes subject to the reporting requirements of the Exchange Act in
reliance upon Rule 144, but without compliance with certain restrictions of
Rule 144, including the holding period requirements. The Company has granted
options under the 1995 Plans covering 1,695,545 shares of Common Stock which
have not been exercised and which become exercisable at various times in the
future; 994,124 shares of Common Stock issued upon the exercise of certain of
these options will be eligible for sale pursuant to Rule 701 provided that the
conditions of Rule 701 have been satisfied.
In addition to shares issuable pursuant to the exercise of outstanding
options, the Company has reserved additional shares for issuance under the
Plan, the Purchase Plan and outstanding warrants. When issued, these shares may
only be sold within the limitations of Rule 144 or pursuant to registration
under the Securities Act. The Company intends to file a registration statement
covering shares of Common Stock to be acquired pursuant
53
<PAGE>
to the exercise of options granted under the Plan, the Purchase Plan and the
1995 Plans, however, the Company has agreed not to file any registration
statement for a period of nine months after the date of this Prospectus without
the prior written consent of BlueStone. Once such a registration statement
becomes effective, persons acquiring shares pursuant to the exercise of options
granted under the Plan, the Purchase Plan and the 1995 Plans, including
affiliates, will be able to sell the shares in the public market without regard
to the one-year holding period of Rule 144.
The executive officers, directors and substantially all of the 1% or
greater shareholders of the Company have agreed, pursuant to the Lock-Up
Agreements, that they will not, without the prior written consent of BlueStone,
offer, sell, contract to sell or otherwise dispose of any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock, for a period of nine months after the date of this Prospectus.
See "Underwriting."
Registration Rights
The Company has granted piggyback registration rights with respect to an
aggregate of 3,241,304 shares of Common Stock outstanding as of the closing of
this offering or purchasable upon the exercise of outstanding warrants to the
following investors: the former Series B Preferred Stock shareholders, Oberlin,
Petra, the former shareholders of ICI, High Point Capital, LLC, Ostrander,
Burch & Company, Inc., and Venture Lending (a division of Cupertino National
Bank and Trust) (collectively, the "Rights Holders"). In general, if the
Company proposes to register shares of Common Stock on a registration form
suitable for secondary offerings, the Company must at its cost and expense use
its best efforts to include in the registration statement certain shares of the
Rights Holders. However, in an underwritten offering, if a greater number of
shares is offered for participation than, in the opinion of the underwriters,
is compatible with the success of the offering, the number of shares shall be
reduced in accordance with the priorities established in the various agreements
between the Company and the Rights Holders. Securities to be offered by the
Company on its own behalf are entitled to first priority.
The Company also granted demand registration rights to (i) the former
Series B Preferred Stock shareholders, who, for up to five years following the
consummation of this offering, are entitled to a maximum of two demand
registrations (excluding registrations on Form S-3) beginning 180 days after
the effectiveness of this offering and a maximum of two demand registrations on
Form S-3 in any 12-month period, and (ii) Petra, which is entitled to two
demand registrations beginning 180 days after this offering. In the event that
either the former Series B Preferred Stock shareholders or Petra exercises
demand registration rights, the Company is obligated at its cost and expense to
use its best efforts to file a registration statement registering the shares of
Common Stock covered by such demand registration rights. All of the foregoing
registration rights holders have agreed to waive such rights, and the Company
has agreed not to file any registration statement, for a period of nine months
after the date of this Prospectus without the prior written consent of
BlueStone.
In addition, the Company will provide the Representatives with a one-time
demand registration right and unlimited piggyback registration rights with
respect to the 280,000 shares of Common Stock underlying the Representatives'
Warrants. See "Underwriting."
UNDERWRITING
The underwriters named below (collectively, the "Underwriters"), for which
BlueStone Capital Partners, L.P. ("BlueStone") and Ferris, Baker Watts,
Incorporated are acting as representatives (the "Representatives"), have agreed
severally, not jointly, subject to the terms and conditions contained in the
underwriting agreement between the Company and the Underwriters (the
"Underwriting Agreement"), to purchase from the Company, and the Company has
agreed to sell to the several Underwriters, the 2,800,000 shares of Common
Stock offered hereby. The number of shares of Common Stock that each
Underwriter has agreed to purchase is set forth opposite its name below:
54
<PAGE>
<TABLE>
<CAPTION>
Underwriter Number of Shares
- ------------------------------------------- ------------------
<S> <C>
BlueStone Capital Partners, L.P. ..........
Ferris, Baker Watts, Incorporated .........
Total ..................................
==================
</TABLE>
The Underwriters are committed on a "firm commitment" basis to purchase
and pay for all of the shares of Common Stock offered hereby (other than shares
offered pursuant to the over-allotment option) if any shares are purchased. The
shares of Common Stock are being offered by the Underwriters, subject to prior
sale, when, as if delivered to and accepted by the Underwriters and subject to
approval of certain legal matters by counsel and to certain other conditions.
Through the Representatives, the several Underwriters have advised the
Company that they propose to offer the shares of Common Stock to the public at
the public offering price set forth on the cover page of this Prospectus. The
Underwriters may allow to certain dealers who are members of the National
Association of Securities Dealers, Inc. ("NASD") concessions, not in excess of
$ per share, of which not in excess of $ per share may be reallowed to
other dealers who are members of the NASD. After the commencement of the
offering, the public offering price, concessions and reallowance may be
changed.
The Company has granted the Representatives an option, exercisable for 45
days following the date of this Prospectus, to purchase up to 420,000
additional shares of Common Stock at the public offering price set forth on the
cover page of this Prospectus, less the underwriting discounts and commissions.
The Representatives may exercise this option in whole or, from time to time, in
part, solely for the purpose of covering over-allotments, if any, made in
connection with the sale of the shares of Common Stock offered hereby.
The Company has agreed to reimburse BlueStone for costs, fees and expenses
customarily incurred by an underwriter during the registration process,
including legal fees and all costs associated with marketing and selling the
offering. The Company has also agreed to pay all expenses in connection with
qualifying the shares of Common Stock offered hereby for sale under the laws of
such states as the Representatives may designate, including expenses of counsel
retained for such purpose by the Representatives.
The Company has agreed to issue to the Representatives and their
designees, for an aggregate of $280, the Representatives' Warrants to purchase
up to 280,000 shares of Common Stock, at an exercise price of $ per share
(120% of the public offering price per share). The Representatives' Warrants
may not be transferred for one year following the date of this Prospectus,
except to the officers and partners of the Representatives or the Underwriters
or members of the selling group, and are exercisable at any time, and from time
to time, during the four-year period commencing one year following the date of
this Prospectus (the "Warrant Exercise Term"). During the Warrant Exercise
Term, the holders of the Representatives' Warrants are given, at nominal cost,
the opportunity to profit from a rise in the market price of the Common Stock.
To the extent that the Representatives' Warrants are exercised or exchanged,
dilution to the interests of the Company's shareholders will occur. Further,
the terms upon which the Company will be able to obtain additional equity
capital may be adversely affected since the holders of the Representatives'
Warrants can be expected to exercise them at a time when the Company would, in
all likelihood, be able to obtain any needed capital on terms more favorable to
the Company than those provided in the Representatives' Warrants. Any profit
realized by the Representatives on the sale of the Representatives' Warrants or
the underlying shares of Common Stock may be deemed additional underwriting
compensation. Subject to certain limitations and exclusions, the Company has
agreed to register, at the request of the holders of a majority of the
Representatives' Warrants and at the Company's expense, the Representatives'
Warrants and the shares of Common Stock underlying the Representatives'
Warrants under the Securities Act on one occasion
55
<PAGE>
during the Warrant Exercise Term and to include such Representatives' Warrants
and such underlying shares in any appropriate registration statement that is
filed by the Company during the seven years following the date of this
Prospectus.
All of the Company's officers, directors and certain shareholders
beneficially owning 1% or more of the Common Stock have agreed that, for the
nine-month period following the date of this Prospectus, they will not, without
the prior written consent of BlueStone, directly or indirectly, sell, offer for
sale, transfer, pledge or otherwise dispose of, any securities of the Company
or exercise any registration rights relating to any securities of the Company.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales in excess of 3% of the number of shares of Common Stock
offered hereby to discretionary accounts.
The Company has agreed to indemnify the Underwriters against certain civil
liabilities in connection with the Registration Statement of which this
Prospectus forms a part, including liabilities under the Securities Act.
Prior to this offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price of the shares of Common
Stock has been determined by negotiation between the Company and the
Representatives and is not necessarily related to the Company's asset value,
net worth or other established criteria of value. Among the factors considered
in determining the offering price are the Company's financial condition and
prospects, management, market prices of similar securities of comparable
publicly-traded companies, certain financial and operating information of
companies engaged in activities similar to those of the Company and the general
condition of the securities market.
In connection with this offering, the Underwriters may purchase and sell
the Common Stock in the open market. These transactions may include
over-allotment and stabilizing transactions and purchases to cover syndicate
short positions created by the Underwriters in connection with the offering.
Stabilizing transactions consist of certain bids or purchases for the purpose
of preventing or retarding a decline in the market price of the Common Stock;
and syndicate short positions created by the Underwriters involve the sale by
the Underwriters of a greater number of securities than they are required to
purchase from the Company in the offering. The Underwriters also may impose a
penalty bid, whereby selling concessions allowed to syndicate members or other
broker-dealers in respect of the securities sold in the offering for their
account may be reclaimed by the syndicate Underwriters if such shares of Common
Stock are repurchased by the syndicate Underwriters in stabilizing or covering
transactions. These activities may stabilize, maintain or otherwise affect the
market price of the Common Stock, which may be higher than the price that might
otherwise prevail in the open market; and these activities, if commenced, may
be discontinued at any time. These transactions may be effected on Nasdaq, the
over-the-counter market or otherwise.
The Underwriters may also place bids or purchase shares to reduce a short
position created in connection with the offering. Short positions are created
by persons who sell shares which they do not own in anticipation of purchasing
shares at a lower price in the market to deliver in connection with the earlier
sale. Short positions tend to place downward pressure on the market price of a
stock.
The Representatives and/or the Underwriters may impose a penalty bid by
reclaiming the selling concession to be paid to an Underwriter or selected
dealer when the securities sold by the Underwriter or selected dealer are
purchased to reduce a short position created in connection with the offering.
BlueStone was organized and registered as a broker-dealer with the
Commission and the NASD in March 1996. Although, since its organization,
BlueStone has engaged in the investment banking business and its principals
have had significant experience in the underwriting of securities in their
capacities with other broker-dealers, this offering will constitute one of the
first public offerings for which BlueStone has acted as lead manager.
LEGAL MATTERS
Certain legal matters in connection with this offering will be passed upon
for the Company by Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan,
L.L.P., Raleigh, North Carolina. Certain legal matters in connection with this
offering will be passed upon for the Underwriters by Tenzer Greenblatt LLP, New
York, New York.
56
<PAGE>
EXPERTS
The consolidated financial statements of the Company at December 31,
1996 and 1997, and for each of the three years in the period ended December 31,
1997 appearing in this Prospectus and the Registration Statement have been
audited by Ernst & Young LLP independent auditors, as set forth in their
report thereon appearing elsewhere herein and in the Registration Statement,
and are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
SB-2 under the Securities Act with respect to the shares of Common Stock
offered hereby. This Prospectus, which constitutes a part of the Registration
Statement, omits certain information contained in the Registration Statement,
and reference is made to the Registration Statement and the exhibits and
schedules thereto for further information with respect to the Company and the
shares of Common Stock offered hereby. Statements contained herein concerning
the provisions of any documents are not necessarily complete; and in each
instance reference is made to the copy of such document filed as an exhibit to
the Registration Statement. Each such statement is qualified in its entirety by
such reference. As of the date of this Prospectus, the Company will become
subject to the informational requirements of the Exchange Act and the rules and
regulations thereunder, and in accordance therewith, will file reports, proxy
and information statements, and other information with the Commission. The
Registration Statement, including exhibits and schedules filed therewith, and
the Company's reports, proxy and information statements and, other information
filed by the Company with the Commission, may be inspected without charge at
the Public Reference Room of the Commission at 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549, or at its Regional Offices located at 7 World
Trade Center, 13th Floor, New York, New York 10048 and 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511, and copies of all or any part of the
Registration Statement can be obtained from such offices at prescribed rates.
The Commission maintains an Internet web site at http://www.sec.gov that will
contain reports, proxy and information statements and other information
regarding the Company.
57
<PAGE>
INTERACTIVE MAGIC, INC.
CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1995, 1996 and 1997
Contents
<TABLE>
<S> <C>
Report of Independent Auditors ........................... F-2
Consolidated Financial Statements
Consolidated Balance Sheets .............................. F-3
Consolidated Statements of Operations .................... F-4
Consolidated Statements of Stockholders' Deficit ......... F-5
Consolidated Statements of Cash Flows .................... F-6
Notes to Consolidated Financial Statements ............... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND SHAREHOLDERS
INTERACTIVE MAGIC, INC.
We have audited the accompanying consolidated balance sheets of
Interactive Magic, Inc. (the "Company") as of December 31, 1996 and 1997, and
the related consolidated statements of operations, stockholders' deficit, and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Interactive Magic, Inc. at December 31, 1996 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Raleigh, North Carolina
May 6, 1998
F-2
<PAGE>
INTERACTIVE MAGIC, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
Pro Forma
Balance
Sheet
December 31, (Note 3)
----------------------- March 31, March 31,
1996 1997 1998 1998
---------- ------------ ------------ ------------
(Unaudited)
ASSETS
Current assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents ................................................ $ 292 $ 384 $ 116 $ 216
Trade receivables, net of allowances of $2,700, $3,650 and $2,707,
respectively ........................................................... 1,168 2,920 4,618 4,618
Inventories .............................................................. 410 637 765 765
Advance royalties ........................................................ 815 1,989 1,622 1,622
Software development costs ............................................... 152 425 758 758
Prepaid expenses and other ............................................... 65 109 114 114
-------- --------- --------- ---------
Total current assets ...................................................... 2,902 6,464 7,993 8,093
Property and equipment, net ............................................... 1,229 1,196 1,158 1,158
Other noncurrent assets:
Advance royalties, less current portion .................................. 263 -- -- --
Other .................................................................... 170 87 60 60
-------- --------- --------- ---------
433 87 60 60
-------- --------- --------- ---------
Total assets .............................................................. $ 4,564 $ 7,747 $ 9,211 $ 9,311
======== ========= ========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses .................................... $ 1,576 $ 2,776 $ 2,942 $ 2,942
Royalties and commissions payable ........................................ 484 858 935 935
Lines of credit .......................................................... 3,514 3,983 2,557 2,557
Current portion of long-term debt ........................................ -- 745 725 725
Current portion of capital lease obligations ............................. 61 35 35 35
-------- --------- --------- ---------
Total current liabilities ................................................. 5,635 8,397 7,194 7,194
Noncurrent liabilities:
Accrued interest payable to related parties .............................. 334 982 1,089 770
Long-term debt, less current portion ..................................... 493 3,759 3,791 3,791
Capital lease obligations ................................................ 80 38 26 26
Notes payable to related parties ......................................... 2,970 3,470 870 870
-------- --------- --------- ---------
Total noncurrent liabilities .............................................. 3,877 8,249 5,776 5,457
Series C Redeemable Convertible Preferred Stock, $.10 par value;
132,744 shares authorized, issued and outstanding at March 31, 1998 ...... -- -- 600 --
Stockholders' deficit:
Series A Convertible Preferred Stock, $.10 par value; 82,634 shares
authorized, shares issued and outstanding at December 31, 1996 and
1997 and March 31, 1998 ................................................ 8 8 8 --
Series B Convertible Preferred Stock, $.10 par value; 778,746 shares
authorized, issued and outstanding at March 31, 1998 ................... -- -- 78 --
Class A Common Stock, $.10 par value; 10,000,000 shares authorized;
3,145,178, 3,145,696, and 3,145,696 shares issued and outstanding at
December 31, 1996 and 1997 and March 31, 1998, respectively ............ 314 314 314 --
Class B Common Stock, $.10 par value; 10,000,000 shares authorized;
6,750, 7,875 and 457,853 shares issued and outstanding at December
31, 1996 and 1997 and March 31, 1998, respectively ..................... 1 1 46 --
Common Stock, $.10 par value; 50,000,000 authorized, 6,793,699
shares issued and outstanding pro forma ................................ -- -- -- 679
Additional paid-in capital ............................................... 4,703 5,047 10,102 10,888
Cumulative currency translation adjustment ............................... (62) (59) (79) (79)
Accumulated deficit ...................................................... (9,912) (14,210) (14,828) (14,828)
-------- --------- --------- ---------
Total stockholders' deficit ............................................... (4,948) (8,899) (4,359) $ (3,340)
-------- --------- --------- =========
Total liabilities and stockholders' deficit ............................... $ 4,564 $ 7,747 $ 9,211 $ 9,311
======== ========= ========= =========
</TABLE>
See accompanying notes.
F-3
<PAGE>
INTERACTIVE MAGIC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Year ended December 31, Three months ended March 31,
---------------------------------------- -----------------------------
1995 1996 1997 1997 1998
----------- ----------- ------------ ------------- -------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net revenues:
CD-ROM product sales ........................... $ 3,950 $ 4,852 $ 14,067 $ 3,399 $ 4,057
Online sales ................................... 6 733 1,615 357 358
Royalties and licenses ......................... 165 472 820 201 498
-------- -------- --------- ------- ----------
Total net revenues .............................. 4,121 6,057 16,502 3,957 4,913
Cost of revenues:
Cost of products sold .......................... 790 1,349 3,715 766 968
Royalties and amortized software costs ......... 879 1,044 2,634 649 909
-------- -------- --------- ------- ----------
Total cost of revenues .......................... 1,669 2,393 6,349 1,415 1,877
-------- -------- --------- ------- ----------
Gross profit .................................... 2,452 3,664 10,153 2,542 3,036
Operating expenses:
Sales and marketing ............................ 2,335 5,008 6,760 1,642 1,667
Product development ............................ 1,518 3,788 3,878 859 1,103
General and administrative ..................... 828 1,451 1,941 598 449
-------- -------- --------- ------- ----------
Total operating expenses ........................ 4,681 10,247 12,579 3,099 3,219
-------- -------- --------- ------- ----------
Operating loss .................................. (2,229) (6,583) (2,426) (557) (183)
Other expense:
Interest expense -- third parties .............. 48 204 622 146 200
Interest expense -- related parties ............ 127 402 1,053 154 107
Other .......................................... -- -- 230 (1) --
-------- -------- --------- --------- ----------
Total other expense ............................. 175 606 1,905 299 307
-------- -------- --------- -------- ----------
Loss before income taxes ........................ (2,404) (7,189) (4,331) (856) (490)
Income tax (expense) benefit .................... (47) (11) 33 31 (128)
-------- -------- --------- -------- ----------
Net loss ........................................ $ (2,451) $ (7,200) $ (4,298) $ (825) $ (618)
======== ======== ========= ======== ==========
Pro forma net loss per share (Note 3) ........... $ (0.68) $ (0.10)
========= ==========
Number of shares used in computing pro
forma net loss per share (Note 3) .............. 6,343,080 6,484,506
</TABLE>
See accompanying notes.
F-4
<PAGE>
INTERACTIVE MAGIC, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(In thousands, except share data)
<TABLE>
<CAPTION>
Series A Series B
Convertible Convertible
Preferred Stock Preferred Stock Class A Common Stock
----------------- ------------------- ---------------------
Shares Amount Shares Amount Shares Amount
-------- -------- ---------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 ............. -- $-- -- $ -- 60,000 $ 6
Issuance of common stock ................. -- -- -- -- 2,158,898 216
Currency translation adjustments ......... -- -- -- -- -- --
Net loss ................................. -- -- -- -- -- --
------- ------- --------- ---- --------- -----
Balance at December 31, 1995 ............. -- -- -- -- 2,218,898 222
Issuance of common stock in lieu
of compensation ......................... -- -- -- -- 164,000 16
Issuance of common stock ................. -- -- -- -- 62,280 6
Exercise of stock options ................ -- -- -- -- -- --
Issuance of warrants ..................... -- -- -- -- -- --
Conversion of note payable into
preferred stock ......................... 82,634 8 -- -- -- --
Conversion of note payable into
common stock ............................ -- -- -- -- 700,000 70
Currency translation adjustments ......... -- -- -- -- -- --
Net loss ................................. -- -- -- -- -- --
------ -------- -------- ---- --------- -----
Balance at December 31, 1996 ............. 82,634 8 -- -- 3,145,178 314
Issuance of common stock ................. -- -- -- -- 518 --
Issuance of warrants ..................... -- -- -- -- -- --
Exercise of stock options ................ -- -- -- -- -- --
Currency translation adjustments ......... -- -- -- -- -- --
Net loss ................................. -- -- -- -- -- --
------ -------- -------- ---- --------- -----
Balance at December 31, 1997 ............. 82,634 8 -- -- 3,145,696 314
Exercise of stock options ................ -- -- -- -- -- --
Issuance of preferred stock .............. -- -- 778,746 78 -- --
Conversion of note payable into
common stock ............................ -- -- -- -- -- --
Currency translation adjustments ......... -- -- -- -- -- --
Net loss ................................. -- -- -- -- -- --
------ ------- ------- ---- --------- -----
Balance at March 31, 1998
(Unaudited) ............................. 82,634 $ 8 778,746 $ 78 3,145,696 $ 314
====== ======== ======= ==== ========= =====
<CAPTION>
Class B Common
Stock Additional Cumulative
------------------- Paid-In Translation Accumulated
Shares Amount Capital Adjustment Deficit Total
---------- -------- ------------ ------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 ............. -- $ -- $ (6) $ -- $ (261) $ (261)
Issuance of common stock ................. -- -- 2,275 -- -- 2,491
Currency translation adjustments ......... -- -- -- (2) -- (2)
Net loss ................................. -- -- -- -- (2,451) (2,451)
---------- ---- ------- ------ -------- ---------
Balance at December 31, 1995 ............. -- -- $ 2,269 $ (2) $ (2,712) $ (223)
Issuance of common stock in lieu
of compensation ......................... -- -- 182 -- -- 198
Issuance of common stock ................. -- -- 999 -- -- 1,005
Exercise of stock options ................ 6,750 1 5 -- -- 6
Issuance of warrants ..................... -- -- 122 -- -- 122
Conversion of note payable into
preferred stock ......................... -- -- 496 -- -- 504
Conversion of note payable into
common stock ............................ -- -- 630 -- -- 700
Currency translation adjustments ......... -- -- -- (60) -- (60)
Net loss ................................. -- -- -- (7,200) (7,200)
---------- ---- ------- ------ -------- ---------
Balance at December 31, 1996 ............. 6,750 1 4,703 (62) (9,912) (4,948)
Issuance of common stock ................. -- -- 15 -- -- 15
Issuance of warrants ..................... -- -- 328 -- -- 328
Exercise of stock options ................ 1,125 -- 1 -- -- 1
Currency translation adjustments ......... -- -- -- 3 -- 3
Net loss ................................. -- -- -- -- (4,298) (4,298)
---------- ---- ------- ------ -------- ---------
Balance at December 31, 1997 ............. 7,875 1 5,047 (59) (14,210) (8,899)
Exercise of stock options ................ 7,500 1 8 -- -- 9
Issuance of preferred stock .............. -- -- 3,091 -- -- 3,169
Conversion of note payable into
common stock ............................ 442,478 44 1,956 -- -- 2,000
Currency translation adjustments ......... -- -- -- (20) -- (20)
Net loss ................................. -- -- -- -- (618) (618)
------- ---- ------- ------ -------- ---------
Balance at March 31, 1998
(Unaudited) ............................. 457,853 $ 46 $10,102 $(79) $(14,828) $(4,359)
======= ==== ======= ====== ======== =========
</TABLE>
See accompanying notes.
F-5
<PAGE>
INTERACTIVE MAGIC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three months ended
Year ended December 31, March 31,
---------------------------------------- ---------------------
1995 1996 1997 1997 1998
-------------- ------------ ------------ ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities
Net loss ............................................... $(2,451) $ (7,200) $ (4,298) $ (825) $ (618)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization ......................... 94 230 422 81 89
Amortization of capitalized software
development costs ................................... 69 147 576 37 250
Issuance of common stock, in lieu of
compensation ........................................ -- 198 -- -- --
Issuance of common stock for services ................. 20 12 15 15 --
Noncash interest expense .............................. -- 122 147 32 33
Write-off of investment ............................... -- -- 120 -- --
Changes in operating assets and liabilities:
Trade receivables ................................... (784) (334) (1,752) (1,209) (1,698)
Inventories ......................................... (269) (141) (227) (120) (128)
Advance royalties ................................... (266) (587) (911) 92 367
Prepaid expenses and other .......................... (79) (21) (87) (307) 22
Accounts payable and accrued expenses ............... 1,109 433 1,084 534 254
Royalties and commissions payable ................... 266 218 374 (10) 77
Accrued interest .................................... 86 282 764 170 18
------- -------- -------- -------- --------
Net cash used in operating activities .................. (2,205) (6,641) (3,773) (1,510) (1,334)
Investing activities
Purchase of property and equipment ..................... (683) (563) (382) (64) (51)
Purchase of investment ................................. -- (120) -- -- --
Software development costs ............................. (289) (79) (849) (255) (583)
------- -------- -------- -------- --------
Net cash used in investing activities .................. (972) (762) (1,231) (319) (634)
Financing activities
Proceeds from issuance of common stock ................. 2,401 999 -- -- 9
Proceeds from issuance of preferred stock .............. -- -- -- -- 3,169
Proceeds from long-term debt ........................... -- 993 4,192 3,000 --
Payments on long-term debt ............................. -- -- -- -- (20)
Proceeds from notes payable to related parties ......... 700 2,370 500 200 --
Net borrowings from (payments on)
lines-of-credit ........................................ 426 3,088 469 (1,510) (1,426)
Payments on capital lease obligations .................. (22) (47) (68) (14) (12)
------- -------- -------- -------- --------
Net cash provided by financing activities .............. 3,505 7,403 5,093 1,676 1,720
Effect of currency exchange rate changes on cash
and cash equivalents .................................. (2) (60) 3 16 (20)
---------- -------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents ........................................... 326 (60) 92 (137) (268)
Cash and cash equivalents at beginning of period........ 26 352 292 292 384
--------- -------- -------- -------- --------
Cash and cash equivalents at end of period ............. $ 352 $ 292 $ 384 $ 155 $ 116
========= ======== ======== ======== ========
Supplemental disclosure of cash flow
information
Cash paid for interest ................................. $ 87 $ 233 $ 760 $ 95 $ 276
--------- -------- -------- -------- --------
Cash paid for income taxes ............................. $ -- $ 47 $ 8 $ -- $ --
========= ======== ======== ======== ========
Noncash investing and financing activities
Acquisition of equipment under capital leases .......... $ 155 $ 55 $ -- $ -- $ --
Issuance of common stock for receivable ................ $ 50 $ -- $ -- $ -- $ --
Issuance of common stock for equipment ................. $ 20 $ -- $ -- $ -- $ --
Conversion of notes payable into stock ................. $ -- $ 1,204 $ -- $ -- $ --
</TABLE>
See accompanying notes.
F-6
<PAGE>
INTERACTIVE MAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
1. DESCRIPTION OF BUSINESS
Interactive Magic, Inc. (the "Company") develops, publishes, and
distributes 3-D interactive, simulation and strategy entertainment software to
customers around the world via (1) retail distribution through international
and domestic software outlets and (2) proprietary, pay-for-play online service
on the Internet. The Company has agreements with various software licensors to
manufacture, market, sell and distribute software in the United States. Through
its wholly owned subsidiaries located in the United Kingdom and Germany, and
through its online service, the Company also distributes its products
internationally.
2. BUSINESS COMBINATION
On April 23, 1997, the Company acquired 100% of the outstanding capital
stock of Interactive Creations, Inc. ("ICI") in exchange for 655,696 shares of
the Company's Class A Common Stock (the "Merger"). Subsequent to the Merger,
ICI's name was changed to iMagic Online Corporation. The Merger constituted a
tax-free reorganization and was accounted for under the pooling of interests
method of accounting in accordance with Accounting Principles Board Opinion No.
16.
The results of operations for the separate companies and the combined
amounts presented in the consolidated financial statements follow (in
thousands):
<TABLE>
<CAPTION>
Year ended December 31, Three months
--------------------------- ended March 31,
1995 1996 1997
------------ ------------ ----------------
(unaudited)
<S> <C> <C> <C>
Net Sales
Interactive Magic, Inc. ........... $ 4,115 $ 5,235 $3,602
iMagic Online Corporation ......... 6 822 355
-------- -------- ------
Combined .......................... $ 4,121 $ 6,057 $3,957
======== ======== ======
Net loss
Interactive Magic, Inc ............ $ (2,167) $ (6,236) $ (688)
iMagic Online Corporation ......... (284) (964) (137)
-------- -------- ------
Combined .......................... $ (2,451) $ (7,200) $ (825)
======== ======== ======
</TABLE>
The accompanying consolidated financial statements include the operations
of the combined entities for the years ended December 31, 1995, 1996 and 1997
and for the three months ended March 31, 1997 and 1998.
3. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, iMagicOnline Corporation, Interactive Magic
Ltd. and Interactive Magic GmbH. All significant intercompany accounts and
transactions have been eliminated in consolidation.
March 31, 1997 and 1998 Interim Financial Information (Unaudited)
The consolidated statements of operations and cash flows for the
three-month periods ended March 31, 1997 and 1998 and the consolidated balance
sheet at March 31, 1998 are unaudited and reflect all adjustments (consisting
of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of financial position, results of operations
and cash flows. All information related to the three-month periods ended March
31, 1997 and 1998 is unaudited.
F-7
<PAGE>
INTERACTIVE MAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
3. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS -- (Continued)
Cash and Cash Equivalents
The Company includes amounts in demand deposit accounts in cash and cash
equivalents.
Inventories
Inventories consist of pre-packaged CD-ROM software packages and related
materials and are stated at the lower of cost or market. Costs are determined
using the first-in, first-out ("FIFO") cost flow assumption.
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------- March 31,
1996 1997 1998
--------- -------- ------------
(unaudited)
<S> <C> <C> <C>
Finished goods ...................... $ 417 $ 645 $ 774
Components .......................... 96 79 138
------ ----- ------
513 724 912
Inventory valuation reserve ......... (103) (87) (147)
------ ----- ------
$ 410 $ 637 $ 765
====== ===== ======
</TABLE>
Advance Royalties
Advance royalties represent prepayments made to independent software
developers under development agreements. Advance royalties are expensed as part
of royalties and amortized software costs at the contractual royalty rate based
on actual net product sales. Management continuously evaluates the future
realization of advance royalties, and charges to cost of revenues any amount
that management deems unlikely to be amortized at the contractual royalty rate
through product sales. Advance royalties are classified as current and
noncurrent assets based upon estimated product release dates of the related
software products.
Property and Equipment
Property and equipment are stated at cost. Depreciation for equipment,
furniture and fixtures and software is computed using the straight-line method
over the estimated useful lives of the assets, ranging from five to seven
years. Leasehold improvements are amortized on a straight-line basis over the
term of the estimated useful life of the asset or the remaining lease term,
whichever is less. Depreciation expense, including amortization of equipment
leased under capital leases, was $91,000, $215,000 and $415,000 for the years
ended December 31, 1995, 1996 and 1997, and $75,000 and $89,000 for the three
months ended March 31, 1997 and 1998, respectively.
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------- March 31,
1996 1997 1998
--------- --------- ------------
(unaudited)
<S> <C> <C> <C>
Equipment .............................................. $1,083 $1,287 $1,345
Furniture and fixtures ................................. 160 167 167
Software ............................................... 278 425 430
Leasehold improvements ................................. 33 54 54
------ ------ ------
1,554 1,933 1,996
Less accumulated depreciation and amortization ......... (325) (737) (838)
------ ------ ------
$1,229 $1,196 $1,158
====== ====== ======
</TABLE>
F-8
<PAGE>
INTERACTIVE MAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
3. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS -- (Continued)
Capitalized Software Development Costs
Costs incurred in the development of software for sale to customers are
capitalized after a product's technological feasibility has been established.
Capitalization of such costs is discontinued when a product is available for
general release to customers. Capitalized software development costs are
capitalized at the lower of cost or net realizable value and amortized using
the greater of the revenue curve method or the straight-line method over the
estimated economic life of the related product. Amortization begins when a
product is ready for general release to customers. Amortization of capitalized
software development costs is included in royalties and amortized software
costs in the consolidated statement of operations and was $69,000, $147,000,
and $576,000 for the years ended December 31, 1995, 1996 and 1997, and $37,000
and $250,000 for the three months ended March 31, 1997 and 1998, respectively.
Information related to net capitalized software development costs is as
follows (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------- March 31,
1996 1997 1998
--------- --------- ------------
(unaudited)
<S> <C> <C> <C>
Balance at beginning of period ......... $ 220 $ 152 $ 425
Capitalized ............................ 79 849 583
Amortized .............................. (147) (576) (250)
------ ------ ------
Balance at end of period ............... $ 152 $ 425 $ 758
====== ====== ======
</TABLE>
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, trade receivables,
accounts payable and notes payable approximates the fair value.
Revenue Recognition
Revenue from CD-ROM product sales, net of allowances for estimated future
returns, is recognized at the time of product shipment. Revenue from online
sales is recognized at the time the game is played and is based upon actual
usage by the customer on an hourly basis.
Product Development
Product development expenses (excluding capitalized software development
costs) are charged to operations in the period incurred and consist primarily
of payroll and payroll related costs.
Advertising
The Company expenses advertising costs as incurred. Advertising expense
was approximately $695,000, $1,661,000 and $2,529,000 for the years ended
December 31, 1995, 1996 and 1997, and $527,000 and $638,000 for the three
months ended March 31, 1997 and 1998, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates include provisions for doubtful
accounts, sales returns and allowances, and estimates regarding the
recoverability of prepaid royalty advances and inventory. Actual results could
differ from those estimates.
F-9
<PAGE>
INTERACTIVE MAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
3. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS -- (Continued)
Foreign Currency Translation
The Company follows the principles of the Financial Accounting Standards
Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 52,
"Foreign Currency Translation," using the local currency of its operating
subsidiaries as the functional currency. Accordingly, all assets and
liabilities outside the United States are translated into U.S. dollars at the
rate of exchange in effect at the balance sheet date. Income and expense items
are translated at the weighted average exchange rate prevailing during the
period. Adjustments resulting from translation of financial statements are
reflected as a separate component of stockholders' equity.
Warrants
Stock purchase warrants issued in connection with debt instruments are
recorded at their estimated fair value and credited to additional paid-in
capital. The resulting debt discount is amortized to interest expense over the
term of the related debt.
Employee Stock Compensation
The Company has elected to continue to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25") and
related interpretations in accounting for its employee stock options as
permitted by SFAS No. 123 and make the required pro forma disclosures required
by SFAS No. 123 (see Note 8). Under APB No. 25, because the exercise price of
the Company's employee stock options is not less than the estimated fair value
of the underlying stock on the date of grant, no compensation expense is
recognized.
Net Loss Per Share and Pro Forma Net Loss Per Share
The Company accounts for net loss per share in accordance with SFAS No.
128 "Earnings Per Share." In accordance with SFAS No. 128, net loss per share
is computed by dividing net loss by the weighted average number of common
shares outstanding during the period.
Pro forma net loss per share as presented in the consolidated statements
of operations has been computed as described above and also gives effect to the
conversion of the Series A and Series B Convertible Preferred Stock, and the
Series C Redeemable Convertible Preferred Stock and the exercise of options and
warrants that will occur in contemplation of completing the Company's planned
initial public offering (using the as-if converted method).
F-10
<PAGE>
INTERACTIVE MAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
3. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS -- (Continued)
A reconciliation of shares used in the calculation of net loss per share
and pro forma net loss per share follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Year ended December 31, Three months ended March 31,
--------------------------------------------- -----------------------------
1995 1996 1997 1997 1998
------------- ------------- ------------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net loss ............................... $ (2,451) $ (7,200) $ (4,298) $ (825) $ (618)
========== ========== ========== ========== ==========
Weighted average shares of common
stock outstanding (shares used in
computing net loss per share) ......... 1,709,320 3,006,715 3,152,930 3,152,106 3,294,356
Net loss per share ..................... $ (1.43) $ (2.39) $ (1.36) $ (0.26) $ (0.19)
========== ========== ========== ========== ==========
Shares used in computing net loss per
share ................................. 3,152,930 3,294,356
Adjustment to reflect the effect of the
assumed conversion of the Series A
and Series B Convertible Preferred
Stock ................................. 2,128,283 2,128,283
Adjustment to reflect the effect of the
assumed conversion of the Series C
Redeemable Convertible Preferred
Stock ................................. 132,744 132,744
Adjustment to reflect the exercise of
certain options, assumed exercise of
certain warrants and assumed
issuance of shares of common stock
in connection with the
recapitalization ...................... 929,123 929,123
---------- ----------
Shares used in computing pro forma net
loss per share ........................ 6,343,080 6,484,506
========== ==========
Pro forma net loss per share .......... $ (0.68) $ (0.10)
========== ==========
</TABLE>
Had the Company been in a net income position, diluted earnings per share
would have been presented and would have included the shares used in the
computation of pro forma net loss per share as well as additional potential
common shares related to outstanding options and warrants. The diluted earnings
per share computation is not included, as the inclusion of all potential common
shares is antidilutive.
Pro Forma Balance Sheet Information
The unaudited pro forma balance sheet information as of March 31, 1998,
reflects the conversion of the existing shares of convertible preferred stock,
redeemable convertible preferred stock, and Class A and Class B Common Stock
into equivalent shares of common stock, which conversion is contingent upon the
closing of the offering. In addition, the pro forma information reflects the
cash proceeds and payment of accrued interest used in connection with the
exercise of options and warrants, as well as the issuance of shares of common
stock, in contemplation of the Company's initial public offering.
Impact of Recently Issued Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." In addition, the American Institute of Certified Public
Accountants issued Statement of Position (SOP) 97-2, "Software Revenue
Recognition",
F-11
<PAGE>
INTERACTIVE MAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
SOP 98-4, "Deferral of the Effective Date of a Provision of SOP 97-2,
\`Software Revenue Recognition'" and SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SFAS Nos. 130 and
131 and SOP 97-2 and SOP 98-4 are effective for fiscal years beginning after
December 15, 1997 and SOP 98-1 is effective for fiscal years beginning after
December 15, 1998. The Company does not believe that adoption of these
standards will have a material impact on the Company's financial position or
results of operations.
4. LINES OF CREDIT
The Company maintains a revolving line of credit arrangement with a bank
for up to $2,750,000. The principal balance outstanding at any point in time is
payable on demand with interest payable monthly at the current prime rate (8.5%
at December 31, 1997). The weighted-average interest rate on the line of credit
was 7.8% and 8.1% for the years ended December 31, 1996 and 1997, and 8.2% and
8.4% for the three months ended March 31, 1997 and 1998, respectively. The
balance outstanding as of December 31, 1996 and 1997 was $1,908,000 and
$2,439,000, respectively, and $2,461,000 as of March 31, 1998. Advances on the
line of credit are collateralized by a personal guarantee of the Company's
majority shareholder.
The Company also entered into a line of credit agreement with the same
bank to borrow up to $150,000. The line of credit is collateralized by the
Company's net property and equipment. The principal balance outstanding at any
point in time is payable on demand with interest payable monthly at the current
prime rate. The weighted-average interest rate on the line of credit was 7.8%
and 8.1% for the years ended December 31, 1996 and 1997, and 8.2% and 8.4% for
the three months ended March 31, 1997 and 1998, respectively. The balance
outstanding at December 31, 1996 and 1997 was $106,000 and $44,000,
respectively and $96,000 as of March 31, 1998.
During 1996, the Company also executed a line of credit agreement with
another bank, the terms of which stipulate that the Company may borrow up to
75% of its eligible domestic accounts receivable up to a maximum of $1,500,000.
The agreement entitles the bank to a perfected first lien security interest in
all of the Company's assets. Borrowings under this credit agreement were
$1,500,000 at December 31, 1996 and 1997. Interest is payable monthly at prime
(8.5% at December 31, 1997) + 2.0%. The weighted-average interest rate on the
line of credit was 10.1% and 10.4% for the years ended December 31, 1996 and
1997, and 10.5% and 10.6% for the three months ended March 31, 1997 and 1998,
respectively. Also, monthly fees of an additional .5% are paid on outstanding
advances under the line with a $15,000 minimum per quarter. The line of credit
agreement expired and the related outstanding borrowings were repaid in full in
February 1998.
5. NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------- March 31,
1996 1997 1998
-------- -------- ------------
(unaudited)
<S> <C> <C> <C>
Note payable to a stockholder, due on demand after January 1, 1999, interest at
14% per annum ................................................................ $ 600 $ 600 $ --
Note payable to a stockholder, principal and interest due on demand after
January 1, 1999, stated interest at 15% per annum until November 17, 1996,
17% thereafter ............................................................... 1,000 1,000 --
Note payable to a stockholder, principal and interest due on demand after
January 1, 1999, stated interest at 15% per annum until January 6, 1997,
17% thereafter ............................................................... 1,000 1,000 --
Note payable to related party, principal and interest due January 1, 1999,
interest at 10% per annum .................................................... 370 870 870
------ ------ ----
$2,970 $3,470 $870
====== ====== ====
</TABLE>
F-12
<PAGE>
INTERACTIVE MAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
5. NOTES PAYABLE TO RELATED PARTIES -- (Continued)
On February 4, 1998, the $600,000 and the two $1 million notes payable to
shareholders were converted into 132,744 shares of Series C Redeemable
Convertible Preferred Stock and 442,478 shares of Class B Common Stock,
respectively. The Series C Redeemable Convertible Preferred Stock is
mandatorily redeemable in cash upon a public offering of the Company's common
stock or convertible into 132,744 shares of common stock at the election of the
holder. Unpaid accrued interest of $702,000 and $740,000 relating to these
notes was not converted and is included in accrued interest at December 31,
1997 and March 31, 1998, respectively.
6. LONG-TERM DEBT
Long-term debt, other than to related parties, consists of the following
(in thousands):
<TABLE>
<CAPTION>
December 31,
------------------- March 31,
1996 1997 1998
------ ---------- ------------
(unaudited)
<S> <C> <C> <C>
Note payable due January 31, 1998, stated interest at prime plus 2% until an
additional round of equity investment is received by the Company at which
time the interest will be prime plus 4%, collateralized by property and
equipment (net of unamortized discount of $7,000 and $5,000 at December 31,
1996 and 1997, respectively) ................................................... $493 $ 495 $ 475
Subordinated note payable due March 24, 2002, stated interest at 13.5% per
annum, collateralized by property, equipment and inventory (net of
unamortized discount of $276,000 at December 31, 1997).......................... -- 2,724 2,747
Note payable due January 9, 1998, stated interest rate at prime (8.5% at
December 31, 1997) , collateralized by a personal guarantee of the Company's
majority shareholder. .......................................................... -- 250 250
Junior, subordinated note payable, due August 30, 2002, interest payable in
arrears every six months, at stated interest rate of 11% per annum for the first
twelve months, 12.0% per annum for next twelve months, and 12.5% thereafter
until maturity, collateralized by the assets of the Company (net of unamortized
discount of $164,000 at December 31, 1997)...................................... -- 1,036 1,044
---- ------ ------
493 4,504 4,516
Current portion ................................................................. -- (745) (725)
---- ------ ------
Long-term debt, less current portion ............................................ $493 $3,759 $3,791
==== ====== ======
</TABLE>
The aggregate principal maturities at December 31, 1997 consist of
$745,000 due in 1998, with the remaining balance of long-term debt becoming due
in 2002.
The Company estimates that the fair value of notes payable approximates
the carrying value based upon its effective current borrowing rate for debt
with similar terms and remaining maturities. Disclosure about fair value of
financial instruments is based upon information available to management as of
December 31, 1996 and 1997 and March 31, 1998. Although management is not aware
of any factors that would significantly affect the fair value of amounts, such
amounts have not been comprehensively revalued for purposes of these financial
statements since that date.
7. LEASES
The Company rents its facilities and certain office equipment under
noncancellable operating leases through 2001. The monthly rent under certain
facility leases are periodically adjusted based on changes in the Consumer
Price Index.
F-13
<PAGE>
INTERACTIVE MAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
7. LEASES -- (Continued)
Property and equipment includes the following amounts for capital leases
(in thousands):
<TABLE>
<CAPTION>
December 31,
------------------- March 31,
1996 1997 1998
-------- -------- ------------
(unaudited)
<S> <C> <C> <C>
Leased equipment ...................... $ 157 $ 157 $ 157
Leased furniture and fixtures ......... 53 53 53
----- ----- -----
210 210 210
Less accumulated amortization ......... (44) (85) (95)
----- ----- -----
$ 166 $ 125 $ 115
===== ===== =====
</TABLE>
The following is a schedule of future minimum lease payments for capital
and operating leases for the years ending December 31 (in thousands):
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
--------- ----------
<S> <C> <C>
1998 ................................................... $ 43 $309
1999 ................................................... 24 235
2000 ................................................... 19 204
2001 ................................................... -- 20
----- ----
Total future minimum lease payments .................... 86 $768
====
Less: amount representing interest ..................... (13)
-----
Present value of future minimum lease payments ......... 73
Less: current portion .................................. (35)
-----
$ 38
=====
</TABLE>
Total rent expense incurred was approximately $84,000, $261,000 and
$309,000 for the years ended December 31, 1995, 1996 and 1997, respectively and
$94,000 and $99,000 for the three months ended March 31, 1997 and 1998,
respectively.
8. STOCKHOLDERS' DEFICIT
Common Stock
The Company has two classes of common stock, Class A (voting) and Class B
(nonvoting). Common stockholder rights are subordinate to those of preferred
stockholders. Holders of the Class A Common Stock are entitled to one vote per
share of common stock held. Holders of Class B Common Stock do not receive any
voting privileges.
Convertible Preferred Stock
The Series A Convertible Preferred Stock ("Series A Preferred") is
automatically convertible into shares of Class A Common Stock upon the closing
of an underwritten public offering pursuant to an effective registration
statement under the Securities Act of 1933, as amended, covering the offer and
sale of Class A Common Stock of the Company to the public with an aggregate
gross offering price of not less than $10,000,000 and a per share price of not
less than $6.10. Each share of outstanding Series A Preferred is currently
convertible into one share of Class A Common Stock, subject to adjustment as
provided in the Amended Articles of Incorporation of the Company. The Company
has reserved 82,634 shares of common stock for issuance upon conversion.
The holders of the Series A Preferred Stock are entitled to vote on all
matters with votes equal to the number of shares of Class A Common Stock into
which the Preferred Stock is convertible. The Series A Preferred stockholders
are entitled to receive annual cumulative dividends of 8% only if, and when,
such dividends are declared by the
F-14
<PAGE>
INTERACTIVE MAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
8. STOCKHOLDERS' DEFICIT -- (Continued)
Company's Board of Directors out of funds legally available therefor. The
approval of the majority of the then outstanding shares of the Series A
Preferred Stock is required in order to declare dividends to the holders of
common stock. As of December 31, 1997 and March 31, 1998, no dividends had been
declared with respect to the Series A Preferred Stock.
The outstanding subordinated and junior subordinated notes payable
prohibit the declaration or payment of any dividends during the terms of the
notes without the written consent of the holders of such notes.
On February 4, 1998, the Company issued 778,746 shares of its Series B
Convertible Preferred Stock for an aggregate purchase price of $3,500,000. The
holders of the Series B Preferred stock are entitled to vote on all matters
with votes equal to the number of shares of common stock into which the Series
B Preferred Stock is convertible. The holders of Series B Preferred Stock are
entitled to convert their preferred shares into 2,045,649 shares of the
Company's common stock in the event the Company consummates an initial public
offering or enters into a sale agreement. In addition, the Company is required
to obtain the consent of the holders of the Series B Preferred Stock in the
event that it (i) contemplates issuance of convertible securities if the
cumulative number of shares issuable during the two years following an initial
public offering exceeds five percent of the outstanding shares of common stock
on a fully diluted basis, excluding the convertible securities and (ii) pays
any dividends other than required dividends on the Series A Preferred Stock.
The liquidation preference for the Series A, Series B and Series C
Preferred Stock is equal to the respective Series' issue price plus any accrued
and unpaid dividends.
Stock Options
Effective January 2, 1995, the Company adopted two employee incentive
stock option plans (the "1995 Plans"). One plan provided for the granting of
options to purchase Class A Common Stock which was voting stock, and one plan
provided for the granting of options to purchase Class B Common Stock which was
non-voting. The 1995 Plans are intended as incentives to induce key employees
of the Company to remain in the employ of the Company or of any subsidiary of
the Company and to encourage such employees to own stock in the Company. This
purpose is carried out by granting options to purchase shares of Common Stock.
The Company may grant incentive stock options ("ISOs") within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") to
eligible participants under the 1995 Plans. The exercise price of an ISO may
not be less than 100% of the fair market value of the underlying shares at the
time the ISO is granted.
The 1995 Plans are administered by the Board of Directors. The Board has
the authority to administer the 1995 Plans and determine, among other things,
the interpretation of any provisions of the 1995 Plans, the eligible employees
who are to be granted stock options, the number of shares which may be issued
and the option exercise price.
The Company's incentive stock options vest over time with 20% vesting
during the second year after the date of grant with an additional 5% vesting
each calendar quarter thereafter. Incentive stock options generally may only be
exercised if the participant has been employed by the Company continuously for
at least one year as of the last day of the first 12-month period following the
date of option grant. The option is only exercisable if the participant is
employed by the Company and for limited periods of time after the participant's
termination of employment. If the participant ceases to be employed on account
of termination by the Company for cause or resignation (other than retirement
as defined in the option agreement), the right to exercise any unexercised
portion of the option terminates. If the participant is terminated by the
Company without cause, the participant shall be entitled to purchase, within
three months, option shares equal to an additional 25% of the participant's
option shares that were not exercisable as of the termination date. The option
becomes immediately and fully vested and exercisable in the event of a change
in control as defined in the option agreement.
The performance incentive stock options are exercisable during the period
commencing from March 31, 1997 and ending March 31, 2005. Performance options
vest upon the earlier of the Company's achievement of
F-15
<PAGE>
INTERACTIVE MAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
8. STOCKHOLDERS' DEFICIT -- (Continued)
certain performance standards or seven years from the date of grant. The number
and exercise price of the options are fixed at the date of grant. Options are
exercisable only in the event the participant is employed by the Company and
for limited periods of time after the participant's termination of employment.
If the participant ceases to be an employee on account of resignation (other
than retirement as defined in the option agreement) or termination for cause,
the right to exercise any unexercised portion of the option shall terminate.
The option becomes immediately and fully vested and exercisable as of a change
in control date.
As the exercise price of the options was not less than the estimated fair
value of the stock on the date of grant, no compensation expense was recorded
related to these options.
The following table summarizes the ISO and PSO activity under the
Company's 1995 Plans:
<TABLE>
<CAPTION>
Class A Class B
Voting Non-Voting Weighted-Average
Shares Shares Exercise
Available for Available for Options Price Per
Grant Grant Outstanding Share Exercisable
--------------- --------------- ------------- ----------------- ------------
<S> <C> <C> <C> <C> <C>
Options authorized for grant ......... 750,000 1,500,000 -- $ -- --
Options granted ...................... (500,000) (1,010,000) 1,510,000 1.00
-------- ---------- --------- ------ -------
Balances at December 31, 1995 .......... 250,000 490,000 1,510,000 1.00 148,750
Options authorized for grant ......... -- 625,000 -- -- --
Options granted ...................... (85,026) (318,294) 403,370 3.83 --
Options exercised .................... -- -- (6,750) 1.00 --
Options canceled ..................... -- 43,250 (43,250) 1.00 --
-------- ---------- --------- ------ -------
Balances at December 31, 1996 .......... 164,924 839,956 1,863,370 1.78 54,644
Options authorized for grant ......... 250,000 357,500 -- -- --
Options granted ...................... (111,360) (218,956) 330,316 5.63 --
Options exercised .................... -- -- (1,125) 1.00 --
Options canceled ..................... 127,933 71,580 199,513 4.90 --
-------- ---------- --------- ------ -------
Balances at December 31, 1997 .......... 431,497 1,050,080 1,993,048 $ 2.14 1,007,328
-------- ---------- --------- ------ ---------
Options granted ...................... -- (11,250) 11,250 6.00 --
Options exercised .................... -- -- (7,500) 0.60 --
Options canceled ..................... -- 120,188 (120,188) 1.86 --
-------- ---------- --------- ------ ---------
Balances at March 31, 1998
(Unaudited) ......................... 431,497 1,159,018 1,876,610 $ 1.99 1,435,665
======== ========== ========= ====== =========
</TABLE>
The Company has adopted the disclosure-only provisions of SFAS 123. The
fair value for each ISO and PSO option was estimated at the date of grant using
a Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
Three months
Year ended ended
December 31, March 31,
------------------------ ----------------
1995 1996 1997 1997 1998
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Expected dividend yield ....................... 0% 0% 0% 0% 0%
Risk-free interest rate ....................... 6% 6% 6% 6% 6%
Expected volatility ........................... 59% 59% 59% 59% 59%
Expected life (in years from vesting) ......... 5.4 3.4 1.9 2.2 4.9
</TABLE>
For purposes of pro forma disclosures, the estimated fair values of the
stock options are amortized to expense over the vesting period. The grant date
Black-Scholes weighted-average value was $0.32, $0.54 and $0.95 per share for
1995, 1996 and 1997 and $1.04 and $1.69 per share for the three-month periods
ended March 31, 1997 and 1998, respectively. As of December 31, 1997, 422,970
Class A options and 584,358 Class B options were exercisable with a
weighted-average remaining contractual life of seven years.
F-16
<PAGE>
INTERACTIVE MAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
8. STOCKHOLDERS' DEFICIT -- (Continued)
The following table shows pro forma net loss and net loss per share as if
the fair value accounting method prescribed by SFAS 123 had been used to
account for stock based compensation (in thousands, except per share data):
<TABLE>
<CAPTION>
Three months ended March
Year ended December 31, 31,
------------------------------------------ -----------------------
1995 1996 1997 1997 1998
------------ ------------ ------------ ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net loss as reported .................................. $ (2,451) $ (7,200) $ (4,298) $ (825) $ (618)
Pro forma compensation expense ........................ (119) (198) (484) (104) (62)
-------- -------- -------- ------- -------
Pro forma net loss (for SFAS 123 disclosure
purposes) ............................................ $ (2,570) $ (7,398) $ (4,782) $ (929) $ (680)
======== ======== ======== ======= =======
Net loss per share:
Historical (as disclosed in Note 3) .................. $ (1.43) $ (2.39) $ (1.36) $ (0.26) $ (0.19)
Pro forma (for SFAS 123 disclosure purposes) ......... (1.50) (2.46) (1.52) (0.29) (0.21)
</TABLE>
Stock Warrants
The following table summarizes all warrants issued to purchase the
Company's Class A and Class B Common Stock:
<TABLE>
<CAPTION>
Shares of
Stock
Purchasable
Under Exercise Date of
Description Warrant Price Expiration
- ----------------------------------------------------------------- ------------ ------------------- -----------
<S> <C> <C> <C>
Issued to shareholders in connection with notes payable or as
consideration for providing loan collateral .................... 60,000 $ 1.00 3/06/01
------
Outstanding at December 31, 1995 ................................ 60,000
Expiration of warrants at date of note conversion ............... (16,155)
Issued to shareholders in connection with notes payable or as
consideration for providing loan collateral .................... 117,607 30,000 @ $1.00 3/06/01
31,250 @ 2.00 7/15/99
50,000 @ 6.00 3/06/01
6,357 @ 5.82 N/A
Issued to lenders in connection with notes payable .............. 99,706 77,648 * 3/06/01
-------
22,058 @ 4.53 7/15/99
Outstanding at December 31, 1996 ................................ 261,158
Issued to lenders in connection with notes payable .............. 345,501 249,886 @ $0.02 3/24/08
95,615 @ 0.02 8/30/03
Issued to shareholders in connection with notes payable ......... 102,896 44,444 @ $2.00 N/A
49,861 @ 6.00 N/A
8,591 @ 5.82 N/A
Issued to members of Board of Directors ......................... 40,500 $ 6.00 12/31/04
-------
Outstanding at December 31, 1997 ................................ 750,055
=======
Issued to placement agent in connection with private placement
of preferred stock ............................................. 16,667 $ 6.00 N/A
Additional warrants issued to lender in connection with
March 24, 1997 note payable .................................... 57,936 $ 0.02 3/24/08
Issued to shareholder in connection with notes payable .......... 834 $ 6.00 N/A
Issued to a member of Board of Directors ........................ 12,500 $ 6.00 12/31/04
-------
Outstanding at March 31, 1998 (unaudited) ....................... 837,992
=======
</TABLE>
- ------------
* Exercise price is calculated as defined in the warrant agreement.
F-17
<PAGE>
INTERACTIVE MAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
8. STOCKHOLDERS' DEFICIT -- (Continued)
In connection with the note payable maturing on August 30, 2002, the
Company granted to the lender and warrant holder an option (the "Put Option")
to sell to the Company its warrant shares. The Put Option becomes effective
beginning on September 29, 2002. As defined in the loan and security agreement,
the price of the Put Option (the "Put Price") is calculated as the higher of
the following: (i) the product of five times the Company's per share earnings
before interest, taxes, depreciation and amortization for the most recent
twelve-month period before exercise of the Put Option less the debt per share
of the Company's outstanding common stock on a fully diluted basis for the same
twelve month period, plus cash per share of the Company's outstanding common
stock on a fully diluted basis all multiplied by the number of Put Shares or
(ii) the Company's book value per share at the end of the most recently
completed month before exercise of the Put Option multiplied by the number of
Put Shares. Based upon the calculated Put Price, the Company determined the Put
Option had negligible value at December 31, 1997 and March 31, 1998.
In connection with the conversion of a note payable, the Company has an
additional commitment to issue 48,604 shares of its Class B common stock to the
former holder of the note. As of December 31, 1997 and March 31, 1998, the
Company had not yet issued the aforementioned shares.
Common Stock Reserved for Future Issuance
The Company has reserved authorized shares of Common Stock for future
issuance as follows:
<TABLE>
<CAPTION>
December 31, 1997,
------------------------
Class A Class B
--------- ------------
<S> <C> <C>
Series A Convertible Preferred Stock ..................... 82,634 --
Outstanding incentive stock options ...................... 514,938 870,610
Outstanding performance based stock options .............. 250,000 357,500
Possible future issuance under stock option plan ......... 431,497 1,050,080
Stock purchase warrants .................................. 750,055 --
</TABLE>
9. INCOME TAXES
At March 31, 1998, the Company has a cumulative domestic federal net
operating loss carryforward available to offset future taxable income of
approximately $11 million which begins to expire in the year 2011. State tax
losses of approximately $11 million will begin to expire in 2001. The Company
also has $78,000 of research credits to carry forward for use against future
domestic federal income taxes. U.S. tax laws impose limitations on the use of
net operating losses and credits following certain changes in ownership. If
such a change occurs, the limitations could reduce the amount of these benefits
that would be available to offset future taxable income each year, starting
with the year of ownership change.
From the Company's inception, June 16, 1994, through October 1995, the
Company operated under the provisions of Subchapter S of the Internal Revenue
Code, and consequently was not subject to federal income tax. On October 31,
1995, the Company terminated its Subchapter S election and now operates under
the provisions of Subchapter C of the Internal Revenue Code. The Company
currently reports on a calendar year end for tax purposes.
F-18
<PAGE>
INTERACTIVE MAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
9. INCOME TAXES -- (Continued)
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities consisted of the following
at (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------- March 31,
1996 1997 1998
--------- --------- ------------
(unaudited)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards ..................... $2,455 $3,669 $4,304
Sales and accounts receivable reserves ............... 828 1,048 578
Accrued salaries ..................................... -- 10 10
Other reserves ....................................... 42 191 190
Accrued interest to related party .................... 131 397 408
Research and development credit carryforward ......... 78 78 78
------ ------ ------
Total deferred tax assets ............................. 3,534 5,393 5,568
Deferred tax liabilities:
Depreciation ......................................... 13 17 17
Accounting method change ............................. 49 72 65
------ ------ ------
Total deferred tax liabilities ........................ 62 89 82
Less:
Valuation allowance .................................. 3,472 5,304 5,486
------ ------ ------
Total net deferred taxes .............................. $ -- $ -- $ --
====== ====== ======
</TABLE>
For financial reporting purposes, income before income taxes includes the
following components (in thousands):
<TABLE>
<CAPTION>
December 31, December 31, March 31,
1996 1997 1998
-------------- -------------- ------------
(unaudited)
<S> <C> <C> <C>
Pretax Income:
United States ......... $ (6,529) $ (4,873) $ (916)
Foreign ............... (660) 542 426
-------- -------- ------
$ (7,189) $ (4,331) $ (490)
======== ======== ======
</TABLE>
Significant components of the provision for income taxes attributable to
continuing operations are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------- March 31,
1996 1997 1998
------ ----------- ------------
(unaudited)
<S> <C> <C> <C>
Current:
Federal ............... $-- $(41) $ --
Foreign ............... 8 15 128
State ................. 3 (7) --
--- ------- ----
Total current ......... $11 $(33) $128
=== ====== ====
</TABLE>
F-19
<PAGE>
INTERACTIVE MAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
9. INCOME TAXES -- (Continued)
The Company has recorded a valuation allowance for the full amount of its
deferred income tax assets as of December 31, 1996 and 1997 and March 31, 1998,
based on management's evaluation of the criteria set forth in SFAS 109.
10. RETIREMENT PLAN
The Company has a qualified 401(k) Retirement Plan. The Plan covers
substantially all of the Company's full-time employees. Effective November 20,
1996, the Plan requires six months of full-time service for an employee to be
eligible to participate. Participants may contribute up to 15% of their
compensation to the Plan, subject to the yearly maximums established by the
Internal Revenue Service. Employer matching contributions are at the discretion
of the Company's Board of Directors. There were no discretionary employer
contributions made during the years ended December 31, 1995, 1996 and 1997 and
for the three-month periods ended March 31, 1997 and 1998.
11. SIGNIFICANT CUSTOMERS
Revenues from significant customers (all of which are domestic customers),
those representing 10% or more of net revenues for the respective periods, are
summarized as follows:
<TABLE>
<CAPTION>
Three months
Year ended December 31, ended March 31,
------------------------ ---------------
1995 1996 1997 1997 1998
------ ------ ------ ------ -----
(unaudited)
<S> <C> <C> <C> <C> <C>
Customer 1 ......... -- -- -- -- 16%
Customer 2 ......... 12% 11% -- -- 15%
Customer 3 ......... -- 27% 19% 25% 12%
Customer 4 ......... -- -- 10% -- 10%
Customer 5 ......... -- -- -- 11% --
Customer 6 ......... 36% -- -- -- --
Customer 7 ......... 11% -- -- -- --
</TABLE>
F-20
<PAGE>
INTERACTIVE MAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
11. SIGNIFICANT CUSTOMERS -- (Continued)
Additionally, two customers comprised 43% of accounts receivable at
December 31, 1996, three customers comprised 40% of accounts receivable at
December 31, 1997, and three customers comprised 35% of accounts receivable at
March 31, 1998.
12. OPERATIONS
In addition to domestic sales, the Company sells its products through its
subsidiaries to international customers. These sales amounted to 13%, 23% and
37% of net revenues during the years ended December 31, 1995, 1996 and 1997 and
37% and 56% of net revenues during the three months ended March 31, 1997 and
1998, respectively.
The following table presents the Company's operations by geographic
location (in thousands):
<TABLE>
<CAPTION>
Year ended December 31, Three months ended March 31,
------------------------------------------ ----------------------------
1995 1996 1997 1997 1998
------------ ------------ ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Identifiable assets:
United States ............... $ 2,410 $ 3,725 $ 5,082 $ 5,527 $ 8,123
Europe ...................... 686 839 2,665 645 1,088
-------- -------- -------- -------- --------
$ 3,096 $ 4,564 $ 7,747 $ 6,172 $ 9,211
======== ======== ======== ======== ========
Net revenue:
United States ............... $ 3,458 $ 4,978 $ 11,090 $ 2,108 $ 3,037
Europe ...................... 663 1,079 5,412 1,849 1,876
-------- -------- -------- -------- --------
$ 4,121 $ 6,057 $ 16,502 $ 3,957 $ 4,913
======== ======== ======== ======== ========
Income (loss) from operations:
United States ............... $ (2,387) $ (5,919) $ (2,971) $ (1,526) $ (1,118)
Europe ...................... 158 (664) 545 969 935
-------- -------- -------- -------- --------
$ (2,229) $ (6,583) $ (2,426) $ (557) $ (183)
======== ======== ======== ======== ========
</TABLE>
F-21
<PAGE>
INTERACTIVE MAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
13. SUBSEQUENT EVENTS
On April 30, 1998, the Company closed on a $5 million line of credit
bearing an interest rate of the bank's prime (8.5% on May 1, 1998) plus 2%.
Borrowings on the line of credit are limited to the lesser of $5 million or 65%
of the Company's outstanding eligible domestic receivables. Borrowings on the
line of credit are collateralized by the Company's accounts receivable,
inventory, and intellectual property, and proceeds will be used to extinguish
certain existing debt and provide additional working capital. The line of
credit expires on April 30, 1999. On May 1, 1998, borrowings on the line were
$1.3 million.
Management believes the financing transactions entered into subsequent to
December 31, 1997 will allow the Company to meet its short-term cash needs in
1998. However, should cash constraints arise, management plans to obtain
additional debt or equity financing or, if such financing is not available on
acceptable terms, reduce expected increases in operating expenses.
Effective May 6, 1998, the Company's Board of Directors approved a
one-for-two reverse stock split of the Company's capital stock in connection
with the Company's reincorporation in North Carolina. All references
in the financial statements with regard to number of shares of each class of
stock have been restated to reflect the reverse stock split for all periods
presented.
The Company's 1998 Stock Plan (the "Plan") was adopted by the Board of
Directors and approved by the shareholders of the Company in May 1998. The
Company anticipates that no future grants will be made under the 1995 Plans
after the effective date of the Plan. A total of 800,000 shares of Common Stock
have been reserved for issuance under the Plan. The Plan provides for grants to
employees of the Company of ISOs. In addition, the Plan provides for grants of
nonqualified stock options and stock purchase rights to employees, directors
and consultants of the Company. The Plan is administered by the Board of
Directors or by a Committee appointed by the Board. The administrator
determines the terms of options and stock purchase rights granted, including
the exercise price and the number of shares subject to the option or stock
purchase right. The exercise price of incentive stock options granted under the
Plan must be at least equal to the fair market value of the Company's Common
Stock on the date of grant. The maximum term of options granted under the Plan
is 10 years.
The Company's 1998 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Company's Board of Directors and approved by the Company's
shareholders in May 1998. The Purchase Plan is intended to qualify under
Section 423 of the Code. The Company has reserved 500,000 shares of Common
Stock for issuance under the Purchase Plan. Under the Purchase Plan, an
eligible employee may purchase shares of Common Stock from the Company through
payroll deductions of up to 10% of his or her base compensation, not to exceed
$25,000 per year, at a price per share equal to 85% of the fair market value of
a share of the Company's Common Stock on the last day of the offering period.
The maximum number of shares that an employee may purchase in any offering
period is 2,500 shares. Any employee who is customarily employed for at least
20 hours per week and more than five months per calendar year and who is
employed on or before the commencement date of an offering period is eligible
to participate in the Purchase Plan.
F-22
<PAGE>
INTERACTIVE MAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
14. RECAPITALIZATION (UNAUDITED)
On May 26, 1998, the shareholders of the Company approved the Company's
reincorporation in North Carolina and in connection with the reincorporation
will effect a one-for-two reverse split of the Company's common stock. It is
anticipated that the reincorporation will be effected in June 1998. The Company
anticipates that the aforementioned reincorporation and the following
recapitalization through the exchange of securities will be deemed to be
effective as of the closing date of the Company's initial public offering, with
the exception of the exercise of options and warrants which may occur at an
earlier date, in contemplation of the offering.
Incentive Stock Options: Options were exercised to purchase 268,750 shares
of Class A Common Stock and 95,000 shares of Class B Common Stock in
exchange for cash and forgiveness of accrued interest.
Stock Warrants: Warrants were exercised to purchase 516,769 shares of Class
A Common Stock in exchange for cash.
Class A Common Stock: Exchanged for an aggregate of 3,931,215 shares of
common stock
Class B Common Stock: Exchanged for an aggregate of 601,457 shares of
common stock, which includes 48,604 shares issued after March 31, 1998
Series A Convertible Preferred Stock: Converted into an aggregate of
82,634 shares of common stock
Series B Convertible Preferred Stock: Converted into an aggregate of
2,045,649 shares of common stock
Series C Redeemable Convertible Preferred Stock: Converted into an
aggregate of 132,744 shares of common stock
Upon consummation of the offering, the Company will have authorized
capital of 50,000,000 shares of $.10 par value common stock and 25,000,000
shares of $.10 par value preferred stock.
F-23
<PAGE>
(inside back cover of Prospectus)
[INTERACTIVE MAGIC logo]
WARBIRDS "Online Game of the Year 1996" - PC Games Magazine
"Online Game of the Year 1997" - PC Games Magazine
"Finalist - Best Simulation Game" (1997) - Computer Gaming
World
"Finalist - Best Online Game" (1997) - Computer Game
Developers Association
SEVEN KINGDOMS "Strategy Game of the Year" (1997) - Power Play (Germany)
"Editor's Choice" (1998) - PC Gamer
"A-List" (1998) - PC Games
iF22 Nominated as "Best Simulation at Electronic
Entertainment Expo" (1997) - Game Pen
WAR INC. "A-List" - PC Games
HIND "Editor's Choice" (1996) - PC Gamer
"Finalist - Best Flight Simulation Game"(1997) - Computer
Gaming World
"Simulation of the Year" (1996) - PC Today Magazine
APACHE "Best Simulation of 1995" - PC Gamer
"Best Simulation of 1995" - Strategy Plus
"Editor's Choice" (1995) - PC Gamer
CAPITALISM "Best Simulation Game - Finalist" (1996) - PC Gamer
"Editor's Choice" (1995) - PC Gamer
"Special Achievement in Tutorial Design" (1996) - PC Gamer
[Award logos from PC Games, PC Gamer, Computer Gaming]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, sales representative, or other person has been authorized to give
any information or to make any representation in connection with this offering
not contained in this Prospectus, and if given or made, such information or
representation must not be relied upon as having been authorized by the Company
or any Underwriter. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the securities
offered by this Prospectus, or an offer to sell or a solicitation of an offer
to buy any securities by anyone in any jurisdiction in which such offer or
solicitation is not authorized or would be unlawful. Neither the delivery of
this Prospectus nor any sale made hereunder shall, under any circumstances,
create any implication that information herein is correct as of any time
subsequent to the date hereof.
-----------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
---------
<S> <C>
Prospectus Summary ............................ 3
Risk Factors .................................. 7
Use of Proceeds ............................... 16
Dividend Policy ............................... 17
Dilution ...................................... 17
Capitalization ................................ 19
Selected Consolidated Financial Data .......... 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ................................. 22
Business ...................................... 29
Management .................................... 40
Principal Shareholders ........................ 46
Certain Transactions .......................... 47
Description of Securities ..................... 49
Shares Eligible for Future Sale ............... 53
Underwriting .................................. 54
Legal Matters ................................. 56
Experts ....................................... 57
Additional Information ........................ 57
Index to Financial Statements ................. F-1
</TABLE>
Until , 1998, (25 days after the date of this Prospectus) all dealers
effecting transactions in the Common Stock, whether or not participating in
this distribution, may be required to deliver a Prospectus. This is in addition
to the obligation of dealers to deliver a Prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
2,800,000 Shares
(Interactive Magic logo)
Common Stock
------------------------
PROSPECTUS
------------------------
BlueStone Capital Partners, L.P.
Ferris, Baker Watts, Incorporated
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Sections 55-8-50 through 55-8-58 of the North Carolina Business
Corporation Act permit a corporation to indemnify its directors, officers,
employees or agents under either or both a statutory or non-statutory scheme of
indemnification. Under the statutory scheme, a corporation may, with certain
exceptions, indemnify a director, officer, employee or agent of the corporation
who was, is, or is threatened to be made, a party to any threatened, pending or
completed legal action, suit or proceeding, whether civil, criminal,
administrative, or investigative, because of the fact that such person was a
director, officer, agent or employee of the corporation, or is or was serving
at the request of such corporation as a director, officer, employee or agent of
another corporation or enterprise. This indemnity may include the obligation to
pay any judgment, settlement, penalty, fine (including an excise tax assessed
with respect to an employee benefit plan) and reasonable expenses incurred in
connection with a proceeding (including counsel fees), but no such
indemnification may be granted unless such director, officer, agent or employee
(i) conducted himself in good faith, (ii) reasonably believed (1) that any
action taken in his official capacity with the corporation was in the best
interest of the corporation or (2) that in all other cases his conduct at least
was not opposed to the corporation's best interest, and (iii) in the case of
any criminal proceeding, had no reasonable cause to believe his conduct was
unlawful. Whether a director has met the requisite standard of conduct for the
type of indemnification set forth above is determined by the board of
directors, a committee of directors, special legal counsel or the shareholders
in accordance with Section 55-8-55. A corporation may not indemnify a director
under the statutory scheme in connection with a proceeding by or in the right
of the corporation in which the director was adjudged liable to the corporation
or in connection with a proceeding in which a director was adjudged liable on
the basis of having received an improper personal benefit.
In addition to, and separate and apart from the indemnification described
above under the statutory scheme, Section 55-8-57 of the North Carolina
Business Corporation Act permits a corporation to indemnify or agree to
indemnify any of its directors, officers, employees or agents against liability
and expenses (including attorney's fees) in any proceeding (including
proceedings brought by or on behalf of the corporation) arising out of their
status as such or their activities in such capacities, except for any
liabilities or expenses incurred on account of activities that were, at the
time taken, known or believed by the person to be clearly in conflict with the
best interests of the corporation. The Company's Bylaws provide for
indemnification to the fullest extent permitted under the North Carolina
Business Corporation Act, provided, however, that the Company will indemnify
any person seeking indemnification in connection with a proceeding initiated by
such person only if such proceeding was authorized by the Board of Directors of
the Company. Accordingly, the Company may indemnify its directors, officers and
employees in accordance with either the statutory or the non-statutory
standard.
Sections 55-8-52 and 55-8-56 of the North Carolina Business Corporation
Act require a corporation, unless its articles of incorporation provide
otherwise, to indemnify a director or officer who has been wholly successful,
on the merits or otherwise, in the defense of any proceeding to which such
director or officer was a party. Unless prohibited by the articles of
incorporation, a director or officer also may make application and obtain
court-ordered indemnification if the court determines that such director or
officer is fairly and reasonably entitled to such indemnification as provided
in Sections 55-8-54 and 55-8-56.
Finally, Section 55-8-57 of the North Carolina Business Corporation Act
provides that a corporation may purchase and maintain insurance on behalf of an
individual who is or was a director, officer, employee or agent of the
corporation against certain liabilities incurred by such persons, whether or
not the corporation is otherwise authorized by the North Carolina Business
Corporation Act to indemnify such party. It is anticipated that the Company's
directors and officers will be covered under directors' and officers' insurance
policies maintained by the Company prior to this offering.
As permitted by North Carolina law, Article IX of the Company's Articles
of Incorporation limits the personal liability of directors for monetary
damages for breaches of duty as a director, provided that such limitation will
not apply to (i) acts or omissions that the director at the time of the breach
knew or believed were clearly in conflict with the best interests of the
Company, (ii) any liability for unlawful distributions under Section 55-8-33,
(iii) any transaction from which the director derived an improper personal
benefit, or (iv) acts or omissions occurring prior to the date the provision
became effective.
II-1
<PAGE>
The form of the Underwriting Agreement filed as Exhibit 1.01 hereto also
contains certain provisions pursuant to which certain officers, directors and
controlling persons of the Company may be entitled to be indemnified by the
underwriters named therein.
Item 25. Other Expenses of Issuance and Distribution.
The estimated expenses of the Company payable in connection with the
issuance and distribution of the Common Stock being registered hereby,
excluding underwriting discounts and commissions, are as follows:
<TABLE>
<S> <C>
SEC Registration Fee ................................... $ 9,499
NASD Filing Fee ........................................ 3,720
NASDAQ Fee ............................................. 42,534
Printing and Engraving Expenses ........................ *
Legal Fees and Expenses ................................ *
Accounting Fees and Expenses ........................... *
Blue Sky Expenses ...................................... *
Transfer Agent and Registrar Fees and Expenses ......... *
Insurance Premium ...................................... *
Miscellaneous Expenses ................................. *
Underwriters' Expenses ................................. *
--------
Total .................................................. $900,000
========
</TABLE>
- ------------
* To be provided by amendment.
Item 26. Recent Sales of Unregistered Securities
In the three years preceding the filing of this Registration Statement,
the Company issued the following securities, which were not registered pursuant
to the Securities Act:
From May 1, 1995 to May 21, 1998, the Company issued an aggregate of
2,026,795 incentive and performance incentive stock options to purchase Common
Stock pursuant to the 1995 Plans to officers and employees of the Company, as
described in the Prospectus, at a weighted average exercise price of $2.30 per
share.
On June 25, 1995, the Company sold 66,000 shares of Common Stock for an
aggregate purchase price of $66,000 to three employees.
On August 31, 1995, the Company issued a warrant currently exercisable for
30,000 shares of Common Stock to J.W. Stealey in consideration of a personal
guarantee and pledge of collateral made by Mr. Stealey in favor of a creditor
of the Company.
On August 31, 1995, the Company issued a warrant currently exercisable for
13,845 shares of Common Stock to Robert L. Pickens in consideration of a
$600,000 loan made by Mr. Pickens to the Company.
On January 2, 1996, the Company issued 144,000 shares of Common Stock to
J. W. Stealey in consideration of the deferral of Mr. Stealey's 1995 salary in
the amount of $144,000.
On March 6, 1996, the Company issued a warrant currently exercisable for
25,882 shares of Common Stock to Venture Lending (a division of Cupertino
National Bank and Trust) in consideration of a $500,000 loan made by Venture
Lending.
On March 6, 1996, the Company issued two warrants, each of which is
currently exercisable for 25,882 shares of Common Stock, to High Point Capital,
LLC in consideration of a $500,000 loan made by High Point Capital, LLC.
On March 29, 1996, the Company issued a warrant exercisable for 10,000
shares of Common Stock in connection with a $500,000 loan made by Southeast
Interactive Technology Fund I, L.L.C.
On March 31, 1996, the Company issued 700,000 shares of Common Stock to
J.W. Stealey in consideration for the conversion of outstanding indebtedness in
the principal amount of $700,000 owed by the Company to
II-2
<PAGE>
Mr. Stealey. The Company also issued a warrant to purchase 30,000 shares of
Common Stock to Mr. Stealey in consideration of such conversion.
Between April 23, 1996 and June 18, 1996, the Company sold 6,750 shares of
Common Stock for an aggregate purchase price of $6,750 to three former
employees who exercised incentive stock options upon departing the Company.
On May 1, 1996, the Company granted William J. Kaluza 20,000 shares of
Common Stock upon his acceptance of employment with the Company.
On May 20, 1996, the Company issued a warrant currently exercisable for
75,695 shares of Common Stock to J.W. Stealey in consideration of a $1,000,000
loan made by Mr. Stealey to the Company.
On July 10, 1996, the Company issued a warrant currently exercisable for
100,695 shares of Common Stock to J.W. Stealey in consideration of a $1,000,000
loan made by Mr. Stealey to the Company.
On July 15, 1996, the Company issued 82,634 shares of Series A Convertible
Preferred Stock to Southeast Interactive Technology Fund I upon conversion of
indebtedness owed to Southeast Interactive Technology Fund I, in the principal
amount of $500,000 plus accrued interest.
On July 15, 1996, the Company issued a warrant currently exercisable for
22,058 shares of Common Stock to Southeast Interactive Technology Fund I,
L.L.C. in exchange for the March 29, 1996 warrant issued to Southeast
Interactive Technology Fund I, L.L.C. by the Company.
On December 31, 1996, the Company issued a warrant to purchase 6,357
shares of Common Stock to Laura M. Stealey in consideration of amounts
outstanding under the $1,000,000 credit line established by Ms. Stealey in
favor of the Company.
On February 11, 1997, the Company issued warrants to purchase 13,500
shares of Common Stock to each of J. Nicholas England, David H. Kestel and W.
Joseph McClelland.
On March 24, 1997, the Company issued a warrant that will be exercisable
for 307,823 shares of Common Stock upon the consummation of this offering to
Petra in consideration of a $3,000,000 loan made by Petra.
On April 23, 1997, in connection with the Company's acquisition of
Interactive Creations Incorporated, the Company issued an aggregate of 655,696
shares of Common Stock to former shareholders of Interactive Creations
Incorporated and options exercisable for 98,218 shares of Common Stock.
On April 23, 1997, the Company issued warrants to purchase 15,000 shares
of Common Stock to Oppenheimer & Co., Inc.
On September 29, 1997, the Company issued a warrant that will be
exercisable for 208,946 shares of Common Stock upon the consummation of this
offering to Oberlin in consideration of a $1,200,000 loan made by Oberlin.
Between December 1, 1997 and January 30, 1998, the Company sold 8,625
shares of Common Stock pursuant to the exercise of employee stock options for
$10,125.
On December 31, 1997, the Company issued a warrant to purchase 8,591
shares of Common Stock to Laura M. Stealey in consideration of amounts
outstanding under the $1,000,000 credit line established by Ms. Stealey in
favor of the Company.
On February 4, 1998, the Company issued warrants to purchase 16,666 shares
of Common Stock to Marion Bass, Inc.
On February 4, 1998, the Company issued 778,746 shares of Series B
Preferred Stock to several investors for $3,500,000, which shares of Series B
Preferred Stock will be converted into 2,045,649 shares of Common Stock upon
the closing of this offering.
On February 4, 1998, the Company issued 132,744 shares of Series C
Preferred Stock to Robert L. Pickens upon the conversion of $600,000 of the
Company's debt held by Mr. Pickens, which shares will be converted into 132,744
shares of Common Stock upon the closing of this Offering.
On February 4, 1998, the Company issued 442,478 shares of Common Stock to
J. W. Stealey upon the conversion of $2,000,000 of the Company's debt held by
Mr. Stealey.
II-3
<PAGE>
On February 4, 1998, the Company issued warrants to purchase 12,500 shares
of Common Stock to Avi Suriel.
On March 12, 1998, the Company issued options to purchase 12,500 shares of
Common Stock to Jeff Stealey, an employee of the Company.
On April 30, 1998, the Company issued 45,000 shares of Common Stock to
William Kaluza upon the exercise of outstanding options held by Mr. Kaluza.
On May 12, 1998, the Company issued 48,604 shares of Common Stock to
Southeast Interactive Technology Fund I, L.L.C. pursuant to certain
anti-dilution rights contained in an agreement between the Company and
Southeast Interactive Technology Fund I, L.L.C.
On May 21, 1998, the Company issued 268,750 shares of Common Stock to J.W.
Stealey upon the exercise of outstanding options held by Mr. Stealey.
On May 21, 1998, the Company issued 50,000 shares of Common Stock to
Robert L. Pickens upon the exercise of outstanding options held by Mr. Pickens.
No underwriter was engaged in connection with the foregoing sales of
securities. Sales of Common Stock and the issuance of warrants to the above
parties were made in reliance upon Section 4(2) of the Securities Act or
Regulation D or Rule 701 promulgated thereunder as transactions not involving
any public offering. In the view of the Company, the options granted pursuant
to the 1995 Plans, the options exchanged in the ICI transaction and certain of
the warrants were issued but not sold and, therefore, registration thereof was
not required.
Item 27. Exhibits
The following documents (unless indicated) are filed herewith and made a
part of this Registration Statement.
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- -------- ------------------------------------------------------------------------------------------
<S> <C>
1.01 -Form of Underwriting Agreement
3.01 -Form of Articles of Incorporation
3.02 -Form of Bylaws
4.01 -Specimen Common Stock Certificate
4.02 -Articles of Incorporation (see Exhibit 3.01)
4.03 -Bylaws (see Exhibit 3.02)
4.04 -Form of Representatives' Warrant Agreement, including Form of Warrant Certificate
5.01* -Opinion of Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P.
10.01 -Stock Purchase Agreement, dated February 4, 1998, by and between the Company and
Vertical Financial Holdings
10.02 -Investor's Rights Agreement, dated February 4, 1998, by and between the Company and
Vertical Financial Holdings
10.03 -Marketing Agreement, dated February 4, 1998, between the Company and General Capital
10.04 -Merger Agreement, dated as of March 24, 1997, as amended April 2, 1997, by and among
the Company, Interactive Creations Acquisition Corp., certain shareholders of Interactive
Creations Incorporated and Interactive Creations Incorporated
10.05 -Form of Shareholder Agreement between the Company and each shareholder of Interactive
Creations Incorporated
10.06 -Form of Stock Purchase Warrant issued to each of J. W. Stealey, Robert L. Pickens, Laura
Stealey, David H. Kestel, J. Nicholas England, W. Joseph McClelland, Avi Suriel, Marion
Bass and Oppenheimer
10.07 -Corporate Airplane Agreement, dated January 3, 1995, between J.W. Stealey and the
Company
10.08 -Loan and Security Agreement, dated March 24, 1997, as amended April 1, 1997 (See
Exhibit 10.10 below), by and between the Company and Petra Capital LLC
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ---------- ----------------------------------------------------------------------------------------
<S> <C>
10.09 -Stock Purchase Warrant, dated March 24, 1997, as amended April 1, 1997 (See Exhibit
10.10 below), and January 31, 1998, as amended, issued by the Company to Petra Capital
LLC
10.10 - First Amendment to Loan and Security Agreement and Stock Purchase Warrant dated April
1, 1997 by and between the Company and Petra Capital LLC
10.11 -Promissory Note, dated August 25, 1997, issued by the Company to Branch Banking &
Trust Company
10.12 -Guaranty Agreement, dated August 25, 1997, between J. W. Stealey and Branch Banking &
Trust Company
10.13 -Loan and Security Agreement, dated September 29, 1997, among the Company, iMagic
Online Corporation and Oberlin Capital, L.P.
10.14 -Loan and Security Agreement, dated April 30, 1997, between Greyrock Business Credit, a
Division of NationsCredit Commercial Corporation, and the Company
10.15 -Lease Agreement, dated December 4, 1995, as amended February 7, 1996, by and between
Southport Business Park Limited Partnership and the Company
10.16 -Employment Agreement, dated January 3, 1995, between the Company and J.W. Stealey
and form of amendment thereto
10.17 -Employment Agreement, dated January 3, 1995, between the Company and Robert L.
Pickens and form of amendment thereto
10.18 -Employment Agreement, dated March 25, 1996, between the Company and William J.
Kaluza
10.19 -Employment Agreement, dated January 3, 1995, between the Company and Joseph Rutledge
and form of amendment thereto
10.20 -Employment Agreement, dated February 1, 1995, between the Company and Raymond
Rutledge and form of amendment thereto
10.21 -Form of Class A Incentive Stock Option Plan
10.22 -Form of Class B Incentive Stock Option Plan
10.23 -Form of ICI Stock Option Plan
10.24 -Form of 1998 Stock Plan
10.25 -Form of 1998 Employee Stock Purchase Plan
21.01 -List of subsidiaries
23.01 -Consent of Ernst & Young LLP
23.02* -Consent of Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P. (included in
Exhibit 5.01 hereto.
24.01 -Powers of Attorney (see Page II-8)
27.01 -Financial Data Schedule
</TABLE>
* To be filed by Amendment
Item 28. Undertakings
1. The small business issuer hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
2. Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
small business issuer pursuant to the foregoing provisions, or otherwise, the
small business issuer has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the small business issuer of the expenses incurred or paid
by a director, officer or controlling person of the small business issuer in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the
II-5
<PAGE>
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
3. The small business issuer hereby undertakes that: (a) for purposes of
determining any liability under the Securities Act, the information omitted
from the form of prospectus filed as part of this Registration Statement in
reliance upon Rule 430A and contained in a form of prospectus filed by the
small business issuer pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this Registration Statement as of
the time it is declared effective; and (b) for the purpose of determining any
liability under the Securities Act, each post-effective amendment that contains
a form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and authorized this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the Town of Morrisville, State of North Carolina on May 27,
1998.
INTERACTIVE MAGIC, INC.
By: /s/ J.W. STEALEY
-----------------------------------
J. W. Stealey
Chairman of the Board of Directors
and Chief Executive Officer
II-7
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints J. W. Stealey and Robert L. Pickens and each of them,
each with full power to act without the other, his true and lawful
attorneys-in-fact and agents, with full powers of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Registration Statement, to
sign a Registration Statement filed pursuant to Rule 462(b) of the Securities
Act of 1933 and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully for all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitutes, may lawfully do or cause to
be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on May 27, 1998.
<TABLE>
<CAPTION>
Signature Title
- -------------------------------------- ---------------------------------------------
<S> <C>
/s/ J.W. STEALEY Chairman of the Board of Directors
- ------------------------------------- and Chief Executive Officer
J.W. Stealey
/s/ ROBERT L. PICKENS President and Chief Operating Officer
- ------------------------------------- (Principal Financial and Accounting Officer)
Robert L. Pickens
/s/ J. NICHOLAS ENGLAND
- -------------------------------------
J. Nicholas England Director
/s/ DAVID H. KESTEL
- -------------------------------------
David H. Kestel Director
/s/ W. JOSEPH MCCLELLAND
- -------------------------------------
W. Joseph McClelland Director
/s/ AVI SURIEL
- -------------------------------------
Avi Suriel Director
</TABLE>
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- -------- ------------------------------------------------------------------------------------------
<S> <C>
1.01 -Form of Underwriting Agreement
3.01 -Form of Articles of Incorporation
3.02 -Form of Bylaws
4.01 -Specimen Common Stock Certificate
4.02 -Articles of Incorporation (see Exhibit 3.01)
4.03 -Bylaws (see Exhibit 3.02)
4.04 -Form of Representatives' Warrant Agreement, including Form of Warrant Certificate
5.01* -Opinion of Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P.
10.01 -Stock Purchase Agreement, dated February 4, 1998, by and between the Company and
Vertical Financial Holdings
10.02 -Investor's Rights Agreement, dated February 4, 1998, by and between the Company and
Vertical Financial Holdings
10.03 -Marketing Agreement, dated February 4, 1998, between the Company and General Capital
10.04 -Merger Agreement, dated as of March 24, 1997, as amended April 2, 1997, by and among
the Company, Interactive Creations Acquisition Corp., certain shareholders of Interactive
Creations Incorporated and Interactive Creations Incorporated
10.05 -Form of Shareholder Agreement between the Company and each shareholder of Interactive
Creations Incorporated
10.06 -Form of Stock Purchase Warrant issued to each of J. W. Stealey, Robert L. Pickens, Laura
Stealey, David H. Kestel, J. Nicholas England, W. Joseph McClelland, Avi Suriel, Marion
Bass and Oppenheimer
10.07 -Corporate Airplane Agreement, dated January 3, 1995, between J.W. Stealey and the
Company
10.08 -Loan and Security Agreement, dated March 24, 1997, as amended April 1, 1997 (See
Exhibit 10.10 below), by and between the Company and Petra Capital LLC
10.09 -Stock Purchase Warrant, dated March 24, 1997, as amended April 1, 1997 (See Exhibit
10.10 below), and January 31, 1998, as amended, issued by the Company to Petra Capital
LLC
10.10 - First Amendment to Loan and Security Agreement and Stock Purchase Warrant dated April
1, 1997 by and between the Company and Petra Capital LLC
10.11 -Promissory Note, dated August 25, 1997, issued by the Company to Branch Banking &
Trust Company
10.12 -Guaranty Agreement, dated August 25, 1997, between J. W. Stealey and Branch Banking &
Trust Company
10.13 -Loan and Security Agreement, dated September 29, 1997, among the Company, iMagic
Online Corporation and Oberlin Capital, L.P.
10.14 -Loan and Security Agreement, dated April 30, 1997, between Greyrock Business Credit, a
Division of NationsCredit Commercial Corporation, and the Company
10.15 -Lease Agreement, dated December 4, 1995, as amended February 7, 1996, by and between
Southport Business Park Limited Partnership and the Company
10.16 -Employment Agreement, dated January 3, 1995, between the Company and J.W. Stealey
and form of amendment thereto
10.17 -Employment Agreement, dated January 3, 1995, between the Company and Robert L.
Pickens and form of amendment thereto
10.18 -Employment Agreement, dated March 25, 1996, between the Company and William J.
Kaluza
10.19 -Employment Agreement, dated January 3, 1995, between the Company and Joseph Rutledge
and form of amendment thereto
10.20 -Employment Agreement, dated February 1, 1995, between the Company and Raymond
Rutledge and form of amendment thereto
10.21 -Form of Class A Incentive Stock Option Plan
10.22 -Form of Class B Incentive Stock Option Plan
10.23 -Form of ICI Stock Option Plan
10.24 -Form of 1998 Stock Plan
10.25 -Form of 1998 Employee Stock Purchase Plan
21.01 -List of subsidiaries
23.01 -Consent of Ernst & Young LLP
23.02* -Consent of Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P. (included in
Exhibit 5.01 hereto.
24.01 -Powers of Attorney (see Page II-8)
27.01 -Financial Data Schedule
</TABLE>
* To be filed by Amendment
INTERACTIVE MAGIC, INC.
__________ Shares of Common Stock
(Par Value $.10 per share)
UNDERWRITING AGREEMENT
New York, New York
_______, 1998
Blue Stone Capital Partners, L.P.
Ferris, Baker Watts Incorporated
as Representatives of the
Several Underwriters named
in Schedule A hereto
c/o BlueStone Capital Partners, L.P.
575 Fifth Avenue
New York, New York 10017
Dear Sirs:
Interactive Magic, Inc., a North Carolina corporation (the
"Company"), proposes to issue and sell to the underwriters (the "Underwriters")
named in Schedule A to this Underwriting Agreement (the "Agreement"), for whom
BlueStone Capital Partners, L.P. ("BlueStone") and Ferris, Baker Watts
Incorporated are acting as representatives (hereinafter sometimes referred to
together as the "Representatives"), two million eight hundred thousand
(2,800,000) shares of common stock, par value $.10 per share (the "Offered
Shares"), which Offered Shares are presently authorized but unissued shares of
the common stock, par value $.10 per share (individually a "Common Share" and
collectively the "Common Shares"), of the Company. In addition, the
Representatives, in order to cover over-allotments in the sale of the Offered
Shares, may purchase from the Company, for their own accounts, up to an
aggregate of four hundred twenty thousand (420,000) Common Shares (the "Optional
Shares"; the Offered Shares and the Optional Shares are hereinafter sometimes
collectively referred to as the "Shares"). The Shares are described in the
Registration Statement, as defined below. The Company also proposes to issue and
sell to the Representatives for their own accounts and/or the accounts of their
designees, warrants to purchase an aggregate of two hundred eight thousand
(280,000) Common Shares (the "Warrant Shares") at an exercise price of $_____
per Warrant Share (the "Representatives' Warrants"), which sale will be
consummated in accordance with the terms and conditions of the form of
Representatives' Warrant Agreement filed as an exhibit to the Registration
Statement.
<PAGE>
The Representatives hereby warrant to the Company that they
have been authorized by each of the Underwriters to enter into this Underwriting
Agreement on their behalf and to act for them in the manner herein provided. The
Company hereby confirms its respective agreements with the Representatives and
each of the Underwriters, on whose behalf the Representatives are signing this
Agreement, as follows:
1. Purchase and Sale of Offered Shares. On the basis of the
representations and warranties herein contained, but subject to the terms and
conditions herein set forth, the Company hereby agrees to sell the Offered
Shares to the Underwriters, severally, and each Underwriter agrees severally and
not jointly, to purchase from the Company, at a purchase price of $______ per
share, the number of Offered Shares set forth opposite the name of such
Underwriter in Schedule A attached hereto, plus any additional Offered Shares
which such Underwriter may become obligated to purchase pursuant to the
provisions of Section 10 hereof. The Underwriters plan to offer the Offered
Shares to the public at a public offering price of $_____ per share.
2. Payment and Delivery.
(a) Payment for the Offered Shares will be made to
the Company by wire transfer against delivery of the Offered Shares to the
Representatives. Such payment and delivery will be made at 10:00 A.M. New York
City time, on the third business day following the Effective Date (the fourth
business day following the Effective Date in the event that trading of the
Offered Shares commences on the day following the Effective Date), the date and
time of such payment and delivery being herein called the "Closing Date." The
certificates representing the Offered Shares to be delivered will be in such
denominations and registered in such names as the Representatives may request
not less than two full business days prior to the Closing Date, and will be made
available to the Representatives for inspection, checking and packaging at the
offices of _______________________________________, the Company's transfer
agent, at ________________________________ not less than one full business day
prior to the Closing Date.
(b) On the Closing Date, the Company will sell the
Representatives' Warrants to the Representatives or to their designees (limited
to officers and partners of the Representatives and Underwriters). The
Representatives' Warrants will be in the form of, and in accordance with, the
provisions of the Representatives' Warrant Agreement attached as an exhibit to
the Registration Statement, with such changes as the Representatives shall
approve. The aggregate purchase price for the Representatives' Warrants is
$_____. The Representatives' Warrants will be restricted from sale, transfer,
assignment or hypothecation for a period of one year from the Effective Date,
except to officers or partners of the Representatives and Underwriters and
members of the selling group and/or their officers or partners.
-2-
<PAGE>
Payment for the Representatives' Warrants will be made to the Company by check
or checks payable to its order on the Closing Date against delivery of the
certificates representing the Representatives' Warrants. The certificates
representing the Representatives' Warrants will be in such denominations and
such names as the Representatives may request prior to the Closing Date.
3. Option to Purchase Optional Shares.
(a) For the purposes of covering any overallotments
in connection with the distribution and sale of the Offered Shares as
contemplated by the Prospectus as defined below, the Representatives are hereby
granted an option to purchase for their own accounts, and not as representatives
of the Underwriters, all or any part of the Optional Shares from the Company.
The purchase price to be paid for the Optional Shares will be the same price per
Optional Share as the price per Offered Share set forth in Section 1 hereof. The
option granted hereby may be exercised by the Representatives as to all or any
part of the Optional Shares at any time within 45 days after the Effective Date.
The Representatives will not be under any obligation to purchase any Optional
Shares prior to the exercise of such option.
(b) The option granted hereby may be exercised by the
Representatives by giving oral notice to the Company, which must be confirmed by
a letter, telex or telegraph setting forth the number of Optional Shares to be
purchased, the date and time for delivery of and payment for the Optional Shares
to be purchased and stating that the Optional Shares referred to therein are to
be used for the purpose of covering over-allotments in connection with the
distribution and sale of the Offered Shares. If such notice is given prior to
the Closing Date, the date set forth therein for such delivery and payment will
not be earlier than either two full business days thereafter or the Closing
Date, whichever occurs later. If such notice is given on or after the Closing
Date, the date set forth therein for such delivery and payment will not be
earlier than two (2) full business days thereafter. In either event, the date so
set forth will not be more than 15 full business days after the date of such
notice. The date and time set forth in such notice is herein called the "Option
Closing Date." Upon exercise of such option, the Company will become obligated
to convey to the Representatives, and, subject to the terms and conditions set
forth in Section 3(d) hereof, the Representatives will become obligated to
purchase, the number of Optional Shares specified in such notice.
(c) Payment for any Optional Shares purchased will be
made to the Company by wire transfer against delivery of the Optional Shares
purchased to the Representatives. The certificates representing the Optional
Shares to be delivered will be in such denominations and registered in such
names as the Representatives request not less than two full business days prior
to the Option Closing Date, and will be made available to the Representatives
for
-3-
<PAGE>
inspection, checking and packaging at the aforesaid office of the Company's
transfer agent or correspondent not less than one full business day prior to the
Option Closing Date.
(d) The obligation of the Representatives to
purchase and pay for any of the Optional Shares is subject to the accuracy and
completeness (as of the date hereof and as of the Option Closing Date) of and
compliance in all material respects with the representations and warranties of
the Company herein, to the accuracy and completeness of the statements of the
Company or its officers made in any certificate or other document to be
delivered by the Company pursuant to this Agreement, to the performance in all
material respects by the Company of its obligations hereunder, to the
satisfaction by the Company of the conditions, as of the date hereof and as of
the Option Closing Date, set forth in Section 3(b) hereof, and to the delivery
to the Representatives of opinions, certificates and letters dated the Option
Closing Date substantially similar in scope to those specified in Sections 5 and
6(b), (c), (d) and (e) hereof, but with each reference to "Offered Shares" and
"Closing Date" to be, respectively, to the Optional Shares and the Option
Closing Date.
4. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, the several Underwriters that:
(a) The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of North
Carolina, with full power and authority, corporate and other, to own or lease,
as the case may be, and operate its properties and to conduct its business as
described in the Registration Statement and to execute, deliver and perform this
Agreement and the Representatives' Warrant Agreement and to consummate the
transactions contemplated hereby and thereby. The Company is duly qualified to
do business as a foreign corporation and is in good standing in all
jurisdictions wherein such qualification is necessary and failure so to qualify
could have a material adverse effect on the financial condition, results of
operations, business or properties of the Company. Other than iMagicOnline
("iMagic"), a corporation duly organized, validly existing and in good standing
under the laws of the State of North Carolina, Interactive Magic Ltd. ("IML"), a
corporation duly organized, validly existing and in good standing under the laws
of the United Kingdom, and Interactive Magic Gmbh ("IM Gmbh"), a corporation
duly organized, validly existing and in good standing under the laws of Germany,
each a wholly-owned subsidiary of the Company (collectively, the
"Subsidiaries"), the Company has no subsidiaries and the Company has no equity
interest in any entities other than the Subsidiaries.
(b) Each of the Subsidiaries has full power and
authority, corporate and other, and all Permits (defined hereafter)
necessary to own or lease, as the case may be, and operate its
-4-
<PAGE>
properties and to conduct its business as described in the Registration
Statement. Each of the Subsidiaries is also duly qualified to do business as a
foreign corporation and is in good standing in all jurisdictions wherein such
qualification is necessary and failure to so qualify could have a material
adverse effect on the financial condition, results of operations, business or
properties of the Company or any Subsidiary. The Company owns all of the issued
and outstanding shares of capital stock of each Subsidiary, free and clear of
any security interests, liens, encumbrances, claims and charges, and all of such
shares have been duly authorized and validly issued and are fully paid and
non-assessable. There are no options or warrants for the purchase of, or other
rights to purchase, or outstanding securities convertible into or exchangeable
for, any capital stock or other securities of any Subsidiary.
(c) This Agreement has been duly executed and
delivered by the Company and constitutes the valid and binding obligation of the
Company, and the Representatives' Warrant Agreement, when executed and delivered
by the Company on the Closing Date, will be the valid and binding obligation of
the Company, enforceable against the Company in accordance with their respective
terms. The execution, delivery and performance of this Agreement and the
Representatives' Warrant Agreement by the Company, the consummation by the
Company of the transactions herein and therein contemplated and the compliance
by the Company with the terms of this Agreement and the Representatives' Warrant
Agreement have been duly authorized by all necessary corporate action and do not
and will not, with or without the giving of notice or the lapse of time, or
both, (i) result in any violation of the Company's or of any Subsidiary's
Articles of Incorporation, Memorandum or Articles of Association or By-Laws (or
similar charter documents); (ii) result in a breach of or conflict with any of
the terms or provisions of, or constitute a default under, or result in the
modification or termination of, or result in the creation or imposition of any
lien, security interest, charge or encumbrance upon any of the properties or
assets of the Company or any Subsidiary pursuant to any indenture, mortgage,
note, contract, commitment or other agreement or instrument to which the Company
or any Subsidiary is a party or by which the Company or any Subsidiary or any of
their respective properties or assets is or may be bound or affected; (iii)
violate any existing applicable law, rule, regulation, judgment, order or decree
of any governmental agency or court, domestic or foreign, having jurisdiction
over the Company or any Subsidiary or any of their respective properties or
business; or (iv) have any effect on any permit, certification, registration,
approval, consent, order, license, franchise or other authorization
(collectively, the "Permits") necessary for the Company or any Subsidiary to own
or lease and operate their respective properties or conduct their respective
businesses or the ability of the Company to make use thereof.
-5-
<PAGE>
(d) No Permits of any court or governmental agency or
body, other than under the Securities Act of 1933, as amended (the "Act"), the
Regulations (as hereinafter defined) and applicable state securities or Blue Sky
laws, are required (i) for the valid authorization, issuance, sale and delivery
of the Shares to the Underwriters, and (ii) the consummation by the Company of
the transactions contemplated by this Agreement and the Representatives' Warrant
Agreement.
(e) The conditions for use of a registration
statement on Form SB-2 set forth in the General Instructions to Form SB-2 have
been satisfied with respect to the Company, the transactions contemplated herein
and in the Registration Statement. The Company has prepared in conformity with
the requirements of the Act and the rules and regulations (the "Regulations") of
the Securities and Exchange Commission (the "Commission") and filed with the
Commission a registration statement (File No. 333-______) on Form SB-2 and has
filed one or more amendments thereto, covering the registration of the Shares
under the Act, including the related preliminary prospectus or preliminary
prospectuses (each thereof being herein called a "Preliminary Prospectus") and a
proposed final prospectus. Each Preliminary Prospectus was endorsed with the
legend required by Item 501(a)(5) of Regulation S-B of the Regulations and, if
applicable, Rule 430A of the Regulations. Such registration statement including
any documents incorporated by reference therein and all financial schedules and
exhibits thereto, as amended at the time it becomes effective, and the final
prospectus included therein are herein, respectively, called the "Registration
Statement" and the "Prospectus," except that, (i) if the prospectus filed by the
Company pursuant to Rule 424(b) of the Regulations differs from the Prospectus,
the term "Prospectus" shall mean the prospectus filed pursuant to Rule 424(b),
and (ii) if the Registration Statement is amended or such Prospectus is
supplemented after the date the Registration Statement is declared effective by
the Commission (the "Effective Date") and prior to the Option Closing Date, the
terms "Registration Statement" and "Prospectus" shall include the Registration
Statement as amended or supplemented.
(f) Neither the Commission nor, to the best of the
Company's knowledge, any state regulatory authority has issued any order
preventing or suspending the use of any Preliminary Prospectus or has instituted
or, to the best of the Company's knowledge, threatened to institute any
proceedings with respect to such an order.
(g) The Registration Statement when it becomes
effective, the Prospectus (and any amendment or supplement thereto) when it is
filed with the Commission pursuant to Rule 424(b), and both documents as of the
Closing Date and the Option Closing Date referred to below, will contain all
statements which are required to be stated therein in accordance with the Act
and the Regulations and will in all material respects conform to the
requirements of
-6-
<PAGE>
the Act and the Regulations, and neither the Registration Statement nor the
Prospectus, nor any amendment or supplement thereto, on such dates, will contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, except
that this representation and warranty does not apply to statements or omissions
made in reliance upon and in conformity with information furnished in writing to
the Company in connection with the Registration Statement or Prospectus or any
amendment or supplement thereto by the Representatives, or by any Underwriter
through the Representatives, expressly for use therein.
(h) The Company had at the date or dates indicated in
the Prospectus a duly authorized and outstanding capitalization as set forth in
the Registration Statement and the Prospectus. The Company will have on the
Closing Date the adjusted stock capitalization set forth therein. Except as set
forth in the Registration Statement or the Prospectus, on the Effective Date and
on the Closing Date, there will be no options to purchase, warrants or other
rights to subscribe for, or any securities or obligations convertible into, or
any contracts or commitments to issue or sell shares of the Company's capital
stock or any such warrants, convertible securities or obligations. Except as set
forth in the Prospectus, no holder of any of the Company's securities has any
rights, "demand," "piggyback" or otherwise, to have such securities registered
under the Act.
(i) The descriptions in the Registration Statement
and the Prospectus of contracts and other documents are accurate and present
fairly the information required to be disclosed, and there are no contracts or
other documents required to be described in the Registration Statement or
Prospectus or to be filed as exhibits to the Registration Statement under the
Act or the Regulations which have not been so described or filed as required.
(j) Ernst & Young LLP, the accountants who have
certified certain of the consolidated financial statements filed and to be filed
with the Commission as part of the Registration Statement and the Prospectus,
are independent public accountants within the meaning of the Act and
Regulations. The consolidated financial statements and schedules and the notes
thereto filed as part of the Registration Statement and included in the
Prospectus are complete, correct and present fairly the financial position of
the Company as of the dates thereof, and the results of operations and changes
in financial position of the Company for the periods indicated therein, all in
conformity with generally accepted accounting principles applied on a consistent
basis throughout the periods involved except as otherwise stated in the
Registration Statement and the Prospectus. The selected financial data set forth
in the Registration Statement and the Prospectus present fairly the information
shown therein and have been compiled on a basis consistent with that of the
audited and unaudited financial
-7-
<PAGE>
statements included in the Registration Statement and the
Prospectus.
(k) The Company and each Subsidiary has each filed
with the appropriate federal, state and local governmental agencies, and all
appropriate foreign countries and political subdivisions thereof, all tax
returns, including franchise tax returns, which are required to be filed or has
duly obtained extensions of time for the filing thereof and has paid all taxes
shown on such returns and all assessments received by it to the extent that the
same have become due; and the provisions for income taxes payable, if any, shown
on the consolidated financial statements filed with or as part of the
Registration Statement are sufficient for all accrued and unpaid foreign and
domestic taxes, whether or not disputed, and for all periods to and including
the dates of such consolidated financial statements. Except as disclosed in
writing to the Representatives, neither the Company nor any Subsidiary has
executed or filed with any taxing authority, foreign or domestic, any agreement
extending the period for assessment or collection of any income taxes and is not
a party to any pending action or proceeding by any foreign or domestic
governmental agency for assessment or collection of taxes; and no claims for
assessment or collection of taxes have been asserted against the Company or any
Subsidiary.
(l) The outstanding Common Shares and outstanding
options and warrants to purchase Common Shares have been duly authorized and
validly issued. The outstanding Common Shares are fully paid and nonassessable.
The outstanding options and warrants to purchase Common Shares constitute the
valid and binding obligations of the Company, enforceable in accordance with
their terms. None of the outstanding Common Shares or options or warrants to
purchase Common Shares has been issued in violation of the preemptive rights of
any shareholder of the Company. None of the holders of the outstanding Common
Shares is subject to personal liability solely by reason of being such a holder.
The offers and sales of the outstanding Common Shares and outstanding options
and warrants to purchase Common Shares were at all relevant times either
registered under the Act and the applicable state securities or Blue Sky laws or
exempt from such registration requirements. The authorized Common Shares and
outstanding options and warrants to purchase Common Shares conform to the
descriptions thereof contained in the Registration Statement and Prospectus.
Except as set forth in the Registration Statement and the Prospectus, on the
Effective Date and the Closing Date, there will be no outstanding options or
warrants for the purchase of, or other outstanding rights to purchase, Common
Shares or securities convertible into Common Shares.
(m) No securities of the Company have been sold by
the Company or by or on behalf of, or for the benefit of, any person or persons
controlling, controlled by, or under common
-8-
<PAGE>
control with the Company within the three years prior to the date hereof, except
as disclosed in the Registration Statement.
(n) The issuance and sale of the Shares and the
Warrant Shares have been duly authorized and, when the Shares and the Warrant
Shares have been issued and duly delivered against payment therefor as
contemplated by this Agreement and the Representatives' Warrant Agreement,
respectively, the Shares and the Warrant Shares will be validly issued, fully
paid and nonassessable, and the holders thereof will not be subject to personal
liability solely by reason of being such holders. Neither the Shares nor the
Warrant Shares will be subject to preemptive rights of any shareholder of the
Company.
(o) The issuance and sale of the Representatives'
Warrants have been duly authorized and, when issued, paid for and delivered as
contemplated by the Representatives' Warrant Agreement, the Representatives'
Warrants will constitute valid and binding obligations of the Company,
enforceable as to the Company in accordance with their terms. The
Representatives' Warrants will not be subject to preemptive rights of any
shareholder of the Company. The Warrant Shares have been duly reserved for
issuance upon exercise of the Representatives' Warrants in accordance with the
provisions of the Representatives' Warrant Agreement. The Representatives'
Warrants conform to the description thereof contained in the Registration
Statement and Prospectus.
(p) Neither the Company nor any Subsidiary is in
violation of, or in default under, (i) any term or provision of its Articles of
Incorporation, Memorandum or Articles of Association or By-Laws (or similar
charter documents); (ii) any material term or provision or any financial
covenants of any indenture, mortgage, contract, commitment or other agreement or
instrument to which it is a party or by which it or any of its property or
business is or may be bound or affected; or (iii) any existing applicable law,
rule, regulation, judgment, order or decree of any governmental agency or court,
domestic or foreign, having jurisdiction over the Company, any Subsidiary or any
of their respective properties or business. The Company and each Subsidiary
owns, possesses or has obtained all governmental and other (including those
obtainable from third parties) Permits necessary to own or lease, as the case
may be, and to operate its properties, whether tangible or intangible, and to
conduct the business and operations of the Company as presently conducted, and
all such Permits are outstanding and in good standing, and there are no
proceedings pending or to the best of the Company's knowledge, threatened (nor,
to the best of the Company's knowledge, is there any basis therefor) which seek
to cancel, terminate or limit such Permits.
(q) Except as set forth in the Prospectus, there
are no claims, actions, suits, proceedings, arbitrations, investigations or
inquiries before any governmental agency, court or tribunal, domestic or
foreign, or before any private arbitration
-9-
<PAGE>
tribunal, pending, or, to the best of the Company's knowledge, threatened
against the Company or any Subsidiary or involving the Company's or any
Subsidiary's properties or business which, if determined adversely to the
Company or any Subsidiary would, individually or in the aggregate, result in any
material adverse change in the financial position, shareholders' equity, results
of operations, properties, business, management or affairs or business prospects
of the Company or any Subsidiary or which question the validity of the capital
stock of the Company or this Agreement or of any action taken or to be taken by
the Company pursuant to, or in connection with, this Agreement; nor, to the best
of the Company's knowledge, is there any basis for any such claim, action, suit,
proceeding, arbitration, investigation or inquiry. There are no outstanding
orders, judgments or decrees of any court, governmental agency or other tribunal
naming the Company or any Subsidiary and enjoining the Company or any Subsidiary
from taking, or requiring the Company or any Subsidiary to take, any action, or
to which the Company or any Subsidiary or the Company's or any Subsidiary's
properties or business is bound or subject.
(r) Neither the Company nor any of its affiliates has
incurred any liability for any finder's fees or similar payments in connection
with the transactions herein contemplated.
(s) The Company and each of the Subsidiaries each
owns or possesses adequate and enforceable rights to use all patents, patent
applications, trademarks, service marks, copyrights, rights, trade secrets,
confidential information, processes and formulations used or proposed to be used
in the conduct of its business as described in the Prospectus (collectively the
"Intangibles"); to the best of the Company's knowledge, neither the Company nor
any Subsidiary has infringed or is infringing upon the rights of others with
respect to the Intangibles; and neither the Company nor any Subsidiary has
received any notice of conflict with the asserted rights of others with respect
to the Intangibles which could, singly or in the aggregate, materially adversely
affect its business as presently conducted or the prospects, financial condition
or results of operations of the Company or any Subsidiary and the Company knows
of no basis therefor; and, to the best of the Company's knowledge, no others
have infringed upon the Intangibles of the Company or any Subsidiary.
(t) Since the respective dates as of which
information is given in the Registration Statement and the Prospectus and the
Company's latest consolidated financial statements, neither the Company nor any
Subsidiary has incurred any material liability or obligation, direct or
contingent, or entered into any material transaction, whether or not incurred in
the ordinary course of business, or sustained any material loss or interference
with its business from fire, storm, explosion, flood or other casualty, whether
or not covered by insurance, or from any labor dispute or court or governmental
action, order or decree; and
-10-
<PAGE>
since the respective dates as of which information is given in the Registration
Statement and the Prospectus, there have not been, and prior to the Closing Date
referred to below there will not be, any changes in the capital stock or any
material increases in the long-term debt of the Company or any Subsidiary or any
material adverse change in or affecting the general affairs, management,
financial condition, shareholders' equity, results of operations or prospects of
the Company or any Subsidiary, other than as set forth or contemplated in the
Prospectus.
(u) Neither the Company nor any Subsidiary owns any
real property. The Company and each Subsidiary each has good title to all
personal property (tangible and intangible) owned by it, free and clear of all
security interests, charges, mortgages, liens, encumbrances and defects, except
such as are described in the Registration Statement and Prospectus or such as do
not materially affect the value or transferability of such property and do not
interfere with the use of such property made, or proposed to be made, by the
Company or any Subsidiary. The leases, licenses or other contracts or
instruments under which the Company and the Subsidiaries lease, hold or are
entitled to use any property, real or personal, are valid, subsisting and
enforceable only with such exceptions as are not material and do not interfere
with the use of such property made, or proposed to be made, by the Company or
any Subsidiary, and all rentals, royalties or other payments, if any, accruing
thereunder which became due prior to the date of this Agreement have been duly
paid, and neither the Company nor any Subsidiary, nor, to the best of the
Company's knowledge, any other party is in default thereunder and, to the best
of the Company's knowledge, no event has occurred which, with the passage of
time or the giving of notice, or both, would constitute a default thereunder.
Neither the Company nor any Subsidiary has received notice of any violation of
any applicable law, ordinance, regulation, order or requirement relating to its
owned or leased properties. The Company and each Subsidiary has adequately
insured its properties against loss or damage by fire or other casualty and
maintains, in adequate amounts, such other insurance as is usually maintained by
companies engaged in the same or similar businesses located in its geographic
area.
(v) Each contract or other instrument (however
characterized or described) to which the Company or a Subsidiary is a party or
by which their respective properties or businesses are or may be bound or
affected and to which reference is made in the Prospectus has been duly and
validly executed, is in full force and effect in all material respects and is
enforceable against the parties thereto in accordance with its terms, and none
of such contracts or instruments has been assigned by the Company or any
Subsidiary, and neither the Company nor any Subsidiary, nor, to the best of the
Company's knowledge, any other party is in default thereunder and, to the best
of the Company's knowledge, no event has occurred which, with the lapse of time
or the giving of notice, or both, would constitute a default thereunder.
-11-
<PAGE>
None of the material provisions of such contracts or
instruments violates any existing applicable law, rule, regulation, judgment,
order or decree of any governmental agency or court having jurisdiction over the
Company or any Subsidiary or any of their respective assets or businesses.
(w) The employment, consulting, confidentiality and
non-competition agreements between the Company and its officers, employees and
consultants and between the Subsidiaries and their respective officers,
employees and consultants, described in the Registration Statement, are binding
and enforceable obligations upon the respective parties thereto in accordance
with their respective terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, moratorium or other similar laws or
arrangements affecting creditors' rights generally and subject to principles of
equity.
(x) Except as set forth in the Prospectus, the
Company has no employee benefit plans (including, without limitation, profit
sharing and welfare benefit plans) or deferred compensation arrangements that
are subject to the provisions of the Employee Retirement Income Security Act of
1974, as amended.
(y) To the best of the Company's knowledge, no
labor problem exists with any of the Company's employees or any Subsidiary's
employees or is imminent which could adversely affect the Company or any
Subsidiary.
(z) Neither the Company nor any Subsidiary has,
directly or indirectly, at any time (i) made any contributions to any candidate
for political office, or failed to disclose fully any such contribution in
violation of law or (ii) made any payment to any state, federal or foreign
governmental officer or official, or other person charged with similar public or
quasi-public duties, other than, in each case, payments or contributions
required or allowed by applicable law. The Company's internal accounting
controls and procedures are sufficient to cause the Company to comply in all
material respects with the Foreign Corrupt Practices Act of 1977, as amended.
(aa) The Shares have been approved for listing on
the Nasdaq National Market ("Nasdaq").
(ff) The Company has provided to Tenzer Greenblatt
LLP, counsel to the several Underwriters ("Underwriters' Counsel"), all material
agreements, certificates, correspondence and other items, documents and
information requested by such counsel's Corporate Review Memorandum dated April
14, 1998.
Any certificate signed by an officer of the Company
or by an officer of a Subsidiary and delivered to the
Representatives or to Underwriters' Counsel shall be deemed to be
-12-
<PAGE>
a representation and warranty by the Company to the Underwriters as to the
matters covered thereby.
5. Certain Covenants of the Company. The Company covenants
with the several Underwriters as follows:
(a) The Company will not at any time, whether
before the Effective Date or thereafter during such period as the Prospectus is
required by law to be delivered in connection with the sales of the Shares by
the Representatives or a dealer, file or publish any amendment or supplement to
the Registration Statement or Prospectus of which the Representatives have not
been previously advised and furnished a copy, or to which the Representatives
shall object in writing.
(b) The Company will use its best efforts to cause
the Registration Statement to become effective and will advise the
Representatives promptly, and, if requested by the Representatives, confirm such
advice in writing, (i) when the Registration Statement, or any post-effective
amendment to the Registration Statement or any supplemented Prospectus is filed
with the Commission; (ii) of the receipt of any comments from the Commission;
(iii) of any request of the Commission for amendment or supplementation of the
Registration Statement or Prospectus or for additional information; and (iv) of
the issuance by the Commission of any stop order suspending the effectiveness of
the Registration Statement or of any order preventing or suspending the use of
any Preliminary Prospectus, or of the suspension of the qualification of the
Shares for offering or sale in any jurisdiction, or of the initiation of any
proceedings for any of such purposes. The Company will use its best efforts to
prevent the issuance of any such stop order or of any order preventing or
suspending such use and to obtain as soon as possible the lifting thereof, if
any such order is issued.
(c) The Company will deliver to each Underwriter,
without charge, from time to time until the Effective Date, as many copies of
each Preliminary Prospectus as each Underwriter may reasonably request, and the
Company hereby consents to the use of such copies for purposes permitted by the
Act. The Company will deliver to each Underwriter, without charge, as soon as
the Registration Statement becomes effective, and thereafter from time to time
as requested, such number of copies of the Prospectus (as supplemented, if the
Company makes any supplements to the Prospectus) as each Underwriter may
reasonably request. The Company has furnished or will furnish to each of the
Representatives a signed copy of the Registration Statement as originally filed
and of all amendments thereto, whether filed before or after the Registration
Statement becomes effective, a copy of all exhibits filed therewith and a signed
copy of all consents and certificates of experts.
(d) The Company will comply with the Act, the
Regulations, the Securities Exchange Act of 1934, as amended (the
-13-
<PAGE>
"Exchange Act"), and the rules and regulations thereunder so as to permit the
continuance of sales of and dealings in the Offered Shares and in any Optional
Shares which may be issued and sold. If, at any time when a prospectus relating
to the Shares is required to be delivered under the Act, any event occurs as a
result of which the Registration Statement and Prospectus as then amended or
supplemented would include an untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, or if it shall be
necessary to amend or supplement the Registration Statement and Prospectus to
comply with the Act or the regulations thereunder, the Company will promptly
file with the Commission, subject to Section 5(a) hereof, an amendment or
supplement which will correct such statement or omission or which will effect
such compliance.
(e) The Company will furnish such proper informa-
tion as may be required and otherwise cooperate in qualifying the Shares for
offering and sale under the securities or Blue Sky laws relating to the offering
in such jurisdictions as the Representatives may reasonably designate, provided
that no such qualification will be required in any jurisdiction where, solely as
a result thereof, the Company would be subject to service of general process or
to taxation or qualification as a foreign corporation doing business in such
jurisdiction.
(f) The Company will make generally available to
its security holders, in the manner specified in Rule 158(b) under the Act, and
deliver to the Representatives and Underwriters' Counsel as soon as practicable
and in any event not later than 45 days after the end of its fiscal quarter in
which the first anniversary date of the effective date of the Registration
Statement occurs, an earning statement meeting the requirements of Rule 158(a)
under the Act covering a period of at least 12 consecutive months beginning
after the effective date of the Registration Statement.
(g) For a period of three years from the Effective
Date, the Company will deliver to the Representatives, on a timely basis (i) a
copy of each report or document, including, without limitation, reports on Forms
8-K, 10-C, 10-K (or 10-KSB) and 10-Q (or 10-QSB) and exhibits thereto, filed or
furnished to the Commission, any securities exchange or the National Association
of Securities Dealers, Inc. (the "NASD") on the date each such report or
document is so filed or furnished; (ii) as soon as practicable, copies of any
reports or communications (financial or other) of the Company mailed to its
security holders; (iii) as soon as practicable, a copy of any Schedule 13D, 13G,
14D-1 or 13E-3 received or prepared by the Company from time to time; (iv) to
the extent available, quarterly statements setting forth such information
regarding the Company's results of operations and financial position (including
balance sheet, profit and loss statements and data regarding backlog) as is
regularly prepared by
-14-
<PAGE>
management of the Company; and (v) such additional information concerning the
business and financial condition of the Company as the Representatives may from
time to time reasonably request and which can be prepared or obtained by the
Company without unreasonable effort or expense. The Company will furnish to its
shareholders annual reports containing audited financial statements and such
other periodic reports as it may determine to be appropriate or as may be
required by law.
(h) Neither the Company nor any person that con-
trols, is controlled by or is under common control with the Company will take
any action designed to or which might be reasonably expected to cause or result
in the stabilization or manipulation of the price of the Common Shares.
(i) If the transactions contemplated by this
Agreement are consummated, BlueStone shall retain the $40,000 previously paid to
it, and the Company will pay or cause to be paid the following: all costs and
expenses incident to the performance of the obligations of the Company under
this Agreement, including, but not limited to, the fees and expenses of
accountants and counsel for the Company; the preparation, printing, mailing and
filing of the Registration Statement (including financial statements and
exhibits), Preliminary Prospectuses and the Prospectus, and any amendments or
supplements thereto; the printing and mailing of the Selected Dealer Agreement;
the issuance and delivery of the Shares to the Representatives; all taxes, if
any, on the issuance of the Shares; the fees, expenses and other costs of
listing the Shares on Nasdaq and of qualifying the Shares for sale under the
"Blue Sky" or securities laws of those states in which the Shares are to be
offered or sold, including the fees and disbursements of Underwriters' Counsel
incurred in connection therewith, and the cost of printing and mailing the "Blue
Sky Survey"; the filing fees incident to securing any required review by the
NASD; the cost of furnishing to the several Underwriters copies of the
Registration Statement, Preliminary Prospectuses and the Prospectus as herein
provided; the costs of placing "tombstone advertisements" in any publications
which may be selected by the Representatives; and all other costs and expenses
incident to the performance of the Company's obligations hereunder which are not
otherwise specifically provided for in this Section 5(i).
In addition, at the Closing Date, the Representatives
will deduct from the payment for the Offered Shares an amount equal to the
Representatives' costs, fees and expenses incurred during the registration
process (less the sum of $40,000 previously paid to BlueStone), including all
reasonable out-of-pocket accountable expenses relating to the transactions
contemplated hereby, which amount will include the fees and expenses of
Underwriters' Counsel (other than those payable by the Company in connection
with "Blue Sky" qualifications referred to in the preceding paragraph) and all
of the costs associated with the marketing and selling of the Offered Shares.
-15-
<PAGE>
(j) If the transactions contemplated by this
Agreement or related hereto are not consummated because the Company decides not
to proceed with the offering for any reason or if the Representatives decide not
to proceed with the offering because of a breach by the Company of its
representations, warranties or covenants in this Agreement or as a result of
adverse changes in the affairs of the Company, the Company will reimburse the
Representatives for all of their accountable expenses reasonably incurred in
connection with the offering. If the Representatives decide not to proceed with
the offering for any other reason, the Company will reimburse the
Representatives for their accountable expenses up to the $40,000 previously paid
to BlueStone. In no event, however, will the Representatives, in the event the
offering is terminated, be entitled to retain or receive more than an amount
equal to their actual accountable out-of-pocket expenses.
(k) The Company intends to apply the net proceeds
from the sale of the Shares for the purposes set forth in the Prospectus.
(l) During the period of nine (9) months following
the date hereof, neither the Company nor any of its officers, directors or
securityholders beneficially owning one percent (1%) or more of the outstanding
Common Shares ("Affiliated Shareholders") will offer for sale, sell, transfer,
pledge or otherwise dispose of, directly or indirectly, any securities of the
Company, in any manner whatsoever, whether pursuant to Rule 144 of the
Regulations or otherwise, and no holder of registration rights relating to
securities of the Company will execute any such registration rights, in either
case, without the prior written consent of BlueStone. The Company will deliver
to the Representatives the undertakings as of the date hereof of its officers,
directors and Affiliated Shareholders to this effect.
(m) The Company will not file any registration
statement relating to the offer or sale of any of the Company's securities,
including any registration statement on Form S-8, during the nine (9) months
following the date hereof without BlueStone's prior written consent.
(n) The Company maintains and will continue to
maintain a system of internal accounting controls sufficient to provide
reasonable assurances that: (i) transactions are executed in accordance with
management's general or specific authorization; (ii) transactions are recorded
as necessary in order to permit preparation of financial statements in
accordance with generally accepted accounting principles and to maintain
accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
-16-
<PAGE>
(o) The Company will use its best efforts to
maintain the listing of the Shares on Nasdaq or another exchange that is
mutually agreed upon by the Company and the Representatives for so long as the
Shares are qualified for such listing.
(p) The Company will, concurrently with the
Effective Date, register the class of equity securities of which the Shares are
a part under Section 12(g) of the Exchange Act and the Company will maintain the
registration for a minimum of five (5) years after the Effective Date.
(q) The Company shall retain a transfer agent for the
Common Shares, reasonably acceptable to BlueStone, for a period of three (3)
years following the Effective Date. In addition, for a period of three (3) years
following the Effective Date, the Company, at its own expense, shall cause its
transfer agent to provide BlueStone, if so requested in writing, with copies of
the Company's daily transfer sheets and when requested by BlueStone, a current
list of the Company's security holders, including a list of the beneficial
owners of securities held by a depository trust company and other nominees.
(r) The Company hereby agrees, at its sole cost and
expense, to supply and deliver to Underwriters' Counsel, within a reasonable
period from the date hereof, four bound volumes, including the Registration
Statement, as amended or supplemented, all exhibits to the Registration
Statement, the Prospectus and all other underwriting documents.
(s) The Company shall, within 10 days of the date
hereof, have applied for listing in Standard & Poor's Corporation Records
Service (including annual report information) or Moody's Industrial Manual
(Moody's OTC Industrial Manual not being sufficient for these purposes) and
shall use its best efforts to have the Company listed in such manual at or prior
to the Effective Date and shall maintain such listing for a period of three (3)
years following the Effective Date.
(t) For a period of two (2) years from the
Effective Date, the Company shall provide BlueStone, on a not less than annual
basis, with internal forecasts setting forth projected results of operations for
each annual period in the two (2) fiscal years following the respective dates of
such forecasts; provided, however, that BlueStone shall keep confidential and
shall not disclose to any third party any material non-public information. Such
forecasts shall be provided to BlueStone more frequently than annually if
prepared more frequently by management, and revised forecasts shall be prepared
and provided to BlueStone when required to reflect more current information,
revised assumptions or actual results that differ materially from those set
forth in the forecasts.
-17-
<PAGE>
(u) For a period of three (3) years following the
Effective Date, the Company shall continue to retain Ernst & Young LLP (or such
other nationally recognized accounting firm as is acceptable to BlueStone) as
the Company's independent public accountants.
(v) For a period of three (3) years following the
Effective Date, the Company, at its expense, shall cause its independent
certified public accountants, as described in Section 5(v) above, to review (but
not audit) the Company's financial statements for each of the first three fiscal
quarters prior to the announcement of quarterly financial information, the
filing of the Company's 10-Q (or 10-QSB) quarterly report and the mailing of
quarterly financial information to shareholders.
(w) For a period of twenty-five (25) days following
the Effective Date, the Company will not issue press releases or engage in any
other publicity without BlueStone's prior written consent, other than normal and
customary releases issued in the ordinary course of the Company's business or
those releases required by law.
(x) For a period of three (3) years following the
Effective Date, the Company will cause its Board of Directors to meet, either in
person or telephonically, a minimum of four (4) times per year and will hold a
shareholder's meeting at least once per annum.
(y) For a period of eighteen (18) months following
the Effective Date, the Company will not offer or sell any of its securities at
a discount from the then current market price without the prior written consent
of the Underwriter, which consent shall not be unreasonably withheld.
6. Conditions of the Underwriters' Obligation to Purchase
Shares from the Company. The obligation of the several Underwriters to purchase
and pay for the Offered Shares which they have agreed to purchase from the
Company is subject (as of the date hereof and the Closing Date) to the accuracy
of, and the Company's compliance in all material respects with, the
representations and warranties of the Company herein, to the accuracy of the
statements of the Company and its officers made pursuant hereto, to the
performance in all material respects by the Company or its Subsidiaries of their
respective obligations hereunder, and to the following additional conditions:
(a) The Registration Statement will have become
effective not later than 9:30 A.M., New York City time, on the day following the
date of this Agreement, or at such later time or on such later date as the
Representatives may agree to in writing; prior to the Closing Date, no stop
order suspending the effectiveness of the Registration Statement will have been
issued and no proceedings for that purpose will have been initiated or will be
-18-
<PAGE>
pending or, to the best of the Representatives' or the Company's knowledge, will
be contemplated by the Commission; and any request on the part of the Commission
for additional information will have been complied with to the satisfaction of
Underwriters' Counsel.
(b) At the Closing Date, there will have been
delivered to the Representatives a signed opinion of Smith, Anderson, Blount,
Dorsett, Mitchell & Jernigan, L.L.P., counsel for the Company ("Company
Counsel"), dated as of the Closing Date (and any other opinions of counsel
referred to in such opinion of Company Counsel or relied upon by Company Counsel
in rendering their opinion), in the form attached to this Agreement as Schedule
B.
(c) At the Closing Date, there will have been
delivered to the Representatives a signed opinion of Underwriters' Counsel,
dated as of the Closing Date, to the effect that the opinions delivered pursuant
to Section 6(b) hereof appear on their face to be appropriately responsive to
the requirements of this Agreement, except to the extent waived by the
Representatives, specifying the same, and with respect to such other related
matters as the Representatives may require.
(d) At the Closing Date (i) the Registration State-
ment and the Prospectus and any amendments or supplements thereto will contain
all material statements which are required to be stated therein in accordance
with the Act and the Regulations and will conform in all material respects to
the requirements of the Act and the Regulations, and neither the Registration
Statement nor the Prospectus nor any amendment or supplement thereto will
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading; (ii)
since the respective dates as of which information is given in the Registration
Statement and the Prospectus, there will not have been any material adverse
change in the financial condition, results of operations or general affairs of
the Company from that set forth or contemplated in the Registration Statement
and the Prospectus, except changes which the Registration Statement and the
Prospectus indicate might occur after the Effective Date; (iii) since the
respective dates as of which information is given in the Registration Statement
and the Prospectus, there shall have been no material transaction, contract or
agreement entered into by the Company, other than in the ordinary course of
business, which would be required to be set forth in the Registration Statement
and the Prospectus, other than as set forth therein; and (iv) no action, suit or
proceeding at law or in equity will be pending or, to the best of the Company's
knowledge, threatened against the Company which is required to be set forth in
the Registration Statement and the Prospectus, other than as set forth therein,
and no proceedings will be pending or, to the best of the Company's knowledge,
threatened against the Company before or by any federal, state or other
commission, board or administrative agency wherein an unfavorable decision,
ruling or finding would materially adversely affect the business, property,
financial condition or results of operations of the Company, other than as set
forth in the Registration Statement and the Prospectus. At the Closing Date,
there will be delivered to the
-24-
<PAGE>
Representatives a certificate signed by the Chairman of the Board or the
President or a Vice President of the Company, dated the Closing Date, evidencing
compliance with the provisions of this Section 6(d) and stating that the
representations and warranties of the Company set forth in Section 4 hereof were
accurate and complete in all material respects when made on the date hereof and
are accurate and complete in all material respects on the Closing Date as if
then made; that the Company has performed all covenants and complied with all
conditions required by this Agreement to be performed or complied with by the
Company prior to or as of the Closing Date; and that, as of the Closing Date, no
stop order suspending the effectiveness of the Registration Statement has been
issued and no proceedings for that purpose have been initiated or, to the best
of his knowledge, are contemplated or threatened. In addition, the
Representatives will have received such other and further certificates of
officers of the Company as the Representatives or Underwriters' Counsel may
reasonably request.
(e) At the time that this Agreement is executed and
at the Closing Date, the Representatives will have received a signed letter from
Ernst & Young LLP, dated the date such letter is to be received by the
Representatives and addressed to them, confirming that it is a firm of
independent public accountants within the meaning of the Act and Regulations and
stating that: (i) insofar as reported on by it, in its opinion, the consolidated
financial statements of the Company included in the Prospectus comply as to form
in all material respects with the applicable accounting requirements of the Act
and the applicable Regulations; (ii) on the basis of procedures and inquiries
(not constituting an examination in accordance with generally accepted auditing
standards) consisting of a reading of the unaudited interim financial statements
of the Company, if any, appearing in the Registration Statement and the
Prospectus and the latest available unaudited interim financial statements of
the Company, if more recent than that appearing in the Registration Statement
and Prospectus, inquiries of officers of the Company responsible for financial
and accounting matters as to the transactions and events subsequent to the date
of the latest audited financial statements of the Company, and a reading of the
minutes of meetings of the shareholders, the Board of Directors of the Company
and any committees of the Board of Directors, as set forth in the minute books
of the Company, nothing has come to its attention which, in its judgment, would
indicate that (A) during the period from the date of the latest financial
statements of the Company appearing in the Registration Statement and Prospectus
to a specified date not more than three business days prior to the date of such
letter, there have been any decreases in net current assets or net assets as
compared with amounts shown in such financial statements or decreases in net
sales or decreases in total or per share net income compared with the
corresponding period in the preceding year or any change in the capitalization
or long-term debt of the Company, except in all cases as set forth in or
contemplated by the Registration Statement and the Prospectus, and (B) the
unaudited
-25-
<PAGE>
interim financial statements of the Company, if any, appearing in the
Registration Statement and the Prospectus, do not comply as to form in all
material respects with the applicable accounting requirements of the Act and the
Regulations or are not fairly presented in conformity with generally accepted
accounting principles and practices on a basis substantially consistent with the
audited financial statements included in the Registration Statement or the
Prospectus; and (iii) it has compared specific dollar amounts, numbers of
shares, numerical data, percentages of revenues and earnings, and other
financial information pertaining to the Company set forth in the Prospectus
(with respect to all dollar amounts, numbers of shares, percentages and other
financial information contained in the Prospectus, to the extent that such
amounts, numbers, percentages and information may be derived from the general
accounting records of the Company, and excluding any questions requiring an
interpretation by legal counsel) with the results obtained from the application
of specified readings, inquiries and other appropriate procedures (which
procedures do not constitute an examination in accordance with generally
accepted auditing standards) set forth in the letter, and found them to be in
agreement.
(f) There shall have been duly tendered to the
Representatives certificates representing the Offered Shares to be sold on the
Closing Date.
(g) The NASD shall have indicated that it has no
objection to the underwriting arrangements pertaining to the sale of the Offered
Shares by the Underwriters or the sale of the Shares by the Representatives.
(h) No action shall have been taken by the
Commission or the NASD the effect of which would make it improper, at any time
prior to the Closing Date or the Option Closing Date, as the case may be, for
any member firm of the NASD to execute transactions (as principal or as agent)
in the Shares, and no proceedings for the purpose of taking such action shall
have been instituted or shall be pending, or, to the best of the
Representatives' or the Company's knowledge, shall be contemplated by the
Commission or the NASD. The Company represents at the date hereof, and shall
represent as of the Closing Date or Option Closing Date, as the case may be,
that it has no knowledge that any such action is in fact contemplated by the
Commission or the NASD.
(i) The Common Shares have been approved for
listing on Nasdaq.
(j) All proceedings taken at or prior to the
Closing Date or the Option Closing Date, as the case may be, in connection with
the authorization, issuance and sale of the Shares shall be reasonably
satisfactory in form and substance to the Representatives and to Underwriters'
Counsel, and such counsel shall have been furnished with all such documents,
certificates and
-26-
<PAGE>
opinions as they may request for the purpose of enabling them to pass upon the
matters referred to in Section 6(c) hereof and in order to evidence the accuracy
and completeness of any of the representations, warranties or statements of the
Company, the performance of any covenants of the Company, or the compliance by
the Company with any of the conditions herein contained.
(k) As of the date hereof, the Company will have
delivered to the Underwriters the written undertakings of its officers,
directors and security holders and/or registration rights holders, as the case
may be, to the effect of the matters set forth in Section 5(l).
If any of the conditions specified in this Section
6 have not been fulfilled, this Agreement may be terminated by the
Representatives on notice to the Company.
7. Indemnification.
(a) The Company agrees to indemnify and hold
harmless each Underwriter, including specifically each person that may be
substituted for an Underwriter as provided in Section 10 hereof, each officer,
director, partner, employee and agent of any Underwriter, and each person, if
any, who controls any of the Underwriters within the meaning of Section 15 of
the Act or Section 20(a) of the Exchange Act, from and against any and all
losses, claims, damages, expenses or liabilities, joint or several (and actions
in respect thereof), to which they or any of them may become subject under the
Act or under any other statute or at common law or otherwise, and, except as
hereinafter provided, will reimburse each of the Underwriters and each such
person, if any, for any legal or other expenses reasonably incurred by them or
any of them in connection with investigating or defending any actions, whether
or not resulting in any liability, insofar as such losses, claims, damages,
expenses, liabilities or actions arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact contained (i) in the
Registration Statement, in any Preliminary Prospectus or in the Prospectus (or
the Registration Statement or Prospectus as from time to time amended or
supplemented) or (ii) in any application or other document executed by the
Company, or based upon written information furnished by or on behalf of the
Company, filed in any jurisdiction in order to qualify the Shares under the
securities laws thereof (hereinafter "application"), 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 in order to make the statements
therein not misleading, in light of the circumstances under which they were
made, unless such untrue statement or omission was made in such Registration
Statement, Preliminary Prospectus, Prospectus or application in reliance upon
and in conformity with information furnished in writing to the Company in
connection therewith by the Underwriter or any such person through the
Underwriter expressly for use therein; provided, however, that the indemnity
agreement
-27-
<PAGE>
contained in this Section 7(a) with respect to any Preliminary Prospectus will
not inure to the benefit of the Underwriter (or to the benefit of any other
person that may be indemnified pursuant to this Section 7(a)) if (A) the person
asserting any such losses, claims, damages, expenses or liabilities purchased
the Shares which are the subject thereof from such Underwriter or other
indemnified person; (B) such Underwriter or other indemnified person failed to
send or give a copy of the Prospectus to such person at or prior to the written
confirmation of the sale of such Shares to such person; and (C) the Prospectus
did not contain any untrue statement or alleged untrue statement or omission or
alleged omission giving rise to such cause, claim, damage, expense or liability.
(b) Each Underwriter (including specifically each
person that may be substituted for an Underwriter as provided in Section 11
hereof) agrees to indemnify and hold harmless the Company, each of its
directors, each of its officers who have signed the Registration Statement and
each person, if any, who controls the Company within the meaning of Section 15
of the Act or Section 20(a) of the Exchange Act, from and against any and all
losses, claims, damages, expenses or liabilities, joint or several (and actions
in respect thereof), to which they or any of them may become subject under the
Act or under any other statute or at common law or otherwise, and, except as
hereinafter provided, will reimburse the Company and each such director, officer
or controlling person for any legal or other expenses reasonably incurred by
them or any of them in connection with investigating or defending any actions,
whether or not resulting in any liability, insofar as such losses, claims,
damages, expenses, liabilities or actions arise out of or are based upon any
untrue statement or alleged untrue statement of a material fact contained (i) in
the Registration Statement, in any Preliminary Prospectus or in the Prospectus
(or the Registration Statement or Prospectus as from time to time amended or
supplemented) or (ii) in any application (including any application for
registration of the Shares under state securities or Blue Sky laws), 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 in order to make the
statements therein not misleading, in light of the circumstances under which
they were made, but only insofar as any such statement or omission was made in
reliance upon and in conformity with information furnished in writing to the
Company in connection therewith by such Underwriter, or by the Representatives
on behalf of such Underwriter, expressly for use therein.
(c) Promptly after receipt of notice of the
commencement of any action in respect of which indemnity may be sought against
any indemnifying party under this Section 7, the indemnified party will notify
the indemnifying party in writing of the commencement thereof, and the
indemnifying party will, subject to the provisions hereinafter stated, assume
the defense of such action (including the employment of counsel satisfactory to
the indemnified party and the payment of expenses) insofar as such
-28-
<PAGE>
action relates to an alleged liability in respect of which indemnity may be
sought against the indemnifying party. After notice from the indemnifying party
of its election to assume the defense of such claim or action, the indemnifying
party shall no longer be liable to the indemnified party under this Section 7
for any legal or other expenses subsequently incurred by the indemnified party
in connection with the defense thereof other than reasonable costs of
investigation; provided, however, that if, in the reasonable judgment of the
indemnified party or parties, it is advisable for the indemnified party or
parties to be represented by separate counsel, the indemnified party or parties
shall have the right to employ a single counsel to represent the indemnified
parties who may be subject to liability arising out of any claim in respect of
which indemnity may be sought by the indemnified parties thereof against the
indemnifying party, in which event the fees and expenses of such separate
counsel shall be borne by the indemnifying party. Any party against whom
indemnification may be sought under this Section 7 shall not be liable to
indemnify any person that might otherwise be indemnified pursuant hereto for any
settlement of any action effected without such indemnifying party's consent.
8. Contribution. To provide for just and equitable
contribution, if (i) an indemnified party makes a claim for indemnification
pursuant to Section 8 hereof (subject to the limitations thereof) and it is
finally determined, by a judgment, order or decree not subject to further
appeal, that such claim for indemnification may not be enforced, even though
this Agreement expressly provides for indemnification in such case; or (ii) any
indemnified or indemnifying party seeks contribution under the Act, the Exchange
Act, or otherwise, then the Company (including, for this purpose, any
contribution made by or on behalf of any director of the Company, any officer of
the Company who signed the Registration Statement and any controlling person of
the Company) as one entity and the Underwriters (including, for this purpose,
any contribution by or on behalf of each person, if any, who controls any
Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act and each officer, director, partner, employee and agent of any of
the Underwriters) as a second entity, shall contribute to the losses,
liabilities, claims, damages and expenses whatsoever to which any of them may be
subject, so that the Underwriters are responsible for the proportion thereof
equal to the percentage which the underwriting discount per Share set forth on
the cover page of the Prospectus represents of the initial public offering price
per Share set forth on the cover page of the Prospectus and the Company is
responsible for the remaining portion; provided, however, that if applicable law
does not permit such allocation, then, if applicable law permits, other relevant
equitable considerations such as the relative fault of the Company and the
Underwriters in connection with the facts which resulted in such losses,
liabilities, claims, damages and expenses shall also be considered. The relative
fault, in the case of an untrue statement, alleged untrue statement,
-29-
<PAGE>
omission or alleged omission, shall be determined by, among other things,
whether such statement, alleged statement, omission or alleged omission relates
to information supplied by the Company or by the Underwriters, and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement, alleged statement, omission or alleged omission. The
Company, on one hand, and the Underwriters, on the other hand, agree that it
would be unjust and inequitable if the respective obligations of the Company and
the Underwriters for contribution were determined by pro rata or per capita
allocation of the aggregate losses, liabilities, claims, damages and expenses or
by any other method of allocation that does not reflect the equitable
considerations referred to in this Section 8. No person guilty of a fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) will be
entitled to contribution from any person who is not guilty of such fraudulent
misrepresentation. For purposes of this Section 8, each person, if any, who
controls any of the Underwriters within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act and each officer, director, partner, employee
and agent of any of the Underwriters will have the same rights to contribution
as the Underwriters, and each person, if any, who controls the Company within
the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, each
officer of the Company who has signed the Registration Statement and each
director of the Company will have the same rights to contribution as the
Company, subject in each case to the provisions of this Section 8. Anything in
this Section 8 to the contrary notwithstanding, no party will be liable for
contribution with respect to the settlement of any claim or action effected
without its written consent. This Section 8 is intended to supersede, to the
extent permitted by law, any right to contribution under the Act or the Exchange
Act or otherwise available.
9. Survival of Indemnities, Contribution, Warranties and
Representations. The respective indemnity and contribution agreements of the
Company and the Underwriters contained in Sections 7 and 8 hereof, and the
representations and warranties of the Company contained in this Agreement shall
remain operative and in full force and effect, regardless of any termination or
cancellation of this Agreement or any investigation made by or on behalf of the
Underwriters, the Company or any of its directors and officers or any
controlling person referred to in said Sections, and shall survive the delivery
of, and payment for, the Shares.
10. Substitution of Underwriters.
(a) If one or more Underwriters should default in its
or their obligation to purchase and pay for any Offered Shares hereunder and if
the aggregate number of such Offered Shares which all Underwriters so defaulting
have agreed to purchase does not exceed 10% of the total number of the Offered
Shares, the non-defaulting Underwriters will be obligated severally to purchase
and pay for (in addition to the number of Offered Shares set forth
-30-
22988/1111/JEJ/385081.3
<PAGE>
opposite their names in Schedule A attached hereto) the full number of Offered
Shares agreed to be purchased by all defaulting Underwriters, and not so
purchased, in proportion to their respective commitments hereunder. In such
event the Representatives, for the accounts of the several nondefaulting
Underwriters, may take up and pay for all or any part of such additional Offered
Shares to be purchased by each such Underwriter under this Section 10(a), and
may postpone the Closing Date to a time not exceeding three full business days
after the Closing Date determined as provided in Section 2 hereof.
(b) If one or more Underwriters should default in its
or their obligation to purchase and pay for any Offered Shares hereunder and if
the aggregate number of such Offered Shares which all Underwriters so defaulting
have agreed to purchase exceeds 10% of the total number of Offered Shares, or if
one or more Underwriters for any reason permitted hereunder should cancel its or
their obligation to purchase and pay for Offered Shares hereunder, the
non-cancelling and non-defaulting Underwriters (hereinafter called the
"remaining Underwriters") will have the right to purchase such Offered Shares in
such proportion as may be agreed among them at the Closing Date determined as
provided in Section 2 hereof. If the remaining Underwriters do not purchase and
pay for such Offered Shares at such Closing Date, the Closing Date will be
postponed for 24 hours and the remaining Underwriters will have the right to
purchase such Offered Shares, or to substitute another person or persons to
purchase the same, or both, at such postponed Closing Date. If purchasers have
not been found for such Offered Shares by such postponed Closing Date, the
Closing Date will be postponed for a further 24 hours, and the Company will have
the right to substitute another person or persons, reasonably satisfactory to
the Representatives to purchase such Offered Shares at such second postponed
Closing Date. If it shall be arranged for the remaining Underwriters or
substituted underwriters to take up the Firm Shares of the defaulting
Underwriter or Underwriters as provided in this Section, (A) the Company shall
have the right to postpone the time of delivery for a period of not more than
three (3) full Business Days, in order to effect whatever changes may thereby be
made necessary in the Registration Statement or the Prospectus or in any other
documents or arrangements, and the Company agrees promptly to file any
amendments to the Registration Statement or supplements to the Prospectus which
may thereby be made necessary. If the Company has not found such purchasers for
such Offered Shares by such second postponed Closing Date, then this Agreement
will automatically terminate, and neither the Company nor the remaining
Underwriters will be under any obligation under this Agreement (except that the
Company and the Underwriters will remain liable to the extent provided in
Sections 7 and 8 hereof and the Company will also remain liable to the extent
provided in Section 5(j) hereof). As used in this Agreement, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section 10(b). Nothing in Section 11 hereof will relieve a defaulting
Underwriter from the liability for its
-31-
<PAGE>
default and nothing in this Section 10(b) will obligate any Underwriter to
purchase or find purchasers for any Offered Shares in excess of those agreed to
be purchased by such Underwriter under the terms of Section 2 hereof.
11. Termination of Agreement.
(a) The Company, by written or telegraphic notice to
the Representatives, or the Representatives, by written or telegraphic notice to
the Company, may terminate this Agreement prior to the earlier of (i) 11:00
A.M., New York City time, on the first full business day after the Effective
Date; or (ii) the time when the Underwriters, after the Registration Statement
becomes effective, release the Offered Shares for public offering. The time when
the Underwriters "release the Offered Shares for public offering" for the
purposes of this Section 11 means the time when the Underwriters release for
publication the first newspaper advertisement, which is subsequently published,
relating to the Offered Shares, or the time when the Underwriters release for
delivery to members of a selling group copies of the Prospectus and an offering
letter or an offering telegram relating to the Offered Shares, whichever will
first occur.
(b) This Agreement, including without limitation, the
obligation to purchase the Shares and the obligation to purchase the Optional
Shares after exercise of the option referred to in Section 3 hereof, is subject
to termination in the absolute discretion of the Underwriters, by notice given
to the Company prior to delivery of and payment for all the Offered Shares or
the Optional Shares, as the case may be, if, prior to such time, any of the
following shall have occurred: (i) the Company withdraws the Registration
Statement from the Commission or the Company does not or cannot expeditiously
proceed with the public offering; (ii) the representations and warranties in
Section 4 hereof are not materially correct or cannot be complied with; (iii)
trading in securities generally on the New York Stock Exchange or the American
Stock Exchange will have been suspended; (iv) limited or minimum prices will
have been established on either such Exchange; (v) a banking moratorium will
have been declared either by federal or New York State authorities; (vi) any
other restrictions on transactions in securities materially affecting the free
market for securities or the payment for such securities, including the Offered
Shares or the Optional Shares, will be established by either of such Exchanges,
by the Commission, by any other federal or state agency, by action of the
Congress or by Executive Order; (vii) trading in any securities of the Company
shall have been suspended or halted by any national securities exchange, the
NASD or the Commission; (viii) there has been a materially adverse change in the
condition (financial or otherwise), prospects or obligations of the Company;
(ix) the Company will have sustained a material loss, whether or not insured, by
reason of fire, flood, accident or other calamity; (x) any action has been taken
by the government of the United States or any department or agency thereof
which, in the judgment
-32-
<PAGE>
of the Representatives, has had a material adverse effect upon the market or
potential market for securities in general; or (xi) the market for securities in
general or political, financial or economic conditions will have so materially
adversely changed that, in the judgment of the Representatives, it will be
impracticable to offer for sale, or to enforce contracts made by the
Underwriters for the resale of, the Offered Shares or the Optional Shares, as
the case may be.
(c) If this Agreement is terminated pursuant to
Section 6 hereof or this Section 11 or if the purchases provided for herein are
not consummated because any condition of the Underwriters' obligations hereunder
is not satisfied or because of any refusal, inability or failure on the part of
the Company to comply with any of the terms or to fulfill any of the conditions
of this Agreement, or if for any reason the Company shall be unable to or does
not perform all of its obligations under this Agreement, the Company will not be
liable to any of the Underwriters for damages on account of loss of anticipated
profits arising out of the transactions covered by this Agreement, but the
Company will remain liable to the extent provided in Sections 5(j), 7, 8 and 9
of this Agreement.
12. Information Furnished by the Underwriters to the Company.
It is hereby acknowledged and agreed by the parties hereto that for the purposes
of this Agreement, including, without limitation, Sections 4(f), 7(a), 7(b) and
8 hereof, the only information given by the Underwriters to the Company for use
in the Prospectus are the statements set forth in the last sentence of the last
paragraph on the cover page, the statement appearing in the last paragraph on
page 2 with respect to stabilizing the market price of Shares, information in
the paragraph on page with respect to concessions and reallowances, the table on
page regarding the offering syndicate, and the information in the ,
, and full paragraphs on page with respect to discretionary accounts, the
determination of the public offering price, stabilizing the market price of the
Shares, and BlueStone, respectively, as such information appears in any
Preliminary Prospectus and in the Prospectus.
13. Notices and Governing Law. All communications hereunder
will be in writing and, except as otherwise provided, will be delivered at, or
mailed by certified mail, return receipt requested, or telecopied to, the
following addresses: if to BlueStone, the Representatives, or the Underwriters,
to BlueStone Capital Partners, L.P., 575 Fifth Avenue, New York, New York 10017,
Facsimile No. (212) 297-5695, with a copy to Tenzer Greenblatt LLP, Attention:
Robert J. Mittman, Esq., 405 Lexington Avenue, New York, New York 10174,
Facsimile No. (212) 885-5001; if to the Company, to Interactive Magic, Inc., 215
Southport Drive, Suite 1000, Morrisville, North Carolina 27560, Attention: J.W.
Stealey, Chairman and Chief Executive Officer, Facsimile No. (919) 462-3081 with
a copy to Smith, Anderson, Blount, Dorsett, Mitchell &
-33-
<PAGE>
Jernigan, L.L.P., Attention: Gerald F. Roach, Esq., 2500 First
Union Capitol Center, Raleigh, North Carolina 27601, Facsimile No.
(919) 821-6800.
This Agreement shall be deemed to have been made and delivered
in New York City and shall be governed as to validity, interpretation,
construction, effect and in all other respects by the internal laws of the State
of New York. The Company (1) agrees that any legal suit, action or proceeding
arising out of or relating to this Agreement shall be instituted exclusively in
New York State Supreme Court, County of New York, or in the United States
District Court for the Southern District of New York, (2) waives any objection
which the Company may have now or hereafter to the venue of any such suit,
action or proceeding, and (3) irrevocably consents to the jurisdiction of the
New York State Supreme Court, County of New York, and the United States District
Court for the Southern District of New York in any such suit, action or
proceeding. The Company further agrees to accept and acknowledge service of any
and all process which may be served in any such suit, action or proceeding in
the New York State Supreme Court, County of New York, or in the United States
District Court for the Southern District of New York and agrees that service of
process upon the Company mailed by certified mail to the Company's address
(Attention: President) shall be deemed in every respect effective service of
process upon the Company in any such suit, action or proceeding.
14. Parties in Interest. This Agreement is made solely for the
benefit of the several Underwriters, the Company and, to the extent expressed,
any person controlling the Company or the Underwriters, each officer, director,
partner, employee and agent of the Underwriters, the directors of the Company,
its officers who have signed the Registration Statement, and their respective
executors, administrators, successors and assigns, and, no other person will
acquire or have any right under or by virtue of this Agreement. The term
"successors and assigns" will not include any purchaser of the Shares from any
of the Underwriters, as such purchaser.
-34-
<PAGE>
If the foregoing is in accordance with your understanding of
our agreement, kindly sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement between the Company and the
Underwriters in accordance with its terms.
Very truly yours,
INTERACTIVE MAGIC, INC.
By:_____________________________
Name: J.W. Stealey
Title: Chairman and Chief
Executive Officer
Confirmed and accepted in New York, N.Y., as of the date first above written:
BLUESTONE CAPITAL PARTNERS, L.P.
By: BlueStone Capital Management, Inc.,
General Partner
By:__________________________________
Kerry J. Dukes
President
FERRIS, BAKER WATTS INCORPORATED
By:__________________________________
Name:
Title:
Acting on behalf of themselves as the Representatives of the several
Underwriters named in Schedule A hereto.
-35-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
SCHEDULE A
TO THE UNDERWRITING AGREEMENT
Underwriter Number of Shares
BlueStone Capital Partners, L.P...........................................
Ferris, Baker Watts, Incorporated..........................................
Total............................................................
</TABLE>
-36-
ARTICLES OF INCORPORATION
OF
I-MAGIC MERGECO, INC.
ARTICLE I
The name of the Corporation is I-MAGIC MERGECO, INC.
ARTICLE II
The period of duration of the Corporation is perpetual.
ARTICLE III
The purpose for which the Corporation is organized is to engage in any
lawful act or activity for which corporations may be organized under Chapter 55
of the General Statutes of North Carolina.
ARTICLE IV
Section 4.1. Authorized Capital. The total number of shares of capital
stock of all classes that the Corporation shall have the authority to issue is
Seventy-Five Million (75,000,000) shares. The authorized capital stock is
divided into Twenty-Five Million (25,000,000) shares of preferred stock, having
$.10 par value (the "Preferred Stock"), and Fifty Million (50,000,000) shares of
common stock, having $.l0 par value (the "Common Stock").
Section 4.2. Preferred Stock.
(a) The shares of Preferred Stock of the Corporation may be issued from
time to time in one or more series, the shares of each series to have such
voting powers, full or limited, or no voting powers, and such designations,
preferences and rights (or qualifications, limitations or restrictions thereof)
as are stated in the resolution or resolutions providing for the issue of such
series adopted by the Board of Directors as provided in Section 4.2(b).
(b) Authority is granted to the Board of Directors of the Corporation,
subject to the provisions of this Article IV and to the limitations prescribed
by the North Carolina Business Corporation Act, to authorize the issuance of one
or more series of Preferred Stock and with respect to each such series to fix by
resolution or resolutions the voting powers, full or limited, if any, of the
shares of such series and the designations, preferences and rights (or
qualifications, limitations or restrictions thereof).
Section 4.3. Common Stock. Thirty Million (30,000,000) of the authorized
shares of the Common Stock are hereby designated Class A Common Stock (Voting)
(the "Class A Common"), and Twenty Million (20,000,000) of the authorized shares
of the Common Stock are
<PAGE>
hereby designated Class B Common Stock (Nonvoting) (the "Class B Common").
Immediately upon the closing of an initial public offering of the Corporation's
securities and a firm commitment underwriting pursuant to a registration
statement on Form S-1 or SB-2 (or any equivalent successor form) under the
Securities Act of 1933, as amended, the Class A Common and the Class B Common
shall combine and become of one and the same class, the Common Stock. Each
reference herein to Class A Common or Class B Common shall be deemed to be a
reference to the Common Stock. Subject to the rights of the Preferred Stock
provided for by resolution or resolutions of the Board of Directors, pursuant to
these Articles of Incorporation or the North Carolina Business Corporation Act
or provided for in these Articles of Incorporation, the holders of shares of the
combined Common Stock shall have one vote per share on all matters on which
holders of shares of Common Stock are entitled to vote. Subject to the rights of
the Preferred Stock, the holders of shares of Common Stock shall receive the net
assets of the Corporation upon dissolution.
(a) Dividends. Subject to the rights of the Preferred Stock, the Class A
Common and the Class B Common shall be entitled, when and if declared by the
Board of Directors of the Corporation, consistent with North Carolina law, to
cash dividends, distributions and redemptions out of funds of the Corporation
legally available for that purpose. Each outstanding share of the Class A Common
and the Class B Common shall be entitled to participate ratably in
distributions, dividends and redemptions paid on the Common Stock.
(b) Voting.
(1) Except as otherwise required by the laws of North Carolina, the
Bylaws of the Corporation or as provided herein, the Class A Common shall
have one vote per share. Holders of the Class B Common shall not be
entitled to vote for the election of Directors or any other purpose and
shall not be entitled to receive notice of any meeting shareholders, unless
otherwise required by North Carolina law.
(2) In addition to any other rights provided by law or as set forth in
these Articles of Incorporation, so long as any Series A Preferred Stock
shall be outstanding, the Corporation shall not, without first obtaining
the affirmative vote or written consent of the holders of not less than a
majority of the then-outstanding shares of Series A Preferred Stock
consenting or voting (as the case may be) separately as a class:
(i) take any action that materially and adversely alters or
changes the rights, preferences or privileges of the Series A
Preferred Stock;
(ii) take any action that increases or decreases the total number
of authorized shares of Series A Preferred Stock; or
(iii) pay or declare any dividend or distribution on any shares
of its capital stock (other than on the Preferred Stock), or apply any
of its assets to the redemption, retirement, purchase or acquisition,
directly or indirectly, through subsidiaries or otherwise, of any
shares of its capital stock, except for repurchases of shares from
former employees upon
2
<PAGE>
termination of employment pursuant to the terms of such former
employees' stock purchase agreements providing for such repurchases at
the original issuance prices for such shares.
(c) Liquidation Preference.
(1) Except as otherwise provided herein, in the event of any
liquidation, dissolution or winding up of the Corporation, either voluntary
or involuntary (collectively, a "Liquidating Event"), the holders of each
series of Preferred Stock shall be entitled to receive, prior and in
preference to any distribution of any of the assets of the Corporation to
the holders of the Class A Common and Class B Common by reason of their
ownership thereof, an amount equal to the consideration paid per share of
the Preferred Stock (the "Liquidation Preference") plus an amount equal to
accrued and unpaid dividends on such shares, if any. The Liquidation
Preference of the Series A Preferred Stock shall be [$6.10] per share (as
adjusted for stock splits, combinations or similar events). Written notice
of any such liquidation, dissolution or winding up, stating a payment date,
the place where such payment shall be made, the amount of each payment in
liquidation and the amount of accrued dividends to be paid shall be given
by first class mail, postage prepaid, not less than 30 days prior to the
payment date stated therein, to each holder of record of the Preferred
Stock at such holder's address as shown in the records of the Corporation.
If upon the occurrence of such event, the assets and funds to be thus
distributed among the holders of the Preferred shall be insufficient to
permit the payment to such holders of the full aforesaid preferential
amount, then the total assets and funds distributed to each series of
Preferred Stock shall be in the proportions which the product of (a) the
number of outstanding shares of such series and (b) the Liquidation
Preference of such series bears to the sum of such products for all such
series.
(2) Any assets of the Corporation remaining after the payments
specified in paragraph (1) above shall be distributed pro rata with respect
to the outstanding shares of Common Stock.
(3) For the purposes of this Section 4.3(c), any merger or
consolidation of the Corporation into or with any other corporation or
entity, or a sale, conveyance, mortgage, transfer, license, pledge, lease
or other disposition of all or substantially all of the assets of the
Corporation, shall be deemed to be a liquidation, dissolution, or winding
up of the Corporation, unless the shareholders of the Corporation
immediately prior thereto shall, immediately thereafter, hold as a group
the right to cast at least a majority of the votes of all holders of voting
securities of the resulting or surviving corporation or entity on any
matter on which any such holders of voting securities shall be entitled to
vote.
(4) For purposes of this Section 4.3(c), if any assets distributed to
shareholders upon liquidation of the Corporation consist of property other
than cash, the amount of such distribution shall be deemed to be the fair
market value thereof at the time of such distribution, as determined in
good faith by the Board of Directors of the Corporation.
Section 4.4. Designation of Series A, Series B and Series C Preferred
Stock.
3
<PAGE>
(a) Series A Preferred Stock. [Eighty Two Thousand Six Hundred Thirty-Four
(82,634)] of the authorized shares of Preferred Stock are hereby designated
Series A Convertible Preferred Stock (the "Series A Preferred Stock").
(1) Voting Rights. Holders of Series A Preferred Stock shall have the
number of votes equal to the number of shares of Common into which their
Series A Preferred Stock is convertible, as adjusted pursuant to Section
4.4(a)(3) hereof.
(2) Cumulative Dividends. Holders of Series A Preferred Stock shall be
entitled, when and if declared by the Board of Directors of the
Corporation, consistent with North Carolina law, to cumulative cash
dividends out of funds of the Corporation legally available for that
purpose, at an annual rate of eight percent (8%), before any dividend shall
be declared, set apart for, or paid on any share of the Common Stock or any
other series of the Preferred Stock. Each outstanding share of Series A
Preferred Stock shall be entitled to participate ratably in dividends paid
on the Series A Preferred Stock.
Such dividends shall accrue on each outstanding share of Series A
Preferred Stock whether or not earned or declared; so that, if, such
dividends with respect to any previous dividend period at the rate provided
for herein have not been paid on all shares of the Series A Preferred Stock
then outstanding, the deficiency shall be fully paid, or provision for the
full payment thereof shall have been made, before any dividend or other
distribution shall be paid on or declared on any shares of the Common Stock
or any other series of the Preferred Stock.
(3) Conversion. The holders of Series A Preferred Stock shall have
conversion rights as follows:
(a) Right to Convert. Each share of Series A Preferred Stock
shall be convertible, at the option of the holder thereof, at any time
and from time to time, and without the payment of additional
consideration by the holder thereof, into such number of fully paid
and nonassessable shares of Class A Common as is determined by
dividing $[6.10] by the Conversion Price (as defined below) in effect
at the time of conversion. The "Conversion Price" for Series A
Preferred Stock shall initially be $[6.10]. Such initial Conversion
Price, and the rate at which shares of Series A Preferred Stock may be
converted into shares of Class A Common, shall be subject to
adjustment as provided below.
(b) Mechanics of Conversion. Before any holder of Series A
Preferred Stock shall be entitled to convert the same into full shares
of Class A Common, the holder shall surrender the certificate or
certificates therefor, duly endorsed for transfer, at the office of
the Corporation or any transfer agent of the Corporation and shall
give written notice to the Corporation at such office that he elects
to convert the same, such notice to state the name or names and
addresses to which certificates for Class A Common will be issued. No
fractional shares of Class A Common shall be issued upon conversion of
Series A Preferred Stock. In lieu of any fractional shares to which
the holder would otherwise be entitled, the Corporation shall pay cash
equal to such fraction multiplied by the then effective Conversion
Price. The
4
<PAGE>
Corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of Series A Preferred Stock, or
to a third party such holder may designate in writing, a certificate
or certificates for the number of shares of Class A Common to which he
shall be entitled as aforesaid and, a check payable to the holder in
the amount of any cash amounts payable as the result of conversion
into fractional shares of Class A Common plus unpaid dividends, and if
less than all the shares of the Series A Preferred Stock represented
by such certificates are converted, a certificate representing the
shares of Series A Preferred Stock not converted. Such conversion
shall be deemed to have been made immediately prior to the close of
business on the date of such surrender of the shares of Series A
Preferred Stock to be converted, and the person or persons entitled to
receive the shares of Class A Common issuable upon such conversion
shall be treated for all purposes as the record holder or holders of
such shares of Class A Common on such date. If the conversion is in
connection with an underwritten offering of securities registered
pursuant to the Securities Act of 1933, as amended, the conversion
may, at the option of any holder surrendering Series A Preferred Stock
for conversion, be conditioned upon the closing with the underwriter
of the sale of securities pursuant to such offering, in which event
the person(s) entitled to receive the Class A Common or other property
issuable upon such conversion of the Series A Preferred Stock shall
not be deemed to have converted such Series A Preferred Stock until
immediately prior to the closing of such sale of securities. Notice of
such conversion in connection with an underwritten offering of
securities shall be given by the Corporation by mail, postage
pre-paid, to the holders of the Series A Preferred Stock at their
addresses shown on the Corporation's records, at least ten (10) days
prior to the closing date of the sale of such securities. On or after
the closing date as specified in such notice, each holder of Series A
Preferred Stock shall surrender his certificate or certificates
representing such Series A Preferred Stock for the number of shares of
Class A Common to which he is entitled at the office of the
Corporation or any transfer agent for the Class A Common. The
Corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of Series A Preferred Stock, a
certificate or certificates for the number of shares of Class A Common
to which he shall be entitled as aforesaid, and a check payable to the
holder in the amount of any cash amounts payable as the result of a
conversion into fractional shares of Class A Common and any declared
but unpaid dividends. The conversion shall be deemed to have occurred
as of the close of business on the actual closing date with respect to
the sale of such securities, and, notwithstanding that any certificate
representing the Series A Preferred Stock to be converted shall not
have been surrendered, each holder of such Series A Preferred Stock
shall thereafter be treated for all purposes as the record holder of
the number of shares of Class A Common issuable to such holder upon
such conversion.
(c) Adjustment of Conversion Price Upon Issuance of Additional
Shares of Class A Common.
(i) The Corporation has issued options to acquire [607,500]
shares of Class A Common and Class B Common of the Corporation
(the "Performance Options"). In the event the Corporation shall
issue additional shares of Class A Common upon the exercise of
any Performance Option on or after the date hereof, then and in
such event, the Conversion Price in effect on the date of, and
immediately prior to, such issue shall be reduced, concurrently
with such issue, to a price (calculated to the nearest cent)
determined by multiplying
5
<PAGE>
such Conversion Price by a fraction, the numerator of which shall
be the number of shares of Class A Common outstanding immediately
prior to such issue and the denominator of which shall be the
number of shares of Class A Common outstanding immediately prior
to such issue plus the number of such additional shares of Class
A Common so issued. For the purpose of the above calculation, the
number of shares of Class A Common outstanding immediately prior
to such issue shall be calculated on a fully diluted basis, as if
all shares of Preferred Stock and all convertible securities had
been fully converted into share of Class A Common immediately
prior to such issuance and any outstanding warrants, options or
other rights for the purchase of shares of stock or convertible
securities had been fully exercised immediately prior to such
issuance (and the resulting securities fully converted into
shares of Class A Common, if so convertible) as of such date, but
not including in such calculation any (i) additional shares of
Class A Common issuable with respect to shares of Preferred
Stock, convertible securities, or outstanding options, warrants
or other rights for the purchase of shares of stock or
convertible securities, solely as a result of the adjustment of
the respective Conversion Prices (or other conversion ratios)
resulting from the issuance of additional shares of Class A
Common causing such adjustment or (ii) Incentive Stock Options
that have become exercisable solely as a result of the passage of
time (and not as a result of a change in control).
(ii) Adjustments for Subdivisions, Class A Common Stock
Dividends, Combinations or Consolidations of Class A Common. In
the event the outstanding shares of Class A Common shall be
subdivided or increased, by stock split or stock dividend, into a
greater number of shares of Class A Common, the Conversion Price
then in effect shall concurrently with the effectiveness of such
subdivision or payment of such stock dividend, be proportionately
decreased. In the event the outstanding shares of Class A Common
shall be combined or consolidated, by reclassification or
otherwise, into a lesser number of shares of Class A Common, the
Conversion Price then in effect shall, concurrently with the
effectiveness of such combination or consolidation, be
proportionately increased.
(iii) Adjustments for Reclassification, Exchange and
Substitution. If the Class A Common issuable upon conversion of
the Series A Preferred Stock shall be changed into the same or a
different number of shares of any other class or classes of
stock, whether by capital reorganization, reclassification or
otherwise (other than a subdivision or combination of shares
provided for above), the Conversion Price then in effect shall,
concurrently with the effectiveness of such reorganization or
reclassification, be proportionately adjusted such that the
Series A Preferred Stock shall be convertible into, in lieu of
the number of shares of Class A Common which the holders would
otherwise have been entitled to receive, a number of shares of
such other class or classes of stock equivalent to the number of
shares of Class A Common that would have been subject to receipt
by the holders upon conversion of the Series A Preferred Stock
immediately before that change.
(iv) Adjustments for Merger, Sale, Lease or Conveyance. In
case of any consolidation with or merger of the Corporation with
or into another corporation, or in case of any sale, lease or
conveyance to another corporation of the assets of the
Corporation as an entirety or substantially as an entirety, the
Series A Preferred Stock shall after the date of such
consolidation, merger, sale, lease or conveyance be convertible
into the number of shares of
6
<PAGE>
stock or other securities or property (including cash) to which
the Class A Common issuable (at the time of such consolidation,
merger, sale, lease or conveyance) upon conversion of the Series
A Preferred Stock would have been entitled upon such
consolidation, merger, sale, lease or conveyance; and in any such
case, if necessary, the provisions set forth herein with respect
to the rights and interests thereafter of the holders of the
Series A Preferred Stock shall be appropriately adjusted so as to
be applicable, as nearly as may reasonably be, to any shares of
stock or other securities or property thereafter deliverable on
the conversion of the shares of Series A Preferred Stock.
(d) Mandatory Conversion. Each share of Series A Preferred Stock
shall automatically be converted into such number of fully paid and
nonassessable shares of Class A Common as is determined by dividing
$[6.10] by the Conversion Price (as defined and adjusted above) in
effect at the time of conversion upon the occurrence of the closing of
an underwritten public offering pursuant to an effective registration
statement under the Securities Act of 1933, as amended, covering the
offer and sale of Class A Common of the Corporation to the public with
an aggregate gross offering price of not less than $10,000,000 and a
per share offering price of not less than $6.10. All holders of record
of shares of Series A Preferred Stock will be given at least twenty
(20) days' prior written notice of the date fixed and place designated
for mandatory conversion of the Series A Preferred Stock and the event
which resulted in the mandatory conversion of the Series A Preferred
Stock into Class A Common. Such notice shall be sent by first class
mail, postage prepaid, to each holder of record of the Series A
Preferred Stock at such holder's address shown in the records of the
Corporation. On or before the date so fixed for conversion, each
holder of shares of the Series A Preferred Stock shall surrender his
or its certificate or certificates for all such shares to the
Corporation at the place designated in such notice and shall
thereafter receive certificates for the number of shares of Class A
Common to which such holder is entitled. The mechanics for conversion
and other provisions relating to conversion of Series A Preferred
Stock into Class A Common set forth elsewhere in these Articles of
Incorporation shall apply to the mandatory conversion of the Series A
Preferred Stock.
(e) Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of the Conversion Price pursuant to this
Section 4.4(a)(3), the Corporation at its expense shall promptly
compute such adjustment or readjustment in accordance with the terms
hereof and furnish to each holder of Series A Preferred Stock a
certificate setting forth such adjustment or readjustment in
accordance with the terms hereof 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 to such holder a
like certificate setting forth (i) such adjustments and readjustments,
(ii) the Conversion Price at the time in effect, and (iii) the number
of shares of Class A Common and the amount, if any, of other property
which at the time would be received upon the conversion of Series A
Preferred Stock.
(f) Notices of Record Date. In the event that this Corporation
shall propose at any time:
7
<PAGE>
(i) to declare any dividend or distribution (other than by
purchase of Class A Common of employees, officers and directors
pursuant to the termination of such persons or pursuant to the
Corporation's exercise of rights of first refusal with respect to
Class A Common held by such persons) upon its Class A Common,
whether in cash, property, stock or other securities, whether or
not a regular cash dividend and whether or not out of earnings or
earned surplus;
(ii) to offer for subscription pro rata to the holders of
any class or series of its stock any additional shares of stock
of any class or series or other rights;
(iii) to effect any reclassification or recapitalization of
its Class A Common shares outstanding involving a change in the
Class A Common; or
(iv) to merge or consolidate with or into any other
corporation, or sell, lease or convey all or substantially all
its property or business, or to liquidate, dissolve or wind up;
then, in connection with each such event, the Corporation shall send
to the holders of the Series A Preferred Stock:
(1) at least twenty (20) days' prior written notice of
the date on which a record shall be taken for such dividend,
distribution or subscription rights (and specifying the date
on which the holders of Class A Common shares shall be
entitled thereto) or for determining rights to vote in
respect of the matters referred to in (i) and (ii) above;
and
(2) in the case of the matters referred to in (iii) and
(iv) above, at least twenty (20) days' prior written notice
of the date when the same shall take place (and specifying
the date on which the holders of Class A Common shares shall
be entitled to exchange their Class A Common shares for
securities or other property deliverable upon the occurrence
of such event).
Each such written notice shall be given by first class mail,
postage prepaid, addressed to the holders of Series A Preferred Stock
at the address for each such holder as shown on the books of this
Corporation.
(g) No Impairment. The Corporation will not, by amendment of its
Articles of Incorporation or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action (other than actions taken in
good faith), avoid the observance or performance of any of the terms
to be observed or performed hereunder by the Corporation but will at
all times in good faith assist in carrying out all the provisions of
this Section 4.4(a) and in taking all such action as may be necessary
or appropriate in order to protect the conversion rights of the
holders of the Series A Preferred Stock against impairment.
8
<PAGE>
(h) Reservation of Class A Common Stock. The Corporation shall,
at all times when the Series A Preferred Stock shall be outstanding,
reserve and keep available out of its authorized but unissued stock,
for the purpose of effecting the conversion of the Series A Preferred
Stock, such number of its duly authorized shares of Class A Common as
shall from time to time be sufficient to effect the conversion of all
outstanding Series A Preferred Stock. Before taking any action which
could cause an adjustment reducing the conversion price below the then
par value of the shares of Class A Common issuable upon conversion of
the Series A Preferred Stock or which would cause the effective
purchase price for the Series A Preferred Stock to be less than the
par value of the shares of Series A Preferred Stock, the Corporation
will take any corporate action which may, in the opinion of its
counsel, be necessary in order that the Corporation may validly and
legally issue fully paid and nonassessable shares of such Class A
Common at such adjusted Conversion Price or effective purchase price,
as the case may be.
(i) No Adjustment. Upon any voluntary conversion of the Series A
Preferred Stock, no adjustment to the conversion rights shall be made
for declared but unpaid dividends on the Series A Preferred Stock
surrendered for conversion or on the Class A Common delivered.
(j) Cancellation of Series A Preferred Stock. All shares of the
Series A Preferred Stock which shall have been surrendered for
conversion as herein provided shall no longer be deemed to be
outstanding and all rights with respect to such shares, including the
rights, if any, to receive notices and to vote, shall forthwith cease
and terminate except only the right of the holders thereof to receive
shares of Class A Common in exchange therefor and to receive payment
of any declared but unpaid dividends thereon. Any shares of the Series
A Preferred Stock so converted shall be retired and cancelled and
shall not be reissued, and the Corporation may from time to time take
such appropriate action as may be necessary to reduce the authorized
Series A Preferred Stock accordingly.
(4) Preemptive Rights. Holders of Series A Preferred Stock shall not
be entitled on account of holding such shares to preemptive rights or other
rights to acquire or subscribe for additional shares or securities of the
Corporation authorized to be issued.
(b) Series B Preferred Stock. [Seven Hundred Seventy-Six Thousand Four
Hundred Fifty Seven (776,457)] shares of the authorized shares of Preferred
Stock of the Corporation are hereby designated Series B Convertible Preferred
Stock (the "Series B Preferred Stock").
(1) Dividend Provisions.
(a) Subject to the rights of any series of Preferred Stock of the
Corporation the terms of which specifically provide that such series
ranks senior to the Series B Preferred Stock and the Series C
Preferred Stock, or the terms of which specifically provide that such
series ranks pari passu with the Series B Preferred Stock and the
Series C Preferred Stock, the holders of shares of the Series B
Preferred Stock and the Series C Preferred Stock shall be entitled to
receive dividends, out of any assets legally available therefor, prior
and in preference to any declaration or payment of any dividend
(payable other than in Class A Common or Class
9
<PAGE>
B Common of the Corporation or other securities and rights convertible
into or entitling the holder thereof to receive, directly or
indirectly, additional shares of Common Stock) on the Common Stock,
when, as and if declared by the Board of Directors. No dividends shall
be payable upon any Junior Securities (as defined below) of the
Corporation unless equivalent dividends, on an as-converted basis, are
declared and paid concurrently on the Series B Preferred Stock and the
Series C Preferred Stock. For purposes of this Section 4.4(b)(1) only,
the Series A Preferred Stock ranks senior to the Series B Preferred
Stock and the Series C Preferred Stock with respect to dividends.
(b) A "Junior Security" shall include (i) the Common Stock and
(ii) any series of Preferred Stock the terms of which provide that
such series ranks junior and subordinate to the Series B Preferred
Stock and the Series C Preferred Stock with respect to dividends and
as to the distribution of assets upon any Liquidation (as defined
below) or deemed liquidation. For purposes of this Section 4.4(b)(1),
the Series B Preferred Stock shall be treated as pari passu with the
Series C Preferred Stock.
(2) Liquidation Preference.
(a) In the event of any liquidation, dissolution or winding-up of
the Corporation, either voluntary or involuntary (a "Liquidation"),
the holders of shares of Series B Preferred Stock shall be entitled to
receive, in pari passu with the holders of the Series A Preferred
Stock and the Series C Preferred Stock, and prior and in preference to
any distribution of any of the assets of the Corporation to the
holders of any Junior Securities (as defined above) by reason of their
ownership thereof, an amount per share equal to $[4.52] (as adjusted
for stock splits, combinations or similar events) for each outstanding
share of Series B Preferred Stock plus any accrued or declared but
unpaid dividends (the "Series B Liquidation Preference"). If, upon the
occurrence of such an event, the assets and funds thus distributed
among the holders of the Series A Preferred Stock, the Series B
Preferred Stock and the Series C Preferred Stock shall be insufficient
to permit the payment to such holders of the full aforesaid
preferential amounts, then the entire assets and funds of the
Corporation legally available for distribution shall be distributed
ratably among the holders of the Series A Preferred Stock, the Series
B Preferred Stock and the Series C Preferred Stock in proportion to
the preferential amount each such holder is otherwise entitled to
receive.
(b) Upon the completion of the distributions required by
subsection (a) of this Section 4.4(b)(2) and any other distribution
that may be required with respect to series of Preferred Stock that
may from time to time come into existence, the remaining assets of the
Corporation available for distribution to shareholders shall be
distributed among the holders of the Common Stock pro rata based on
the number of shares of Common Stock held by each such holder.
(c) For purposes of this Section 4.4(b)(2), a Liquidation shall
be deemed to be occasioned by, or to include (i) the acquisition of
the Corporation by another entity or person by means of any
transaction or series of related transactions (including, without
10
<PAGE>
limitation, any reorganization, merger or consolidation, but excluding
any merger effected exclusively for the purpose of changing the
domicile of the Corporation) or (ii) a sale of all or substantially
all of the assets of the Corporation; unless the Corporation's
shareholders of record as constituted immediately prior to such
acquisition or sale will, immediately after such acquisition or sale
(by virtue of securities issued as consideration for the Corporation's
acquisition or sale or otherwise) hold at least 51% of the voting
power of the surviving or acquiring entity. Nothing contained in this
Section 4.4(b)(2)(c) shall in any way restrict or prohibit the holders
of Series B Preferred Stock from exercising their conversion rights
pursuant to Section 4.4(b)(4) hereof prior to the effective date of
the Liquidation to be effected hereunder.
(3) Redemption. The shares of Series B Preferred Stock shall not be
redeemable.
(4) Conversion. The holders of the Series B Preferred Stock shall have
conversion rights as follows (the "Conversion Rights"):
(a) Automatic Conversion. (i) Each share of Series B Preferred
Stock shall automatically be converted into fully paid and
nonassessable shares of Class A Common at the then effective
Conversion Rate for such series (determined in accordance with Section
4.4(a)(4)(d) below) immediately upon the closing of a Sale Event
(defined below) in which the Company Valuation (defined below) equals
or exceeds $27,000,000. (ii) Each share of Series B Preferred Stock
shall automatically be so converted at the then effective Conversion
Rate on the date specified by written consent or agreement of the
holders of two-thirds of the then outstanding shares of such series of
Series B Preferred Stock.
(b) A "Sale Event" shall include (i) an initial public offering
of the Corporation's securities in a firm commitment underwriting
pursuant to a registration statement on Form S-1 or SB-2 (or any
equivalent successor form) under the Securities Act of 1933, as
amended (an "IPO"), (ii) the consummation by the Corporation of a
merger or consolidation or other acquisition transaction in which more
than fifty percent (50%) of the voting power of the Corporation is
transferred (excluding any merger effected exclusively for the purpose
of changing the domicile of the Corporation) (a "Change in Control")
or (iii) a sale or other disposition of all or substantially all of
the assets of the Corporation (a "Sale").
(c) Right to Convert. Each share of Series B Preferred Stock
shall be convertible, at the option of the holder thereof at any time
after the date of issuance of such share at the office of the
Corporation or any transfer agent for such stock. Each share of Series
B Preferred Stock shall be convertible on a pro rata basis into the
number of fully paid and nonassessable shares of Class A Common
determined at the then effective Conversion Rate.
(d) Determination of Conversion Rate. The number of shares of
Class A Common into which the Series B Preferred Stock is convertible
is hereinafter collectively referred to as the "Conversion Rate" for
such series. The Conversion Rate for the Series B Preferred Stock
shall be determined by multiplying a fraction, the numerator of which
is the
11
<PAGE>
Applicable Percentage (determined in accordance with this Section
4.4(b)(4)(d)) and the denominator of which is the difference between
1.0 and the Applicable Percentage, by the Total Number of Shares
Outstanding (as defined in Section 4.4(b)(4)(d)(iv)) on the date of
determination. The Applicable Percentage shall be determined as
follows:
(i) if the Company Valuation (defined below) is less than
$42,500,000, the Applicable Percentage shall be 0.11475;
(ii) if the Company Valuation is greater than or equal to
$42,500,000, the Applicable Percentage shall be a fraction, the
numerator of which is the sum of (A) 0.11475 multiplied by the
Company Valuation and (B) the product of 0.3 multiplied by the
difference between the Company Valuation and $42,500,000, and the
denominator of which is the Company Valuation; provided, that in
no event shall the Applicable Percentage be greater than 0.29.
(iii) The Company Valuation shall be determined as follows:
(A) in the case of an IPO, the aggregate valuation of
the Corporation taken as a whole assigned to the Corporation
by the managing underwriter on the effective date of the
registration statement relating to such IPO;
(B) in the case of any Change in Control that results
in the transfer of one hundred percent (100%) of the capital
stock of the Corporation to an unaffiliated entity, by the
aggregate cash and non-cash consideration received or to be
received by the Corporation or its securityholders (in their
capacity as securityholders and not as employees) as
consideration for their shares transferred in connection
with the transaction;
(C) in the case of any Change in Control in which more
than fifty percent (50%) but less than one hundred percent
(100%) of the voting power of the Corporation is
transferred, by multiplying the Total Number of Shares
Outstanding by a fraction, the numerator of which is the
aggregate cash and non-cash consideration received or to be
received by the Corporation or its securityholders (in their
capacity as securityholders and not as employees) as
consideration for the shares transferred in connection with
the transaction and the denominator of which is the number
of shares of Common Stock transferred in connection with the
Change in Control;
(D) in the case of any Sale, by the aggregate cash and
non-cash consideration received or to be received by the
Corporation or its securityholders (in their capacity as
securityholders and not as employees) in connection with the
transaction plus the assumption of all liabilities; or
(E) In all other cases,
(x) if the Class A Common Stock is listed on a national
securities exchange or admitted to unlisted trading
privileges on such exchange or listed
12
<PAGE>
for trading on the Nasdaq National Market, by multiplying
the last reported sale price of the Class A Common on such
exchange or market on the last business day prior to the
date of determination, or if no such sale is made on such
day, the average closing bid and asked prices for such day
on such exchange or market by the Total Number of Shares
Outstanding on such date;
(y) if the Class A Common Stock is not so listed or
admitted to unlisted trading privileges, but is traded on
the Nasdaq SmallCap Market, by multiplying the average of
the closing bid and asked prices for such day on such
market, or if the Class A Common Stock is not so traded, the
mean of the last reported bid and asked prices reported by
the National Quotation Bureau, Inc. on the last business day
prior to the date of determination by the Total Number of
Shares Outstanding on such date; or
(z) if the Class A Common Stock is not so listed or
admitted to unlisted trading privileges and bid and asked
prices are not so reported, the Company Valuation shall be
an amount, not less than book value of the Corporation at
the end of the most recent fiscal year of the Corporation
ending prior to the date of determination, determined in
good faith and in such reasonable manner as may be
prescribed by the Board of Directors of the Corporation.
(iv) On any date of determination, the "Total Number of
Shares Outstanding" shall equal (A) the aggregate number of
shares of Common Stock outstanding on such date, plus (B) the
aggregate maximum number of shares of Common Stock (the
"Underlying Shares") issuable upon exercise, conversion or
exchange (assuming the satisfaction of any conditions thereto
including, without limitation, the passage of time) of securities
of the Company ("Convertible Securities") outstanding on such
date that are exercisable for, convertible into or exchangeable
for, shares of Common Stock, minus (C) Convertible Securities
exercisable for, convertible into or exchangeable for [450,000]
of the Underlying Shares (subject to adjustment for stock splits,
combinations or similar events), or such lesser amount if there
are outstanding on such date of determination Convertible
Securities exercisable for, convertible into or exchangeable for
less than [450,000] shares of Common Stock. Notwithstanding
anything to the contrary herein, the Total Number of Shares
Outstanding shall not include any portion of any Convertible
Securities to the extent that such Convertible Securities, by
their explicit terms, can no longer be exercised due to their
expiration or the irrevocable failure of any precondition to
their exercisability, including the failure to achieve
performance goals required for exercisability.
(v) Notwithstanding Section 4.4(b)(4)(d)(iv), in the event
that, prior to any Sale Event, the Corporation shall issue shares
of Common Stock as consideration for any strategic acquisition by
the Corporation of another entity (the "Acquisition Shares"), and
the per share value of the Acquisition Shares multiplied by the
Total Number of Shares Outstanding immediately prior to such
acquisition (such number hereinafter referred to as the
"Acquisition Valuation") exceeds $35,000,000, the Total Number of
Shares Outstanding on the Sale Event shall be reduced by the
number of shares equal to the number of Acquisition Shares
multiplied by a fraction, the numerator of which is the
difference between the Acquisition Valuation and $35,000,000 and
the denominator of which is the Acquisition Valuation.
13
<PAGE>
(vi) If in connection with any Sale Event that is not an
IPO, any provisions are made with respect to any Convertible
Securities such that such Convertible Securities become entitled
to any cash or non-cash consideration in connection with such
Sale Event and, as a result of such provisions, the aggregate
number of shares of Common Stock and Convertible Securities
entitled to receive compensation in connection with such Sale
Event exceeds the Total Number of Shares Outstanding, then for
purposes of this Section 4.4(b)(4), the Total Number of Shares
Outstanding shall be increased by such additional number of
shares and/or Convertible Securities.
(d) Mechanics of Conversion. Before any holder of Series B
Preferred Stock shall be entitled to convert the same into shares of
Class A Common Stock, such holder shall surrender the certificate or
certificates therefor, duly endorsed, at the office of the Corporation
or of any transfer agent for the Series B Preferred Stock, and shall
give written notice to the Corporation at its principal corporate
office, of the election to convert the same and shall state therein
the name or names in which the certificate or certificates for shares
of Class A Common Stock are to be issued. The Corporation shall, as
soon as practicable thereafter, issue and deliver to such holder of
Series B Preferred Stock, or to the nominee or nominees of such
holder, a certificate or certificates for the number of shares of
Class A Common Stock to which such holder shall be entitled as
aforesaid. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of such
surrender of the shares of Series B Preferred Stock to be converted,
and the person or persons entitled to receive the shares of' Class A
Common Stock issuable upon such conversion shall be treated for all
purposes as the record holder or holders of such shares of Class A
Common Stock as of such date. If the conversion is in connection with
an underwritten offering of securities registered pursuant to the
Securities Act of 1933, as amended, the conversion may, at the option
of any holder tendering Series B Preferred Stock for conversion, be
conditioned upon the closing with the underwriters of the sale of
securities pursuant to such offering, in which event the person(s)
entitled to receive the Class A Common Stock upon conversion of the
Series B Preferred Stock shall not be deemed to have converted such
Series B Preferred Stock until immediately prior to the closing of
such sale of securities.
(e) Other Distributions. In the event the Corporation shall
declare a distribution payable in securities of other persons,
evidences of indebtedness issued by the Corporation or other persons,
assets (excluding cash dividends) or options or rights, then, in each
such case, the holders of the Series B Preferred Stock shall be
entitled to a proportionate share of any such distribution as though
they were the holders of the number of shares of Class A Common Stock
of the Corporation into which their shares of Series B Preferred Stock
are convertible as of the record date fixed for the determination of
the holders of Common Stock of the Corporation entitled to receive
such distribution.
(f) Recapitalizations. If at any time or from time to time there
shall be a recapitalization of the Common Stock (other than a merger
or sale of assets transaction provided for in Section 4.4(b)(2))
provision shall be made so that the holders of the Series B Preferred
14
<PAGE>
Stock shall thereafter be entitled to receive upon conversion of the
Series B Preferred Stock the number of shares of stock or other
securities or property of the Corporation or otherwise, to which a
holder of Class A Common Stock deliverable upon conversion would have
been entitled on such recapitalization. In any such case, appropriate
adjustment shall be made in the application of the provisions of this
Section 4.4(b)(2) with respect to the rights of the holders of the
Series B Preferred Stock after the recapitalization to the end that
the provisions of this Section 4.4(b) (including adjustment of the
number of shares issuable upon conversion of the Series B Preferred
Stock) shall be applicable after that event as nearly equivalent as
may be practicable.
(g) No Impairment. The Corporation will not, by amendment of its
Articles of Incorporation or through any reorganization,
recapitalization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary
action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Corporation,
but will at all times in good faith assist in the carrying out of all
the provisions of this Section 4.4(b)(4) and in the taking of all such
action as may be necessary or appropriate in order to protect the
conversion rights of the holders of the Series B Preferred Stock
against impairment.
(h) No Fractional Shares. No fractional shares shall be issued
upon the conversion of any share or shares of the Series B Preferred
Stock, and the number of shares of Class A Common Stock to be issued
shall be rounded to the nearest whole share. Whether or not fractional
shares are issuable upon such conversion shall be determined on the
basis of the total number of shares of Series B Preferred Stock the
holder is at the time converting into Class A Common Stock and the
number of shares of Class A Common Stock issuable upon such aggregate
conversion.
(i) Notices of Record Date. In the event of any taking by the
Corporation of a record of the holders of any class of securities for
the purpose of determining the holders thereof who are entitled to
receive any dividend (other than a cash dividend) or other
distribution, any right to subscribe for, purchase or otherwise
acquire any shares of stock of any class or any other securities or
property, or to receive any other right, the Corporation shall mail to
each holder of Series B Preferred Stock, at least twenty (20) days
prior to the date specified therein, a notice specifying the date on
which any such record is to be taken for the purpose of such dividend,
distribution or right, and the amount and character of such dividend,
distribution or right.
(j) Reservation of Stock Issuable Upon Conversion. The
Corporation shall at all times reserve and keep available out of its
authorized but unissued shares of Class A Common Stock, solely for the
purpose of effecting the conversion of the shares of the Series B
Preferred Stock, such number of its shares of Class A Common Stock as
shall from time to time be sufficient to effect the conversion of all
outstanding shares of the Series B Preferred Stock; and if at any time
the number of authorized but unissued shares of Class A Common Stock
shall not be sufficient to effect the conversion of all then
outstanding shares of the Series B Preferred Stock, in addition to
such other remedies as shall be available to the holder of such
Preferred Stock, the Corporation will take such corporate action as
may, in the opinion of its counsel, be
15
<PAGE>
necessary to increase its authorized but unissued shares of Class A
Common Stock to such number of shares as shall be sufficient for such
purposes, including, without limitation, engaging in best efforts to
obtain the requisite shareholder approval of any necessary amendment
to these provisions.
(k) Notices. Any notice required by the provisions of this
Section 4.4(b)(4)to be given to the holders of shares of Series B
Preferred Stock shall be deemed given upon personal delivery or upon
delivery by registered or certified mail, postage prepaid, return
receipt requested and addressed to each holder of record at his
address appearing on the books of the Corporation, or at such other
address as such party may designate by ten (10) days' advance written
notice to the Corporation.
(5) Voting Rights. Except as may otherwise be provided in these
Articles of Incorporation or by law or by contract, the Series B Preferred
Stock shall be entitled to vote, as a single class with the holders of
Class A Common Stock and the holders of any other classes or series of
stock of the Corporation so entitled to vote, on all matters as to which
the holders of Class A Common Stock shall be entitled to vote. Each share
of Series B Preferred Stock shall have that number of votes equal to the
number of shares of Class A Common Stock into which it is then convertible,
the holders of Series B Preferred Stock shall be entitled to notice of any
shareholders' meeting in accordance with the bylaws of the Corporation.
(6) Status of Converted Stock. In the event any shares of Series B
Preferred Stock shall be converted pursuant to Section 4.4(b)(4) hereof,
the shares so converted shall be cancelled by the Corporation. Any shares
so cancelled shall revert to the status of authorized but unissued
Preferred Stock without designation. The Articles of Incorporation of the
Corporation may be appropriately amended from time to time to effect the
corresponding reduction, if any, in the Corporation's authorized capital
stock.
(7) Right to Elect Director. The holders of Series B Preferred Stock,
voting as a separate class, shall have the night to elect one individual to
the Corporation's Board of Directors (the "Series B Director"). In the
event of the resignation or removal of a Series B Director, a special
meeting shall be convened at which elections shall be held for the election
of a substitute Series B Director, provided that the holders of Series B
Preferred Stock may act by written consent in lieu of such meeting.
(8) Covenants. So long as any shares of Series B Preferred Stock are
outstanding, the Corporation shall not without first obtaining the written
consent of the holders of at least two-thirds of the then outstanding
shares of Series B Preferred Stock:
(a) except in the case of a Sale Event in which the Company
Valuation is greater than or equal to $50,000,000, (i) sell, convey,
or otherwise dispose of all or substantially all of its property or
business or (ii) merge into or consolidate with any other corporation
(other than a wholly-owned subsidiary corporation or for the exclusive
purpose of changing the domicile of the Corporation) or effect any
transaction or series of related transactions if, in the case of this
subsection (ii), the Corporation's shareholders of record
16
<PAGE>
immediately prior to such transaction or series of related
transactions do not immediately after such transaction or series of
related transactions (by virtue of securities issued as consideration
for such transaction or series of related transactions) hold at least
fifty-one percent (51%) of the voting power of the Corporation;
(b) increase or decrease (other than by conversion) the total
number of authorized shares of Series B Preferred Stock or amend the
terms of the Series B Preferred Stock (or any other capital stock of
the Corporation) so as to affect the Series B Preferred Stock
adversely;
(c) authorize or issue, or obligate itself to issue, any other
equity security, including any other security or debt instrument
convertible into or exercisable for any such equity security, having a
preference over, or being on a parity with, the Series B Preferred
Stock with respect to dividends, redemption or liquidation;
(d) increase the authorized number of directors of the
Corporation to more than seven (7) members;
(e) engage in or consummate any Sale Event in which the Company
Valuation is less than $50,000,000;
(f) issue any shares of Common Stock (or any options to purchase
or rights to subscribe for Common Stock, securities by their terms
convertible into or exchangeable for Common Stock or options to
purchase or rights to subscribe for such convertible or exchangeable
securities) without consideration or for a consideration per share
less than the fair market value (determined on a per share basis in
accordance with subsection 4.4(b)(d)(iii) hereof) in effect
immediately prior to the issuance of such securities; provided, that
this restriction shall not apply to (i) shares of Common Stock
issuable or issued to employees, advisors, consultants or outside
directors of the Corporation directly or pursuant to a stock option
plan or restricted stock plan approved by the Board of Directors of
the Corporation, (ii) shares of Common Stock issuable upon exercise of
options and warrants outstanding on February 2, 1998, or (iii) Class A
Common Stock issued or issuable upon conversion of the Series A
Preferred Stock, Series B Preferred Stock or Series C Preferred Stock;
or
(g) liquidate, dissolve or otherwise wind up the affairs of the
Corporation.
(9) Amendments. No provision of these Articles of Incorporation
relating to the Series B Preferred Stock may be amended, modified or waived
without the written consent or affirmative vote of the holders of at least
two-thirds of the then outstanding shares of Series B Preferred Stock.
(c) Series C Preferred Stock. [One Hundred Thirty-Two Thousand Seven
Hundred Forty-Three (132,743)] shares of the authorized shares of Preferred
Stock of the Corporation are hereby designated as Series C Preferred Stock (the
"Series C Preferred Stock").
17
<PAGE>
(1) Dividend Provisions.
(a) Subject to the rights of any series of Preferred Stock of the
Corporation the terms of which specifically provide that such series
ranks senior to the Series B Preferred Stock and the Series C
Preferred Stock, or the terms of which specifically provide that such
series ranks pari passu with the Series B Preferred Stock and the
Series C Preferred Stock, the holders of shares of the Series B
Preferred Stock and the Series C Preferred Stock shall be entitled to
receive dividends, out of any assets legally available therefor, prior
and in preference to any declaration or payment of any dividend
(payable other than in Common Stock) or other securities and rights
convertible into or entitling the holder thereof to receive, directly
or indirectly, additional shares of Common Stock) on the Common Stock,
when, as and if declared by the Board of Directors. No dividends shall
be payable upon any Junior Securities of the Corporation unless
equivalent dividends, on an as-converted basis, are declared and paid
concurrently on the Series B Preferred Stock and the Series C
Preferred Stock. For purposes of this Section 4.4(c)(1), the Series C
Preferred Stock shall be treated as pari passu with the Series B
Preferred Stock and the Series A Preferred Stock ranks senior to the
Series B Preferred Stock and the Series C Preferred Stock with respect
to dividends.
(2) Liquidation Preference.
(a) In the event of any Liquidation, the holders of shares of
Series C Preferred Stock shall be entitled to receive, in pari passu
with the holders of shares of the Series A Preferred Stock and the
Series B Preferred Stock, and prior and in preference to any
distribution of any of the assets of the Corporation to the holders of
any Junior Securities by reason of their ownership thereof, an amount
per share equal to $[4.52] as adjusted for stock splits, combinations
or similar events) for each outstanding share of Series C Preferred
Stock plus any accrued or declared but unpaid dividends (the "Series C
Liquidation Preference"), If, upon the occurrence of such an event,
the assets and funds thus distributed among the holders of the Series
A Preferred Stock, the Series B Preferred Stock and the Series C
Preferred Stock shall be insufficient to permit the payment to such
holders of the full aforesaid preferential amounts, then the entire
assets and funds of the Corporation legally available for distribution
shall be distributed ratably among the holders of the Series A
Preferred Stock, the Series B Preferred Stock and the Series C
Preferred Stock in proportion to the preferential amount each such
holder is otherwise entitled to receive.
(b) Upon the completion of the distributions required by
subsection (a) of this Section 4.4(c)(2) and any other distribution
that may be required with respect to series of Preferred Stock that
may from time to time come into existence, the remaining assets of the
Corporation available for distribution to shareholders shall be
distributed among the holders of the Common Stock pro rata based on
the number of shares of Common Stock held by each such holder.
(c) For purposes of this Section 4.4(c)(2), a Liquidation shall
be deemed to be occasioned by, or to include (i) the acquisition of
the Corporation by another entity or person by means of any
transaction or series of related transactions (including, without
18
<PAGE>
limitation, any reorganization, merger or consolidation, but excluding
any merger effected exclusively for the purpose of changing the
domicile of the Corporation) or (ii) a sale of all or substantially
all of the assets of the Corporation; unless the Corporation's
shareholders of record as constituted immediately prior to such
acquisition or sale will, immediately after such acquisition or sale
(by virtue of securities issued as consideration for the Corporation's
acquisition or sale or otherwise) hold at least 51% of the voting
power of the surviving or acquiring entity.
(3) Redemption.
(a) Mandatory Redemption by the Corporation.
(i) Subject to the rights of the holders of Series C
Preferred Stock set forth in Section 4.4(c)(4) below, the
Corporation shall, to the extent it may do so under applicable
law, redeem the then outstanding shares of Series C Preferred
Stock upon the occurrence of a Sale Event that results in gross
proceeds of at least $15,000,000 (the "Redemption Date"). In the
event shares of Series C Preferred Stock scheduled for redemption
are not redeemed because of a prohibition under applicable law,
such shares shall be redeemed as soon as such prohibition no
longer exists.
(ii) The redemption price (the "Redemption Price") for each
share of Series C Preferred Stock redeemed pursuant to this
Section 4.4(c)(3)(a) shall be equal to the Series C Liquidation
Preference.
(b) Surrender of Certificates. Each holder of shares of Series C
Preferred Stock to be redeemed under this Section 4.4(c)(3) shall
surrender the certificate or certificates representing such shares to
the Corporation on the Redemption Date, and thereupon the Redemption
Price for such shares as set forth in this Section 4.4(c)(3) shall be
paid to the order of the person whose name appears on such certificate
or certificates. Irrespective of whether the certificates therefor
shall have been surrendered, all shares of Series C Preferred Stock
shall be deemed to have been redeemed and shall be cancelled effective
as of the Redemption Date, unless the Corporation shall default in the
payment of the applicable Redemption Price.
(4) Conversion. Each share of the Series C Preferred Stock shall be
convertible at the option of the holder thereof at any time into such
number of shares of Class A Common Stock as determined by dividing [$4.52]
by the Conversion Price of [$4.52].
(5) Voting Rights. Except as may otherwise be provided in these
Articles of Incorporation or by law or by contract, the Series C Preferred
Stock shall be entitled to vote, as a single class with the holders of
Class A Common Stock and the holders of any other classes or series of
stock of the Corporation so entitled to vote, on all matters as to which
the holders of Class A Common Stock shall be entitled to vote. Each share
of Series C Preferred Stock shall have that number of votes equal to
600,000 divided by [4.52]. The holders of Series C Preferred
19
<PAGE>
Stock shall be entitled to notice of any stockholders' meeting in
accordance with the bylaws of the Corporation.
(6) Covenants. So long as any shares of Series C Preferred Stock are
outstanding, the Corporation shall not, without first obtaining the written
consent of the holders of at least two-thirds of the then outstanding
shares of Series C Preferred Stock, increase or decrease the total number
of authorized shares of Series C Preferred Stock or amend the terms of the
Series C Preferred Stock (or any other capital stock of the Corporation) so
as to affect the Series C Preferred Stock adversely.
(7) Amendments. No provision of these Articles of Incorporation
relating to the Series C Preferred Stock may be amended, modified or waived
without the written consent or affirmative vote of the holders of at least
two-thirds of the then outstanding shares of Series C Preferred Stock.
ARTICLE V
The address of the initial registered office of the Corporation is 215
Southport Drive, Suite 1000, Morrisville, Wake County, North Carolina 27560, and
the name of its initial registered agent at such address is J.W. Stealey.
20
<PAGE>
ARTICLE VI
Section 6.1. Number of Directors. The number of directors constituting the
Board of Directors shall be not less than five (5) nor more than fifteen (15),
as specified in the Corporation's Bylaws.
Section 6.2. Classified Board of Directors. Upon such time as the number of
directors constituting the Board of Directors shall be fixed at nine (9) or
more, the Board of Directors shall be divided into three (3) classes, Class I,
Class II, and Class III, which shall be as nearly equal in number as possible.
The term of office of each Director in Class I shall expire at the first annual
meeting of shareholders of the Corporation following the effectiveness of the
resolution or bylaw fixing the number of directors at nine or more. The term of
office of each Director in Class II shall expire at the second annual meeting of
shareholders of the Corporation following the effectiveness of the resolution or
bylaw fixing the number of directors at nine or more. The term of office of each
Director in Class III shall expire at the third annual meeting of shareholders
of the Corporation following the effectiveness of the resolution or bylaw fixing
the number of directors at nine or more. Each Director shall serve until the
election and qualification of a successor or until such Director's earlier
resignation, death, or removal from office. Upon the expiration of the term of
office for each class of Directors, the Directors of such class shall be elected
for a term of three (3) years, to serve until the election and qualification of
their successors or until their earlier resignation, death, or removal from
office.
Section 6.3. Directors. The names of those persons who are to serve as the
Directors of the Corporation following the effectiveness of these Articles of
Incorporation are set forth below. The address for each such director is 215
Southport Drive, Suite 1000, Morrisville, North Carolina 27560.
J. Nicholas England
David H. Kestel
W. Joseph McClelland
Avi Suriel
J. W. Stealey
Section 6.4. Removal of Directors. Any Director, or the entire Board of
Directors, may be removed from office at any time, with or without cause, but
only by the affirmative vote of the holders of at least sixty-six and two-thirds
percent (66-2/3%) of the voting power of all of the shares of capital stock of
the Corporation then entitled to vote generally in the election of Directors. If
a Director was elected by the holders of one class or series of capital stock,
or of a group of such classes or series, only members of that voting group may
participate in the vote to remove him.
Section 6.5. Factors to be Considered by the Directors. In connection with
the exercise of its or his judgment in determining what is in the best interests
of the Corporation and its shareholders, the Board of Directors of the
Corporation, any committee of the Board of Directors, or any individual director
may, but shall not be required to, in addition to considering
21
<PAGE>
the long-term and short-term interests of the shareholders, consider any of the
following factors and any other factors that it or he deems relevant: (i) the
social and economic effects of the matter to be considered on the Corporation
and its subsidiaries, its and their employees, clients, and creditors, and the
communities in which the Corporation and its subsidiaries operate or are
located; and (ii) when evaluating a business combination or a proposal by
another Person or Persons to make a business combination or a tender or exchange
offer or any other proposal relating to a potential change of control of the
Corporation (x) the business and financial condition and earnings prospects of
the acquiring Person or Persons, including, but not limited to, debt service and
other existing financial obligations, financial obligations to be incurred in
connection with the acquisition, and other likely financial obligations of the
acquiring Person or Persons, and the possible effect of such conditions upon the
Corporation and its subsidiaries and the communities in which the Corporation
and its subsidiaries operate or are located, (y) the competence, experience, and
integrity of the acquiring Person or Persons and its or their management, and
(z) the prospects for successful conclusion of the business combination, offer
or proposal. The provisions of this Section shall be deemed solely to grant
discretionary authority to the directors and shall not be deemed to provide to
any constituency the right to be considered. As used in this Section, the term
"Person" means any individual, partnership, firm, corporation, limited liability
company, association, trust, unincorporated organization or other entity; when
two or more Persons act as a partnership, limited partnership, syndicate, or
other group acting in concert for the purpose of acquiring, holding, voting or
disposing of securities of the Corporation, such partnership, limited
partnership, syndicate or group shall also be deemed a "Person" for purposes of
this Section.
ARTICLE VII
Section 7.1. Approval of Business Combinations. With regard to any Business
Combination (as defined in Section 7.5(b)) between the Corporation and any other
corporation, person, or other entity, excluding its Subsidiaries (as defined in
Section 7.5(g)) except as provided in section 7.5(b), such Business Combination
must be approved only as follows unless otherwise more restrictively required by
applicable North Carolina law:
(a) The Business Combination must be approved by resolution adopted by
affirmative vote of a majority of a quorum of the Board of Directors;
(b) In addition to the Board approval specified in Section 7.1(a), the
Business Combination must receive one of the following levels of
shareholder approval:
(1) To the extent a shareholder's vote is required by law, at a
special or annual meeting of shareholders by an affirmative vote of
the shareholders holding at least a majority of the shares of capital
stock of the Corporation issued and outstanding and entitled to vote
thereon if such Business Combination has received the prior approval
by resolution adopted by an affirmative vote of at least sixty-six and
two-thirds percent (66 2/3%) of the full Board of Directors before
such Business Combination is submitted for approval to the
shareholders; or
22
<PAGE>
(2) At a special or annual meeting of shareholders by an
affirmative vote of the shareholders holding at least sixty-six and
two-thirds percent (66-2/3%) of the shares of capital stock of the
Corporation issued and outstanding and entitled to vote thereon if
such Business Combination has received the prior approval by
resolution adopted by an affirmative vote of a majority of a quorum
(but less than sixty-six and two-thirds percent (66-2/3%)) of the
Board of Directors; and
(c) If the Business Combination is to be approved pursuant to Section
7.1(b)(2), the Business Combination as approved must grant to shareholders
not voting to approve the Business Combination the rights set forth in
Section 7.2.
Section 7.2. Fair Price. When any Business Combination above is approved
pursuant to Section 7.1(b)(2), any shareholder not voting to approve the
Business Combination may elect to sell his shares for cash to the Corporation at
their "Fair Price" (as defined in Section 7.5(f)), upon so notifying the
Corporation in writing within twenty (20) days after receiving written
notification of his rights hereunder and that the Business Combination was
approved by the Corporation's shareholders. The Corporation shall have ten (10)
days after receipt of the shareholder's tender of shares to make payment in
cash. Tender of shares may be made simultaneously with, or after, the
shareholder's written notification that he is electing to be paid the Fair Price
of his shares. The Business Combination shall not be consummated until all
shareholders electing to sell their shares for cash to the Corporation at their
Fair Price pursuant to this Article VII have been paid in full by the
Corporation.
Section 7.3. Certain Restrictions on Business Combinations. Notwithstanding
any other provision of this Article VII, prior to the consummation of any
Business Combination between the Corporation and a Control Person (as defined in
Section 7.5(c)):
(a) such Control Person shall not have received the benefit, directly
or indirectly (except proportionately as a shareholder), of any loans,
advances, guarantees, pledges or other financial assistance or tax credits
provided by the Corporation; and
(b) there shall have been no increase or reduction in the annual rate
of dividends paid on the Corporation's common stock after the Control
Person became such (except as necessary to reflect any subdivision of the
common stock), unless such increase or reduction has been approved by a
majority of Disinterested Directors (as defined in Section 7.5(e)).
Section 7.4. Amendments to Articles of Incorporation. Amendments to these
Articles of Incorporation shall be adopted only upon receiving the affirmative
vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of
all the shares of capital stock of the Corporation issued and outstanding and
entitled to vote thereon; provided, however, that if such amendment shall have
received prior approval by resolution adopted by an affirmative vote of a
majority of Disinterested Directors, then the affirmative vote of the holders of
at least a majority of all the shares of capital stock of the Corporation issued
and outstanding and entitled to vote, or such greater percentage approval as
required by North Carolina law, shall be sufficient to amend these Articles of
Incorporation.
23
<PAGE>
Section 7.5. Definitions. As used in this Article VII, the following terms
shall have the following meanings:
(a) "Affiliate," as used in defining "Control Person," shall mean a
corporation, person, group, or other entity that directly or indirectly
controls, is controlled by, or is under common control with the Control
Person.
(b) "Business Combination" shall mean (i) any merger or consolidation
of the Corporation into any other corporation, person, group or other
entity where the Corporation is not the surviving or resulting entity; (ii)
any merger or consolidation of the Corporation with or into any Control
Person or with any corporation, person, group or other entity where the
merger or consolidation is proposed by or on behalf of a Control Person;
(iii) any sale, lease, exchange, transfer, hypothecation or other
disposition of all or substantially all of the assets of the Corporation;
(iv) any sale, lease, exchange, transfer, hypothecation or other
disposition of a Substantial Part (as defined in Section 7.5(h)) of the
assets of the Corporation to a Control Person, whether in a single
transaction or in related transactions; (v) the issuance of any securities
of the Corporation to a Control Person; (vi) the acquisition by the
Corporation of any securities of a Control Person unless such acquisition
commences prior to the person becoming a Control Person or is an attempt to
prevent the Control Person from obtaining greater control of the
Corporation; (vii) the acquisition by the Corporation of all or
substantially all of the assets of any Control Person or any corporation,
person, group or other entity where the acquisition is proposed by or on
behalf of a Control Person; (viii) the adoption of any plan or proposal for
the liquidation or dissolution of the corporation which is proposed by or
on behalf of a Control Person; (ix) any reclassification of securities
(including any reverse stock split), or recapitalization of the Corporation
which has the effect, directly or indirectly, of increasing the
proportionate share of the outstanding shares of any class of equity or
convertible securities of the Corporation which is beneficially owned or
controlled by a Control Person; (x) any of the transactions described in
this definition of Business Combination which are between the Corporation
and any of its Subsidiaries and which are proposed by or on behalf of any
Control Person; or (xi) any agreement, plan, contract or other arrangement
providing for any of the transactions described in this definition of
Business Combination.
(c) "Control Person" shall mean and include any corporation, person,
group or other entity which, together with its Affiliates prior to a
Business Combination beneficially owns (as the term is defined by federal
securities law) ten percent (10%) or more of the shares of any class of
equity or convertible securities of the Corporation, and any Affiliate of
any such corporation, person, group or other entity; provided, however, any
corporation, person, group or other entity which, together with its
Affiliates, prior to May 31, 1998 beneficially owned (as the term is
defined by federal securities law) ten percent (10%) or more of the shares
of any class of equity or convertible securities of the Corporation, and
any Affiliate of any such corporation, person, group or other entity shall
not be considered to be a Control Person for the purposes hereof.
(d) "Corporation" shall mean I-Magic Mergeco, Inc. and its
Subsidiaries, or any one of them, and their successors.
24
<PAGE>
(e) "Disinterested Director" shall mean any member of the Board of
Directors of the Corporation who is unaffiliated with, and not a nominee
of, a Control Person and was a member of the Board of Directors prior to
the time a Control Person became such, and any successor of a Disinterested
Director who is unaffiliated with, and not a nominee of, a Control Person
and who is recommended to succeed a Disinterested Director by a majority of
Disinterested Directors then on the Board of Directors.
(f) "Fair Price" shall mean the highest of the following: (i) the
highest price per share paid for the Corporation's shares during the four
years immediately preceding the Section 7.1(b)(2) vote of shareholders by
any shareholder who, at the time of the Section 7.1(b)(2) shareholder vote,
beneficially owned five percent (5%) or more of the Corporation's common
stock and who, in whole or in part, votes in favor of the Business
Combination; (ii) the cash value of the highest price per share previously
offered pursuant to a tender offer to the shareholders of the Corporation
within the four years immediately preceding the Section 7.1(b)(2)
shareholder vote; and (iii) the highest price per share (including
brokerage commissions, soliciting dealers' fees and dealer-management
compensation) paid by a Control Person in acquiring any of its holdings of
the Corporation's common stock.
(g) "Subsidiaries" shall mean any entity in which the Corporation
owns, directly or indirectly, a majority of the voting interests.
(h) "Substantial Part" shall mean more than ten percent (10%) of the
total assets of the Corporation, as of the end of the Corporation's most
recent fiscal year prior to the time the determination is being made.
ARTICLE VIII
The Board of Directors shall have the power to adopt, amend, alter, change,
and repeal the Bylaws of the Corporation. In addition to any requirements of the
Bylaws and the North Carolina Business Corporation Act as in effect from time to
time (and notwithstanding the fact that a lesser percentage may be specified by
the Bylaws or the North Carolina Business Corporation Act), the affirmative vote
of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the
voting power of all the shares of capital stock of the Corporation then entitled
to vote generally in the election of directors, voting together as a single
class, shall be required for the shareholders of the Corporation to adopt,
amend, alter, change, or repeal the Bylaws of the Corporation.
ARTICLE IX
Except to the extent that the North Carolina General Statutes prohibit such
limitation or elimination of liability of directors for breaches of duty, no
director of the Corporation shall have any personal liability arising out of an
action whether by or in the right of the Corporation or otherwise for monetary
damages for breach of any duty as a director. No amendment to or repeal of this
article shall apply to or have any effect on the liability or alleged liability
of any director
25
<PAGE>
of the Corporation for or with respect to any acts or omissions of such director
occurring prior to such amendment or repeal. The provisions of this article
shall not be deemed to limit or preclude indemnification of a director by the
Corporation for any liability that has not been eliminated by the provisions of
this article.
ARTICLE X
Section 10.1. Opt-Out of North Carolina Shareholder Protection Act. The
provisions of the North Carolina Shareholder Protection Act, as amended from
time to time, shall not be applicable to the Corporation.
Section 10.2. Opt-Out of North Carolina Control Share Acquisition Act. The
provisions of the North Carolina Control Share Acquisition Act, as amended from
time to time, shall not be applicable to the Corporation.
BYLAWS OF
I-MAGIC MERGECO, INC.
ARTICLE I
DEFINITIONS
In these bylaws, unless otherwise provided, the following terms shall have
the following meanings:
(1) "Act" shall mean the North Carolina Business Corporation Act, as
codified in Chapter 55 of the North Carolina General Statutes, and as
amended from time to time;
(2) "Articles of Incorporation" shall mean the Corporation's articles
of incorporation, including amended and restated articles of incorporation
and articles of merger;
(3) "Corporation" shall mean I-Magic Mergeco, Inc.;
(4) "Distribution" shall mean a direct or indirect transfer of money
or other property (except the Corporation's own shares) or incurrence of
indebtedness by the Corporation to or for the benefit of its shareholders
in respect of any of its shares. A distribution may be in the form of a
declaration or payment of a dividend; a purchase, redemption, or other
acquisition of shares; a distribution of indebtedness; or otherwise;
(5) "Emergency" shall mean a catastrophic event which prevents a
quorum of the board of directors from being readily assembled;
(6) "Shares" shall mean the units into which the proprietary interests
in the Corporation are divided; and
(7) "Voting group" shall mean all shares of one or more classes or
series that under the articles of incorporation or the Act are entitled to
vote and be counted together collectively on a matter at a meeting of
shareholders. All shares entitled by the articles of incorporation or the
Act to vote generally on a matter are for that purpose a single voting
group.
ARTICLE II
OFFICES
SECTION 1. Principal Office: The principal office of the Corporation shall
be located at 215 Southport Drive, Suite 1000, Morrisville, Wake County, North
Carolina 27560, or at such other place as may be determined from time to time by
the directors.
SECTION 2. Registered Office: The registered office of the Corporation
shall be located at 215 Southport Drive, Suite 1000, Morrisville, Wake County,
North Carolina 27560.
<PAGE>
SECTION 3. Other Offices: The Corporation may have offices at such other
places, either within or without the State of North Carolina, as the board of
directors may from time to time determine, or as the affairs of the Corporation
may require.
ARTICLE III
MEETING OF SHAREHOLDERS
SECTION 1. Place of Meetings: All meetings of shareholders shall be held at
the principal office of the Corporation, or at such other place, either within
or without the State of North Carolina, as shall be designated in the notice of
the meeting or as may be agreed upon by a majority of the shareholders entitled
to vote at the meeting.
SECTION 2. Annual Meeting: The annual meeting of shareholders for the
election of directors and the transaction of other business shall be held
annually at 10:00 a.m. on the third Wednesday in April, or at such other place,
time, and date as the board of directors may designate.
SECTION 3. Substitute Annual Meeting: If the annual meeting shall not be
held on the day designated by these bylaws, a substitute annual meeting may be
called by the board of directors, the chairman of the board, or the president. A
meeting so called shall be designated and treated for all purposes as the annual
meeting.
SECTION 4. Special Meetings: Special meetings of the shareholders may be
called at any time by the board of directors, the chairman of the board, or the
president. The Corporation shall also hold a special meeting of shareholders if
requested by the holders of at least twenty percent (20%) of all the votes
entitled to be cast on any issue proposed to be considered at the special
meeting; provided, however, the right of shareholders to call a special meeting
is subject to compliance with the provisions specified in Section 12 of this
Article relating to shareholder proposals generally and the provisions specified
in Section 3 of Article IV relating to nomination of directors. Only business
within the purpose or purposes described in the meeting notice specified in
Section 5 of this Article may be conducted at a special meeting of shareholders.
SECTION 5. Notice of Meeting: Written or printed notice stating the time
and place of the meeting shall be delivered by the Corporation not less than ten
(10) nor more than sixty (60) days before the date of any shareholders' meeting,
either personally, by mail, by telegraph, by teletype, or by facsimile
transmission, to each shareholder of record entitled to vote at such meeting. If
mailed, such notice shall be deemed to be delivered when deposited in the United
States mail, addressed to the shareholder at his address as it appears on the
record of the shareholders of the Corporation, with postage thereon prepaid.
In the case of a special meeting, the notice of meeting shall specifically
state the purpose or purposes for which the meeting is called. In the case of an
annual or substitute annual meeting, the notice of meeting need not specifically
state the business to be transacted unless such a statement is required by the
Act.
When an annual or special meeting is adjourned to a different date, time,
and place, it is not necessary to give any notice of the adjourned meeting other
than by announcement at the meeting at which the adjournment is taken; provided,
however, that if a new record date for the adjourned meeting is or must be set,
notice of the adjourned meeting must be given to persons who are shareholders as
of the new record date.
2
<PAGE>
The record date for determining the shareholders entitled to notice of and
to vote at an annual or special meeting shall be fixed as provided in Section 3
of Article VIII.
SECTION 6. Waiver of Notice: A shareholder may waive notice of any meeting
either before or after such meeting. Such waiver shall be in writing, signed by
the shareholder, and filed with the minutes or corporate records. A
shareholder's attendance at a meeting: (i) waives objection to lack of notice or
defective notice of the meeting, unless the shareholder at the beginning of the
meeting objects to holding the meeting or transacting business at the meeting;
and (ii) waives objection to consideration of a particular matter at the meeting
that is not within the purpose or purposes described in the meeting notice,
unless the shareholder objects to considering the matter before it is voted
upon.
SECTION 7. Shareholder List: Commencing two (2) business days after notice
of a meeting of shareholders is given and continuing through such meeting, the
secretary of the Corporation shall maintain at the principal office of the
Corporation an alphabetical list of the shareholders entitled to vote at such
meeting, arranged by voting group, with the address of and number of shares held
by each. This list shall be subject to inspection by any shareholder or his
representative at any time during usual business hours and may be copied at the
shareholder's expense.
SECTION 8. Quorum: A majority of the votes entitled to be cast on a matter
by any voting group, represented in person or by proxy, shall constitute a
quorum of that voting group for action on that matter. The shareholders present
at a duly organized meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough shareholders to leave less than a
quorum.
In the absence of a quorum at the opening of any meeting of shareholders,
such meeting may be adjourned from time to time by a majority of the votes
voting on the motion to adjourn; and at any adjourned meeting at which a quorum
is present, any business may be transacted which might have been transacted at
the original meeting.
SECTION 9. Proxies: Shares may be voted either in person or by one or more
agents authorized by a written proxy executed by the shareholder or by his duly
authorized attorney in fact. A proxy may take the form of a telegram, telex,
facsimile or other form of wire or wireless communication which appears to have
been transmitted by a shareholder. A proxy is effective when received by the
secretary or other officer or agent authorized to tabulate votes. A proxy is not
valid after the expiration of eleven (11) months from the date of its execution,
unless the person executing it specifies therein the length of time for which it
is to continue in force or limits its use to a particular meeting.
SECTION 10. Voting of Shares: Subject to the provisions of the articles of
incorporation, and the Act, each outstanding share, regardless of class, shall
be entitled to one vote on each matter submitted to a vote at a meeting of
shareholders.
Except for the election of directors, which is governed by the provisions
of Section 4 of Article IV, if a quorum is present, action on a matter by a
voting group is approved if the votes cast within the voting group favoring the
action exceed the votes cast against the action, unless the vote of a greater
number is required by the Act, the articles of incorporation, or these bylaws.
Shares of the Corporation are not entitled to vote if: (i) they are owned,
directly or indirectly, by the Corporation, unless they are held by it in a
fiduciary capacity; (ii) they are owned, directly or indirectly, by a second
corporation in which the Corporation owns a majority of the shares entitled to
vote for directors of the second corporation; or (ii) they are redeemable shares
and (x) notice of redemption has been given and
3
<PAGE>
(y) a sum sufficient to redeem the shares has been deposited with a bank, trust
company, or other financial institution under an irrevocable obligation to pay
the holders the redemption price upon surrender of the shares.
SECTION 11. Informal Action by Shareholders: Any action which may be taken
at a meeting of the shareholders may be taken without a meeting if a consent in
writing, setting forth the action so taken, is signed by all of the persons who
would be entitled to vote upon such action at a meeting and is delivered to the
Corporation to be included in the minutes or to be kept as part of the corporate
records.
SECTION 12. Shareholder Proposals. Any shareholder wishing to bring any
business before a meeting of shareholders must provide notice to the Corporation
not more than ninety (90) and not less than fifty (50) days before the meeting
in writing by registered mail, return receipt requested, of the business to be
presented by him at the shareholder's meeting. Any such notice shall set forth
the following as to each matter the shareholder proposes to bring before the
meeting: (i) a brief description of the business desired to be brought before
the meeting and the reasons for conducting such business at the meeting and, if
such business includes a proposal to amend the bylaws of the Corporation, the
language of the proposed amendment; (ii) the name and address, as they appear on
the Corporation's books, of the shareholder proposing such business; (iii) the
class and number of shares of the Corporation which are beneficially owned by
such shareholder; (iv) a representation that the shareholder is a holder of
record of stock of the Corporation entitled to vote at such meeting and intends
to appear in person or by proxy at the meeting to propose such business; and (v)
any material interest of the shareholder in such business. Notwithstanding the
foregoing provisions of this Section, a shareholder shall also comply with all
applicable requirements of the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder with respect to the matters set forth in
this Section. In the absence of such notice to the Corporation meeting the above
requirements, a shareholder shall not be entitled to present any business at any
meeting of the shareholders.
SECTION 13. Corporation's Acceptance of Votes: If the name signed on a
vote, consent, waiver, or proxy appointment corresponds to the name of a
shareholder, the Corporation is entitled to accept the vote, consent, waiver, or
proxy appointment and to give it effect as the act of the shareholder.
If the name signed on a vote, consent, waiver, or proxy appointment does
not correspond to the name of a shareholder, the Corporation is nevertheless
entitled to accept the vote, consent, waiver, or proxy appointment and to give
it effect as the act of such shareholder if: (i) the shareholder is an entity
and the name signed purports to be that of an officer or agent of the entity;
(ii) the name signed purports to be that of an administrator, executor,
guardian, or conservator representing the shareholder and, if the Corporation
requests, evidence of fiduciary status acceptable to the Corporation has been
presented with respect to the vote, consent, waiver, or proxy appointment; (iii)
the name signed purports to be that of a receiver or trustee in bankruptcy of
the shareholder and, if the Corporation requests, evidence of its status
acceptable to the Corporation has been presented with respect to the vote,
consent, waiver, or proxy appointment; (iv) the name signed purports to be that
of a beneficial owner or attorney-in-fact of the shareholder and, if the
Corporation requests, evidence acceptable to the Corporation of the signatory's
authority to sign for the shareholder has been presented with respect to the
vote, consent, waiver, or proxy appointment; or (v) two or more persons are the
shareholder as co-tenants or fiduciaries and the name signed purports to be the
name of at least one of the co-owners and the person signing appears to be
acting on behalf of all the co-owners.
4
<PAGE>
The Corporation is entitled to reject a vote, consent, waiver, or proxy
appointment if the secretary or other officer or agent authorized to tabulate
votes has a reasonable basis for doubt about the validity of the signature on it
or about the signatory's authority to sign for the shareholder.
SECTION 14. Number of Shareholders: The following persons or entities
identified as a shareholder in the Corporation's current record of shareholders
constitute one shareholder for purposes of these bylaws: (i) all co-owners of
the same shares; (ii) a corporation, partnership, trust, estate, or other
entity; and (iii) the trustees, guardians, custodians, or other fiduciaries of a
single trust, estate, or account. Shareholdings registered in substantially
similar names constitute one shareholder if it is reasonable to believe that the
names represent the same person.
ARTICLE IV
BOARD OF DIRECTORS
SECTION 1. General Powers: All corporate powers shall be exercised by or
under the authority of, and the business and affairs of the Corporation shall be
managed under the direction of, its board of directors.
SECTION 2. Number, Term and Qualifications: The number constituting the
board of directors shall be within the range specified in the articles of
incorporation and may be divided into three (3) classes as provided for in the
articles of incorporation. The board of directors may by resolution fix or
change the number of directors from time to time, so long as the number is
within the range specified in the articles of incorporation. Each director shall
hold office until his death, resignation, retirement, removal, disqualification,
or until his successor is elected and qualified. Directors need not be residents
of the State of North Carolina.
SECTION 3. Nomination of Directors: Nominations for the election of
directors may only be made by the board of directors, by the nominating
committee of the board of directors (or, if none, any other committee serving a
similar function) or by any shareholder entitled to vote generally in elections
of directors where the shareholder complies with the requirements of this
Section. Any shareholder of record entitled to vote generally in elections of
directors may nominate one or more persons for election as directors at a
meeting of shareholders only if written notice of such shareholder's intent to
make such nomination or nominations has been given, either by personal delivery
or by United States certified mail, postage prepaid, to the Secretary of the
Corporation (i) with respect to an election to be held at an annual meeting of
shareholders, not more than ninety (90) days nor less than fifty (50) days in
advance of such meeting; and (ii) with respect to an election to be held at a
special meeting of shareholders called for the purpose of the election of
directors, not later than the close of business on the tenth business day
following the date on which notice of such meeting is first given to
shareholders. Each such notice of a shareholder's intent to nominate a director
or directors at an annual or special meeting shall set forth the following: (A)
the name and address, as they appear on the Corporation's books, of the
shareholder who intends to make the nomination and the name and residence
address of the person or persons to be nominated; (B) the class and number of
shares of the Corporation which are beneficially owned by the shareholder; (C) a
representation that the shareholder is a holder of record of stock of the
Corporation entitled to vote at such meeting and intends to appear in person or
by proxy at the meeting to nominate the person or persons specified in the
notice; (D) a description of all arrangements or understandings between the
shareholder and each nominee and any other person or persons (naming such person
or persons) pursuant to which the nomination or nominations are to be made by
the shareholders; (E) such other information regarding each nominee proposed by
such shareholder as would be required to be disclosed in solicitations of
proxies for
5
<PAGE>
election of directors, or as would otherwise be required, in each case pursuant
to Regulation 14A under the Securities and Exchange Act of 1934, as amended,
including any information that would be required to be included in a proxy
statement filed pursuant to Regulation 14A had the nominee been nominated by the
board of directors; and (F) the written consent of each nominee to be named in a
proxy statement and to serve as director of the Corporation if so elected. No
person nominated by a shareholder shall be eligible to serve as a director of
the Corporation unless nominated in accordance with the procedures set forth in
this Section. If the chairman of the shareholders meeting shall determine that a
nomination was not made in accordance with the procedures described by the
bylaws of the Corporation, he shall so declare to the meeting, and the defective
nomination shall be disregarded. Notwithstanding the foregoing provisions of
this Section, a shareholder shall also comply with all applicable requirements
of the Securities Exchange Act of 1934, as amended, and the rules and
regulations thereunder with respect to the matters set forth in this Section.
SECTION 4. Election of Directors: Except as provided in Section 6 of this
Article and in the articles of incorporation, the directors shall be elected at
the annual meeting of shareholders and those persons who receive the highest
number of votes shall be deemed to have been elected.
SECTION 5. Removal: Any director, or the entire board of directors, may be
removed from office at any time, with or without cause, but only by the
affirmative vote of the holders of at least sixty-six and two-thirds percent
(66-2/3%) of the voting power of all shares then entitled to vote generally in
the election of directors. If a director is elected by a voting group of
shareholders, only members of that voting group may participate in the vote to
remove him. A director may not be removed by the shareholders at a meeting
unless the notice of the meeting specifies such removal as one of its purposes.
If any directors are removed, new directors may be elected at the same meeting.
SECTION 6. Vacancies: Any vacancy occurring in the board of directors,
including, without limitation, a vacancy resulting from an increase in the
number of directors or from the failure by the shareholders to elect the full
authorized number of directors, shall be filled only by the board of directors
or, if the directors remaining in office constitute fewer than a quorum of the
board, by the affirmative vote of a majority of the remaining directors or by
the sole remaining director. If the vacant office was held by a director elected
by a voting group of shareholders, only the remaining director or directors
elected by that voting group are entitled to fill the vacancy. The term of a
director elected to fill a vacancy expires at the next meeting of shareholders
at which directors are elected.
SECTION 7. Compensation: The board of directors may compensate directors
for their services as such and may provide for the payment of all expenses
incurred by directors in attending regular and special meetings of the board.
SECTION 8. Committees: The board of directors may create one or more
committees of the board, each of which shall have at least two (2) members, all
of whom shall be directors. The creation of a committee and the appointment of
members to it must be approved by a majority of all the directors in office when
the action is taken. Each committee may, as specified by the board of directors,
exercise some or all of the authority of the board, except that a committee may
not: (i) authorize distributions; (ii) approve or propose to shareholders action
that the Act requires be approved by shareholders; (iii) fill vacancies on the
board of directors or on any of its committees; (iv) amend the articles of
incorporation pursuant to N.C. Gen. Stat. Section 55-10-02 or its successor; (v)
adopt, amend, or repeal bylaws; (vi) approve a plan of merger not requiring
shareholder approval; (vii) authorize or approve a reacquisition of shares,
except according to a formula or method prescribed by the board of directors; or
(viii) authorize or approve the issuance or sale or contract for sale of shares,
or determine the designation and relative rights, preferences,
6
<PAGE>
and limitations of a class or series of shares, except that the board of
directors may authorize a committee to do so within limits specifically
prescribed by the board of directors. The provisions of Article V, which govern
meetings of the board of directors, shall likewise apply to meetings of any
committee of the board.
SECTION 9. Executive Committee: In accordance with Section 8 of this
Article, the board of directors shall designate an executive committee. The
chairman of the executive committee shall be appointed in accordance with the
provisions of Article VI, and he shall appoint a secretary of the committee, who
need not be from among its own members.
Subject to the provisions of Section 8 of this Article, the executive
committee may exercise all of the power of the board of directors during
intervals between meetings thereof, including but not limited to the power to
authorize the execution of contracts, deeds, leases, and other agreements
respecting real or personal property. Without limiting the generality of the
foregoing, it may fill vacancies occurring in any offices between meetings of
the board of directors and may create new offices and elect persons to fill such
offices, provided that vacancies in the offices of chairman of the board,
president, executive vice president, and chief financial officer may be filled
only by action of the board of directors. It shall consider and act upon any
matters submitted to it by the board of directors and shall advise the board of
directors in writing at the next regular meeting of the board in regard to its
acts.
The board of directors shall approve, disapprove, or modify the action
taken by the executive committee and shall record such action in the minutes of
the board meeting.
In the event of the death, prolonged absence, or the inability of the
chairman of the board to act, as determined by a majority of the remaining
executive committee members, the executive committee shall appoint an acting
chairman of the board who shall assume the duties and have the powers of the
chairman of the board until the board of directors elects a new chairman of the
board. The executive committee shall meet upon the call of the chairman of the
executive committee or, any two (2) of its members. The person or persons
calling the meeting shall cause reasonable notice to be given to all committee
members.
SECTION 10. Audit Committee: In accordance with Section 8 of this Article,
the board of directors shall designate an audit committee, which shall be
composed of directors who are not active officers or employees of the
Corporation. A chairman of the committee shall be designated by the board of
directors.
The audit committee shall assure that there exist viable auditing
processes, both internal and independent, for the Corporation and its subsidiary
or affiliated companies. The committee shall recommend to the board of directors
the appointment of the independent auditors. The committee shall maintain open
lines of communication with internal auditors, external auditors, and regulatory
examiners, for the purposes of satisfying the committee that the audit scope and
program are not restricted, short of need; that management takes appropriate and
timely action on recommendations made by auditors or examiners; and that
corporate personnel cooperate with auditors and examiners.
The audit committee shall meet on call of the chairman of the committee as
the nature of business warrants and shall review and consider reports of
examination of regulatory agencies, management letters or other comments of
external auditors, reports of the general auditor, and any other audit related
business it considers appropriate. The chairman of the committee shall report to
the board of directors on any recommendations made by the committee and on
action taken by management on such recommendations.
SECTION 11. Compensation and Benefits Committee: In accordance with Section
8 of this Article,
7
<PAGE>
the board of directors shall designate a compensation and benefits committee.
The chairman of the board of the Corporation shall be a non-voting member of
this committee and the President shall have the right to attend the meetings in
the discretion of the Board of Directors; all other members shall be directors
who are not also officers of the Corporation.
As provided in Section 3 of Article VI, the compensation and benefits
committee shall fix the compensation and other benefits of all officers of the
Corporation except those officers who are also members of the executive or
compensation and benefits committees. The compensation and benefits committee
may delegate this duty to such person or persons as it may deem appropriate.
ARTICLE V
MEETINGS OF DIRECTORS
SECTION 1. Regular Meetings: Regular meetings of the board of directors
shall be held at such time and place, within or without the State of North
Carolina, as the board of directors shall fix by resolution.
SECTION 2. Special Meetings: Special meetings of the board of directors may
be called by or at the request of the chairman of the board, the chief executive
officer, the president, or any three (3) directors. Such meetings may be held
either within or without the State of North Carolina, as fixed by the person or
persons calling the meeting.
SECTION 3. Notice of Meetings: Regular meetings of the board of directors
may be held without notice. The person or persons calling a special meeting of
the board of directors shall, at least one (1) day before the meeting, give
notice of the meeting by any usual means of communication, including by
telephone, telegraph, teletype, mail, private carrier, facsimile transmission,
or other form of wire or wireless communication. Such notice may be oral and
need not specify the purpose for which the meeting is called.
SECTION 4. Waiver of Notice: Any director may waive notice of any meeting
either before or after such meeting. Such waiver shall be in writing, signed by
the director, and filed with the minutes or corporate records; provided,
however, that a director's attendance at or participation in a meeting waives
any required notice to him unless the director at the beginning of the meeting
(or promptly upon his arrival) objects to holding the meeting or transacting
business at the meeting and does not thereafter vote for or assent to action
taken at the meeting.
SECTION 5. Quorum. A majority of the directors fixed by these bylaws shall
constitute a quorum for the transaction of business at any meeting of the board
of directors.
SECTION 6. Manner of Acting: The act of a majority of the directors present
at a meeting at which a quorum is present shall be the act of the board of
directors, unless a greater number is required by the articles of incorporation
or these bylaws.
SECTION 7. Presumption of Assent: A director of the Corporation who is
present at a meeting of the board of directors or a committee of the board of
directors when corporate action is taken is deemed to have assented to the
action taken unless: (i) he objects at the beginning of the meeting (or promptly
upon his arrival) to holding it or transacting business at the meeting; (ii) his
dissent or abstention from the action taken is entered in the minutes of the
meeting; or (iii) he files written notice of his dissent or abstention with the
presiding officer of the meeting before its adjournment or with the Corporation
immediately after
8
<PAGE>
adjournment of the meeting. This right of dissent or abstention is not available
to a director who votes in favor of the action taken.
SECTION 8. Participation in Meetings: Any or all of the directors may
participate in a regular or special meeting by, or conduct the meeting through
the use of, any means of communication by which all directors participating may
simultaneously hear each other during the meeting.
SECTION 9. Action Without Meeting. Action that may be taken at a board of
directors meeting may be taken without a meeting if the action is taken by all
members of the board and is evidenced by one or more written consents signed by
each director before or after such action, which describes the action taken and
is included in the minutes or filed with the corporate records. Such action is
effective when the last director signs the consent, unless the consent specifies
a different effective date.
ARTICLE VI
OFFICERS
SECTION 1. Officers of the Corporation: The officers of the Corporation
shall consist of a chairman of the board, one or more vice chairmen of the
board, a chairman of the executive committee, a president, one or more vice
presidents, a chief financial officer, a secretary, one or more assistant
secretaries, a treasurer, one or more assistant treasurers, and such other
officers as the board of directors may from time to time appoint. There shall
also be a management group as provided in Section 6 of this Article. Any two or
more offices may be held by the same person, but no officer may act in more than
one capacity where action of two or more officers is required.
SECTION 2. Appointment and Term: The officers of the Corporation shall be
appointed by the board of directors. Each officer shall hold office until his
death, resignation, retirement, removal, disqualification or until his successor
is appointed and qualifies. The appointment of an officer does not itself create
contract rights for either the officer or the Corporation.
SECTION 3. Compensation of Officers: Except as otherwise provided in these
bylaws, the compensation of and other benefits provided to officers of the
Corporation shall be fixed by the compensation and benefits committee of the
board of directors or by such persons or persons to whom such duty has been
delegated by such committee; provided, however, that the compensation and
benefits of those officers who are members of the executive or compensation and
benefits committees of the board shall be fixed by the board of directors.
SECTION 4. Resignation and Removal: An officer may resign at any time by
communicating his resignation to the Corporation. A resignation is effective
when it is communicated unless it specifies in writing a later date. If a
resignation is made effective as of a later date and the corporation accepts the
future effective date, the board of directors may fill the pending vacancy
before the effective date if the board provides that the successor does not take
office until the effective date. An officer's resignation does not affect the
Corporation's contract rights, if any, with the officer. Any officer or agent
appointed by the board of directors may be removed by the board at any time,
with or without cause, but such removal shall be without prejudice to the
contract rights, if any, of the person so removed.
9
<PAGE>
SECTION 5. Bonds: The board of directors may by resolution require any
officer, agent, or employee of the corporation to give bond to the Corporation,
with sufficient sureties, conditioned on the faithful performance of the duties
of his respective office or position, and to comply with such other conditions
as may from time to time be required by the board of directors.
SECTION 6. Chief Executive, Chief Operating, and Chief Financial Officers:
The board of directors may designate a chief executive officer. The chief
executive officer shall be responsible for carrying out the policies adopted by
the board of directors.
The board of directors may also designate a chief operating officer. The
chief operating officer shall have general authority and supervision over the
operations of the Corporation.
The board of directors may also designate a chief financial officer. The
chief financial officer shall have general authority and supervision over
financial and accounting matters.
SECTION 7. Chairman of the Board: The chairman of the board shall preside
at all meetings of the board of directors and the shareholders and shall perform
such other duties as may be prescribed from time to time by the board of
directors. In the interim between meetings of the board of directors, he may
make appointments pro tem to offices below the level of executive vice
president, either for the purpose of filling a vacancy or increasing the number
of offices, such appointees to hold office until the next succeeding regular or
special meeting of the directors who may, at that time, confirm or revoke such
appointments. The chairman of the board shall have the power to execute on
behalf of the Corporation certificates for shares, as well as any deeds,
mortgages, contracts, or other instruments which the board of directors has
authorized to be executed, except in cases where the signing and execution of
such documents or instruments shall be expressly delegated by the board of
directors or by these bylaws to some other officer or agent of the Corporation
or shall be required by the Act to be otherwise signed or executed. The chairman
of the board shall make a report of the Corporation's condition to the
shareholders at their annual meeting and to the board of directors at their
regular meetings. He shall be an ex officio member of all committees of the
board of directors except the audit committee.
SECTION 8. Chairman of the Executive Committee: The chairman of the
executive committee shall preside at all meetings of the executive committee of
the board of directors and shall have such other powers and shall perform such
other duties as may be prescribed from time to time by the board of directors.
SECTION 9. President: The president shall have general authority and
supervision over the officers and employers of the Corporation and shall perform
such other duties as may be prescribed from time to time by the board of
directors. All officers shall report to him except to the extent specifically
reserved by the chairman of the board. He shall consult with the chairman of the
board as to matters within the scope of the authority of the chairman of the
board. He shall have the authority to sign certificates for shares, as well as
any deeds, mortgages, contracts, or other instruments which the board of
directors has authorized to be executed, except in cases where the signing and
execution of such contracts or instruments shall be expressly delegated by the
board of directors or by these bylaws to some other officer or agent of the
Corporation, or shall be required by the Act to be otherwise signed or executed.
SECTION 10. Vice Presidents: Vice presidents shall be designated as senior
executive vice presidents, executive vice presidents, senior vice presidents and
assistant vice presidents. In the absence of the president, the vice presidents
in the order determined by the board of directors, or in the absence thereof, in
the order of seniority of senior executive vice presidents, executive vice
presidents, senior vice presidents
10
<PAGE>
and assistant vice presidents, respectively, shall perform the duties of the
president, and when so acting shall have all the powers of and be subject to all
the restrictions upon that office. Any vice president may sign certificates for
shares, as well as any deeds, mortgages, contracts, or other instruments which
the board of directors has authorized to be executed, except in cases where the
signing and execution of such documents or instruments shall be expressly
delegated by the board of directors or these bylaws to some other officer or
agent of the Corporation or shall be required by the Act to be otherwise signed
or executed. A vice president shall perform such other duties as from time to
time may be assigned to him by the chairman of the board, the president, or the
board of directors.
SECTION 11. Secretary: The secretary shall: (i) keep the minutes of the
meetings of shareholders, of the board of directors, and of all committees of
the board in one or more books provided for that purpose; (ii) see that all
notices are duly given in accordance with the provisions of these bylaws or as
required by law; (iii) be custodian of the seal of the Corporation and see that
the seal of the Corporation is affixed to all documents the execution of which
on behalf of the Corporation under its seal is duly authorized; (iv) keep a
register of the mailing address of each shareholder which shall be furnished to
the secretary by such shareholder; (v) sign, with the chairman of the board, the
president, or a vice president, certificates for shares, the issuance of which
shall have been authorized by resolution of the board of directors; (vi) have
general charge of the stock transfer books of the Corporation; (vii) keep or
cause to be kept in the State of North Carolina at the Corporation's principal
office a record of the Corporation's shareholders, giving the names and
addresses of all shareholders and the number and class of shares held by each,
and prepare or cause to be prepared a shareholder list prior to each meeting of
shareholders as required by the Act; (viii) maintain and authenticate the books
and records of the Corporation; (ix) with the assistance of the treasurer and
other officers, prepare and deliver to the Corporation's shareholders such
financial statements, notices, and reports as may be required by N.C. Gen. Stat.
Sections 55-16-20 and 55-16-21 (or their successors); (x) prepare and file with
the North Carolina Secretary of State the annual report required by N. C. Gen.
Stat. Section 55-1622 (or its successor); and (xi) in general perform all duties
incident to the office of secretary and such other duties as from time to time
may be assigned to him by the chairman of the board, the president, or the board
of directors.
SECTION 12. Assistant Secretaries: In the absence of the secretary, the
assistant secretaries in the order of their length of service as assistant
secretary, unless otherwise determined by the board of directors, shall perform
the duties of the secretary, and when so acting shall have all the powers of and
be subject to all the restrictions upon the secretary. They shall perform such
other duties as may be assigned to them by the secretary, the chairman of the
board, the president, or the board of directors. Any assistant secretary may
sign, with the chairman of the board, the president, or a vice president,
certificates for shares.
SECTION 13. Treasurer: The treasurer shall: (i) have charge and custody of
and be responsible for all funds and securities of the Corporation; (ii) receive
and give receipts for monies due and payable to the corporation from any source
whatsoever, and deposit all such monies in accordance with the provisions of
Section 4 of Article VII; (iii) prepare, or cause to be prepared, an annual
financial statement in accordance with Section 3 of Article IX; and (iv) in
general, perform all of the duties incident to the office of treasurer and such
other duties as from time to time may be assigned to him by the chairman of the
board, the president, or the board of directors. The treasurer may sign, with
the chairman of the board, the president, or a vice president, certificates for
shares.
SECTION 14. Assistant Treasurer: In the absence of the treasurer, the
assistant treasurers, in the order of their length of service as assistant
treasurer, unless otherwise determined by the board of directors, shall perform
the duties of the treasurer, and when so acting shall have all the powers of and
be subject to all the restrictions upon the treasurer. They shall perform such
other duties as may be assigned to them by the
11
<PAGE>
treasurer, the chairman of the board, the president, or the board of directors.
Any assistant treasurer may sign, with the chairman of the board, the president,
or a vice president, certificates for shares.
ARTICLE VII
CONTRACTS, LOANS, CHECKS AND DEPOSITS
SECTION 1. Contracts: The board of directors may authorize any officer or
agent to enter into any contract or to execute and deliver any instrument on
behalf of the Corporation, and such authority may be general or confined to
specific instances.
SECTION 2. Loans: No loans shall be contracted on behalf of the Corporation
and no evidences of indebtedness shall be issued in its name unless authorized
by a resolution of the board of directors. Such authority may be general or
confined to specific instances.
SECTION 3. Checks and Drafts: All checks, drafts or other orders for
payment of money issued in the name of the Corporation shall be signed by such
officers or agents of the Corporation and in such manner as shall from time to
time be determined by resolution of the board of directors.
SECTION 4. Deposits: All funds of the Corporation not otherwise employed
shall be deposited from time to time to the credit of the Corporation in such
depositories as the board of directors shall direct.
ARTICLE VIII
CERTIFICATES FOR SHARES AND THEIR TRANSFERS
SECTION 1. Certificates for Shares: Shares may, but need not, be
represented by certificates. If certificates are issued, they shall be in such
form as the board of directors shall determine; provided that, at a minimum,
each certificate shall state on its face: (i) the name of the Corporation and
that it is organized under the laws of North Carolina; (ii) the name of the
person to whom issued; and (iii) the number and class of shares and the
designation of the series, if any, the certificate represents. If the
Corporation issues certificates for shares of preferred stock, the designations,
relative rights, preferences, and limitations applicable to that class, and the
variations in rights, preferences, and limitations for each series within that
class (and the authority of the board of directors to determine variations for
future series) must be summarized on the front or back of each certificate;
alternatively, each certificate may state conspicuously on its front or back
that the Corporation will furnish the shareholder this information in writing
and without charge. These certificates shall be signed, either manually or in
facsimile, by the chairman of the board, the president, or any vice president,
and the secretary, any assistant secretary, the treasurer or any assistant
treasurer. They shall be consecutively numbered or otherwise identified and the
name and address of the persons to whom they are issued, with the number of
shares and date of issue, shall be entered on the stock transfer books of the
Corporation.
SECTION 2. Transfer of Shares: Transfer of shares of the Corporation shall
be made only on the stock transfer books of the Corporation by the holder of
record, by his legal representative (who shall furnish proper evidence of
authority to transfer) or by his attorney (whose authority shall be evidenced by
a power of attorney duly executed and filed with the secretary), and only upon
surrender for cancellation of the certificates for such shares.
12
<PAGE>
SECTION 3. Fixing Record Date: For the purpose of determining shareholders
entitled to receive notice of a shareholders meeting, to demand a special
meeting, to vote, to take any other action, or to receive payment, or for any
other purpose, the board of directors may fix in advance a date as the record
date for any such determination of shareholders, such record date in any case to
be not more than seventy (70) days, and, in case of a meeting of shareholders,
not less than ten (10) days, before the date on which the particular action
requiring such determination of shareholders is to be taken. If no record date
is fixed for the determination of shareholders entitled to notice of or to vote
at a meeting of shareholders, or of shareholders entitled to receive a
distribution, the day before the first notice of the meeting is mailed or the
day on which the board of directors authorize the distribution, as the case may
be, shall be the record date for such determination of shareholders.
When a determination of shareholders entitled to notice of or to vote at
any meeting of shareholders has been made as provided in this Section, such
determination shall apply to any adjournment of such meeting unless the board of
directors fixes a new record date, which it must do if the meeting is adjourned
to a date more than 120 days after the date fixed for the original meeting.
SECTION 4. Lost Certificates: The board of directors may authorize the
issuance of a new share certificate in place of a certificate claimed to have
been lost or destroyed, upon receipt of an affidavit of such fact from the
person claiming the loss or destruction. When authorizing the issuance of a new
certificate, the board may require the claimant to give the Corporation a bond
in such sum as it may direct to indemnify the Corporation against loss from any
claim with respect to the certificate claimed to have been lost or destroyed; or
the board may, by resolution reciting that the circumstances justify such
action, authorize the issuance of the new certificate without requiring such a
bond.
SECTION 5. Reacquired Shares: A corporation may acquire its own shares and
shares so acquired constitute authorized but unissued shares.
ARTICLE IX
GENERAL PROVISIONS
SECTION 1. Distributions: The board of directors may from time to time
declare, and the Corporation may make, distributions on its outstanding shares
in the manner and subject to the terms and conditions provided by the Act and by
the articles of incorporation.
SECTION 2. Seal: The corporate seal of the Corporation shall consist of two
concentric circles between which is the name of the Corporation and in the
center of which is inscribed "CORPORATE SEAL" or "SEAL," and which shall have
such other characteristics as the board of directors may determine.
SECTION 3. Records and Reports: All of the Corporation's records shall be
maintained in written form or in another form capable of conversion into written
form within a reasonable time.
The Corporation shall keep as permanent records minutes of all meetings of
its incorporators, shareholders, and board of directors, a record of all actions
taken by the shareholders or board of directors without a meeting, and a record
of all actions taken by a committee of the board of directors in place of the
board of directors.
13
<PAGE>
The Corporation shall keep a copy of the following records at its principal
office: (i) the articles of incorporation and all amendments to them currently
in effect; (ii) these bylaws and all amendments to them currently in effect;
(iii) resolutions adopted by its board of directors creating one or more classes
or series of shares and fixing their relative rights, preferences, and
limitations, (if shares issued pursuant to those resolutions are outstanding);
(iv) the minutes of all shareholders meetings and records of all actions taken
by shareholders without a meeting during the past three years; (v) all written
communications to shareholders generally within the past three years; (vi) the
annual financial statements described below, prepared during the past three
years; (vii) a list of the names and business addresses of its current directors
and officers; and (viii) its most recent annual report delivered to the North
Carolina Secretary of State.
The Corporation shall prepare and make available to its shareholders annual
financial statements for the Corporation and its subsidiaries that: (i) include
a balance sheet as of the end of the fiscal year, an income statement for that
year, and a statement of cash flows for that year; and (ii) are accompanied by
either (x) a report of a public accountant on the annual financial statements,
or (y) a statement by the chief financial officer or treasurer stating his
reasonable belief whether the annual financial statements were prepared on the
basis of generally accepted accounting principles (and, if not, describing the
basis of preparation) and describing any respects in which the statements were
not prepared on a basis of accounting consistent with the statements prepared
for the preceding year. These annual financial statements, or a written notice
of their availability, shall be mailed to each shareholder within 120 days after
the close of each fiscal year of the Corporation. On written request from a
shareholder who was not mailed the annual financial statements, the Corporation
shall mail to him the latest such statements.
The Corporation shall also prepare and file with the North Carolina
Secretary of State an annual report in such form as required by N.C. Gen. Stat.
Section 55-16-22, or its successor.
SECTION 4.01. Right to Indemnification: Each person who was or is a party
or is threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative and whether
formal or informal (hereinafter, a "proceeding" and including without
limitation, a proceeding brought by or on behalf of the Corporation itself), by
reason that he is or was a director or officer of the Corporation, or was
serving at the request of the Corporation as a director, officer, partner,
trustee, employee or agent of another foreign or domestic corporation,
partnership, joint venture, trust or other enterprise, or as a trustee or
administrator under an employee benefit plan, whether the basis of such
proceeding is alleged action in an official capacity as a director or officer or
in any other capacity while serving as a director, officer, partner, trustee,
employee, agent, trustee or administrator, shall be indemnified and held
harmless by the Corporation to the fullest extent authorized by the Act as the
same exists or may hereafter be amended (but, in the case of any such amendment,
only to the extent that such amendment permits the Corporation to provide
broader indemnification rights than the Act permitted the Corporation to provide
prior to such amendment) against all expense, liability and loss (including
attorney's fees, judgments, fines, excise taxes or penalties and amounts paid or
to be paid in settlement) reasonably incurred or suffered by such person in
connection therewith, and such indemnification shall continue as to a person who
has ceased to serve in the capacity that initially entitled such person to
indemnification hereunder and shall inure to the benefit of his heirs, executors
and administrators; provided, however, that the Corporation shall indemnify any
such person seeking indemnification in connection with a proceeding (or part
thereof) initiated by such person only if such proceeding (or part thereof) was
authorized by the board of directors of the Corporation. The right to
indemnification conferred in this Article shall be a contract right and shall
include the right to be paid by the Corporation the expenses incurred in
defending any such proceeding in advance of its final disposition; provided,
however, that, if the Act so requires, the payment of expenses incurred by a
director or officer in his capacity as a director or officer (and not in any
other capacity in which service was or is rendered by such person while a
director or officer, including,
14
<PAGE>
without limitation, service to an employee benefit plan) in advance of the final
disposition of a proceeding shall be made only upon delivery to the Corporation
of an undertaking, by or on behalf of such director or officer, to repay all
amounts so advanced if it shall ultimately be determined that the director or
officer is not entitled to be indemnified under this Section or otherwise.
SECTION 4.02. Right of Claimant to Bring Suit: If a claim under Section
4.01 hereof is not paid in full by the Corporation within ninety (90) days after
a written claim has been received by the Corporation, the claimant may at any
time thereafter bring suit against the Corporation to recover the unpaid amount
of the claim and, if successful in whole or in part, the claimant shall be
entitled to be paid also the expense of prosecuting such claim. It shall be a
defense to any such action (other than an action brought to enforce a claim for
expenses incurred in defending any proceeding in advance of its final
disposition where the required undertaking, if any is required, has been
tendered to the Corporation) that the claimant has not met the standards of
conduct which make it permissible under the Act for the Corporation to indemnify
the claimant for the amount claimed, but the burden of proving such defense
shall be on the Corporation. Neither the failure of the Corporation (including
its board of directors, independent legal counsel, or its shareholders) to have
made a determination prior to the commencement of such action that
indemnification of the claimant is proper in the circumstances because he has
met the applicable standard of conduct set forth in the Act, nor an actual
determination by the Corporation (including its board of directors, independent
legal counsel, or its shareholders) that the claimant has not met the applicable
standard of conduct, shall be a defense to the action or create a presumption
that the claimant has not met the applicable standard of conduct.
SECTION 4.03. Nonexclusivity of Rights: The right to indemnification and
the advancement and payment of expenses conferred in this Article shall not be
exclusive of any other right which any person may have or hereafter acquire
under any law (common or statutory), the Corporation's articles of
incorporation, these bylaws, any agreement, the vote of shareholders or
disinterested directors or otherwise.
SECTION 4.04. Insurance: The Corporation may maintain insurance, at its
expense, to protect itself and any person who is or was serving as a director,
officer, employee or agent of the Corporation or is or was serving at the
request of the Corporation as a director, officer, partner, trustee, employee or
agent of another foreign or domestic corporation, partnership, joint venture,
trust or other enterprise or trustee or administrator under an employee benefit
plan against any liability asserted against and incurred by that person in any
such capacity, or arising out of his status as such, whether or not the
Corporation would have the power to indemnify that person against such liability
under the Act.
SECTION 4.05. Savings Clause. If this Article or any portion hereof shall
be invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify and hold harmless each director and
officer of the Corporation, as to costs, charges and expenses (including
attorneys' fees), judgments, fines, and amounts paid in settlement with respect
to any action, suit or proceeding, whether civil, criminal, administrative or
investigative to the full extent permitted by any applicable portion of this
Article that shall not have been invalidated and to the full extent permitted by
applicable law.
SECTION 5. Fiscal Year: The fiscal year of the Corporation shall be fixed
by the board of directors.
SECTION 6. Amendments: (a) The board of directors may amend or repeal these
bylaws, except to the extent otherwise provided in the articles of
incorporation, a bylaw adopted by the shareholders, or the Act, and except that
a bylaw adopted, amended or repealed by the shareholders may not be readopted,
15
<PAGE>
amended or repealed by the board of directors if neither of the articles of
incorporation nor a bylaw adopted by the shareholders authorizes the board of
directors to adopt, amend, or repeal that particular bylaw or the bylaws
generally; provided, however, the original adoption of these bylaws by the
shareholders shall not preclude the board of directors from thereafter
readopting, amending, or repealing these bylaws.
(b) The Corporation's shareholders may adopt, amend, alter, change, or
repeal any of these bylaws; provided that, in addition to any requirements of
the Act (and notwithstanding the fact that a lesser percentage may be specified
in the Act), the affirmative vote of the holders of at least sixty-six and
two-thirds percent (66 2/3%) of the voting power of all shares then entitled to
vote generally in the election of directors, voting together as a single class,
shall be required for the shareholders to adopt, amend, alter, change, or repeal
any of these bylaws.
(c) A bylaw that fixes a greater quorum or voting requirement for the board
of directors may be amended or repealed: (i) if originally adopted by the
shareholders, only by the shareholders, unless the bylaw permits amendment or
repeal by the board of directors; or (ii) if originally adopted by the board of
directors, either by the shareholders or by the board of directors.
(d) A bylaw referred to in Sub-Section (c) above: (i) may not be adopted by
the board of directors by a vote of less than a majority of the directors then
in office; and (ii) may not itself be amended by a quorum or vote of the
directors less than the quorum or vote therein prescribed or prescribed by a
bylaw adopted or amended by the shareholders.
SECTION 7. Opt-Out of North Carolina Shareholder Protection Act: The
provisions of the North Carolina Shareholder Protection Act shall not be
applicable to the Corporation.
SECTION 8. Opt-Out of North Carolina Control Share Acquisition Act: The
provisions of the North Carolina Control Share Acquisition Act shall not be
applicable to the Corporation.
SECTION 9. Emergencies: In anticipation of or during an emergency, the
board of directors may: (i) modify lines of succession to accommodate the
incapacity of any director, officer, employee, or, agent; and (ii) relocate the
principal office or designate alternative principal or regional offices, or
authorize the officers to do so.
During an emergency: (i) notice of a meeting of the board of directors need
be given only to those directors whom it is practicable to reach and may be
given in any practicable manner, including by publication and radio; and (ii)
one or more officers present at a meeting of the board of directors may be
deemed to be directors for the meeting, in order of rank and within the same
rank in order of seniority, as necessary to achieve a quorum.
SECTION 10. Severability: Should any provision of these bylaws become
ineffective or be declared to be invalid for any reason, such provision shall be
severable from the remainder of these bylaws and all other provisions of these
bylaws shall continue to be in full force and effect.
ATTESTED:
- ----------------------------------------
Secretary
EXHIBIT 4.01
NUMBER INTERACTIVE MAGIC, INC. SHARES
INCORPORATED UNDER THE LAWS
OF THE STATE OF NORTH CAROLINA
COMMON STOCK COMMON STOCK
CUSIP __________
See Reverse for Certain Definitions
This Certifies that __________ is the owner of __________ fully paid and
non-assessable Shares of the Common Stock, Par Value $.10 per Share of
Interactive Magic, Inc. transferable on the books of the Corporation by the
holders hereof in person or by duly authorized attorney upon surrender of this
Certificate properly endorsed.
This Certificate is not valid unless countersigned by the Transfer
Agent and registered by the Registrar.
Witness the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated: __________
/s/ William H. Marks /s/ J.W. Stealey
Secretary Chief Executive Officer
COUNTERSIGNED AND REGISTERED:
WACHOVIA BANK AND TRUST COMPANY
TRANSFER AGENT AND REGISTRAR
AUTHORIZED SIGNATURE
<PAGE>
INTERACTIVE MAGIC, INC.
This Corporation will furnish without charge to each shareholder who so
requests a statement of the powers, designations, preferences and relative,
participating, optional, or other special rights of each class of stock or
series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C>
TEN COM as tenants in common
TEN ENT as tenants by the entirety
JT TEN as joint tenants with right of survivorship
UNIF TRANS MIN ACT ___________ Custodian ______________
(Cust) (Minor)
Under Uniform Transfers to Minors Act __________________
(State)
Additional abbreviations may also be used though not in the above list.
For value received, hereby sell, assign and transfer unto
----------------------------------
</TABLE>
Please insert Social Security or other identifying number of assignee
- -----------------------------------------------------------------------
- ----------------------------------------------------------------------
Please print or type/write name and address of assignee
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
Shares
- --------------------------------------------------------------------
of the Stock represented by the within Certificate, and do hereby irrevocably
constitute and appoint __________________ Attorney, to transfer the said shares
of the books of the within name Corporation with full power of substitution.
Dated __________________
__________________
__________________
NOTICE: THE SIGNATURE(S) TO
THIS ASSIGNMENT MUST
CORRESPOND WITH THE
NAMES(S) AS WRITTEN UPON
THE FACE OF THE
CERTIFICATE, IN EVERY
PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT
OR ANY CHANGE WHATSOEVER.
<PAGE>
Signature(s) Guaranteed: ___________________________
THE SIGNATURE(S) SHOULD BE
GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION,
(BANK, STOCKBROKER, SAVINGS
AND LOAN ASSOCIATION AND
CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEED
MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE
17Ad-15.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, OR DESTROYED, THE
CORPORATION MAY REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE OF A
REPLACEMENT CERTIFICATE.
WARRANT AGREEMENT dated as of _______ __, 1998 between
Interactive Magic, Inc., a North Carolina corporation (the "Company"), on one
hand, and BlueStone Capital Partners, L.P. ("BlueStone") and Ferris, Baker Watts
Incorporated (together with BlueStone collectively hereinafter referred to as
the "Representatives"), on the other hand.
W I T N E S S E T H:
WHEREAS, the Company proposes to issue to the Representatives,
in their individual capacity and not as representatives of the several
Underwriters (defined below), warrants ("Warrants") to purchase up to 420,000
(as such number may be adjusted from time to time pursuant to Article 8 of this
Agreement) shares (the "Shares") of common stock, par value $.10 per share, of
the Company (the "Common Stock"); and
WHEREAS, the Representatives have agreed, pursuant to the
underwriting agreement (the "Underwriting Agreement") dated _______ __, 1998
between the Representatives, as representatives of the several underwriters
named in Schedule A to the Underwriting Agreement (the "Underwriters") and the
Company, to act as representatives of the several Underwriters in connection
with the Company's proposed public offering (the "Public Offering") of 2,800,000
shares of Common Stock (the "Public Shares") at an initial public offering price
of $____ per share; and
WHEREAS, the Warrants issued pursuant to this Agreement are
being issued by the Company to the Representatives and/or to their designees who
are officers or partners of the Representatives and/or, at the Representatives'
direction, to members of the selling group or underwriting syndicate and/or
their respective officers or partners (collectively, the "Designees"), in
consideration for, and as part of the Representatives' compensation in
connection with, the Representatives' acting as representatives of the several
Underwriters pursuant to the Underwriting Agreement;
NOW, THEREFORE, in consideration of the premises, the payment
by the Representatives to the Company of FOUR HUNDRED AND TWENTY DOLLARS ($420),
the agreements herein set forth and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Grant.
The Representatives and/or their Designees are hereby granted
the right to purchase, at any time from ______ __, 1999 until 5:00 P.M., New
York City time, on ______ __, 2003, (the "Warrant Exercise Term"), up to 420,000
fully paid and non-
<PAGE>
assessable Shares at an initial exercise price (subject to adjustment as
provided in Article 8 hereof) of $_______ per Share.
2. Warrant Certificates.
The warrant certificates delivered and to be delivered
pursuant to this Agreement (the "Warrant Certificates") shall be in the form set
forth as Exhibit A attached hereto and made a part hereof, with such appropriate
insertions, omissions, substitutions and other variations as required or
permitted by this Agreement.
3. Exercise of Warrants.
3.1 Cash Exercise. The Warrants initially are
exercisable at a price of $______ per Share, payable in cash or by check to the
order of the Company, or any combination of thereof, subject to adjustment as
provided in Article 8 hereof. Upon surrender of a Warrant Certificate with the
annexed Form of Election to Purchase duly executed, together with payment of the
Exercise Price (as hereinafter defined) for the Shares purchased, at the
Company's principal offices in North Carolina (currently located at 215
Southport Drive, suite 1000, Morrisville, North Carolina 27560) the registered
holder of a Warrant Certificate ("Holder" or "Holders") shall be entitled to
receive a certificate or certificates for the Shares so purchased. The purchase
rights represented by each Warrant Certificate are exercisable at the option of
the Holder thereof, in whole or in part (but not as to fractional shares of the
Common Stock). In the case of the purchase of less than all the Shares
purchasable under any Warrant Certificate, the Company shall cancel said Warrant
Certificate upon the surrender thereof and shall execute and deliver a new
Warrant Certificate of like tenor for the balance of the Shares purchasable
thereunder.
3.2 Cashless Exercise. At any time during the Warrant
Exercise Term, the Holder may, at the Holder's option, exchange, in whole or in
part, the Warrants represented by such Holder's Warrant Certificate (a "Warrant
Exchange"), into the number of Shares determined in accordance with this Section
3.2, by surrendering such Warrant Certificate at the principal office of the
Company or at the office of its transfer agent, accompanied by a notice stating
such Holder's intent to effect such exchange, the number of Warrants to be so
exchanged and the date on which the Holder requests that such Warrant Exchange
occur (the "Notice of Exchange"). The Warrant Exchange shall take place on the
date specified in the Notice of Exchange or, if later, the date the Notice of
Exchange is received by the Company (the "Exchange Date"). Certificates for the
Shares issuable upon such Warrant Exchange and, if applicable, a new Warrant
Certificate of like tenor representing the Warrants which were subject to the
surrendered Warrant Certificate and not included
-2-
<PAGE>
in the Warrant Exchange, shall be issued as of the Exchange Date and delivered
to the Holder within three (3) days following the Exchange Date. In connection
with any Warrant Exchange, the Holder shall be entitled to subscribe for and
acquire (i) the number of Shares (rounded to the next highest integer) which
would, but for the Warrant Exchange, then be issuable pursuant to the provision
of Section 3.1 above upon the exercise of the Warrants specified by the Holder
in its Notice of Exchange (the "Total Number") less (ii) the number of Shares
equal to the quotient obtained by dividing (a) the product of the Total Number
and the existing Exercise Price (as hereinafter defined) by (b) the Market Price
(as hereinafter defined) of a Public Share on the day preceding the Warrant
Exchange. "Market Price" at any date shall be deemed to be the last reported
sale price, or, in case no such reported sales takes place on such day, the
average of the last reported sale prices for the last three (3) trading days, in
either case as officially reported by the principal securities exchange on which
the Common Stock is listed or admitted to trading or as reported in the NASDAQ
National market System, or, if the Common Stock is not listed or admitted to
trading on any national securities exchange or quoted on the NASDAQ National
Market System, the closing bid price as furnished by (i) the National
Association of Securities Dealers, Inc. through NASDAQ or (ii) a similar
organization if NASDAQ is no longer reporting such information.
4. Issuance of Certificates.
Upon the exercise of the Warrants, the issuance of
certificates for the Shares purchased shall be made forthwith (and in any event
within three (3) business days thereafter) without charge to the Holder thereof
including, without limitation, any tax which may be payable in respect of the
issuance thereof, and such certificates shall (subject to the provisions of
Article 5 hereof) be issued in the name of, or in such names as may be directed
by, the Holder thereof; provided, however, that the Company shall not be
required to pay any tax which may be payable in respect of any transfer involved
in the issuance and delivery of any such certificates in a name other than that
of the Holder and the Company shall not be required to issue or deliver such
certificates unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
The Warrant Certificates and the certificates representing the
Shares shall be executed on behalf of the Company by the manual or facsimile
signature of the present or any future Chairman or Vice Chairman of the Board of
Directors or President or Vice President of the Company under its corporate seal
reproduced thereon, attested to by the manual or facsimile signature of the
present or any future Secretary or Assistant Secretary of the Company. Warrant
Certificates shall be dated
-3-
<PAGE>
the date of execution by the Company upon initial issuance, division, exchange,
substitution or transfer.
Upon exercise, in part or in whole, of the Warrants,
certificates representing the Shares shall bear a legend substantially similar
to the following:
"The securities represented by this certificate have not been
registered for purposes of public distribution under the Securities Act
of 1933, as amended (the "Act"), and may not be offered or sold except
(i) pursuant to an effective registration statement under the Act, (ii)
to the extent applicable, pursuant to Rule 144 under the Act (or any
similar rule under such Act relating to the disposition of securities),
or (iii) upon the delivery by the holder to the Company of an opinion
of counsel, reasonably satisfactory to counsel to the Company, stating
that an exemption from registration under such Act is available."
5. Restriction on Transfer of Warrants.
The Holder of a Warrant Certificate, by the Holder's
acceptance thereof, covenants and agrees that the Warrants are being acquired as
an investment and not with a view to the distribution thereof, and that the
Warrants may not be sold, transferred, assigned, hypothecated or otherwise
disposed of, in whole or in part, for a period of one (1) year from the date
hereof, except to the Designees.
6. Price.
6.1. Initial and Adjusted Exercise Price. The
initial exercise price of each Warrant shall be $____ per Share. The adjusted
exercise price per Share shall be the price which shall result from time to time
from any and all adjustments of the initial exercise price in accordance with
the provisions of Article 8 hereof.
6.2. Exercise Price. The term "Exercise Price"
herein shall mean the initial exercise price or the adjusted exercise price,
depending upon the context.
7. Registration Rights.
7.1. Registration Under the Securities Act of
1933. None of the Warrants or Shares have been registered for purposes of public
distribution under the Securities Act of 1933, as amended (the "Act").
7.2. Registrable Securities. As used herein the
term "Registrable Security" means each of the Warrants, the Shares and any
shares of Common Stock issued upon any stock split
-4-
<PAGE>
or stock dividend in respect of such Shares; provided, however, that with
respect to any particular Registrable Security, such security shall cease to be
a Registrable Security when, as of the date of determination, (i) it has been
effectively registered under the Act and disposed of pursuant thereto, (ii)
registration under the Act is no longer required for the subsequent public
distribution of such security or (iii) it has ceased to be outstanding. The term
"Registrable Securities" means any and/or all of the securities falling within
the foregoing definition of a "Registrable Security." In the event of any
merger, reorganization, consolidation, recapitalization or other change in
corporate structure affecting the Common Stock, such adjustment shall be made in
the definition of "Registrable Security" as is appropriate in order to prevent
any dilution or enlargement of the rights granted pursuant to this Article 7.
7.3. Piggyback Registration. If, at any time
during the seven years following the effective date of the Public Offering, the
Company proposes to prepare and file one or more post-effective amendments to
the registration statement filed in connection with the Public Offering or any
new registration statement or post-effective amendments thereto covering equity
or debt securities of the Company, or any such securities of the Company held by
its shareholders (in any such case, other than in connection with a merger,
acquisition or pursuant to Form S-8 or successor form), (for purposes of this
Article 7, collectively, the "Registration Statement"), it will give written
notice of its intention to do so by registered mail ("Notice"), at least thirty
(30) business days prior to the filing of each such Registration Statement, to
all holders of the Registrable Securities. Upon the written request of such a
holder (a "Requesting Holder"), made within twenty (20) business days after
receipt of the Notice, that the Company include any of the Requesting Holder's
Registrable Securities in the proposed Registration Statement, the Company
shall, as to each such Requesting Holder, use its best efforts to effect the
registration under the Act of the Registrable Securities which it has been so
requested to register ("Piggyback Registration"), at the Company's sole cost and
expense and at no cost or expense to the Requesting Holders; provided, however,
that if, in the written opinion of the Company's managing underwriter, if any,
for such offering, the inclusion of all or a portion of the Registrable
Securities requested to be registered, when added to the securities being
registered by the Company or the selling shareholder(s), will exceed the maximum
amount of the Company's securities which can be marketed (i) at a price
reasonably related to their then current market value, or (ii) without otherwise
materially adversely affecting the entire offering, then the Company may exclude
from such offering all or a portion of the Registrable Securities which it has
been requested to register.
Notwithstanding the provisions of this Section 7.3, the
Company shall have the right at any time after it shall have
-5-
<PAGE>
given written notice pursuant to this Section 7.3 (irrespective of whether any
written request for inclusion of Registrable Securities shall have already been
made) to elect not to file any such proposed Registration Statement, or to
withdraw the same after the filing but prior to the effective date thereof.
7.4. Demand Registration.
(a) At any time during the Warrant Exercise
Term, any "Majority Holder" (as such term is defined in Section 7.4.(c) below)
of the Registrable Securities shall have the right (which right is in addition
to the piggyback registration rights provided for under Section 7.3 hereof),
exercisable by written notice to the Company (the "Demand Registration
Request"), to have the Company prepare and file with the Securities and Exchange
Commission (the "Commission"), on one occasion, at the sole expense of the
Company (except as provided in Section 7.5.(b) hereof, a Registration Statement
and such other documents, including a prospectus, as may be necessary (in the
opinion of both counsel for the Company and counsel for such Majority Holder),
in order to comply with the provisions of the Act, so as to permit a public
offering and sale of the Registrable Securities by the holders thereof. The
Company shall use its best efforts to cause the Registration Statement to become
effective under the Act, so as to permit a public offering and sale of the
Registrable Securities by the holders thereof. Once effective, the Company will
use its best efforts to maintain the effectiveness of the Registration Statement
until the earlier of (i) the date that all of the Registrable Securities have
been sold or (ii) the date that the holders of the Registrable Securities
receive an opinion of counsel to the Company that all of the Registrable
Securities may be freely traded (without limitation or restriction as to
quantity or timing and without registration under the Act) under Rule 144(k)
promulgated under the Act or otherwise. Notwithstanding the foregoing, in the
event the Company is engaged in a transaction involving a merger or acquisition
which requires the filing of financial statements with the Commission, then the
Holders agree that a Demand Registration Request will not be effective for 75
days following the consummation of such transaction, provided that the Company
gives written notice of such transaction to the Holders within five (5) business
days of the Demand Registration Request.
(b) The Company covenants and agrees to give
written notice of any Demand Registration Request to all holders of the
Registrable Securities within ten (10) business days from the date of the
Company's receipt of any such Demand Registration Request. After receiving
notice from the Company as provided in this Section 7.4(b), holders of
Registrable Securities may request the Company to include their Registrable
Securities in the Registration Statement to be filed pursuant to Section 7.4(a)
hereof by notifying the Company of their decision to have such
-6-
<PAGE>
securities included within ten (10) days of their receipt of the
Company's notice.
(c) The term "Majority Holder" as used in
Section 7.4 hereof shall mean any holder or any combination of holders of
Registrable Securities, if included in such holders' Registrable Securities are
that aggregate number of Shares (including Shares already issued and Shares
issuable pursuant to the exercise of outstanding Warrants) as would constitute a
majority of the aggregate number of Shares (including Shares already issued and
Shares issuable pursuant to the exercise of outstanding Warrants) included in
all the Registrable Securities.
7.5. Covenants of the Company With Respect to
Registration. The Company covenants and agrees as follows:
(a) In connection with any registration
under Section 7.4 hereof, the Company shall file the Registration Statement as
expeditiously as possible, but in any event no later than thirty (30) business
days following receipt of any demand therefor, shall use its best efforts to
have any such Registration Statement declared effective at the earliest possible
time, and shall furnish each holder of Registrable Securities such number of
prospectuses as shall reasonably be requested.
(b) The Company shall pay all costs, fees
and expenses (other than underwriting fees, discounts and nonaccountable expense
allowances applicable to the Registrable Securities and the fees and expenses of
counsel retained by the holders of the Registrable Securities) in connection
with all Registration Statements filed pursuant to Sections 7.3. and 7.4.(a)
hereof including, without limitation, the Company's legal and accounting fees,
printing expenses, and blue sky fees and expenses.
(c) The Company will take all necessary
action which may be required in qualifying or registering the Registrable
Securities included in the Registration Statement for offering and sale under
the securities or blue sky laws of such states as are reasonably requested by
the holders of such securities, provided that the Company shall not be obligated
to execute or file any general consent to service of process or to qualify as a
foreign corporation to do business under the laws of any such jurisdiction.
(d) The Company shall indemnify any holder
of the Registrable Securities to be sold pursuant to any Registration Statement
and any underwriter or person deemed to be an underwriter under the Act and each
person, if any, who controls such holder or underwriter or person deemed to be
an underwriter within the meaning of Section 15 of the Act or Section 20(a) of
the Securities Exchange Act of 1934, as amended ("Exchange Act"), against all
loss, claim, damage, expense or liability (including
-7-
<PAGE>
all expenses reasonably incurred in investigating, preparing or defending
against any claim whatsoever) to which any of them may become subject under the
Act, the Exchange Act or otherwise, arising from such registration statement to
the same extent and with the same effect as the provisions pursuant to which the
Company has agreed to indemnify the Underwriters as set forth in Section 7 of
the Underwriting Agreement and to provide for just and equitable contribution as
set forth in Section 8 of the Underwriting Agreement.
(e) Any holder of Registrable Securities to
be sold pursuant to a Registration Statement, and such Holder's successors and
assigns, shall severally, and not jointly, indemnify, the Company, its officers
and directors and each person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against
all loss, claim, damage or expense or liability (including all expenses
reasonably incurred in investigating, preparing or defending against any claim
whatsoever) to which they may become subject under the Act, the Exchange Act or
otherwise, arising from information furnished by or on behalf of such Holder, or
such Holder's successors or assigns, for specific inclusion in such Registration
Statement to the same extent and with the same effect as the provisions pursuant
to which the Underwriters have agreed to indemnify the Company as set forth in
Section 7 of the Underwriting Agreement and to provide for just and equitable
contribution as set forth in Section 8 of the Underwriting Agreement.
(f) Nothing contained in this Agreement
shall be construed as requiring any Holder to exercise the Warrants held by such
Holder prior to the initial filing of any Registration Statement or the
effectiveness thereof.
(g) The Company shall promptly deliver
copies of all correspondence between the Commission and the Company, its counsel
or auditors and all memoranda relating to discussions with the Commission or its
staff with respect to the Registration Statement to each Holder of Registrable
Securities included for registration in such Registration Statement pursuant to
Section 7.3 or Section 7.4 hereof that requests such correspondence and
memoranda and to the managing underwriter, if any, of the offering in connection
with which such Holder's Registrable Securities are being registered and shall
permit each such Holder and managing underwriter to do such investigation, upon
reasonable advance notice, with respect to information contained in or omitted
from the Registration Statement as it deems reasonably necessary to comply with
applicable securities laws or rules of the National Association of Securities
Dealers, Inc. Such investigation shall include access to books, records and
properties and opportunities to discuss the business of the Company with its
officers and independent auditors, all to such
-8-
<PAGE>
reasonable extent and at such reasonable times and as often as any such Holder
or managing underwriter shall reasonably request.
8. Adjustments of Exercise Price and Number of
Shares.
8.1 Computation of Adjusted Price. In case the
Company shall at any time after the date hereof pay a dividend in shares of
Common Stock or make a distribution in shares of Common Stock, then upon such
dividend or distribution, the Exercise Price in effect immediately prior to such
dividend or distribution shall forthwith be reduced to a price determined by
dividing:
(a) an amount equal to the total
number of shares of Common Stock outstanding immediately prior to such dividend
or distribution multiplied by the Exercise Price in effect immediately prior to
such dividend or distribution, by
(b) the total number of shares of
Common Stock outstanding immediately after such issuance or sale.
For the purposes of any computation to be
made in accordance with the provisions of this Section 8.1, the Common Stock
issuable by way of dividend or other distribution on any stock of the Company
shall be deemed to have been issued immediately after the opening of business on
the date following the date fixed for the determination of stockholders entitled
to receive such dividend or other distribution.
8.2. Subdivision and Combination. In case the
Company shall at any time subdivide or combine the outstanding shares of Common
Stock, the Exercise Price shall forthwith be proportionately decreased in the
case of subdivision or increased in the case of combination.
8.3. Adjustment in Number of Shares. Upon each
adjustment of the Exercise Price pursuant to the provisions of this Article 8,
the number of Shares issuable upon the exercise of each Warrant shall be
adjusted to the nearest full number by multiplying a number equal to the
Exercise Price in effect immediately prior to such adjustment by the number of
Shares issuable upon exercise of the Warrants immediately prior to such
adjustment and dividing the product so obtained by the adjusted Exercise Price.
8.4. Reclassification, Consolidation, Merger, etc.
In case of any reclassification or change of the outstanding shares of Common
Stock (other than a change in par value to no par value, or from no par value to
par value, or as a result of a subdivision or combination), or in the case of
any consolidation of the Company with, or merger of the Company into, another
corporation (other than a consolidation or merger in which the Company is the
surviving corporation and which does not result in any reclassification or
change of the outstanding shares of
-9-
<PAGE>
Common Stock, except a change as a result of a subdivision or combination of
such shares or a change in par value, as aforesaid), or in the case of a sale or
conveyance to another corporation of the property of the Company as an entirety,
the Holders shall thereafter have the right to purchase the kind and number of
shares of stock and other securities and property receivable upon such
reclassification, change, consolidation, merger, sale or conveyance as if the
Holders were the owners of the shares of Common Stock underlying the Warrants
immediately prior to any such events at a price equal to the product of (x) the
number of shares of Common Stock issuable upon exercise of the Holder's Warrants
and (y) the Exercise Price in effect immediately prior to the record date for
such reclassification, change, consolidation, merger, sale or conveyance as if
such Holders had exercised the Warrants.
8.5. Determination of Outstanding Shares of
Common Stock. The number of shares of Common Stock at any one time outstanding
shall include the aggregate number of shares of Common Stock issued and the
aggregate number of shares of Common Stock issuable upon the exercise of
options, rights, warrants and upon the conversion or exchange of convertible or
exchangeable securities.
8.6 Dividends and Other Distributions with
Respect to Outstanding Securities. In the event that the Company shall at any
time prior to the exercise of all Warrants make any distribution of its assets
to holders of its Common Stock as a liquidating or a partial liquidating
dividend, then the holder of Warrants who exercises its Warrants after the
record date for the determination of those holders of Common Stock entitled to
such distribution of assets as a liquidating or partial liquidating dividend
shall be entitled to receive for the Warrant Price per Warrant, in addition to
each share of Common Stock, the amount of such distribution (or, at the option
of the Company, a sum equal to the value of any such assets at the time of such
distribution as determined by the Board of Directors of the Company in good
faith) which would have been payable to such holder had he been the holder of
record of the Common Stock receivable upon exercise of his Warrant on the record
date for the determination of those entitled to such distribution. At the time
of any such dividend or distribution, the Company shall make appropriate
reserves to ensure the timely performance of the provisions of this Subsection
8.6.
8.7 Subscription Rights for Shares of Common
Stock or Other Securities. In the case the Company or an affiliate of the
Company shall at any time after the date hereof and prior to the exercise of all
the Warrants issue any rights, warrants or options to subscribe for shares of
Common Stock or any other securities of the Company or of such affiliate to all
the shareholders of the Company, the Holders of unexercised Warrants on the
record date set by the Company or such affiliate
-10-
<PAGE>
in connection with such issuance of rights, warrants or options shall be
entitled, in addition to the shares of Common Stock or other securities
receivable upon the exercise of the Warrants, to receive such rights, warrants
or options shall be entitled, in addition to the shares of Common Stock or other
securities receivable upon the exercise of the Warrants, to receive such rights
at the time such rights, warrants or options that such Holders would have been
entitled to receive had they been, on such record date, the holders of record of
the number of whole shares of Common Stock then issuable upon exercise of their
outstanding Warrants (assuming for purposes of this Section 8.7), that the
exercise of the Warrants is permissible immediately upon issuance).
9. Exchange and Replacement of Warrant Certificates.
Each Warrant Certificate is exchangeable without expense, upon
the surrender thereof by the registered Holder at the principal executive office
of the Company, for a new Warrant Certificate of like tenor and date
representing in the aggregate the right to purchase the same number of Shares in
such denominations as shall be designated by the Holder thereof at the time of
such surrender.
Upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of any Warrant
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to it, and reimbursement to the Company of all
reasonable expenses incidental thereto, and upon surrender and cancellation of
the Warrant Certificate, if mutilated, the Company will make and deliver a new
Warrant Certificate of like tenor, in lieu thereof.
10. Elimination of Fractional Interests.
The Company shall not be required to issue certificates
representing fractions of Shares, nor shall it be required to issue scrip or pay
cash in lieu of fractional interests, it being the intent of the parties that
all fractional interests shall be eliminated by rounding any fraction up to the
nearest whole number of Shares.
11. Reservation and Listing of Securities.
The Company shall at all times reserve and keep available out
of its authorized shares of Common Stock, solely for the purpose of issuance
upon the exercise of the Warrants, such number of shares of Common Stock as
shall be issuable upon the exercise thereof. The Company covenants and agrees
that, upon exercise of the Warrants and payment of the Exercise Price therefor,
all Shares issuable upon such exercise shall be duly and validly issued, fully
paid, non-assessable and not subject to the preemptive rights of any
shareholder. As long as the
-11-
<PAGE>
Warrants shall be outstanding, the Company shall use its best efforts to cause
all shares of Common Stock issuable upon the exercise of the Warrants to be
listed on the Nasdaq National Market or listed on such national securities
exchanges as the Common Stock is listed at such time.
12. Notices to Warrant Holders.
Nothing contained in this Agreement shall be construed as
conferring upon the Holder or Holders the right to vote or to consent or to
receive notice as a shareholder in respect of any meetings of shareholders for
the election of directors or any other matter, or as having any rights
whatsoever as a shareholder of the Company. If, however, at any time prior to
the expiration of the Warrants and their exercise, any of the following events
shall occur:
(a) the Company shall take a record of the
holders of its shares of Common Stock for the purpose of entitling them to
receive a dividend or distribution payable otherwise than in cash, or a cash
dividend or distribution payable otherwise than out of current or retained
earnings, as indicated by the accounting treatment of such dividend or
distribution on the books of the Company; or
(b) the Company shall offer to all the holders of its
Common Stock any additional shares of capital stock of the Company or securities
convertible into or exchangeable for shares of capital stock of the Company, or
any option, right or warrant to subscribe therefor; or
(c) a dissolution, liquidation or winding up of
the Company (other than in connection with a consolidation or merger) or a sale
of all or substantially all of its property, assets and business as an entirety
shall be proposed; or
(d) reclassification or change of the outstanding
shares of Common Stock (other than a change in par value to no par value, or
from no par value to par value, or as a result of a subdivision or combination),
consolidation of the Company with, or merger of the Company into, another
corporation (other than a consolidation or merger in which the Company is the
surviving corporation and which does not result in any reclassification or
change of the outstanding shares of Common Stock, except a change as a result of
a subdivision or combination of such shares or a change in par value, as
aforesaid), or a sale or conveyance to another corporation of the property of
the Company as an entirety is proposed; or
(e) The Company or an affiliate of the Company shall
propose to issue any rights to subscribe for shares of
-12-
<PAGE>
Common Stock or any other securities of the Company or of
such affiliate to all the shareholders of the Company;
then, in any one or more of said events, the Company shall give written notice
to the Holder or Holders of such event at least fifteen (15) days prior to the
date fixed as a record date or the date of closing the transfer books for the
determination of the shareholders entitled to such dividend, distribution,
convertible or exchangeable securities or subscription rights, options or
warrants, or entitled to vote on such proposed dissolution, liquidation, winding
up or sale. Such notice shall specify such record date or the date of closing
the transfer books, as the case may be. Failure to give such notice or any
defect therein shall not affect the validity of any action taken in connection
with the declaration or payment of any such dividend or distribution, or the
issuance of any convertible or exchangeable securities or subscription rights,
options or warrants, or any proposed dissolution, liquidation, winding up or
sale.
13. Notices.
All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been duly made when
delivered, or mailed by registered or certified mail, return receipt requested:
(a) If to a registered Holder of the Warrants, to the
address of such Holder as shown on the books of the Company; or
(b) If to the Company, to the address set forth in Section 3
of this Agreement or to such other address as the Company may designate by
notice to the Holders.
14. Supplements and Amendments.
The Company and BlueStone may from time to time supplement or
amend this Agreement without the approval of any Holders of Warrant Certificates
in order to cure any ambiguity, to correct or supplement any provision contained
herein which may be defective or inconsistent with any provisions herein, or to
make any other provisions in regard to matters or questions arising hereunder
which the Company and BlueStone may deem necessary or desirable and which the
Company and the BlueStone deem not to adversely affect the interests of the
Holders of Warrant Certificates.
15. Successors.
All the covenants and provisions of this Agreement by or for
the benefit of the Company and the Holders inure to the benefit of their
respective successors and assigns hereunder.
-13-
<PAGE>
16. Termination.
This Agreement shall terminate at the close of business on
_______ __, 2006. Notwithstanding the foregoing, this Agreement will terminate
on any earlier date when all Warrants have been exercised and all the Shares
have been resold to the public; provided, however, that the provisions of
Section 7.5. hereof shall survive any termination pursuant to this Section 16
until the close of business on _______ __, 2009.
17. Governing Law.
This Agreement and each Warrant Certificate issued hereunder
shall be deemed to be a contract made under the laws of the State of New York
and for all purposes shall be construed in accordance with the laws of said
State.
18. Benefits of This Agreement.
Nothing in this Agreement shall be construed to give to any
person or corporation other than the Company and the Representatives and any
other registered holder or holders of the Warrant Certificates, Warrants or the
Shares any legal or equitable right, remedy or claim under this Agreement; and
this Agreement shall be for the sole and exclusive benefit of the Company and
the Representatives and any other holder or holders of the Warrant Certificates,
Warrants or the Shares.
19. Counterparts.
This Agreement may be executed in any number of counterparts
and each of such counterparts shall for all purposes be deemed to be an
original, and such counterparts shall together constitute but one and the same
instrument.
-14-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed, as of the day and year first above written.
[SEAL] INTERACTIVE MAGIC, INC.
By:
Name:
Title:
Attest:
- -----------------------
BLUESTONE CAPITAL PARTNERS, L.P.
By: BlueStone Capital Management, Inc.,
By:
Kerry J. Dukes,
President
FERRIS, BAKER WATTS INCORPORATED
By:
Name:
Title:
-15-
<PAGE>
EXHIBIT A
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED OR SOLD EXCEPT (i) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (ii) TO THE EXTENT APPLICABLE,
PURSUANT TO RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING
TO THE DISPOSITION OF SECURITIES), OR (iii) UPON THE DELIVERY BY THE HOLDER TO
THE COMPANY OF AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO COUNSEL FOR THE
COMPANY, STATING THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS
AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS
CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREE-
MENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:00 P.M., NEW YORK TIME, _______ __, 2003
No. W- _______ Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that _______________
____________ or registered assigns, is the registered holder of _______ Warrants
to purchase, at any time from _______ __, 1999 until 5:00 P.M. New York City
time on ______ __, 2003 ("Expiration Date"), up to _____ fully-paid and
non-assessable shares ("Shares") of common stock, no par value (the "Common
Stock"), of Interactive Magic, Inc., a North Carolina corporation (the
"Company"), at the initial exercise price, subject to adjustment in certain
events (the "Exercise Price"), of $____ per Share upon surrender of this Warrant
Certificate and payment of the Exercise Price at an office or agency of the
Company, but subject to the conditions set forth herein and in the warrant
agreement dated as of ______ __, 1998 between the Company and BlueStone Capital
Partners, L.P. and Ferris, Baker Watts Incorporated (the "Warrant Agreement").
Payment of the Exercise Price may be made in cash, or by certified or official
bank check in New York Clearing House funds payable to the order of the Company,
or any combination thereof.
No Warrant may be exercised after 5:00 P.M., New York City
time, on the Expiration Date, at which time all Warrants evidenced hereby,
unless exercised prior thereto, shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of
a duly authorized issue of Warrants issued pursuant to the Warrant Agreement,
which Warrant Agreement is hereby incorporated by reference in and made a part
of this instrument and is
<PAGE>
hereby referred to in a description of the rights, limitation of rights,
obligations, duties and immunities thereunder of the Company and the holders
(the words "holders" or "holder" meaning the registered holders or registered
holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of
certain events, the Exercise Price and/or number of the Company's securities
issuable thereupon may, subject to certain conditions, be adjusted. In such
event, the Company will, at the request of the holder, issue a new Warrant
Certificate evidencing the adjustment in the Exercise Price and the number
and/or type of securities issuable upon the exercise of the Warrants; provided,
however, that the failure of the Company to issue such new Warrant Certificates
shall not in any way change, alter, or otherwise impair, the rights of the
holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this
Warrant Certificate at an office or agency of the Company, a new Warrant
Certificate or Warrant Certificates of like tenor and evidencing in the
aggregate a like number of Warrants shall be issued to the transferee(s) in
exchange for this Warrant Certificate, subject to the limitations provided
herein and in the Warrant Agreement, without any charge except for any tax, or
other governmental charge imposed in connection therewith.
Upon the exercise of less than all of the Warrants evidenced
by this Certificate, the Company shall forthwith issue to the holder hereof a
new Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof
as the absolute owner(s) of this Warrant Certificate (notwithstanding any
notation of ownership or other writing hereon made by anyone), for the purpose
of any exercise hereof, and of any distribution to the holder(s) hereof, and for
all other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined
in the Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.
-2-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed under its corporate seal.
Dated: _______ __, 1998 Interactive Magic, Inc.
[SEAL] By:__________________________
Name:
Title:
Attest:
- ----------------------
-3-
<PAGE>
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the
right, represented by this Warrant Certificate, to purchase _________ Shares and
herewith tenders in payment for such Shares cash or a certified or official bank
check payable in New York Clearing House Funds to the order of Interactive
Magic, Inc. in the amount of $______________ , all in accordance with the terms
hereof. The undersigned requests that a certificate for such Shares be
registered in the name of , whose address is __________________, and that such
Certificate be delivered to __________________, whose address is _____________.
Dated: Signature:
(Signature must conform in
all respects to name of
holder as specified on the
face of the Warrant
Certificate.)
--------------------------------
--------------------------------
(Insert Social Security or Other
Identifying Number of Holder)
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such
holder desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED ___________________________________________
hereby sells, assigns and transfers unto
________________________________________________________________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint _______________, Attorney, to
transfer the within Warrant Certificate on the books of the within-named
Company, with full power of substitution.
Dated: Signature:____________________
(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant Certificate)
- -------------------------------
- -------------------------------
(Insert Social Security or Other
Identifying Number of Assignee)
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT, dated as of February 4, 1998, by and between
INTERACTIVE MAGIC, INC., a corporation organized under the laws of the State of
Maryland (the "Company"), and VERTICAL FINANCIAL HOLDINGS, a corporation
organized under the laws of Liechtenstein (the "Investor").
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Purchase and Sale of Shares
1.1. Agreement to Purchase. Subject to the terms and conditions of
this Agreement and in reliance on the representations, warranties and
agreements of the Company contained herein, the Investor agrees to purchase
at the Closing (as defined in Section 1.2 below), and the Company agrees to
sell and issue to the Investor at the Closing, 1,552,915 shares (the
"Shares") of the Company's Series B Convertible Preferred Stock, par value
$.10 per share (the "Series B Preferred Stock"), for an aggregate purchase
price of $3,500,000 (the "Purchase Price").
1.2. Closing. The purchase and sale of the Shares to be purchased by
the Investor shall take place at the offices of Bachner, Tally, Polevoy &
Misher LLP, New York, New York, on February 4, 1998, or at such other time
and place as shall be mutually agreed upon between the Investor and the
Company (the "Closing"). At the Closing, the Company shall deliver to the
Investor a certificate or certificates representing the Shares that the
Investor is purchasing, in such names and denominations as the Investor may
request not less than two (2) business days prior to the date of the
Closing, against receipt of a certified check payable to the order of the
Company or a wire transfer of the purchase price to an account designated
by the Company not less than two (2) business days prior to the date of the
Closing.
2. Representations and Warranties of the Company. Except for the exceptions
set forth on the Schedule of Exceptions attached hereto as Exhibit A and
furnished to the Investor, which exceptions shall be deemed to be
representations and warranties as if made hereunder, the Company hereby
represents and warrants to the Investor that:
2.1 Organization, Good Standing, Qualification and Corporate Power.
(a) The Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of Maryland and has
all requisite corporate power and authority to carry on its business
as now conducted and as presently proposed to be conducted. The
Company is duly qualified to transact business, and is in good
standing as a foreign corporation in North Carolina and in each other
jurisdiction in which the failure so to qualify would have a material
adverse effect on its business or properties. True and correct copies
of the Company's Articles of Incorporation, as amended (the "Articles
of Incorporation") and Amended By-laws (the "By-laws") as currently in
effect have been provided to the Investor.
(b) The Company has all requisite legal and corporate power to
execute and deliver this Agreement, the Investors' Rights Agreement of
even date herewith, by and among
-1-
<PAGE>
the Company and the Investor, the form of which is attached hereto as
Exhibit B (the "Rights Agreement"), and the Marketing Agreement of
even date herewith, by and among the Company and General Capital, the
form of which is attached hereto as Exhibit C (the "Marketing
Agreement"), to issue and sell the Shares hereunder and to carry out
and perform its obligations under the terms of this Agreement, the
Rights Agreement and the Marketing Agreement.
2.2 Capitalization and Voting Rights. The authorized capital of the
Company consists of:
(a) Preferred Stock. 5,000,000 shares of Preferred Stock, par
value $.10 per share (the "Preferred Stock"), of which (i) 175,000
shares have been designated Series A Convertible Preferred Stock, of
which 248,193 shares are issued and outstanding, (ii) 1,552,915 shares
have been designated Series B Convertible Preferred Stock, of which no
shares will be issued and outstanding until consummation of the
transactions contemplated hereby, and (iii) 265,487 shares have been
designated Series C Convertible Preferred Stock (the "Series C
Preferred Stock"), of which no shares will be issued and outstanding
until consummation of the transactions contemplated hereby. The
rights, privileges and preferences of the Series B Preferred Stock and
Series C Preferred Stock are as stated in the Company's Articles
Supplementary to the Articles of Incorporation, the form of which is
attached hereto as Exhibit D (the "Articles Supplementary").
(b) Common Stock. 10,000,000 shares of Class A Common Stock
(Voting), par value $.10 per share (the "Class A Common Stock"), of
which 6,291,392 shares are issued and outstanding and 10,000,000
shares of Class B Common Stock (Nonvoting), par value $.10 per share
(the "Class B Common Stock"), of which 30,750 shares are issued and
outstanding (the Class A Common Stock and the Class B Common Stock,
collectively, the "Common Stock").
(c) Except for the conversion privileges of the Series A
Convertible Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock and except as otherwise set forth on Exhibit A, there
are not outstanding any options, warrants, rights (including
conversion or preemptive rights) or agreements for the purchase or
acquisition from the Company of any shares of its capital stock. A
list of all holders of 5% or more of shares of capital stock of the
Company is set forth on Exhibit A, together with the number of shares,
options or other derivative securities held by each such person and
entity.
2.3 Subsidiaries. A list of the direct and indirect subsidiaries of
the Company (each, a "Subsidiary") is set forth on Exhibit A, and the
Company does not own, directly or indirectly, any capital stock or other
equity ownership or proprietary interests in any other corporation,
association, trust, partnership, joint venture or other entity. Each
Subsidiary is a corporation duly organized and validly existing under the
laws of the state or country set forth on Exhibit A, and the capital stock
of each Subsidiary set forth on Exhibit A is owned by the Company in the
percentage amounts set forth on Exhibit A free and clear of all liens,
encumbrances, security interests, claims, restrictions on transfer and
other defects in title ("Encumbrances").
2.4 Authorization. This Agreement, the Rights Agreement and the
Marketing Agreement have been duly authorized, executed and delivered by
the Company and constitute the legal, valid and binding obligations of the
Company, enforceable in accordance with their respective terms, except (i)
as limited by applicable bankruptcy, insolvency, reorganization, moratorium
and
-2-
<PAGE>
other laws of general application affecting the enforcement of creditors'
rights generally, (ii) as limited by laws relating to the availability of
specific performance, injunctive relief or other equitable remedies and
(iii) to the extent that the indemnification provisions contained in the
Rights Agreement may be limited by applicable laws.
2.5 Valid Issuance of Common Stock.
(a) The issuance, sale and delivery of the Series B Preferred
Stock which is being purchased by the Investor hereunder and the
reservation for issuance of the Class A Common Stock issuable upon
conversion thereof have been duly authorized by all required corporate
action on the part of the Company, and when issued, sold, and
delivered in accordance with the terms hereof for the consideration
expressed herein, will be duly and validly issued, fully paid and
non-assessable and, based in part upon the representations and
warranties of the Investor in this Agreement, will be issued in
compliance with all applicable federal and state securities laws. The
Class A Common Stock issuable upon conversion of the Series B
Preferred Stock purchased under this Agreement has been duly and
validly reserved for issuance and, upon issuance in accordance with
the terms of the Articles of Incorporation and the Articles
Supplementary, shall be duly and validly issued, fully paid, and
non-assessable, and based in part upon the representations and
warranties of the Investor in this Agreement, issued in compliance
with all applicable securities laws, as presently in effect, of the
United States and each of the states whose securities laws govern the
issuance of any of the Series B Preferred Stock hereunder. The Series
B Preferred Stock issued hereunder (and the Class A Common Stock
issuable upon conversion of such Series B Preferred Stock) will be
free and clear from any liens or encumbrances other than those created
by, or imposed upon, the holders thereof through no action of the
Company, other than restrictions on transfer under the Rights
Agreement and under applicable federal and state securities laws.
(b) The outstanding shares of capital stock of the Company are
all duly and validly authorized and issued, fully paid, and
non-assessable, and to the best of the Company's knowledge, were
issued in compliance with all applicable federal and state securities
laws.
2.6 Financial Statements. The Company has delivered to the Investor
its audited consolidated balance sheets as of March 31, 1995, 1996 and
1997, and the related consolidated statements of operations, cash flows and
stockholder's equity as of, and for the fiscal years ended, March 31, 1995,
1996 and 1997 (the "Audited Financial Statements"). The Audited Financial
Statements are complete and correct in all material respects and have been
prepared in accordance with United States generally accepted accounting
principles applied on a consistent basis throughout the periods indicated.
The Company has also provided the Investor with its unaudited consolidated
balance sheet as of September 30, 1997, and the related consolidated
statements of operations, cash flows and stockholder's equity as of, and
for the six months ended, September 30, 1997 (the "Interim Financial
Statements"), certified by the chief financial officer of the Company and
reviewed by the Company's independent accountants. The Company has also
provided the Investor with its unaudited consolidated balance sheets as of
October 31, 1997, November 30, 1997 and December 31, 1997, and the related
consolidated statements of operations, cash flows and stockholder's equity
as of, and for the seven months ended October 31, 1997, the eight months
ended November 30, 1997 and the nine months ended December 31, 1997 (the
"Internal Financial Statements"), certified by the chief financial officer
of the Company. The Audited Financial Statements, the Interim Financial
Statements and the Internal Financial Statements (collectively, the
-3-
<PAGE>
"Financial Statements") fairly present the financial condition and results
of operations of the Company on a consolidated basis as of the dates and
during the periods indicated therein, subject to normal year-end audit
adjustments which are neither individually nor in the aggregate expected to
be material. As of the date of the balance sheet included in the Interim
Financial Statements (the "Interim Balance Sheet Date") and except as set
forth in such Interim Financial Statements, to the best of the Company's
knowledge, the Company has no liabilities or obligations of any nature
(absolute, accrued, contingent or otherwise), other than (i) liabilities
incurred in the ordinary course of business, consistent with past
practices, subsequent to the Interim Balance Sheet Date and (ii)
obligations under contracts and commitments incurred in the ordinary course
of business, consistent with past practices, which in the case of both (i)
and (ii) above, individually or in the aggregate, are immaterial to the
financial condition or operating results of the Company, which were not
fully reflected or reserved against in the Financial Statements, and all
reserves established by the Company and set forth on such balance sheet
were adequate for the purposes for which they were established.
2.7 Governmental Consents. Except as listed on Exhibit A, no consent,
approval, order, or authorization of, or registration, qualification,
designation, declaration or filing with, any United States federal, state,
local or provincial governmental authority on the part of the Company or
any Subsidiary is required in connection with (i) the consummation of the
transactions contemplated by this Agreement or (ii) the offer, issuance,
sale and delivery hereunder of the Shares (and the Class A Common Stock
issuable upon conversion of the Shares). To the best of the Company's
knowledge, the Company and each Subsidiary has complied (and in carrying
out their respective businesses the Company and each Subsidiary will be in
compliance) with all laws, ordinances and regulations applicable to it and
its business, which the failure to comply with would, either individually
or in the aggregate, have a materially adverse effect upon the Company and
its Subsidiaries taken as a whole. The Company and each Subsidiary has
obtained all British, German and United States federal, state, local and
foreign governmental licenses and permits material to and necessary in the
conduct of their respective businesses, such licenses and permits are in
full force and effect, no material violations are or have been recorded in
respect of any such licenses or permits, and no proceeding is pending or,
to the best of the Company's knowledge, threatened to revoke or limit any
thereof.
2.8 Litigation. Except as described on Exhibit A hereto, (i) there is
no action, suit, proceeding, or investigation pending or to the Company's
knowledge currently threatened against the Company or any Subsidiary (nor,
to the Company's knowledge, is there any reasonable basis for any such
action, suit, proceeding, or investigation which, if determined adversely
to the Company, would have a material adverse effect on the Company and its
Subsidiaries taken as a whole); (ii) neither the Company nor any Subsidiary
is a party or, to the best of the Company's knowledge, subject to the
provisions of any order, injunction, judgment, or decree of any court or
government agency or instrumentality; and (iii) there is no action, suit,
proceeding or investigation by the Company or any Subsidiary currently
pending or which the Company or any Subsidiary intends to initiate.
2.9 Patents and Trademarks. Except as set forth on Exhibit A hereto,
the Company and each Subsidiary owns or possesses sufficient legal rights
to all Intellectual Property (as defined below) (i) free and clear of all
material liens and encumbrances and (ii) to the best of the Company's
knowledge (but without having conducted any special investigation or patent
search),
-4-
<PAGE>
without any conflict with or infringement of the rights of others, if the
effect of such conflict or infringement would materially adversely affect
the Company and its Subsidiaries taken as a whole. Exhibit A attached
hereto contains a complete list of items of Intellectual Property which are
required for the conduct of the business of the Company and each
Subsidiary. Except as shown on Exhibit A, there are no outstanding options,
licenses, or agreements of any kind relating to the Intellectual Property,
nor is the Company or any Subsidiary bound by or a party to any options,
licenses, or agreements of any kind with respect to the patents,
trademarks, service marks, trade names, copyrights, trade secrets,
licenses, information, proprietary rights, and processes of any other
person or entity. To the best of the Company's knowledge (but without
having conducted any special investigation or patent search), the
Intellectual Property does not violate any of the patents, trademarks,
service marks, trade names, copyrights, or trade secrets or other
proprietary rights of any other person or entity. The Company is not aware
that any of the employees of the Company or any Subsidiary is obligated
under any contract (including licenses, covenants, or commitments of any
nature) or other agreement, or subject to any judgment, decree or order of
any court or administrative agency, that would interfere with the use of
such employee's best efforts to promote the interests of the Company and
such Subsidiary, as the case may be, or that would conflict with the
business of the Company or such Subsidiary as proposed to be conducted.
Except as disclosed on Exhibit A, none of the past or present employees,
officers, directors, shareholders or consultants of the Company or any
Subsidiary has any ownership or any other material rights in any of the
Intellectual Property. Neither the execution nor delivery of this
Agreement, the Rights Agreement or the Marketing Agreement nor the carrying
on of the business of the Company and each Subsidiary by the employees of
the Company and each Subsidiary, nor the conduct of the business of the
Company and each Subsidiary as proposed, will, to the Company's knowledge,
conflict with or result in a breach of the terms, conditions or provisions
of, or constitute a default under, any contract, covenant or instrument
under which any of such employees is now obligated. Exhibit A sets forth
all copyrights owned by the Company and each Subsidiary and all copyright
applications which have been made by the Company and each Subsidiary.
"Intellectual Property" includes all patents, patent applications,
trademarks (whether or not registered), trade names, service marks (whether
or not registered), trademark and service mark registrations (and pending
applications therefor), copyrights, computer software (including without
limitation all object code and source code owned by the Company or any
Subsidiary or authored or developed for the Company or any Subsidiary by
any of their respective employees or agents), licenses, sublicenses and
franchise agreements of the Company or any Subsidiary, and all know-how,
formulae, processes, techniques, confidential business information,
designs, patterns, shapes, inventions (whether or not patented or
patentable), trade secrets and other proprietary information and technology
used in the business of the Company and each Subsidiary or required to
operate such business.
2.10 Compliance with Other Instruments. Except as noted in Exhibit A
hereto, neither the Company nor any Subsidiary is in violation or default
of any provisions of its respective Articles of Incorporation or By-laws
(or other organizational documents) or of any instrument, judgment, order,
writ, decree, or contract to which it is a party or by which it is bound
or, to the Company's knowledge, of any provision of British, German,
federal or state statute, rule or regulation, license, or permit applicable
to the Company or any Subsidiary, the violation or default of which would
have a material adverse effect on the Company and its Subsidiaries taken as
a whole. The execution, delivery, and performance of this Agreement, the
Rights Agreement and the Marketing Agreement and the consummation of the
transactions contemplated hereby and thereby will not result in any such
violation or be in conflict with or constitute, with or without the passage
-5-
<PAGE>
of time and giving of notice, either a material default under any such
provision, instrument, judgment, order, writ, decree, or contract or an
event which results in the creation of any material lien, charge, or
encumbrance upon any assets of the Company or any Subsidiary. The Company
does not have any knowledge of any termination or material breach or
anticipated termination or material breach by the other parties to any
material contract or commitment to which the Company or any Subsidiary is a
party or to which any of the Company's or any Subsidiary's assets is
subject. To the Company's knowledge, there are no warranty claims or other
uninsured claims against the Company or any Subsidiary under completed
contracts which might involve a material monetary liability which is not
reserved against in the Financial Statements.
2.11 Agreements; Action.
(a) Except as listed on Exhibit A hereto and except for
agreements explicitly contemplated hereby and standard employee
benefits and salaries paid in compensation for services rendered,
there are no agreements, understandings, or proposed transactions
between the Company or any Subsidiary and any of their respective
officers, directors, affiliates, or any affiliate thereof.
(b) Except as listed on Exhibit A hereto, there are no
agreements, understandings, instruments, contracts or proposed
transactions to which the Company or any Subsidiary is a party or by
which it is bound which (i) involve obligations (contingent or
otherwise) of, or payments to, the Company or any Subsidiary in excess
of, $100,000, (ii) are material to the conduct and operations of the
Company's or any Subsidiary's business or properties, including,
without limitation, the license of any patent, copyright, trade
secret, or other proprietary rights to or from the Company or any
Subsidiary or provisions restricting or affecting the development,
manufacture, or distribution of the Company's or any Subsidiary's
products or services, or (iii) involve any employment or consulting
arrangement, whether written or oral, between the Company or any
Subsidiary and any person, except for oral agreements which may be
terminated by the Company or any Subsidiary at will.
(c) Except as listed on Exhibit A hereto, since the Interim
Balance Sheet Date, neither the Company nor any Subsidiary has (i)
declared or paid any dividends, or authorized or made any distribution
upon or with respect to any class or series of its capital stock, (ii)
incurred any indebtedness for money borrowed or any other liabilities
individually in excess of $100,000 or, in the case of indebtedness
and/or liabilities individually less than $100,000, in excess of
$200,000 in the aggregate, (iii) made any loans or advances that have
not been repaid to any person, other than ordinary advances for travel
expenses, or (iv) sold, exchanged, or otherwise disposed of any of its
assets or rights, other than the sale of its inventory in the ordinary
course of business.
(d) For the purposes of subsections (b) and (c) above, all
indebtedness, liabilities, agreements, understandings, instruments,
contracts, and proposed transactions involving the same person or
entity (including persons or entities the Company or any Subsidiary
has reason to believe are affiliated therewith) shall be aggregated
for the purpose of meeting the individual minimum dollar amounts of
such subsections.
2.12 Disclosure. The Company has fully provided the Investor with a
copy of the Company's most recently available financial projections (the
"Projections") and all other information which the Investor has requested
for deciding whether to purchase the Shares sold
-6-
<PAGE>
hereunder. The Projections were prepared by the Company in good faith and
were carefully reviewed by management of the Company, and the Company
believes that the assumptions underlying the Projections were reasonable.
Neither this Agreement, nor any other statements or certificates made or
delivered by the Company or its employees in connection herewith, contains
any untrue statement of a material fact or omits to state a material fact
necessary to make the statements herein or therein not misleading in light
of the circumstances in which they were made.
2.13 Registration Rights. Except as provided in Section 1 of the
Rights Agreement, and as set forth on Exhibit A hereto, the Company has not
granted or agreed to grant any registration rights, including piggyback
rights, to any person or entity.
2.14 Title to Property and Assets. Except as set forth on Exhibit A
hereto, the Company and each Subsidiary has good and marketable title to
the property and assets it owns free and clear of all mortgages, liens,
loans, and encumbrances, except such encumbrances and liens which arise in
the ordinary course of business and do not materially impair the Company's
or such Subsidiary's ownership or use of such property or assets. With
respect to the property and assets it leases, the Company and each
Subsidiary is in material compliance with such leases and, to its
knowledge, holds a valid leasehold interest free of any liens, claims, or
encumbrances. All of the Company's and each Subsidiary's properties and
assets are, in all material respects, in good operating and usable
condition, subject to normal wear and tear.
2.15 Labor Agreements and Actions; Employee Benefits. Neither the
Company nor any Subsidiary is bound by or subject to (and none of their
respective assets or properties are bound by or subject to) any written or
oral, express or implied, contract, commitment, or arrangement with any
labor union, and no labor union has requested or, to the knowledge of the
Company, has sought to represent any of the employees, representatives, or
agents of the Company or any Subsidiary. There is no strike or other labor
dispute involving the Company or any Subsidiary pending, or, to the
knowledge of the Company, threatened, which could have a material adverse
effect on the assets, properties, financial condition, operating results,
or business of the Company and its Subsidiaries taken as a whole (as such
business is presently conducted and as it is proposed to be conducted), nor
is the Company aware of any labor organization activity involving its
employees. Except as set forth on Exhibit A, neither the Company nor any
Subsidiary has any employment contract, deferred compensation agreement or
bonus, incentive or profit-sharing plans currently in force and effect, and
there are no existing or proposed material arrangements or transactions
between the Company or any Subsidiary and any officer or director or holder
of capital stock of the Company or any Subsidiary, other than transactions
referred to in this Agreement. To the best of the Company's knowledge, no
officer or key employee of the Company or any Subsidiary is in violation of
(a) any material term of any employment agreement, non-disclosure
agreement, noncompete agreement or other similar agreement with any
previous employer of such employee (and the employment of such employee
with the Company or any Subsidiary will not result in a violation of any
such agreement) or (b) any obligation binding on such employee which would
prohibit the use of information obtained from such employee which the
Company or any Subsidiary has used or proposes to use.
2.16 Tax Matters. Except as set forth on Exhibit A hereto, the Company
and each Subsidiary (i) has timely filed all tax returns that are required
to have been filed by it with all appropriate governmental agencies (and
all such returns are true and correct in all material respects and fairly
reflect its operations for tax purposes); and (ii) has paid all taxes owed
or
-7-
<PAGE>
assessments by it (other than taxes the validity of which are being
contested in good faith by appropriate proceedings and which are reserved).
The assessment of any additional taxes for periods for which returns have
been filed is not expected to exceed the recorded liability therefor and,
to the Company's knowledge, there are no material unresolved questions or
claims concerning the Company's or any Subsidiary's tax liability. Neither
the Company's nor any Subsidiary's tax returns have been audited by any
taxing authority. There is no pending dispute with any taxing authority
relating to any of said returns.
2.17 Insurance. All insurable properties of the Company and each
Subsidiary are insured for the benefit of the Company or the respective
Subsidiary against such risks as are usually insured against, and in such
amounts as are usually obtained, by persons owning or operating similar
properties in the locality where such properties are located, under
policies issued by insurers of recognized responsibility. Exhibit A hereto
sets forth a description of the liability insurance carried by the Company
and each Subsidiary, including policy amounts, deductibles, carriers and
coverage.
3. Representations and Warranties of the Investor. The Investor hereby
represents and warrants to the Company that:
3.1 Authorization. This Agreement and the Rights Agreement constitute
its valid and legally binding obligations, enforceable in accordance with
their terms. The Investor represents that it has full power and authority
to enter into this Agreement and the Rights Agreement.
3.2 No Unregistered Distribution. The Shares to be received by the
Investor pursuant to the terms hereof (and the Class A Common Stock
issuable upon conversion thereof) will be acquired for investment for the
Investor's own account, without any view to the unregistered public
distribution or resale thereof and, except with respect to certain
assignees of the Investor who may participate in the purchase of the Shares
at the Closing, the Investor represents that it does not currently have any
contract, undertaking, agreement or arrangement with any person to sell or
transfer any of the Shares; provided, that such representations shall not
in any way prejudice the right of the Investor at any time lawfully to sell
or otherwise to dispose of all or any part of the Shares (and the Class A
Common Stock issuable upon conversion thereof) pursuant to registration or
any exemption therefrom under the Securities Act of 1933, as amended (the
"Act"), and applicable state securities laws.
3.3 Restricted Securities. The Investor understands that the Shares it
is purchasing (and the Class A Common Stock issuable upon conversion
thereof) are characterized as "restricted securities" under the federal
securities laws inasmuch as they are being acquired from the Company in a
transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration
under the Act only in certain limited circumstances.
3.4 Accredited Investor Status. The Investor represents and warrants
that it is an "accredited investor" within the meaning of Rule 501(a) of
Regulation D, promulgated under the Act.
-8-
<PAGE>
3.5 Legends. It is understood that the certificates evidencing the
Shares (and the Class A Common Stock issuable upon conversion thereof) may
bear one or all of the following legends:
(a) "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR
SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION
STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR
AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT."
(b) Any legend required by the laws of the State of Maryland.
The legend referred to in clause (a) above shall be removed by the
Company from any certificate at such time as the holder of the Shares (or
the Class A Common Stock issuable upon conversion thereof) represented by
the certificate delivers an opinion of counsel reasonably satisfactory to
the Company to the effect that such legend is not required in order to
establish compliance with any provisions of the Act, or at such time as the
holder of such shares satisfies the requirements of Rule 144(k) under the
Act, provided that Rule 144(k) as then in effect does not differ
substantially from Rule 144(k) as in effect as of the date of this
Agreement, and provided further that the Company has received from the
holder a written representation that such holder satisfies the requirements
of Rule 144(k) as then in effect with respect to such shares.
3.6 Information. The Investor represents that it has had an
opportunity to ask questions and receive answers from the Company regarding
the terms and conditions of the offer and sale of the Shares hereunder and
the business, properties, prospects, and financial condition of the
Company; however, this representation does not limit or modify the
representations and warranties of the Company in Section 2 hereof or the
right of the Investor to rely thereon.
3.7 Foreign Investor. The Investor represents that it is satisfied as
to the full observance of the laws of its jurisdiction in connection with
the offer and sale of the Shares hereunder, including (i) the legal
requirements of the Investor's jurisdiction for the purchase of the Shares,
(ii) any foreign exchange restrictions applicable to such purchase, (iii)
any governmental or other consents that may need to be obtained, and (iv)
the income tax and other tax consequences, if any, which may be relevant to
the purchase, holding, sale or transfer of the Shares. The Investor's
subscription and payment for, and continued beneficial ownership of, the
Shares will not result in any material violation of any applicable
securities or other laws of the Investor's jurisdiction.
4. Conditions of Investor's Obligations at Closing. The obligations of the
Investor under subsection 1.2 of this Agreement are subject to the fulfillment
on or before the Closing of each of the following conditions, the waiver of
which shall not be effective against the Investor unless the Investor has
consented in writing thereto:
4.1 Representations and Warranties. The representations and warranties
of the Company contained in Section 2 shall be true and correct on and as
of the Closing with the same effect as though such representations and
warranties had been made on and as of the date of the Closing.
-9-
<PAGE>
4.2 Performance. The Company shall have performed and complied with
all agreements, obligations, and conditions contained in this Agreement
that are required to be performed or complied with by it on or before the
Closing.
4.3 Compliance Certificate. The President and Chief Financial Officer
of the Company shall deliver to the Investor at the Closing a certificate
certifying that the relevant conditions specified in Sections 4.1 and 4.2
have been fulfilled.
4.4 Secretary's Certificate. The Secretary of the Company shall
deliver to the Investor at the Closing a certificate certifying: (i) that
attached thereto is a true and complete copy of the By-laws as in effect at
the Closing; (ii) that attached thereto is a true and complete copy of all
resolutions adopted by the Board of Directors and the stockholders of the
Company authorizing the transactions contemplated hereby and that such
resolutions have not been amended or modified and are in full force and
effect; (iii) that the Articles of Incorporation (a true and correct copy
of which are attached) have not been further amended since January 21,
1997; (iv) to the incumbency and specimen signatures of each officer of the
Company executing this Agreement and the other agreements and certificates
contemplated hereby.
4.5 Qualifications. The Company shall have obtained all necessary Blue
Sky law permits and qualifications, or secured exemptions therefrom,
required by any state for the offer and sale of the Shares hereunder.
4.6 Opinions of Company Counsel. The Investor shall have received from
Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P., special
counsel for the Company, an opinion, dated as of the Closing, in the form
attached hereto as Exhibit E.
4.7 Articles Supplementary. The Articles Supplementary in the form
attached hereto as Exhibit D shall have been filed with the Secretary of
State of the State of Maryland on or prior to the Closing.
4.8 Consents and Waivers. The Company shall have obtained any and all
consents and waivers necessary or appropriate for consummation of the
transactions contemplated by this Agreement and the Rights Agreement.
4.9 Rights Agreement. The Company and the Investor shall have executed
and delivered the Rights Agreement.
4.10 Marketing Agreement. The Company and General Capital shall have
executed and delivered the Marketing Agreement.
4.11 Conversion of Indebtedness. The Investor shall have received
evidence satisfactory to it and its counsel that (i) an aggregate of at
least $2,000,000 of indebtedness of the Company to the Chairman of the
Board of the Company shall have been converted into Class A Common Stock at
a conversion price equal to $2.26 and (ii) an aggregate of at least
$600,000 of indebtedness of the Company to the President of the Company
shall have been converted into Series C Preferred Stock.
-10-
<PAGE>
5. Conditions of Company's Obligations at Closing. The obligations of the
Company under subsection 1.2 of this Agreement are subject to the fulfillment on
or before the Closing of the following conditions, the waiver of which shall not
be effective against the Company unless the Company has consented in writing
thereto:
5.1 Representations and Warranties. The representations and warranties
of the Investor contained in Section 3 shall be true and correct on and as
of the Closing with the same effect as though such representations and
warranties had been made on and as of the date of the Closing.
5.2 Qualifications. The Company shall have obtained all necessary Blue
Sky law permits and qualifications, or secured exemptions therefrom,
required by any state for the offer and sale of the Shares hereunder.
6. Covenants of the Company and the Investor
6.1 Sale Event.
(a) The Company agrees that it shall use its best efforts to
prepare and file with the Securities and Exchange Commission (the
"SEC") a registration statement on Form S-1 or SB-2 (or any equivalent
successor form) under the Act relating to a firm commitment
underwritten initial public offering of securities (an "IPO") no later
than June 30, 1998 and, subject to the Investor's rights pursuant to
Section 6.1(b) below, that it shall use its best efforts to consummate
such IPO or another Sale Event (defined below) no later than September
30, 1998; provided, that the Company shall have no liability for the
breach of such covenants if, after using its best efforts and in the
reasonable exercise of its fiduciary duty, the Board of Directors of
the Company determines that it would not be in the best interests of
the Company to consummate such IPO or other Sale Event. A "Sale Event"
shall include (i) an IPO, (ii) the consummation by the Company of a
merger or consolidation or other acquisition transaction in which more
than fifty percent (50%) of the voting power of the Company is
transferred (excluding any merger effected exclusively for the purpose
of changing the domicile of the Company) or (iii) a sale or other
disposition of all or substantially all of the assets of the Company.
(b) No Sale Event in which the Company Valuation (as defined in
the Articles Supplementary) is less than $50,000,000 will be
consummated by the Company without the prior written consent of the
Investor.
7. Indemnification
7.1. Indemnification by the Company. The Company shall indemnify
Investor and each of its officers and directors and hold each of them
harmless from, against and in respect of, and shall on demand reimburse
such persons for all of their losses, liabilities, damages, costs and
expenses arising from any misrepresentation or breach of any
representation, warranty, covenant or agreement on the part of the Company
under this Agreement, and any and all actions, suits, proceedings,
elections, demands, assessments, judgments, costs and expenses, including
without limitation, reasonable legal fees and expenses actually incurred,
incident to any of the
-11-
<PAGE>
foregoing or incurred in investigating or attempting to avoid same or to
oppose the imposition thereof, or in enforcing this indemnity.
Notwithstanding the foregoing, in the event that a court of competent
jurisdiction having final adjudicative authority and from which no appeal
is available shall determine that the Investor or such other person is not
entitled to indemnification, then the Investor or such other person, as the
case may be, shall not be entitled to recover its legal fees with respect
to such claim from the Company.
7.2. Indemnification by Investor. The Investor shall indemnify the
Company and each of its officers and directors and hold each of them
harmless from, against and in respect of, and shall on demand reimburse
such persons for all of their losses, liabilities, damages, costs and
expenses arising from or in connection with any misrepresentation or breach
of any representation, warranty, covenant or agreement on the part of the
Investor under this Agreement, and any and all actions, suits, proceedings,
elections, demands, assessments, judgments, costs and expenses, including
without limitation, reasonable legal fees and expenses actually incurred,
incident to any of the foregoing or incurred in investigating or attempting
to avoid same or to oppose the imposition thereof, or in enforcing this
indemnity. Notwithstanding the foregoing in the event that a court of
competent jurisdiction having final adjudicative authority and from which
no appeal is available shall determine that the Company or such other
person is not entitled to indemnification then the Company or such other
person, as the case may be, shall not be entitled to recover its legal fees
with respect to such claim from the Investor.
7.3. Procedures for Indemnification. Promptly after receipt by an
indemnified party under sections 7.1 or 7.2 of notice of the commencement
of any action for which indemnification may be available under section 7.1
or 7.2 such indemnified party shall, if a claim in respect thereof is to be
made against an indemnifying party under such section, give notice to the
indemnifying party of the commencement thereof, but the failure so to
notify the indemnifying party shall not relieve it of any liability that it
may have to any indemnified party except to the extent the indemnifying
party demonstrates that the defense of such action is prejudiced thereby.
In case any such action shall be brought against an indemnified party and
it shall give notice to the indemnifying party of the commencement thereof,
the indemnifying party shall be entitled to participate therein and, to the
extent that it shall elect, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party and, after notice from
the indemnifying party to such indemnified party of its election so to
assume the defense thereof, the indemnifying party shall not be liable to
such indemnified party under such section for any fees of other counsel or
any other expenses, in each case subsequently incurred by such indemnified
party in connection with the defense thereof, other than reasonable costs
of investigation and costs and expenses of legal counsel, if the
indemnified party and the indemnifying party are both parties to the action
and the indemnified party has been advised by counsel that there may be one
or more defenses available to it and not available to the indemnifying
party. If an indemnifying party assumes the defense of such an action, (a)
no compromise or settlement thereof may be effected by the indemnifying
party without the indemnified party's consent (which shall not be
unreasonably withheld) unless (i) there is no finding or admission of any
violation of law or any violation of the rights of any person and no effect
on any other claims that may be made against the indemnified party or (ii)
the sole relief provided is monetary damages that are paid in full by the
indemnifying party and (b) the indemnifying party shall have no liability
with respect to any compromise or settlement thereof effected without its
consent (which shall not be unreasonably withheld). If notice is given to
an indemnifying party of the commencement of any action and it does not,
-12-
<PAGE>
within ten business days after the indemnified party's notice is given,
give notice to the indemnified party of its election to assume the defense
thereof, the indemnifying party shall be bound by any determination made in
such action or any compromise or settlement thereof effected by the
indemnified party. Notwithstanding the foregoing, if an indemnified party
determines in good faith that there is a reasonable probability that an
action may materially and adversely affect it or its affiliates other than
as a result of monetary damages, such indemnified party may, by notice to
the indemnifying party, assume the exclusive right to defend such action,
but the indemnifying party shall have the right to participate in such
action and not be bound by any determination of an action so defended or
any compromise or settlement thereof effected without its consent (which
shall not be unreasonably withheld).
8. Miscellaneous
8.1 Survival of Warranties. The warranties, representations, and
covenants of the Company and the Investor contained in or made pursuant to
this Agreement shall survive the execution and delivery of this Agreement
and the Closing until one month following the delivery to the Investor of
the Company's financial statements for the fiscal year ending March 31,
1999 (together with an opinion of the Company's independent auditors) and
shall in no way be affected by any investigation of the subject matter
thereof made by or on behalf of the Investor or the Company; provided, that
covenants and agreements contained in or made pursuant to this Agreement
which by their terms are required to be performed or complied with after
such time shall survive until they are, by their terms, no longer
applicable.
8.2 Successors and Assigns. Except as otherwise provided herein, the
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties. 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.
8.3 Governing Law. This Agreement shall be governed by and construed
under the laws of the State of New York, disregarding any New York
principles of conflicts of laws that would otherwise provide for the
application of the substantive laws of another jurisdiction.
8.4 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.
8.5 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.
8.6 Notices. Unless otherwise provided, any notice required or
permitted under this Agreement shall be given in writing and shall be
deemed effectively given upon personal delivery to the party to be
notified, upon delivery by registered or certified mail, postage prepaid,
return receipt requested and addressed to the party to be notified at the
address indicated for such party on the signature page hereof, or at such
other address as such party may designate by ten
-13-
<PAGE>
(10) days' advance written notice to the other parties, with a copy for the
Company to Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P.,
P.O. Box 2611, 2500 First Union Capitol Center, Raleigh, North Carolina
27602, Attention: Gerald F. Roach, Esq. and a copy for the Investor to
Bachner, Tally, Polevoy & Misher, LLP, 380 Madison Avenue, New York, New
York 1017-2590, Attention: Marc S. Goldfarb, Esq.
8.7 Finder's Fee. Except as set forth on Exhibit A hereto, each party
represents that it neither is nor will be obligated for any finder's fee or
commission in connection with this transaction. The Company agrees to
indemnify and hold harmless the Investor from any liability for any
commission or compensation in the nature of a finder's fee (and the costs
and expenses of defending against such liability or asserted liability) for
which the Company or any of its officers, employees, or representatives is
responsible. The Investor agrees to indemnify and hold harmless the Company
from any liability for any commission or compensation in the nature of a
finder's fee (and the costs and expenses of defending against such
liability or asserted liability) for which the Investor or any of its
officers, employees or representatives is responsible.
8.8 Entire Agreement; Amendments and Waivers. This Agreement
constitutes the full and entire understanding and agreement between the
parties with regard to the subjects hereof. Any term of this Agreement may
be amended and the observance of any term of this Agreement may be waived
(either generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the
Investor. Any amendment or waiver effected in accordance with this Section
8.8 shall be binding upon each holder of any securities purchased under
this Agreement at the time outstanding (including securities into which
such securities are convertible), each future holder of all such
securities, and the Company.
8.9 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.
8.10 Expenses. Whether or not the transactions contemplated by this
Agreement shall be consummated, each party agrees that all fees and
expenses incurred by it in connection with this Agreement and the
transactions contemplated hereby shall be borne by it, including, without
limitation, all fees of counsel, actuaries and accountants.
-14-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Stock Purchase
Agreement to be duly executed all as of the day and year first above written.
INTERACTIVE MAGIC, INC.
By: /s/ Robert L. Pickens
____________________________________________
Name: Robert L. Pickens
Title: President
Address: P.O. Box 13491
Research Triangle Park, NC 27708
VERTICAL FINANCIAL HOLDINGS
By: /s/ Jacob Agam
____________________________________________
Name: Jacob Agam
Title: Chairman
Address: Hombrechtikerstrasse 61
CH-8640 Rapperswil, Switzerland
-15-
INVESTOR'S RIGHTS AGREEMENT
THIS INVESTOR'S RIGHTS AGREEMENT (the "Agreement") is made as of February
4, 1998, by and between INTERACTIVE MAGIC, INC., a corporation organized under
the laws of the State of Maryland (the "Company"), and VERTICAL FINANCIAL
HOLDINGS, a corporation organized under the laws of Liechtenstein (the
"Investor").
RECITALS
WHEREAS, the Company and the Investor are parties to that certain Stock
Purchase Agreement of even date herewith (the "Stock Purchase Agreement");
WHEREAS, to induce the Investor to invest funds in the Company pursuant to
the Stock Purchase Agreement, the Investor and the Company hereby agree that
this Agreement shall govern the rights of the Investor to cause the Company to
register shares of Class A Common Stock issuable to the Investor upon conversion
of shares of Series B Convertible Preferred Stock purchased by the Investor
pursuant to the Stock Purchase Agreement, and certain other matters as set forth
herein;
NOW, THEREFORE, in consideration of the mutual promises and covenants set
forth herein, the parties hereto agree as follows:
1. Registration Rights. The Company covenants and agrees as follows:
1.1 Definitions.
(a) "Act" means the Securities Act of 1933, as amended.
(b) "Common Stock" means shares of the (i) Class A Common Stock
(Voting) of the Company, par value $.10 per share (the "Class A Common
Stock"), and (ii) Class B Common Stock (Nonvoting) of the Company, par
value $.10 per share.
(c) "Form S-3" means such form under the Act as in effect on the date
hereof or any registration form under the Act subsequently adopted by the
SEC which permits inclusion or incorporation of substantial information by
reference to other documents filed by the Company with the SEC.
(d) "Holder" means any person owning or having the right to acquire
Registrable Securities or any assignee thereof in accordance with Section
1.12 hereof.
(e) "1934 Act" means the Securities Exchange Act of 1934, as amended.
1
<PAGE>
(f) "Series B Preferred Stock" means the Company's Series B
Convertible Preferred Stock, par value $.10 per share.
(g) "Register," "registered," and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Act, and the declaration or ordering of effectiveness
of such registration statement.
(h) "Registrable Securities" means (i) the Class A Common Stock
issuable or issued upon conversion of the Series B Preferred Stock and (ii)
any 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 referenced in (i) above, excluding in all cases,
however, any Registrable Securities sold by a person in a transaction in
which his rights under this Section 1 are not assigned, or any shares of
Common Stock which have previously been registered or which have been sold
to the public either pursuant to a registration statement or Rule 144
promulgated under the Act.
(i) "SEC" shall mean the Securities and Exchange Commission.
1.2 Request for Registration.
(a) If the Company shall receive, at any time commencing one hundred
eighty (180) days after the effective date of the first registration
statement for a public offering of securities of the Company (the "IPO"), a
written request from the Investor or any Holder of at least 50% of the then
outstanding Registrable Securities that the Company file a registration
statement under the Act covering the registration of Registrable Securities
having a reasonably anticipated aggregate offering price to the public of
at least $7,500,000, the Company shall:
(i) within ten (10) days of the receipt thereof, give written
notice, in accordance with Section 3.5 hereof, of such request to all
Holders; and
(ii) file as soon as practicable, and in any event within sixty
(60) days of the receipt of such request, and use its best efforts to
cause to become effective as soon as practicable, the registration
under the Act of all Registrable Securities which the Holders request
to be registered as specified in a written request received by the
Company within twenty (20) days after such written notice from the
Company is mailed or delivered, subject to the limitations of
Subsection 1.2(b);
provided, that, if requested in writing by the managing underwriter of the
IPO, the Investor shall agree to refrain from exercising its rights
pursuant to this Section 1.2 until the first annual anniversary of the
effective date of the IPO.
(b) If the Holders initiating the registration request hereunder
("Initiating Holders") intend to distribute the Registrable Securities
covered by their request by means of an underwriting, they shall so advise
the Company as a part of their request made pursuant to
2
<PAGE>
Subsection 1.2(a) and the Company shall include such information in the
written notice referred to in Subsection 1.2(a). The underwriter will be
selected by the Company and shall be acceptable to a majority in interest
of the Initiating Holders. In such event, the right of any Holder to
include his Registrable Securities in such registration 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. All
Holders proposing to distribute their securities through such underwriting
shall (together with the Company as provided in Subsection 1.4(e)) enter
into an underwriting agreement in customary form with the underwriter or
underwriters selected for such underwriting. Notwithstanding any other
provision of this Section 1.2, if the underwriter advises the Initiating
Holders in writing that marketing factors require a limitation of the
number of shares to be underwritten, then the Company shall exclude from
such underwriting (x) first, the maximum number of securities, if any,
other than Registrable Securities, as is necessary to reduce the size of
the offering and (y) then the minimum number of Registrable Securities, pro
rata to the extent practicable, on the basis of the number of Registrable
Securities requested to be registered among the participating holders of
Registrable Securities, as is necessary in the opinion of the managing
underwriter(s) to reduce the size of the offering.
(c) In addition, the Company shall not be obligated to effect, or to
take any action to effect, any registration pursuant to this Section 1.2:
(i) In any particular jurisdiction in which the Company would be
required to execute a general consent to service of process in
effecting such registration, qualification, or compliance, unless the
Company is already subject to service in such jurisdiction and except
as may be required by the Act;
(ii) After the Company has effected one (1) registration pursuant
to this Section 1.2, excluding any registrations effected on Form S-3,
and such registration has been declared or ordered effective;
provided, that in the event that any Holders determine in good faith,
based on market conditions, not to sell substantially all of their
Registrable Securities registered pursuant to Section 1.2, such
Holders shall be entitled to require the Company to effect one (1)
additional registration pursuant to this Section 1.2;
(iii) If the Initiating Holders propose to dispose of shares of
Registrable Securities that may be immediately registered on Form S-3
pursuant to a request made pursuant to Section 1.11 below;
(iv) If the Company delivers to the Initiating Holders an
opinion, in form and substance acceptable to such Initiating Holders,
of counsel satisfactory to the Initiating Holders that the Registrable
Securities requested to be registered by the Initiating Holders may be
sold or transferred without restriction pursuant to Rule 144(k) of the
Act;
(v) 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) a date ninety (90) days after the effective date or
(B) the date of abandonment of, a Company-initiated registration
3
<PAGE>
statement relating to the offering of any of the Company's securities;
provided, that the Company is actively employing in good faith all
reasonable efforts to cause such registration statement to become
effective; or
(vi) If the Company reasonably anticipates that it will
consummate, within sixty (60) days after the date of receipt of any
request pursuant to this Section 1.2, a significant business
transaction that would be materially adversely affected, to the
material detriment of the Company, by a registration pursuant to this
Section 1.2 (all in the good faith determination of the Company's
Board of Directors as certified by a certificate of the President or
Chief Executive Officer of the Company); provided, that the
registration statement relating to the request pursuant to this
Section 1.2 shall be filed no later than sixty (60) days after the
closing (or any such similar event) of agreements or documents
consummating such transaction or the abandonment of such transaction,
but in any event not later than 120 days after the receipt of the
request pursuant to this Section 1.2; and provided, further, that the
Company shall not be permitted to delay, pursuant to this Section
1.2(c)(vi) or Section 1.2(c)(v), its obligations pursuant to this
Section 1.2 more than once in any twelve month period.
1.3 Company Registration. If (but without any obligation to do so) the
Company proposes to register (including for this purpose a registration effected
by the Company for stockholders other than the Holders) any of its stock or
other securities under the Act in connection with the public offering of such
securities (other than a registration relating solely to the sale of securities
to participants in a Company stock plan, a registration relating solely to a
Rule 145 transaction, a registration on any form which does not include
substantially the same information as would be required to be included in a
registration statement covering the sale of the Registrable Securities, a
registration in which the only Common Stock being registered is Common Stock
issuable upon conversion of debt securities which are also being registered, or
a registration on any registration form that does not permit secondary sales),
the Company shall, at such time, promptly give each Holder written notice of
such registration. Upon the written request of each Holder given within twenty
(20) days after giving of such notice by the Company in accordance with Section
3.5, the Company shall, subject to the provisions of Section 1.8, use its best
efforts to cause to be registered under the Act all of the Registrable
Securities that each such Holder has requested to be registered.
1.4 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 such Registrable Securities and use its best efforts to cause
such registration statement to become effective, and keep such registration
statement effective for a period of up to one hundred twenty (120) days or
until the distribution contemplated in the Registration Statement has been
completed, whichever first occurs; provided, however, that such one hundred
twenty (120) day period shall be extended for a period of time equal to the
period the Holder refrains from selling any securities included in such
registration at the request of an underwriter of Common Stock (or other
securities) of the Company, and provided further that in the case of any
registration of Registrable Securities on Form S-3 that are intended to be
offered on a continuous or delayed
4
<PAGE>
basis, such one hundred twenty (120) day period shall be extended until all
such Registrable Securities are sold, if applicable rules under the Act
governing the obligation to file a post-effective amendment permit, in lieu
of filing a post-effective amendment which (I) includes any prospectus
required by Section 10(a)(3) of the Act or (II) reflects facts or events
representing a material or fundamental change in the information set forth
in the registration statement, the incorporation by reference of
information required to be included in (I) and (II) above to be contained
in periodic reports filed pursuant to Section 13 or 15(d) of the 1934 Act
in the registration statement.
(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, in the opinion of counsel to the Company, may be
necessary to comply with the provisions of the Act with respect to the
disposition of all securities covered by such registration statement.
(c) Furnish to the Holders such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of
the Act, and such other documents as they may reasonably request in order
to facilitate the disposition of Registrable Securities owned by them.
(d) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue
Sky laws of such jurisdictions as shall be reasonably requested by the
Holders; provided that the Company shall not be required in connection
therewith or as a condition thereto to qualify to do business or to file a
general consent to service of process in any such states or jurisdictions,
unless the Company is already subject to service in such jurisdiction and
except as may be required by the Act.
(e) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(f) 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 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.
(g) Cause all such Registrable Securities registered pursuant
hereunder to be listed on each securities exchange on which similar
securities issued by the Company are then listed.
(h) 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.
5
<PAGE>
(i) Use its best efforts to furnish, on the date that such Registrable
Securities are delivered to the underwriters for sale in connection with
the registration pursuant to this Section 1, if such Registrable Securities
are being sold through underwriters, (i) an opinion, dated such date, of
counsel representing the Company for the purposes of such registration, in
form and substance as is customarily given to underwriters in an
underwritten public offering, addressed to the underwriters, and (ii) a
letter, dated such date, from the independent certified public accountants
of the Company, in form and substance as is customarily given by
independent certified public accountants to underwriters in an underwritten
public offering, addressed to the underwriters.
1.5 Furnish Information. 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.
1.6 Expenses of Demand 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 and the reasonable fees and
disbursements of one counsel for the selling Holders shall be borne by the
Company if such registration occurs after the one year anniversary of the IPO;
provided, that the Company shall not be responsible for fees and disbursements
of counsel for the selling Holders to the extent that they exceed $15,000. All
expenses including underwriting discounts and commissions incurred in connection
with a registration pursuant to Section 1.2 shall be borne by the selling
Holders if such registration occurs on or prior to the one year anniversary of
the IPO.
1.7 Expenses of Company Registration. The Company shall bear and pay all
expenses incurred in connection with any registration, filing or qualification
of Registrable Securities with respect to the registrations pursuant to Section
1.3 for each Holder, including (without limitation) all registration, filing,
and qualification fees, printers' and accounting fees relating or apportionable
thereto and, for one such registration only, the reasonable fees and
disbursements of one counsel for the selling Holders, but excluding underwriting
discounts and commissions relating to Registrable Securities.
1.8 Underwriting Requirements. In connection with any offering involving an
underwriting of shares of the Company's capital stock pursuant to Section 1.3,
the Company shall not be required under Section 1.3 to include any of a Holder's
securities in such underwriting unless such Holder accepts the terms of the
underwriting as agreed upon between the Company and the underwriters (or by
other persons entitled to select the underwriters), and then only in such
quantity as the underwriters determine in their sole discretion will not
jeopardize the success of the offering by the Company. If the total amount of
securities, including Registrable Securities, requested by stockholders and the
Company to be included in such offering exceeds the amount of securities that
the underwriters determine in their sole discretion is compatible with the
success of the offering, then the following priorities shall govern:
6
<PAGE>
(a) If the underwritten offering has been initiated by the Company,
the Company shall include in such underwriting (x) first, the securities
the Company proposes to sell, (y) second, the Registrable Securities, any
other securities entitled to the benefit of registration rights existing on
the date of this Agreement ("Third Party Registrable Securities") requested
to be included in such registration and up to 15% of the then outstanding
shares of Common Stock to the extent that such shares are owned by
directors or employees of the Company ("Management Registrable Securities")
and are requested to be included in such registration, pro rata to the
extent practicable, on the basis of the number of Registrable Securities,
Third Party Registrable Securities and Management Registrable Securities
requested to be registered among the participating holders of such
securities, and (z) third, any other securities, including Management
Registrable Securities that exceed the 15% threshold above, requested to be
included in such registration, all as is necessary in the opinion of the
managing underwriter(s) to reduce the size of the offering; and
(b) If the underwritten offering has been initiated by any holder of
Third Party Registrable Securities entitled to the benefit of any duly
exercised demand registration right, the Company shall include in such
underwriting (x) first, the securities requested to be included therein by
the holder of Third Party Registrable Securities requesting such
registration, (y) second, the Registrable Securities and any other Third
Party Registrable Securities or Management Registrable Securities
(provided, that such Management Registrable Securities shall not exceed 15%
of the then outstanding shares of Common Stock) requested to be included in
such registration, pro rata to the extent practicable, on the basis of the
number of Registrable Securities and such other Third Party Registrable
Securities and Management Registrable Securities requested to be registered
among the participating holders of such securities, and (z) third, any
other securities, including Management Registrable Securities that exceed
the 15% threshold above, requested to be included in such registration, all
as is necessary in the opinion of the managing underwriter(s) to reduce the
size of the offering.
1.9 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, the officers and directors of each Holder
participating in such registration, any underwriter (as defined in the Act)
for such Holder and each person, if any, who controls such Holder or
underwriter within the meaning of the Act or the 1934 Act, against any
losses, claims, damages, or liabilities (joint or several) to which they
may become subject under the Act or state securities and blue sky laws, or
otherwise 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 and any document filed in connection therewith or in
connection with any registration or qualification under the state
securities and blue sky laws, (ii) 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 (iii) any violation or
alleged violation by the Company of the Act or state
7
<PAGE>
securities and blue sky laws or any rule or regulation promulgated under
the Act or state securities and blue sky laws 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, expense
or action; provided, however, that the Company shall not be liable in any
such case 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 strict conformity with written information furnished
expressly for use in connection with such registration by any such Holder,
underwriter or controlling person.
(b) To the extent permitted by law, each Holder will, if Registrable
Securities held by such Holder are included in the securities as to which
registration is being effected, 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 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 Act, 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 strict conformity with written information
furnished by such Holder expressly for use in connection with such
registration; provided, however, that the indemnity agreement contained in
this Subsection 1.9(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; and provided, further, that in no event shall any
selling Holder's liability under this Subsection 1.9(b) exceed the proceeds
received by such Holder from the offering (net of any underwriting
discounts and commissions).
(c) Promptly after receipt by an indemnified party under this Section
1.9 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 1.9, 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 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
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 its liability under
this Section 1.9, but (i) only to the extent of the liability actually
resulting from the failure to deliver written notice and (ii) the omission
so to deliver written notice to the indemnifying party will not relieve it
of any liability that it may have to any indemnified party otherwise than
under this Section 1.9. The indemnifying party will not be subject to any
liability under this Section 1.9 for any settlement
8
<PAGE>
made by the indemnified party without its consent (which consent shall not
be unreasonably withheld).
(d) If the indemnification provided for in this Section 1.9 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. The relative fault
of the indemnifying party and of the indemnified party shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission to state a material fact
relates to information supplied by the indemnifying party or by the
indemnified party and the parties' relative intent, knowledge, access to
information, and opportunity to correct or prevent such statement or
omission; provided, that in no event shall any selling Holder's liability
under this Section 1.9(d) exceed the proceeds received by such Holder from
the offering (net of any underwriting discounts and commissions).
(e) Notwithstanding the foregoing, to the extent that the provisions
on indemnification and contribution contained in the underwriting agreement
entered into in connection with the underwritten public offering are in
conflict with the foregoing provisions, the provisions in the underwriting
agreement shall control.
(f) The obligations of the Company and Holders under this Section 1.9
shall survive the completion of any offering of Registrable Securities in a
registration statement under this Section 1, and otherwise.
1.10 Reports Under Securities Exchange Act of 1934. With a view to making
available to the Holders the benefits of Rule 144 promulgated under the 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 S-3, the Company agrees to use its best efforts to:
(a) make and keep public information available, as those terms are
understood and defined in SEC Rule 144, at all times after ninety (90) days
after the effective date of the first registration statement filed by the
Company for the offering of its securities to the general public;
(b) take such action, including the voluntary registration of its
Class A Common Stock under Section 12 of the 1934 Act, as is necessary to
enable the Holders to utilize Form S-3 for the sale of their Registrable
Securities, such action to be taken as soon as practicable after the end of
the fiscal year in which the first registration statement filed by the
Company for the offering of its securities to the general public is
declared effective;
9
<PAGE>
(c) file with the SEC in a timely manner all reports and other
documents required of the Company under the Act and the 1934 Act at any
time after the Company has become subject to any such reporting
requirements; and
(d) furnish to any Holder, so long as the Holder owns any Registrable
Securities, forthwith upon written request (i) a written statement by the
Company as to its compliance with the reporting requirements of SEC Rule
144 (at any time after ninety (90) days after the effective date of the
first registration statement filed by the Company for an offering of its
securities to the general public), the Act and the 1934 Act (at any time
after it has become subject to such reporting requirements), (ii) a copy of
the most recent annual or quarterly report of the Company and such other
reports and documents so filed by the Company, and (iii) such other
information as may be reasonably requested in availing any Holder of any
rule or regulation of the SEC which permits the selling of any such
securities without registration or pursuant to such form.
1.11 Form S-3 Registration. In case the Company shall receive at any time
after the completion of the first registration statement for a public offering
of securities of the Company (other than a registration statement relating
either to the sale of securities to employees of the Company pursuant to a stock
option, stock purchase or similar plan or an SEC Rule 145 transaction), a
written request from the Holders of at least fifteen percent (15%) of the
Registrable Securities then outstanding that the Company effect a registration
on Form S-3 and any related qualification or compliance with respect to all or a
part of the Registrable Securities owned by such Holder or Holders, the Company
will:
(a) promptly give written notice of the proposed registration, and any
related qualification or compliance, to all other Holders; and
(b) as soon as practicable, use its best efforts to effect such
registration and all such qualifications and compliances as may be so
requested and as would permit or facilitate the sale and distribution of
all or such portion of such Holder's or Holders' Registrable Securities as
are specified in such request, together with all or such portion of the
Registrable Securities of any other Holder or Holders joining in such
request as are specified in a written request given within twenty (20) days
after receipt of such written notice from the Company; provided, however,
that the Company shall not be obligated to effect any such registration,
qualification or compliance, pursuant to this Section 1.11: (1) if Form S-3
is not available for such offering by the Holders; or (2) in any particular
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; (3) if the Holders,
together with the holders of any other securities of the Company entitled
to inclusion in such registration, propose to sell Registrable Securities
and such other securities on Form S-3 at a reasonably anticipated aggregate
offering price to the public of less than $1,000,000; (4) if, during any
twelve month period, the Company has already effected two registrations
pursuant to this Section 1.11; or (5) during the periods set forth in
Sections 1.2(c)(v) and (vi), if the provisions of such sections are
applicable to such proposed registration.
10
<PAGE>
(c) Subject to the foregoing, the Company shall file a registration
statement covering the Registrable Securities and other securities so
requested to be registered as soon as practicable after receipt of the
request or requests of the Holders. All expenses incurred in connection
with a registration requested pursuant to this Section 1.11, including,
without limitation, all registration, filing, qualification, printers' and
accounting fees, the reasonable fees and disbursements of one (1) counsel
for the selling Holder or Holders and the fees and disbursements of counsel
for the Company, but excluding any underwriting discounts or commissions
associated with Registrable Securities, shall be borne by the Company;
provided, that the Company shall not be responsible for fees and
disbursements of counsel for the selling Holders to the extent that they
exceed $15,000. Registrations effected pursuant to this Section 1.11 shall
not be counted as registrations effected pursuant to Sections 1.2 or 1.3.
1.12 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 any transferee or assignee who
acquires at least 25% of the Registrable Securities held by such Holder
immediately prior to such transfer or assignment, provided: (a) 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 (b) such
transferee or assignee agrees in writing to be bound by and subject to the terms
and conditions of this Agreement. In no event shall the Company be obligated to
effect more than one (1) registration pursuant to Section 1.2 hereof in the
aggregate except as otherwise provided in Section 1.2(c)(ii) hereof.
Notwithstanding anything herein to the contrary, the Investor shall be permitted
to assign the rights to cause the Company to register Registrable Securities
pursuant to this Section 1 to certain assignees of the Investor who may
participate in the initial purchase of the Series B Preferred Stock.
1.13 Termination of Registration Rights. No Holder shall be entitled to
exercise any registration right provided for in this Section 1 after five (5)
years following the consummation of the sale of securities pursuant to a
registration statement filed by the Company under the Act in connection with a
firm commitment underwritten offering of its securities to the general public or
if all shares of Registrable Securities held or entitled to be held upon
conversion by such holder may immediately be sold without restriction under Rule
144(k); provided, that to the extent that such five year period would otherwise
lapse during any period in which a request pursuant to Section 1.2 hereof is
delayed pursuant to Sections 1.2(c)(v) or (vi), such five year period shall be
extended for a period of time equal to such delay.
1.14 "Market Stand-Off" Agreement. The Investor hereby agrees that, during
the period of duration specified by the Company and an underwriter of Common
Stock or other securities of the Company, following the effective date of a
registration statement of the Company filed under the Act, it shall not, to the
extent requested by the Company and such underwriter, directly or indirectly
sell, offer to sell, contract to sell (including, without limitation, any short
sale), grant any option to purchase or otherwise transfer or dispose of (other
than to donees who agree to be similarly bound) any securities of the Company
held by it at any time during such period except Common Stock included in such
registration; provided, however:
11
<PAGE>
(a) that such market stand-off time period shall not exceed one
hundred eighty (180) days following the effective date of the Company's
first registration of Common Stock or other securities under the Act and
ninety (90) days following the effective date with respect to all
subsequent registrations; and
(b) all officers and directors of the Company and all five percent
(5%) or greater stockholders of the Company enter into similar agreements.
In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to the Registrable Securities of the
Investor (and the shares or securities of every other person subject to the
foregoing restriction) until the end of such period.
2. Covenants of the Company.
2.1 Financial Statements and Other Information. Except as otherwise set
forth below in this Section 2.1, until the Company is subject to the reporting
requirements of the 1934 Act, the Company will deliver to the Investor, for so
long as the Investor holds any shares of the Class A Common Stock:
(a) as soon as available, but in any event within forty-five (45) days
after the end of each quarterly accounting period in each fiscal year,
unaudited consolidated statements of operations and consolidated cash flows
of the Company and its subsidiaries for such quarterly period and for the
period from the beginning of the fiscal year to the end of such quarter,
and consolidated balance sheets of the Company and its subsidiaries as of
the end of such quarterly period, setting forth in each case comparisons to
the annual budget and to the corresponding period in the preceding fiscal
year, and all such statements will be prepared in accordance with generally
accepted accounting principles, consistently applied (except for the
absence of notes and subject to normal year-end adjustments);
(b) as promptly as possible (but in any event within ninety (90) days)
after the end of each fiscal year, audited consolidated statements of
operations and a consolidated statement of cash flows of the Company and
its subsidiaries for such fiscal year and consolidated balance sheets and
statements of stockholders' equity of the Company and its subsidiaries as
of the end of such fiscal year, setting forth comparisons to the annual
budget and to the preceding fiscal year, all prepared in accordance with
United States generally accepted accounting principles, consistently
applied, and accompanied by an opinion of an independent accounting firm
selected by the Company's Board of Directors and, in the event such firm is
not Ernst & Young LLP, reasonably acceptable to the Investor;
(c) prior to the end of each fiscal year, an annual budget (approved
by the Board of Directors) prepared on a monthly, consolidated basis for
the Company and its subsidiaries for the succeeding fiscal year (displaying
detailed anticipated statements of operations and cash flows and balance
sheets), and promptly upon preparation thereof any other significant
budgets which the Company prepares and any revisions of such annual or
other budgets;
12
<PAGE>
(d) promptly (and in any event within thirty (30) days) after the
discovery or receipt of notice of any event or circumstance affecting the
Company or its subsidiaries that is determined in good faith by the Company
to be material to the Company and its subsidiaries, taken as a whole,
including but not limited to, the filing of any material litigation against
the Company or its subsidiaries, acquisitions, mergers, substantial sales
of assets, significant regulatory or legal developments, the commencement
of voluntary or involuntary bankruptcy proceedings, natural or other
disasters, significant changes in management or directors, changes in
auditors, and execution or termination of, or defaults under, material
contracts, a letter from the Chief Executive Officer or Chief Financial
Officer of the Company specifying the nature and period of existence
thereof and, in the case of material litigation, what actions the Company
and its subsidiaries have taken and propose to take with respect thereto;
(e) promptly after transmission thereof, copies of all financial
statements, proxy statements, reports and any other written communications
which the Company sends to its stockholders generally and copies of all
registration statements and all regular, special or periodic reports which
it files with the SEC or with any securities exchange on which any of its
securities are then listed, and copies of all press releases and other
statements made available generally by the Company to the public;
(f) a notice specifying the terms of all sales of the Company's
securities, promptly following the consummation thereof; and
(g) notice of the effectiveness under the Act of the registration
covering the Company's initial public offering, such notice to be provided
by telecopier immediately following the SEC's notification to the Company
of such effectiveness.
Each of the financial statements referred to in this Section 2.1 will be
true and correct in all material respects and will fairly present the Company's
consolidated financial position and results of operations as of the dates and
for the periods stated therein, subject in the case of the unaudited financial
statements to changes resulting from normal year-end audit adjustments (none of
which would, alone or in the aggregate, be materially adverse to the Company's
financial condition, operating results or business prospects). The Company's
obligation to provide to the Investor the materials described in Subsection (e)
above will continue after the Company is subject to the reporting requirements
of the 1934 Act until the Investor no longer holds at least 20% of the shares of
the Series B Preferred Stock (or Class A Common Stock issued upon conversion
thereof).
2.2 Inspection of Property. Until the Company is subject to the reporting
requirements of the 1934 Act, the Company will permit the Investor, or any
representatives designated by the Investor, upon reasonable notice and during
normal business hours and such other times as the Investor may reasonably
request, to (i) visit and inspect any of the properties of the Company and its
subsidiaries, (ii) examine the corporate and financial records of the Company
and its subsidiaries and make copies thereof or extracts therefrom, (iii)
discuss the affairs, finances and accounts of the Company and its subsidiaries
with the directors, senior management and independent accountants of the Company
and its subsidiaries, and (iv) consult
13
<PAGE>
with the management of the Company and its subsidiaries as to their affairs,
finances and accounts.
2.3 Positive Covenants. So long as any shares of the Series B Preferred
Stock (or Class A Common Stock issued upon conversion thereof) are outstanding,
the Company agrees as follows:
(a) The Company will retain Ernst & Young LLP or, in the event Ernst &
Young LLP is terminated by the Company, such other independent public
accountants reasonably acceptable to the Investor in its discretion who
shall certify the Company's financial statements at the end of each fiscal
year. In the event the services of the independent public accountants so
selected, or any firm of independent public accountants hereafter employed
by the Company are terminated, the Company will promptly thereafter notify
the Investor and will request the firm of independent public accountants
whose services are terminated to deliver to the Investor a letter from such
firm setting forth the reasons for the termination of their services. In
the event of such termination, the Company will promptly thereafter engage
another firm of independent public accountants of recognized national
standing. In its notice to the Investor the Company shall state whether the
change of accountants was recommended or approved by the Board of Directors
of the Company or any committee thereof.
(b) The Company's Board of Directors will meet at least once every
fiscal quarter. The number of directors shall not exceed seven.
(c) The Company shall maintain in full force and effect, fire,
casualty, workmen's compensation and liability insurance policies, with
extended coverage, in such amounts and with such coverage as are carried by
companies in a position similar to that of the Company.
2.4 Negative Covenants. the Company shall not without first obtaining the
written consent of the Investor:
(a) engage in any spin-out, distribution or sale of any business unit
of the Company;
(b) enter into any transactions with affiliates of the Company except
on arms-length terms;
(c) redeem or repurchase any outstanding equity securities of the
Company except for: repurchases of unvested or restricted shares of Common
Stock at cost from employees, consultants, or members of the Board of
Directors pursuant to repurchase options of the Company (i) currently
outstanding or (ii) hereafter entered into pursuant to a stock option plan
or restricted stock plan approved by the Company's Board of Directors; or
(d) pay any dividend on or any distribution in respect of any shares
of capital stock, other than required dividends on the Series A Preferred
Stock.
14
<PAGE>
2.5 Issuance of Additional Shares; Covenant Regarding Stock Options.
(a) On the date on which the last outstanding share of the Series B
Preferred Stock is converted (the "Final Conversion Date"), the Company
shall determine, and identify on a schedule provided to the Holders, the
maximum aggregate number of shares of Common Stock issuable upon exercise,
conversion or exchange (assuming the satisfaction of any conditions thereto
including, without limitation, the passage of time) of securities of the
Company that are exercisable for, convertible into or exchangeable for
shares of Common Stock outstanding on the Final Conversion Date (the
securities identified on the schedule shall be referred to herein as the
"Convertible Securities"); provided, that notwithstanding anything to the
contrary herein, the Convertible Securities outstanding on the Final
Conversion Date shall not include any portion of any Convertible Securities
to the extent that such Convertible Securities, by their explicit terms,
can no longer be exercised due to their expiration or the irrevocable
failure of any precondition to their exercisability, including the failure
to achieve performance goals required for exercisability. Each such share
of Common Stock underlying such Convertible Securities may hereinafter be
referred to as an "Underlying Share" and such maximum number of Underlying
Shares may hereinafter be referred to as the "Total Number of Underlying
Shares." If the Total Number of Underlying Shares exceeds 900,000, the
"Protected Amount" shall equal the Total Number of Underlying Shares minus
900,000; otherwise, the Protected Amount shall equal zero (0). After the
date (the "Trigger Date") upon which Convertible Securities outstanding on
the Final Conversion Date that are exercisable for, convertible into or
exchangeable for such number of Underlying Shares as shall equal the
Protected Amount shall have been exercised, converted or exchanged, or
shall have expired or terminated, the Company shall, within twenty (20)
days after the end of each fiscal quarter of the Company commencing with
the fiscal quarter in which the Trigger Date occurs, determine whether in
such prior fiscal quarter there have been any Underlying Shares issued in
excess of the Protected Amount ("Excess Shares") If any such Excess Shares
shall have been issued, the Company shall, within ten (10) days of such
determination, issue to the Holders, pro rata and without any additional
consideration, such number of additional shares of Class A Common Stock as
shall equal the aggregate number of such Excess Shares issued in such
fiscal quarter multiplied by the Applicable Percentage (as defined in the
Articles Supplementary to the Articles of Incorporation of the Company)
determined on the Final Conversion Date. The Company's obligations pursuant
to this Section 2.5(a) shall terminate at such time as all Convertible
Securities outstanding on the Final Conversion Date shall no longer be
outstanding (whether through exercise, conversion, exchange, expiration or
termination).
(b) During the period commencing on the date of conversion of the
Series B Preferred Stock and ending two years from such date, the Company
shall not without first obtaining the written consent of the Investor,
issue any security convertible into Common Stock to employees, advisors,
consultants or outside directors pursuant to a stock option plan or
restricted stock plan if the cumulative total number of shares of Common
Stock issuable or issued upon exercise of such securities issued during
such period (and not repurchased at cost by the Company in connection with
the termination of employment) exceeds 5% of the outstanding shares of
Common Stock determined on a fully diluted basis; provided, that the
Convertible Securities outstanding on the Final Conversion Date shall not
be considered outstanding for purposes of this Section 2.5(b).
15
<PAGE>
2.6 Termination of Certain Covenants. The covenants set forth in Sections
2.3 and 2.4 shall terminate and be of no further force or effect upon the
consummation of a firm commitment underwritten initial public offering of
securities of the Company.
3. Miscellaneous.
3.1 Successors and Assigns. Except as otherwise provided herein, the terms
and conditions of this Agreement shall inure to the benefit of and be binding
upon the respective successors and assigns of the parties (including transferees
of any shares of Registrable Securities). 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.
3.2 Governing Law. This Agreement shall be governed by and construed under
the laws of the State of New York, disregarding New York principles of conflicts
of laws which would otherwise provide for the application of the substantive
laws of another jurisdiction.
3.3 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.
3.4 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.
3.5 Notices. Unless otherwise provided, any notice required or permitted
under this Agreement shall be given in writing and shall be deemed effectively
given upon personal delivery to the party to be notified upon delivery by
registered or certified mail, postage prepaid, return receipt requested and
addressed to the party to be notified at the address indicated for such party on
the signature page hereof, or at such other address as such party may designate
by ten (10) days' advance written notice to the other parties with a copy for
the Company to Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P.,
P.O. Box 2611, 2500 First Union Capital Center, Raleigh, North Carolina 27602,
Attention: Gerald F. Roach, Esq., and a copy for the Investor, to Bachner,
Tally, Polevoy & Misher LLP, 380 Madison Avenue, New York, New York 10017-2590,
Attention: Marc S. Goldfarb, Esq.
3.6 Expenses. 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 actually incurred, costs and necessary disbursements
in addition to any other relief to which such party may be entitled.
3.7 Amendments and Waivers. Any term of this Agreement may be amended and
the observance of any term of this Agreement may be waived (either generally or
in a particular instance and either retroactively or prospectively), only with
the written consent of the Company and the holders of two-thirds of the
Registrable Securities then outstanding. Any amendment or
16
<PAGE>
waiver effected in accordance with this Section 3.7 shall be binding upon each
holder of any Registrable Securities then outstanding, each future holder of all
such Registrable Securities, and the Company.
3.8 Severability. If one or more provisions of this Agreement are held to
be unenforceable under applicable law, such provision shall be excluded from
this Agreement and the balance of the Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.
3.9 Entire Agreement. This Agreement constitutes the full and entire
understanding and agreement between the parties with regard to the subjects
hereof.
17
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
INTERACTIVE MAGIC, INC.
By: /s/ Robert L. Pickens
_____________________________________
Name: Robert L. Pickens
Title: President
Address: P.O. Box 13491
Research Triangle Park, NC 27708
VERTICAL FINANCIAL HOLDINGS
By: /s/ Jacob Agam
_____________________________________
Name: Jacob Agam
Title: Chairman
Address: Hombrechtikerstrasse 61
CH-8640 Rapperswil, Switzerland
18
MARKETING AGREEMENT
MARKETING AGREEMENT, dated as of February 4, 1998 (the "Agreement"),
between INTERACTIVE MAGIC, INC., a corporation organized under the laws of the
State of Maryland (the "Company"), and General Capital, a corporation organized
under the laws of Switzerland ("General").
W I T N E S S E T H :
WHEREAS, the Company desires to receive services in connection with (a)
marketing its products worldwide, (b) arranging debt or equity financing for the
Company's products to be purchased by its customers and (c) arranging financing
for the Company's operations, leasing programs, joint ventures and distribution
arrangements generally, in each case for the further enhancement of the
Company's marketing strategy (collectively, the "Objectives"); and
WHEREAS, General has established its expertise in, among other things,
assisting companies in marketing their products worldwide and arranging
financing for customers; and
WHEREAS, General has performed services for the Company since October 1997
as outlined above and the parties now desire to memorialize their agreement and
understanding as to their respective duties and obligations.
NOW, THEREFORE, in consideration of the mutual covenants and agreements,
and other good and valuable consideration, the receipt and adequacy of which is
hereby acknowledged, the parties do hereby covenant and agree, upon the terms
and subject to the conditions hereinafter set forth, as follows:
Section 1. Retention of General. The Company engages General to assist the
Company in achieving its Objectives, and General accepts such engagement,
subject to the terms and conditions of this Agreement.
Section 2. Services. (a) Upon request of the Company and at such times as
are mutually convenient to General and the Company during the Term (as defined
below), General shall provide its services to the Company in connection with the
Objectives.
(b) In connection with performing its services, General and the
Company acknowledge and agree that General may, from time to time, propose
certain arrangements to the Company in connection with its Objectives and
the Company has no obligation to accept such proposals or further obligate
itself.
Section 3. Term. This Agreement shall be for a term of five years,
commencing on the date hereof and ending on February 3, 2003 (the "Term").
-1-
<PAGE>
Section 4. Compensation. For services rendered or to be rendered by General
pursuant to this Agreement, the Company shall pay to General $400,000, payable
within five business days following the date upon which the Company's
stockholders' equity equals or exceeds $5,000,000; provided, that in the event
that the Company completes a private placement of equity securities or a
strategic acquisition prior to the date upon which payment hereunder is made
and, as a result of such private placement or acquisition, the Company's
stockholders' equity equals or exceeds $3,000,000, such payment shall thereafter
be payable within five business days following the date upon which the Company's
stockholders' equity equals or exceeds $10,000,000.
Section 5. Marketing Efforts. (a) The Company shall provide General with
certain technical and other information relating to its business and operations
as is reasonable and necessary for General to market the Company's products
pursuant to this Agreement. In addition, the Company shall provide General with
the necessary sales promotion materials to market the Company's products.
(b) The Company shall also make its management available to General and
prospective customers at such reasonable times and locations as is necessary for
General to market the Company's products.
Section 6. Confidentiality. General acknowledges that in the course of its
engagement it will become familiar with trade secrets and other confidential
information ("Confidential Information") concerning the Company and that its
services will be special, unique and extraordinary to the Company. General
agrees that, during the Term and for a period of five years following the Term,
it shall not disclose to any third party any Confidential Information for any
purpose other than the performance of its duties under this Agreement; provided,
that Confidential Information shall not include information that shall become
known to the public or the trade without violation of this Section; and
provided, further, that General shall not violate this Section if Confidential
Information is disclosed by General at the direction of the Company in
connection with the performance of General's duties or if General is required to
provide Confidential Information in any legal proceeding or by order of any
court.
Section 7. Noncompetition. During the term hereof, neither General nor its
affiliates will directly engage in the interactive gaming business, or own or
control an interest in (except as a passive investor owning less than two
percent (2%) of the equity securities of a publicly owned company), or act as
director, officer or employee of, or consultant to, any individual, partnership,
joint venture, corporation or other business entity known to General to be
directly engaged in the interactive gaming business.
Section 8. Further Assurances. During the Term, the Company shall use its
reasonable good faith efforts to maintain and promote its products.
-2-
<PAGE>
Section 9. Representations and Warranties. The Company and General each
represent that (a) it has the requisite power and authority to enter into this
Agreement and to consummate the transactions contemplated hereby, (b) the
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized and (c) this
Agreement is valid and binding upon each party, enforceable against each party
in accordance with its terms.
Section 10. Governing Law. This Agreement shall be governed by and
construed under the laws of the State of New York, disregarding any New York
principles of conflicts of laws that would otherwise provide for the application
of the substantive laws of another jurisdiction. The parties agree that all
actions or proceedings arising in connection with this Agreement shall be tried
and litigated only in the State of New York.
Section 11. Entire Agreement; Amendments. This Agreement contains the full
and entire understanding and agreement between the parties and supersedes and
preempts any prior understandings or agreements, whether written or oral. The
provisions of this Agreement may be amended or waived only with the prior
written consent of the Company and General.
Section 12. Successors and Assigns. This Agreement shall be binding upon,
inure to the benefit of, and shall be enforceable by General and the Company and
their respective successors and permitted assigns. The rights and obligations of
General under this Agreement (with the exception of those rights in Section 4
hereof) shall not be assignable without the prior written consent of the
Company.
Section 13. Counterparts. This Agreement may be executed in two or more
counterparts, each which shall be deemed an original, but all of which together
shall constitute one and the same instrument.
Section 14. Notices. Unless otherwise provided, any notice required or
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or upon
delivery by registered or certified mail, postage prepaid, return receipt
requested and addressed to the party to be notified at the address indicated for
such party on the signature page hereof, or at such other address as such party
may designate by ten (10) days' advance written notice to the other parties,
with a copy for the Company to Smith, Anderson, Blount, Dorsett, Mitchell &
Jernigan, L.L.P., P.O. Box 2611, 2500 First Union Capitol Center, Raleigh, North
Carolina 27602, Attention: Gerald F. Roach, Esq. and a copy for General to
Bachner, Tally, Polevoy & Misher, LLP, 380 Madison Avenue, New York, New York
1017-2590, Attention: Marc S. Goldfarb, Esq.
Section 15. 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.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Marketing
Agreement on the date first written above.
INTERACTIVE MAGIC, INC.
By: /s/ Robert L. Pickens
__________________________________
Name: Robert L. Pickens
Title: President
Address: P.O. Box 13491
Research Triangle Park,
North Carolina 27708
GENERAL CAPITAL
By: /s/ Jacob Agam
__________________________________
Name: Jacob Agam
Title: Chairman
Address: Hombrechtikerstrasse 61
CH - 8640 Rapperswil, Switzerland
-4-
================================================================================
MERGER AGREEMENT
Dated as of March 24, 1997
by and among
INTERACTIVE MAGIC, INC.
INTERACTIVE CREATIONS ACQUISITION CORP.,
CERTAIN SHAREHOLDERS OF INTERACTIVE CREATIONS INCORPORATED
and
INTERACTIVE CREATIONS INCORPORATED
================================================================================
<PAGE>
TABLE OF CONTENTS
i
<PAGE>
MERGER AGREEMENT
THIS MERGER AGREEMENT (the "Agreement") is made and dated as of March 24,
1997 by and among INTERACTIVE MAGIC, INC., a Maryland corporation (the
"Purchaser"), INTERACTIVE CREATIONS ACQUISITION CORP., a North Carolina
corporation and wholly-owned subsidiary of the Purchaser ("Acquisition"),
INTERACTIVE CREATIONS INCORPORATED, a Texas corporation (the "Company"), and the
shareholders of the Company signatory hereto (the "Management Shareholders").
Capitalized terms used in this Agreement and not otherwise defined are defined
in Section 9.1 below. Except as otherwise specifically stated, references in
this Agreement to schedules and exhibits are references to the documents
attached as schedules and exhibits to this Agreement, all of which form a part
hereof.
WITNESSETH:
WHEREAS, the parties hereto desire for Acquisition and the Company to
engage in, and the Boards of Directors of the Purchaser, Acquisition and the
Company have approved, the merger of the Company with and into Acquisition (the
"Merger") upon the terms and subject to the conditions set forth herein and in
the related Plan of Merger attached as Exhibit A (the "Plan of Merger"); and
WHEREAS, the Management Shareholders are the owners of certain shares of
the issued and outstanding Common Stock of the Company, as set forth adjacent to
their names on Schedule 2.2; and
WHEREAS, the parties intend and desire for the Merger to constitute a
"pooling of interests" for the Purchaser's accounting purposes; and
WHEREAS, for United States federal income tax purposes it is intended that
the Merger shall qualify as a reorganization within the meaning of Section
368(a) of the Code;
NOW, THEREFORE, in consideration of the premises, covenants and agreements
set forth in this Agreement and of other good and valuable consideration, the
receipt and legal sufficiency of which they hereby acknowledge, and intending to
be legally bound by and upon execution and delivery hereof, the parties agree as
follows:
ARTICLE I
The Merger
1.1 The Merger.
(a) Upon the performance of all covenants and obligations of the parties
contained herein and upon the fulfillment of all conditions to the obligations
of the parties contained herein (other than such covenants, obligations and
conditions as shall have been waived in accordance with the terms hereof), and
in accordance with the North Carolina Business Corporation Act, as amended (the
"NCBCA"), and the Texas Business Corporation
1
<PAGE>
Act, as amended (the "Texas Code"), at the Effective Time (as defined in
subsection (b) below), the Company shall be merged with and into Acquisition in
accordance with the Plan of Merger; the separate existence of the Company shall
cease; Acquisition shall be the surviving corporation (sometimes referred to
herein as the "Surviving Corporation") and shall continue its corporate
existence under the Laws of the State of North Carolina; all right, title and
interest to all real estate and other property owned by the Company shall be
allocated to and vested in Acquisition as provided in the Plan of Merger,
without reversion or assignment having occurred, and subject to any existing
lease or encumbrance thereon; and all liabilities and obligations of the Company
shall be allocated to Acquisition, and Acquisition shall become the primary
obligor therefor. The name of the Surviving Corporation shall be "iMagicOnline
Corporation."
(b) The Merger shall be effected by the filing of articles of merger with
the Secretaries of State of the States of North Carolina and Texas in accordance
with the provisions of Article 11 of the NCBCA and Article 5.04 of the Texas
Code, respectively. The merger shall become effective at the time set forth in
the articles of merger, which shall be filed contemporaneously with the closing
conducted pursuant to Section 1.5 below. The time and date when the Merger shall
become effective is referred to in this Agreement as the "Effective Time".
(c) Pursuant to the Plan of Merger, and subject to the withholding into
escrow referred to in Section 1.4 below, at the Effective Time each share of
Common Stock of the Company issued and outstanding immediately prior to the
Effective Time (other than shares held in the treasury of the Company, all of
which shall be cancelled at the Effective Time by virtue of the Merger and
without further action) shall be converted into the right to receive 0.2592 (the
"Exchange Ratio") shares of Class A Common Stock of the Purchaser. Shares of
Class A Common Stock of the Purchaser issued pursuant to this Agreement and the
Plan of Merger sometimes are referred to in this Agreement as "Purchaser
Shares". All of the shares of Common Stock of the Company issued and outstanding
immediately prior to the Effective Time sometimes are referred to in this
Agreement as the "Company Shares". Purchaser Shares shall be issued by the
Purchaser upon surrender of the corresponding certificates evidencing Company
Shares in accordance with the Plan of Merger; provided, however, that the
Purchaser shall not be required to issue any fractional shares, and that any
fractional share otherwise issuable upon surrender of a certificate evidencing
Company Shares shall be cancelled.
1.2 Treatment of Company Stock Options.
(a) Effective as of the Effective Time, Acquisition shall assume the
Company's Incentive Stock Option Plan (by operation of the Merger), and each
then outstanding but unexercised option thereunder to purchase shares of the
Company's Common Stock (as specified on Schedule 2.2) shall cease to be
exercisable to purchase shares of the Company's Common Stock and shall become
exercisable to purchase shares of the Purchaser's Class B Common Stock on the
following basis (and otherwise on the terms then in effect therefor, including
as to term, vesting and exercise periods):
(i) the number of shares of the Purchaser's Class B Common Stock
purchasable upon the exercise of such option shall be the product
determined by multiplying the number of shares of the Company's Common
Stock that were
2
<PAGE>
purchasable upon the exercise of such option by the Exchange Ratio (as
calculated and defined in Section 1.1(c) above); and
(ii) the exercise price per share of the Purchaser's Class B Common
Stock purchasable under such option shall be the quotient determined by
dividing the exercise price per share of the Company's Common Stock under
such option by the Exchange Ratio.
As soon as practicable after the Effective Time, the Purchaser shall deliver to
the holder of each such option appropriate notice setting forth the number of
shares of the Purchaser's Class B Common Stock purchasable and the corresponding
exercise price thereunder.
(b) In the event the Purchaser determines to register shares of its capital
stock in connection with a public offering, the Purchaser shall (i) register
under the Securities Act the shares of capital stock of the Purchaser subject to
the Company options referred to in Section 1.2(a) above, and (ii) administer the
Company's Incentive Stock Option Plan in a manner that complies with Rule
16(b)-3 promulgated under Section 16 of the Securities Exchange Act of 1934, as
amended, in each case to the same extent that the Purchaser registers shares
issuable under other stock option plans of the Purchaser and administers such
plans to comply with such Rule.
1.3 Pooling of Interests. The Purchaser, the Company and the Management
Shareholders intend for the transactions contemplated by this Agreement to
qualify for "pooling of interests" treatment for purposes of the Purchaser's
accounting.
1.4 Withholding Into Escrow.
(a) When making the issuances required by Section 1.1(c) above and pursuant
to the Plan of Merger, and notwithstanding any provision therein to the
contrary, the Purchaser shall withhold from the Management Shareholders (on a
pro rata basis according to their respective interests in Company Shares) and
deliver to the Escrow Agent (as defined in the Escrow Agreement referred to
below) certificates representing an aggregate of 65,572 Purchaser Shares
(constituting five percent (5%) of the total number of Purchaser Shares), to be
held and distributed by the Escrow Agent pursuant to the terms of this Agreement
and the Escrow Agreement attached as Exhibit B (the "Escrow Agreement"). All
such certificates representing Purchaser Shares shall be issued in the names of
the corresponding Management Shareholders entitled to receive such Purchaser
Shares and shall be accompanied by corresponding stock powers, duly executed,
undated and in blank, which such Management Shareholders shall provide to
facilitate distribution by the Escrow Agent pursuant to the Escrow Agreement.
(b) The Management Shareholders hereby irrevocably appoint Dale H. Addink
to serve as the "Representative" for all purposes of and under the Escrow
Agreement, subject to replacement as provided therein.
1.5 Closing. Consummation of the transactions contemplated by this
Agreement and the Plan of Merger (the "Closing") shall take place at 10:00 a.m.
at the offices of Smith,
3
<PAGE>
Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P. on March 31, 1997, or at
such other time and date as the Purchaser and the Company shall mutually agree
in writing (such specified or other time and date, the "Closing Date").
1.6 Transaction Documents. As used in this Agreement, the term "Transaction
Documents" shall mean, collectively, this Agreement, the Plan of Merger (and any
related articles or certificates of merger), the Escrow Agreement, the
Shareholder Agreements, confidentiality and non-competition agreements referred
to in Sections 5.17, 5.21 and 5.22 below, respectively, and all agreements,
instruments, certificates and other documents executed or delivered in
accordance with the terms of this Agreement or any Transaction Document.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE MANAGEMENT SHAREHOLDERS AND THE COMPANY
Each of the Management Shareholders and the Company jointly and severally
represent and warrant to the Purchaser and Acquisition and agree as follows:
2.1 Existence and Good Standing. The Company is a corporation duly
organized, validly existing and in good standing under the Laws of the State of
Texas. The Company has the power to own its property and to carry on its
business as now being conducted. The Company is not required by applicable Law
to be qualified to do business in any other state or foreign jurisdiction.
2.2 Capital Stock. The Company has an authorized capitalization consisting
solely of 10,000,000 shares of common stock, no par value per share. As of the
date of this Agreement, 5,059,570 shares of the Company's Common Stock are
issued and outstanding and are held by the Persons and in the amounts set forth
in Schedule 2.2; no other shares of the Company's capital stock are issued or
outstanding; 900,000 shares of the Company's Common Stock are reserved for
issuance under the Company's Incentive Stock Option Plan; options to acquire an
aggregate of 757,877 shares of Common Stock of the Company are outstanding under
such Plan (the "ICI Options"); and there are no other outstanding Stock
Acquisition Rights for securities of the Company (other than as contemplated by
this Agreement). As of the Effective Time, 5,095,570 shares of the Company's
Common Stock will be issued and outstanding and held by the Persons and in the
amounts set forth in Schedule 2.2; no other shares of the Company's capital
stock will be issued or outstanding; and, except for the ICI Options, there will
be no outstanding Stock Acquisition Rights for securities of the Company (other
than as contemplated by this Agreement). All such shares outstanding as of the
date of this Agreement have been duly authorized and validly issued and are
fully paid and nonassessable, and none were issued in violation of any Stock
Acquisition Right for securities of the Company. All such shares outstanding as
of the Effective Time will have been duly authorized and validly issued by the
Effective Time and will be fully paid and nonassessable as of the Effective
Time, and none will have been issued in violation of any Stock Acquisition Right
for securities of the Company.
4
<PAGE>
2.3 Power and Authority.
(a) The Company has all requisite power and authority to enter into and
deliver this Agreement, the Plan of Merger and the other Transaction Documents
to which the Company is a party, to perform its obligations hereunder and
thereunder and to consummate the transactions contemplated hereby and thereby.
The Company's execution, delivery and performance of this Agreement, the Plan of
Merger and the other Transaction Documents to which the Company is a party and
the Company's consummation of the transactions contemplated hereby and thereby,
upon approval by the Company's shareholders, will have been duly and validly
authorized by all corporate, shareholder and other action required of the
Company by applicable Law or its Organizational Documents. The Board of
Directors of the Company has determined to recommend the approval of the Merger
to the shareholders of the Company, and such determination is in effect on the
date hereof. This Agreement, the Plan of Merger and the other Transaction
Documents to which the Company is a party constitute the valid and legally
binding obligations of the Company, enforceable against the Company in
accordance with their respective terms.
(b) Each Management Shareholder has the legal right, power and authority to
enter into and deliver this Agreement and the other Transaction Documents to
which such Management Shareholder is a party, perform such Management
Shareholder's obligations hereunder and thereunder and consummate the
transactions contemplated hereby and thereby. This Agreement and the other
Transaction Documents to which such Management Shareholder is a party constitute
the valid and legally binding obligations of such Management Shareholder,
enforceable against such Management Shareholder in accordance with its and their
respective terms.
2.4 Subsidiaries and Investments. The Company does not own stock or have
any other equity interest in, and does not control, directly or indirectly, any
corporation, partnership, association, trust, joint venture or other entity. The
Company is not a party to any joint venture or partnership arrangement or
agreement except as disclosed in Schedule 2.4.
2.5 Financial Statements; No Material Changes; Budget and Projections.
(a) The Company has furnished the Purchaser with the balance sheets of the
Company as of December 31, 1996 (the "Company Balance Sheet") and December 31,
1995, and the related statements of income, shareholders' equity and cash flows
for the years then ended, compiled by Whitsell and Company, P.C. All such
financial statements, including the notes thereto, have been prepared on the
accounting basis used by the Company for income tax purposes, consistently
applied throughout the periods indicated, and are correct, complete, and
consistent with the Company's books and records (which are correct and
complete). The accounting basis used by the Company for income tax purposes
differs materially from generally accepted accounting principles only as
described on Schedule 2.5. The Company Balance Sheet and such other balance
sheets fairly present the financial condition of the Company as of the
respective dates thereof, and reflect all claims against and all debts and
liabilities of the Company, fixed or contingent, as of the respective dates
thereof; and the related statements of income, shareholders' equity and cash
flows fairly present the results of the operations of the Company and the
changes in its financial position for the periods indicated. There are no
transactions between the Company and any shareholder of the
5
<PAGE>
Company (or any affiliate of any such shareholder) which are not disclosed in
such financial statements.
(b) Since December 31, 1996 (the "Company Balance Sheet Date") there has
been (i) no event, fact, condition, circumstance or other development which has
had or reasonably could be expected (individually or in the aggregate) to have a
Material Adverse Effect on the Company, whether as a result of any legislative
or regulatory change, revocation of any license or rights to do business,
Casualty or otherwise, and (ii) no material change in the assets, liabilities or
equity, or in the business or condition, financial or otherwise, or in the
results of operations or prospects of the Company; and no fact or condition
exists or is contemplated or threatened which might cause such a change in the
future.
(c) The Company has furnished the Purchaser with true and complete copies
of the Company's financial budget for the calendar year 1997 and financial
projections for the calendar years 1997 and 1998 (the "Company Projections").
Although the Company can give no assurance of achievement, neither the Company
nor any Management Shareholder knows of any reason such budget and the Company
Projections will not be achieved. Such budget and the Company Projections are
reasonable and are consistent with the Company's current and historical
financial performance, and, except as described in Schedule 2.5, were prepared
on the same basis and consistent with the Company's previous budgets and the
Company's financial statements referred to above.
2.6 Books and Records. The minute books of the Company, as previously made
available to the Purchaser and its representatives, contain accurate records of
all meetings of and corporate action taken by the shareholders and Board of
Directors (including committees thereof) of the Company.
2.7 Title to Properties; Encumbrances. Except as set forth in Schedule 2.7,
the Company has good, valid and marketable title to (a) all of its properties
and assets (real and personal, tangible and intangible), including without
limitation all of the properties and assets reflected in the Company Balance
Sheet, except as indicated in the notes thereto, and (b) all of the properties
and assets purchased by the Company since the Company Balance Sheet Date; in
each case subject to no Encumbrance, except for (i) liens reflected in the
Company Balance Sheet, (ii) liens consisting of zoning or planning restrictions,
easements, permits and other restrictions or limitations on the use of real
property or irregularities in title thereto which do not detract materially from
the value of, or impair the use of, such property by the Company in the
operation of its business, and (iii) liens for current taxes, assessments or
governmental charges or levies on property not yet due and delinquent.
2.8 Tangible Assets. Schedule 2.8 contains an accurate and complete list of
all tangible assets of the Company, whether owned or leased (as so indicated),
having a value (individually or in the aggregate with other like items) in
excess of $5,000. The tangible assets listed in Schedule 2.8 are in a state of
good maintenance and repair (ordinary wear and tear excepted), are adequate and
suitable for the purposes for which they are currently being used, and
constitute all of the tangible assets (having such value) used in the Company's
business as currently conducted.
6
<PAGE>
2.9 Real Property. Except as described in Schedule 2.10 in respect of its
leases, the Company does not own, in whole or in part, any interest in any real
property.
2.10 Leases. Schedule 2.10 contains an accurate and complete list of all
leases to which the Company is a party (as lessee or lessor). Each lease
identified in Schedule 2.10 (or required to be set forth in Schedule 2.10) is in
full force and effect; all rents and additional rents due to date on each such
lease have been paid; in each case, the lessee has been in peaceable possession
since the commencement of the original term of such lease and is not in default
thereunder, and no waiver, indulgence or postponement of the lessee's
obligations thereunder has been granted by the lessor; and there exists no event
of default or event, occurrence, condition or act (including the transactions
contemplated by this Agreement) which, with the giving of notice, the lapse of
time or the happening of any further event or condition, would become a default
under such lease. The Company has not violated any of the terms or conditions
under any lease set forth in Schedule 2.10 (or required to be set forth in
Schedule 2.10) in any material respect, and there is no reason to believe there
will be a violation by the Company in the future. The Company is in good
relations with each other party thereto, and, to the Company's and each
Management Shareholder's knowledge, all of the covenants to be performed by any
other party under any such lease have been fully performed. The property leased
by the Company is in a state of good maintenance and repair (ordinary wear and
tear excepted) and is adequate and suitable for the purposes for which it is
presently being used.
2.11 Contracts. Except as set forth in Schedule 2.11, the Company neither
has nor is bound by (a) any Contract relating to the delivery of goods or the
performance by the Company of services for or on behalf of any person or entity,
(b) any Contract relating to the engagement as an independent contractor or
employment of any person by the Company, (c) any Contract which contains
restrictions with respect to the payment of dividends or any other distribution
in respect of the Company's capital stock, (d) any Contract relating to capital
expenditures, (e) any loan or advance to, or investment in, any Person or any
Contract relating to the making of any such loan, advance or investment, (f) any
guarantee or other contingent liability in respect of any indebtedness or
obligation of any Person (other than the endorsement of negotiable instruments
for collection in the ordinary course of business), (g) any management service,
consulting or any other similar type Contract, (h) any Contract limiting the
freedom of the Company to engage in any line of business or do business in any
geographic area, or to compete with any Person, (i) any Contract which involves
the payment or receipt by the Company of $20,000 or more or (j) any Contract
which might reasonably be expected to have a Material Adverse Effect on the
Company. Each Contract or agreement set forth in Schedule 2.11 (or required to
be set forth in Schedule 2.11) is in full force and effect, and neither the
Company nor any Management Shareholder knows of any, and neither any Management
Shareholder nor the Company has received any notice or other communication
asserting the actual or alleged existence of any, default or event of default or
event, occurrence, condition or act (including the consummation of the
transactions contemplated by this Agreement) which, with the giving of notice,
the lapse of time or the occurrence of any other event or condition, would
become a default or event of default thereunder. The Company has not violated
any of the terms or conditions of any Contract set forth in Schedule 2.11 (or
required to be set forth in Schedule 2.11) in any material respect, and there is
no reason to believe there will be a violation by the Company in the future. The
Company is in good relations with each other party thereto, and, to the
Company's and each Management Shareholder's knowledge, all of the covenants to
be performed by any other party thereto have been fully performed. The
7
<PAGE>
Company considers its relations with its current licensors, licensees,
customers, vendors, suppliers and contractors to be good.
2.12 No Conflicts. The execution and delivery of this Agreement and each
other applicable Transaction Document by the Company and the Management
Shareholders do not, and the performance of this Agreement and each other
applicable Transaction Document by the Company and the Management Shareholders
will not, (i) conflict with or violate any provision of the Organizational
Documents of the Company or any Management Shareholder, (ii) assuming that all
consents, approvals, authorizations and other actions described in Schedule 2.12
have been obtained and all filings and obligations described in Schedule 2.12
have been made, conflict with or violate any Law applicable to the Company or
any Management Shareholder or by which any property or asset of the Company or
any Management Shareholder is bound or affected, or (iii) except as set forth in
Schedule 2.12, result in any breach of or constitute a default (or an event
which with notice or lapse of time or both would become a default) under, or
give to others any right of termination, amendment, acceleration or cancellation
of, or result in the creation of an Encumbrance on any property or asset of the
Company pursuant to, any Contract.
2.13 Litigation. Except as set forth in Schedule 2.13, there is no action,
suit, proceeding at law or in equity, arbitration or administrative or other
proceeding or investigation by or before any governmental or other
instrumentality or agency pending or threatened against or affecting the Company
or any of its properties or rights; and the Company is not aware of any basis
for any such action, proceeding or investigation. The Company is not subject to
or affected by any judgment, order or decree entered in any lawsuit or
proceeding which has had or reasonably may be expected to have a Material
Adverse Effect on the Company or which has impaired or reasonably may be
expected to impair the ability of the Company to acquire any property or conduct
business in any geographic area.
2.14 Taxes. The Company has filed or caused to be filed, within the times
and manners prescribed by Law, all federal, state, local and foreign tax returns
and tax reports which are required to be filed by, or with respect to, the
Company. True and complete copies of all such state and federal income and other
material tax returns have been made available to the Purchaser. Such returns and
reports reflect accurately all liability for taxes of the Company for the
periods covered thereby. All material federal, state, local and foreign income,
profits, franchise, sales, use, occupancy, excise and other taxes and
assessments (including interest and penalties) payable by or due from the
Company have been fully paid or adequately reserved against in the financial
statements of the Company. To the Company's and each Management Shareholder's
knowledge, no examination of any tax return of the Company is currently in
progress, and, to the Company's and each Management Shareholder's knowledge, no
basis for any assessment exists. There are no outstanding agreements or waivers
extending the statutory period of limitation applicable to any tax return of the
Company.
2.15 Independent Contractor Status. Schedule 2.15 sets forth a complete
list of the Persons engaged by the Company at any time to render management,
consulting, research, development, programming or other services to the Company
as an independent contractor (collectively, the "Company Contractors"). The
Company has previously provided to the Purchaser true and complete copies of
each and every agreement between the Company and any Company Contractor. Each
Company Contractor is and at all times has been an
8
<PAGE>
independent contractor to, and not an employee of, the Company for purposes of
all applicable federal and state income tax withholding requirements and
otherwise, and, except as disclosed in Schedule 2.15, has executed an agreement
not to disclose the Company's confidential Intellectual Property (as defined in
Section 2.18 below).
2.16 Liabilities; Indebtedness.
(a) There are no liabilities, obligations or indebtedness of or claims
against the Company, whether known or unknown, due or not yet due, asserted or
unasserted (whether or not probable of assertion), actual or potential, choate
or inchoate, fixed, contingent, or otherwise, arising from or in connection with
or based upon acts, omissions, events, things, facts, conditions, matters or
occurrences existing, occurring or taking place on or before the Closing Date,
whether or not discovered, known, asserted, expected or contemplated by any
party or third party, or in any way choate on the Closing Date, and the
Purchaser shall not suffer or be subject to any Losses (as defined in Section
8.2(a) below) arising from the foregoing, whether such Losses occur before or
after the Closing Date, except (i) those liabilities set forth in the Company
Balance Sheet or referred to in the notes thereto, (ii) non-material liabilities
which have arisen since the Company Balance Sheet Date in the ordinary course of
business (none of which is a liability for breach of contract, breach of
warranty, tort or infringement), (iii) non-material liabilities arising under
executory contracts entered into in the ordinary course of business (none of
which is a liability for breach of contract), (iv) liabilities specifically set
forth on Schedule 2.16 and (v) other liabilities which, in the aggregate, are
not material to the Company.
(b) Schedule 2.16 is a complete and correct listing of all (i) existing
indebtedness of the Company for money borrowed, (ii) guarantees of the Company
and (iii) letters of credit and other credit enhancements extended to the
Company (all obligations described by (i) through (iii) being referred to herein
as "Indebtedness"). The Company has performed and is in compliance in all
material respects with all of the terms of its Indebtedness and all instruments
and agreements relating thereto, and no default or event of default, or event or
condition which with the giving of notice, the lapse of time, a determination of
materiality, the satisfaction of any other condition or any combination of the
foregoing, would constitute such a default or event of default, exists with
respect to any such Indebtedness. The sum of the Indebtedness of the Company
does not exceed $10,000.
2.17 Insurance. Set forth in Schedule 2.17 is a complete list of insurance
policies which the Company maintains with respect to its business, properties
and employees, together with a description of each claim made thereon in excess
of $10,000. All such policies are in full force and effect and are free from any
right of termination on the part of the applicable insurance carriers. Such
policies, with respect to their amounts and types of coverage, are customary for
corporations of similar size engaged in similar lines of business as the
Company, and do not require the payment of any unusual premium, surcharge, or
other increase above market insurance rates as a result of the nature of the
Company's business or the manner in which such business has been conducted,
including but not limited to past loss or claim experience or risks of
operations pertinent to insurability. There are no outstanding unpaid premiums
except in the ordinary course of business, and the Company has not received any
notice of cancellation or non-renewal of any such policy. The Company is not
aware of any extraordinary risks, situations, occurrences or other matters which
have been disclosed, or
9
<PAGE>
should have been disclosed, to insurance carriers or brokers in connection with
any applications for insurance. Since January 1, 1995, there has not been any
material adverse change in the relationship of the Company with its insurers or
in the premiums payable pursuant to such policies. There exists no event of
default or event, occurrence, condition or act (including the transactions
contemplated by this Agreement) which, with the giving of notice, the lapse of
time or the happening of any further event or condition would become a default
or occasion a material premium increase under any such policy or give rise to,
and the Company has no anticipation of, any termination or cancellation thereof
or premium increase therefor. The Company has been covered by one or more
policies of insurance of the types described in Schedule 2.17 continuously since
the commencement of its operations for all services provided by the Company at
any time.
2.18 Intellectual Property. The lawful operation of the business of the
Company as currently conducted and as currently planned to be conducted requires
no rights under Intellectual Property (as defined below) other than rights under
Intellectual Property listed in Schedule 2.18 and rights granted to the Company
pursuant to agreements listed in Schedule 2.18. Since inception, the Company has
not made use of any Intellectual Property rights other than rights under
Intellectual Property listed in Schedule 2.18 and rights granted to the Company
pursuant to agreements listed in Schedule 2.18. Except as otherwise set forth in
Schedule 2.18, the Company owns all right, title and interest in the
Intellectual Property listed in Schedule 2.18, including without limitation
exclusive rights to use and license the same. Each item of Intellectual Property
listed in Schedule 2.18 has been duly registered with, filed in, or issued by a
domestic or foreign governmental agency to the extent specified in Schedule
2.18, and each such registration, filing and issuance remains in full force and
effect. No claim adverse to the interests of the Company in the Intellectual
Property or agreements listed in Schedule 2.18 has been made in litigation. No
such claim has been threatened or asserted; to the Company's and each Management
Shareholder's knowledge, no basis or alleged basis exists for any such claim;
and, to the Company's and each Management Shareholder's knowledge, no Person has
infringed or otherwise violated the Company's right in any of the Intellectual
Property or agreements listed in Schedule 2.18. Neither the Intellectual
Property listed in Schedule 2.18 nor the Company's use thereof infringes or has
infringed at any time upon the valid Intellectual Property rights of another,
and no litigation is pending wherein the Company is accused of infringing or
otherwise violating the Intellectual Property right of another, or of breaching
a Contract conveying rights under Intellectual Property. No such claim has been
asserted or threatened against the Company, nor, to the Company's or any
Management Shareholder's knowledge, are there any facts that would give rise to
such a claim. The Company has taken reasonable steps to safeguard and maintain
the secrecy and confidentiality of, and its proprietary rights in, its
Intellectual Property. For purposes of this Section 2.18 and Section 3.16,
"Intellectual Property" means domestic and foreign patents, patent applications,
registered and unregistered trademarks and service marks, registered and
unregistered copyrights, computer programs and databases, trade secrets and
other proprietary information.
2.19 Licenses. Schedule 2.19 contains an accurate and complete list of all
licenses, franchises, permits, rights and other authorizations (collectively,
"Licenses") used in the operation of the business of the Company or otherwise
held by the Company. The Company owns or otherwise lawfully uses each License
necessary or required by applicable Law to conduct its business as conducted as
of the date of this Agreement, except for Licenses
10
<PAGE>
the absence of which do not and cannot reasonably be expected to have a Material
Adverse Effect on the Company. Each such License is in full force and effect,
and, to the Company's and each Management Shareholder's knowledge, no such
License is subject to any current default or right of cancellation, termination
or revocation.
2.20 Compliance with Laws. The Company is, will be, and at all times since
inception has been in compliance with all applicable Laws, except for such
noncompliance which has not and will not have a Material Adverse Effect on the
Company. To the Company's and each Management Shareholder's knowledge, there
exists no event, occurrence, condition or act which, with the giving of notice
or the lapse of time, would constitute a violation of any applicable Law the
violation of which reasonably could be expected to have a Material Adverse
Effect on the Company. Neither the Company nor, to the Company's and each
Management Shareholder's knowledge, any Person acting for or on behalf of the
Company has at any time made or participated in any bribe, kickback or illegal
payment.
2.21 Working Capital, Accounts Receivable. The amount of all accounts
receivable, unbilled invoices and other debts due or recorded in the respective
records and books of account of the Company as being due to the Company as of
the Closing Date (less the amount of any provision or reserve therefor made in
the respective records and books of account of the Company) will be good and
collectible in full in the ordinary course of business in accordance with the
terms thereof; and none of such accounts receivable or other debts is or will be
at the Closing Date subject to any counterclaim or set-off except to the extent
of any such provision or reserve. There has been no material adverse change
since the Company Balance Sheet Date in the amount of accounts receivable or
other debts due the Company or the allowances with respect thereto, or accounts
payable of the Company, from that reflected in the Company Balance Sheet.
2.22 Employee Relations. Schedule 2.22 contains an accurate list of all of
the Company's employees, showing for each his or her position, date of
employment, 1996 compensation, and current annualized salary. Except as
specified in Schedule 2.22, the Company has not been involved with any organized
labor, union or collective bargaining activities or events whatsoever. The
Company is in substantial compliance with all federal, state and other
applicable Laws, domestic or foreign, respecting employment and employment
practices, terms and conditions of employment and wages and hours, and has not
and is not engaged in any unfair labor practice. The Company has not experienced
any labor difficulty during the last three years other than isolated routine
grievance matters which were neither material individually nor in the aggregate
and which did not constitute a pattern of behavior. Except as specified in
Schedule 2.22, no person currently employed by the Company as a manager,
programmer or artist has expressed or communicated to the Company any current
grievance or any intent to leave or contemplation of leaving the Company's
employ. There has not been, and neither the Company nor any Management
Shareholder anticipates, any materially adverse change in relations with
employees of the Company as a result of any announcement or the consummation of
the transactions contemplated by this Agreement.
2.23 Employee Benefit Plans.
(a) Set forth in Schedule 2.23 is an accurate and complete list of all
employee benefit plans of any variety whatsoever (the "Company Employee Benefit
Plans"),
11
<PAGE>
including without limitation any within the meaning of Section 3(3) of ERISA
(whether or not any such Company Employee Benefit Plans are otherwise exempt
from the provisions of ERISA), established, maintained or contributed to by or
with respect to the Company at any time. The Company has provided the Purchaser
with true and complete copies of all documents governing or relating to each
such Company Employee Benefit Plan.
(b) Each Company Employee Benefit Plan has been administered in all
material respects in accordance with its terms and is in compliance in all
material respects with the applicable provisions, if any, of ERISA and the Code.
All reports, returns and similar documents with respect to the Company Employee
Benefit Plans required to be filed with any government agency or distributed to
any Company Employee Benefit Plan participant have been duly and timely filed or
distributed. To the Company's and each Management Shareholder's knowledge, there
are no investigations by any government agency, and no termination proceedings
or other claims, suits or proceedings against or involving any Company Employee
Benefit Plan or asserting any rights or claims to benefits under any Company
Employee Benefit Plan that could give rise to any liability to the Company or
such Company Employee Benefit Plan. All of the Company Employee Benefit Plans
that are intended to be qualified under Section 401(a) of the Code have received
determination letters from the Internal Revenue Service to the effect that such
Company Employee Benefit Plans are qualified; the Company Employee Benefit Plans
and the trusts related thereto are exempt from federal income taxes; no such
determination letter has been revoked and revocation has not been threatened;
and no such Company Employee Benefit Plan has been amended since the date of its
most recent determination letter or application therefor in any respect that
would adversely affect its qualification or increase its cost. No Company
Employee Benefit Plans have been terminated; there have not been any "reportable
events" (as defined in Section 4043 of ERISA and the regulations thereunder)
with respect thereto; and no Company Employee Benefit Plan has an "accumulated
funding deficiency" within the meaning of Section 412(a) of the Code or any
unfunded liability of any kind.
2.24 Environmental Matters.
(a) For purposes of this Section 2.24, the following terms shall have the
following meanings: (A) "Facilities" shall mean any and all buildings,
structures and properties of any sort owned, leased, operated or occupied by the
Company at any time; (B) "Hazardous Materials" shall mean any substance, waste,
or material characterized, defined or listed as "hazardous" or "toxic" or
regulated under Environmental Laws (as defined below), including any and all
constituents of such substance, waste, or material. The term "Hazardous
Materials" shall include, without limitation, solid or liquid raw materials,
wastes, petroleum and petroleum products, and source, special nuclear or
by-product material as defined by the Atomic Energy Act of 1954, as amended; (C)
"CERCLA" shall mean the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended; (D) "RCRA" shall mean the Resource
Conservation and Recovery Act, as amended; (E) "Claim" shall mean any and all
claims, demands, causes of actions, suits, proceedings, administrative
proceedings, losses, judgments, decrees, debts, damages, liabilities, court
costs, attorneys' fees and any other expenses incurred, assessed or sustained by
or against the Company; and (F) "Environmental Laws" shall mean any and all Laws
relating to the environment or hazardous or toxic materials or substances, the
protection of human health and the environment, or the release of any materials
or substances into the environment, whether existing or hereafter enacted or
issued
12
<PAGE>
which govern behavior, activities or conditions with respect to the
Facilities prior to the Closing Date.
(b) Compliance with Environmental Laws. The Company has provided to the
Purchaser all material information relating to the following items: (i) the
nature, quantities and ultimate disposal locations of any Hazardous Materials
generated, transported, treated or disposed of by the Company, if any, together
with a description of the location of each such activity, and (ii) a summary of
the nature and quantities of any Hazardous Materials, if any, that, to the
Company's and each Management Shareholder's knowledge, have been disposed of or
found at any site or facility owned, operated or occupied presently or at any
previous time by the Company. The Company is in compliance with all applicable
Environmental Laws, including without limitation those relating to product
registration, pollution control and environmental contamination and those
governing the generation, use, collection, discharge, or disposal of Hazardous
Materials and record keeping, notification and reporting requirements respecting
Hazardous Materials. Except as disclosed in Schedule 2.24, the Company has not
violated or been alleged to have violated any Environmental Law, nor has the
Company been subject to any administrative or judicial proceeding pursuant to
any Environmental Law at any time. Except as disclosed in Schedule 2.24, to the
Company's and each Management Shareholder's knowledge, there are no facts or
circumstances which could form the basis for the assertion of any Claim against
the Company relating to environmental matters, including without limitation any
Claim arising from past or present environmental practices of the Company
asserted under CERCLA or RCRA or any other Environmental Law, which could
reasonably be expected to have a Material Adverse Effect on the Company.
(c) Asbestos, Urea Formaldehyde, and Underground Storage Tanks. To the
knowledge of the Company and each Management Shareholder, there is not and has
never been constructed, placed, deposited, stored, disposed of nor located on or
at any Facility any asbestos or asbestos-containing-materials or any insulating
materials containing urea formaldehyde in any form, and no underground treatment
or storage tanks (excluding non-industrial waste septic tanks) or sumps are or
have ever been located on or at the Facilities, except as listed in Schedule
2.24.
(d) Investigations There have been no environmental investigations,
studies, audits, tests, reviews or other analyses conducted by, on behalf of, or
which are in the possession or control of the Company in relation to the
Facilities.
(e) Liens. There are no liens arising under or pursuant to any
Environmental Laws on the Facilities; no actions by any governmental authority
have been taken or, to the knowledge of the Company and each Management
Shareholder, are in process which likely would subject the Facilities to such
liens; and the Company is not required to place any notice or restriction
relating to the presence of any Hazardous Materials at the Facilities or in any
deed to the Facilities.
2.25 Interests in Clients, Suppliers, Etc. Except as described in Schedule
2.25, neither the Company nor any officer or director of the Company possesses,
directly or indirectly, any financial or other interest in any corporation,
firm, association or business organization which is a licensor, licensee,
client, supplier, customer, lessor, lessee, or competitor or potential
competitor of or to the Company, the Purchaser or the Surviving
13
<PAGE>
Corporation (other than an interest in a public corporation which does not
exceed one percent (1%) of such corporation's outstanding securities).
2.26 Bank Accounts, Powers of Attorney. Set forth in Schedule 2.26 is an
accurate and complete list showing (a) the name and address of each bank in
which the Company has an account or safe deposit box, the number of any such
account or any such box and the names of all persons authorized to draw thereon
or to have access thereto, and (b) the names of all persons, if any, holding
powers of attorney (including without limitation with respect to tax matters)
from the Company and a summary statement of the terms thereof.
2.27 No Changes Since Company Balance Sheet Date. Except as described in
Schedule 2.27, since the Company Balance Sheet Date the Company has not (a)
incurred any liability or obligation of any nature (whether accrued, absolute,
contingent or otherwise) except in the ordinary course of business in an amount
less than $10,000 individually or in the aggregate, (b) sold, transferred or
otherwise disposed of any assets except in the ordinary course of business for
an amount less than $10,000 individually or in the aggregate, (c) made any
capital expenditure or commitment therefor except in the ordinary course of
business, none of which individually or in the aggregate exceeds $10,000, (d)
declared or paid any dividend or made any distribution on any shares of its
capital stock, or redeemed, purchased or otherwise acquired any shares of its
capital stock or any Stock Acquisition Right for any such shares, (e) made any
bonus or profit sharing distribution or payment of any kind, (f) made any loan
to any Person, (g) written off as uncollectible any notes or accounts receivable
except write-offs in the ordinary course of business charged to applicable
reserves, none of which individually or in the aggregate exceeds $10,000, (h)
granted any increase in the rate of wages, salaries, bonuses or other
remuneration of any executive employee or other employees, (i) canceled or
waived any material claims or rights, (j) made any change in any method of
accounting or auditing practice, (k) otherwise conducted its business in any
material respect or entered into any material transaction other than in the
ordinary course of business, or (l) agreed, whether or not in writing, to do any
of the foregoing.
2.28 Disclosure. Neither this Agreement, the financial statements referred
to in Section 2.5 hereof (including the notes thereto), or any schedule, exhibit
or certificate attached hereto or delivered in accordance with the terms hereof
or any document or statement in writing which has been supplied by or on behalf
of any Management Shareholder or the Company in connection with the transactions
contemplated by this Agreement nor the Company's Confidential Private Placement
Memorandum dated August 31, 1996 (without regard to any effective date specified
therein) contains any untrue statement of a material fact or omits any statement
of a material fact necessary in order to make the statements contained herein or
therein not misleading. There is no fact known to the Company or any Management
Shareholder which reasonably would be expected to have a Material Adverse Effect
on the Company which has not been set forth in this Agreement, the financial
statements referred to in Section 2.5 hereof (including the notes thereto), or
any schedule, exhibit or certificate attached hereto or delivered in accordance
with the terms hereof or any document or statement in writing which has been
supplied by or on behalf of any Management Shareholder or the Company in
connection with the transactions contemplated by this Agreement.
2.29 Broker's or Finder's Fees. No agent, broker, person or firm acting on
behalf of any Management Shareholder or the Company is, or will be, entitled to
any commission or
14
<PAGE>
broker's or finder's fees from any of the parties hereto, or from any Person
controlling, controlled by or under common control with any Management
Shareholder or the Company, in connection with any of the transactions
contemplated by this Agreement.
2.30 Matters Affecting Employees. To the knowledge of the Company and each
Management Shareholder, no employee of the Company is subject to any Contract or
Law which adversely affects or which might adversely affect such employee's
ability to act as an employee of the Purchaser or the Surviving Corporation
following consummation of the transactions contemplated by this Agreement.
2.31 Purchase for Investment. Not more than thirty-five (35) of the
Company's shareholders are not "accredited investors" (as defined in Regulation
D promulgated under the Securities Act). Without limiting any other provision in
this Agreement, to the Company's and each Management Shareholder's knowledge,
the Company's shareholders are under no binding obligation and have no present
plan, intention or arrangement to dispose of any Purchaser Shares that would
reduce the aggregate fair value of all such shares retained by the Company's
shareholders to an amount less than fifty percent (50%) of the aggregate fair
value of the Company's issued and outstanding common stock immediately prior to
consummation of the Merger.
2.32 Copies of Documents. The Company has caused to be made available for
inspection and copying by the Purchaser and its advisers true, complete and
correct copies of all documents referred to in this Article II or in any
corresponding schedule attached to this Agreement.
2.33 Absence of Certain Conditions. There exists no event, occurrence,
condition or act which, with the giving of notice, the lapse of time or the
occurrence of any further event or condition (including without limitation
consummation of the transactions contemplated by this Agreement and the other
Transaction Documents) would constitute a breach of or cause any of the
representations and warranties in this Article II to become untrue.
2.34 Disclosure Statement. None of the information provided by the Company
to the Purchaser in writing for use in any materials prepared by the Purchaser
to be delivered to the Company's shareholders in connection with their
consideration of the Merger, nor any information prepared by the Company to be
delivered to the Company's shareholders in connection with their consideration
of the Merger, at the time such information is provided to the Company's
shareholders or at the time the Company's shareholders vote on the Merger, will
contain any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements contained therein, in light of
the circumstances under which they are made, not misleading.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
AND ACQUISITION
The Purchaser and Acquisition jointly and severally represent and warrant
to the Company and agree as follows:
15
<PAGE>
3.1 Existence and Good Standing; Power and Authority.
(a) The Purchaser is a corporation duly organized, validly existing and in
good standing under the Laws of the State of Maryland. The Purchaser has the
power to own its properties and to carry on its business as now being conducted.
The Purchaser is duly qualified to do business and is in good standing in each
jurisdiction in which the character or location of the properties owned or
leased by the Purchaser or the nature of the business conducted by the Purchaser
makes such qualification necessary under applicable Law. The Purchaser has all
requisite power and authority to enter into and deliver this Agreement, the Plan
of Merger and the other Transaction Documents to which the Purchaser is a party,
to perform its obligations hereunder and thereunder and to consummate the
transactions contemplated hereby and thereby. The Purchaser's execution,
delivery and performance of this Agreement, the Plan of Merger and the other
Transaction Documents to which the Purchaser is a party and the Purchaser's
consummation of the transactions contemplated hereby and thereby have been duly
and validly authorized by all corporate, shareholder and other action required
of the Purchaser by applicable Law, its Articles of Incorporation or Bylaws. The
Board of Directors of the Purchaser has determined to approve of the Merger, and
such approval is in effect on the date hereof. This Agreement, the Plan of
Merger and the other Transaction Documents to which the Purchaser is a party
constitute the valid and legally binding obligations of the Purchaser,
enforceable against the Purchaser in accordance with their respective terms.
(b) Acquisition is a corporation duly organized, validly existing and in
good standing under the Laws of the State of North Carolina. Acquisition has the
power to own its property and to carry on its business as now being conducted.
Acquisition is not required by applicable Law to be qualified to do business in
any other state or foreign jurisdiction. Acquisition has all requisite power and
authority to enter into and deliver this Agreement, the Plan of Merger and the
other Transaction Documents to which Acquisition is a party, to perform its
obligations hereunder and thereunder and to consummate the transactions
contemplated hereby and thereby. Acquisition's execution, delivery and
performance of this Agreement, the Plan of Merger and the other Transaction
Documents to which Acquisition is a party and Acquisition's consummation of the
transactions contemplated hereby and thereby, upon approval by Acquisition's
shareholder, will have been duly and validly authorized by all corporate,
shareholder and other action required of Acquisition by applicable Law, its
Articles of Incorporation or Bylaws. The Board of Directors of Acquisition has
determined to recommend the approval of the Merger to the shareholders of the
Acquisition, and such determination is in effect on the date hereof. This
Agreement, the Plan of Merger and the other Transaction Documents to which
Acquisition is a party constitute the valid and legally binding obligations of
Acquisition, enforceable against Acquisition in accordance with their respective
terms.
3.2 Capital Stock.
(a) The Purchaser has an authorized capitalization consisting solely of
10,000,000 shares of Class A common stock (voting), par value $.10 per share,
10,000,000 shares of Class B common stock (non-voting), par value $.10 per
share, and 5,000,000 shares of preferred stock, par value $.10 per share, of
which 175,000 have been designated "Series A Preferred Stock" and the balance
remain undesignated. As of the date of this Agreement, 5,145,114 shares of the
Purchaser's Class A Common Stock, 13,500 shares of the Purchaser's
16
<PAGE>
Class B Common Stock and 165,114 shares of the Purchaser's Series A Preferred
Stock are issued and outstanding; and no other shares of the Purchaser's capital
stock are issued or outstanding. As of the Effective Time, not more than
5,145,114 shares of the Purchaser's Class A Common Stock, 13,500 shares of the
Purchaser's Class B Common Stock and 165,114 shares of the Purchaser's Series A
Preferred Stock, together with any other securities issued upon the proper
exercise of any Stock Acquisition Rights described in Schedule 3.2, will be
issued and outstanding; and no other shares of the Purchaser's capital stock
will be issued or outstanding. The Purchaser Shares, when issued as provided in
this Agreement and the Plan of Merger, will be duly authorized and validly
issued and outstanding and fully paid and nonassessable. Except as shown on
Schedule 3.2, there are no outstanding Stock Acquisition Rights for securities
of the Purchaser, other than as contemplated by this Agreement.
(b) Acquisition has an authorized capitalization consisting solely of 1,000
shares of common stock, par value $0.001 per share, of which 100 shares are
issued and outstanding and are held by the Purchaser, and no other shares of
Acquisition's capital stock are issued or outstanding. There are no outstanding
Stock Acquisition Rights for securities of Acquisition, other than as
contemplated by this Agreement.
3.3 Subsidiaries and Investments. The Purchaser does not own stock or have
any other equity interest in, and does not control, directly or indirectly, any
corporation, partnership, association, trust, joint venture or other entity.
3.4 Financial Statements; Working Capital.
(a) The Purchaser has furnished the Company with the balance sheets of the
Purchaser as of March 31, 1996 (the "Purchaser Balance Sheet") and March 31,
1995, and the related statements of income, shareholders' equity and cash flows
for the years then ended, audited by Ernst & Young, LLP. All such financial
statements, including the notes thereto, have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods indicated, and are correct, complete, and consistent with the
Purchaser's books and records (which are correct and complete). All such balance
sheets fairly present the financial condition of the Purchaser as of the
respective dates thereof, and reflect all claims against and all debts and
liabilities of the Purchaser, fixed or contingent, as of the respective dates
thereof; and the related statements of income, shareholders' equity and cash
flows fairly present the results of the operations of the Purchaser and the
changes in its financial position for the periods indicated. There are no
transactions between the Purchaser and any shareholder of the Purchaser (or any
affiliate of any such shareholder) which are not disclosed in such financial
statements.
(b) Since March 31, 1996 (the "Purchaser Balance Sheet Date") there has
been (i) no event, fact, condition, circumstance or other development which has
had or reasonably could be expected (individually or in the aggregate) to have a
Material Adverse Effect on the Purchaser, whether as a result of any legislative
or regulatory change, revocation of any license or rights to do business,
Casualty or otherwise, and (ii) no material change in the assets, liabilities or
equity, or in the business or condition, financial or otherwise, or in the
results of operations or prospects of the Purchaser, except (in each case) as
reflected in the unaudited balance sheet of the Purchaser as of December 31,
1996 or the related statements
17
<PAGE>
of income for the month and nine months ended December 31, 1996; and no fact or
condition exists or is contemplated or threatened which might cause such a
change in the future.
(c) As of the date of this Agreement, the Purchaser is negotiating in good
faith with Petra Capital LLC ("Petra") for a financing substantially on the
terms described in the term sheet attached as Schedule 3.4. The Purchaser
intends to use the first $3,000,000 of proceeds of this financing (or the total
amount thereof, if $3,000,000 or less), if consummated, primarily for working
capital for the combined operations of the Purchaser and the Surviving
Corporation, and has not earmarked any material amount of any such proceeds for
any other purpose. Although the Purchaser believes as of the date of this
Agreement that the Purchaser's negotiations with Petra are proceeding
satisfactorily, the Purchaser can provide no assurance that the proposed
financing will be consummated or that other similar financing will be available
on terms satisfactory to the Purchaser.
3.5 Books and Records. The minute books of the Purchaser, as previously
made available to the Company and its representatives, contain accurate records
of all meetings of and corporate action taken by the shareholders and Board of
Directors (including committees thereof) of the Purchaser.
3.6 Title to Properties; Encumbrances. Except as set forth in Schedule 3.6,
the Purchaser has good, valid and marketable title to (a) all of its properties
and assets (real and personal, tangible and intangible), including without
limitation all of the properties and assets reflected in the Purchaser Balance
Sheet, except as indicated in the notes thereto, and (b) all of the properties
and assets purchased by the Purchaser since the Purchaser Balance Sheet Date; in
each case subject to no Encumbrance, except for (i) liens reflected in the
Purchaser Balance Sheet, (ii) liens consisting of zoning or planning
restrictions, easements, permits and other restrictions or limitations on the
use of real property or irregularities in title thereto which do not detract
from the value of, or impair the use of, such property by the Purchaser in the
operation of its business, and (iii) liens for current taxes, assessments or
governmental charges or levies on property not yet due and delinquent.
3.7 Tangible Assets. The Purchaser's tangible assets having a value in
excess of $10,000 are in a state of good maintenance and repair (ordinary wear
and tear excepted) and are adequate and suitable for the purposes for which they
are currently being used.
3.8 Real Property. Except as described in Schedule 3.9 in respect of its
leases, the Company does not own, in whole or in part, any interest in any real
property.
3.9 Leases. Schedule 3.9 contains an accurate and complete list of all
leases to which the Purchaser is a party (as lessee or lessor). Each lease
identified in Schedule 3.9 (or required to be set forth in Schedule 3.9) is in
full force and effect; all rents and additional rents due to date on each such
lease have been paid; in each case, the lessee has been in peaceable possession
since the commencement of the original term of such lease and is not in default
thereunder, and no waiver, indulgence or postponement of the lessee's
obligations thereunder has been granted by the lessor; and there exists no event
of default or event, occurrence, condition or act (including the transactions
contemplated by this Agreement) which, with the giving of notice, the lapse of
time or the happening of any further event or condition, would become a default
under such lease. The Purchaser has not violated any of the terms or
18
<PAGE>
conditions under any lease set forth in Schedule 3.9 (or required to be set
forth in Schedule 3.9) in any material respect, and there is no reason to
believe there will be a violation by the Purchaser in the future. The Purchaser
is in good relations with each other party thereto, and, to the Purchaser's
knowledge, all of the covenants to be performed by any other party under any
such lease have been fully performed. The property leased by the Purchaser is in
a state of good maintenance and repair (ordinary wear and tear excepted) and is
adequate and suitable for the purposes for which it is presently being used.
3.10 Contracts. The Purchaser does not know of any, and the Purchaser has
not received any notice or other communication asserting the actual or alleged
existence of any, default or event of default or event, occurrence, condition or
act (including the consummation of the transactions contemplated by this
Agreement) which, with the giving of notice, the lapse of time or the occurrence
of any other event or condition, would become a default or event of default
under any material Contract to which the Purchaser is a party. The Purchaser has
not violated in any material respect any of the terms or conditions of any
material Contract to which the Purchaser is a party, and there is no reason to
believe there will be a violation by the Purchaser in the future. The Purchaser
is in good relations with each other party to each such Contract, and, to the
Purchaser's knowledge, all of the covenants to be performed by any other party
thereto have been fully performed. The Purchaser considers its relations with
its current licensors, licensees, customers, vendors, suppliers and contractors
to be good.
3.11 No Conflicts. The execution and delivery of this Agreement and each
other applicable Transaction Document by the Purchaser and Acquisition do not,
and the performance of this Agreement and the other applicable Transaction
Documents by the Purchaser and Acquisition will not, (i) conflict with or
violate any provision of the Organizational Documents of the Purchaser or
Acquisition, (ii) assuming that all consents, approvals, authorizations and
other actions described in Schedule 3.11 have been obtained and all filings and
obligations described in Schedule 3.11 have been made, conflict with or violate
any Law applicable to the Purchaser or Acquisition or by which any property or
asset of the Purchaser or Acquisition is bound or affected or (iii) except as
set forth in Schedule 3.11, result in any breach of or constitute a default (or
an event which with notice or lapse of time or both would become a default)
under, or give to others any right of termination, amendment, acceleration or
cancellation of, or result in the creation of an Encumbrance on any property or
asset of the Purchaser or Acquisition pursuant to, any Contract.
3.12 Litigation. Except as set forth in Schedule 3.12, there is no action,
suit, proceeding at law or in equity, arbitration or administrative or other
proceeding or investigation by or before any governmental or other
instrumentality or agency pending or threatened against or affecting the
Purchaser or any of its properties or rights; and the Purchaser is not aware of
any basis for any such action, proceeding or investigation. The Purchaser is not
subject to or affected by any judgment, order or decree entered in any lawsuit
or proceeding which has or reasonably may be expected to have a Material Adverse
Effect on the Purchaser or which has impaired or reasonably may be expected to
impair the ability of the Purchaser to acquire any property or conduct business
in any geographic area.
3.13 Taxes. The Purchaser has filed or caused to be filed, within the times
and manners prescribed by Law, all federal, state, local and foreign tax returns
and tax reports which are required to be filed by, or with respect to, the
Purchaser. Such returns and reports
19
<PAGE>
reflect accurately all liability for taxes of the Purchaser for the periods
covered thereby. All federal, state, local and foreign income, profits,
franchise, sales, use, occupancy, excise and other taxes and assessments
(including interest and penalties) payable by or due from the Purchaser have
been fully paid or adequately reserved against in the financial statements of
the Purchaser. To the Purchaser's knowledge, no examination of any tax return of
the Purchaser is currently in progress, and, to the Purchaser's knowledge, no
basis for any assessment exists. There are no outstanding agreements or waivers
extending the statutory period of limitation applicable to any tax return of the
Purchaser.
3.14 Liabilities. There are no known liabilities, obligations or
indebtedness of or claims against the Purchaser arising from or in connection
with or based upon acts, omissions, events, things, facts, conditions, matters
or occurrences existing, occurring or taking place on or before the Closing Date
except (i) those liabilities set forth in the Purchaser Balance Sheet or
referred to in the notes thereto or in the unaudited balance sheet of the
Purchaser as of December 31, 1996, (ii) non-material liabilities which have
arisen since December 31, 1996 in the ordinary course of business (none of which
is a liability for breach of contract, breach of warranty, tort or
infringement), (iii) non-material liabilities arising under executory contracts
entered into in the ordinary course of business (none of which is a liability
for breach of contract), (iv) liabilities specifically set forth on Schedule
3.14 and (v) other liabilities which, in the aggregate, are not material to the
Purchaser.
3.15 Insurance. The Purchaser's insurance policies currently in effect,
with respect to their amounts and types of coverage, are customary for
corporations of similar size engaged in similar lines of business as the
Purchaser.
3.16 Intellectual Property. The lawful operation of the business of the
Purchaser as currently conducted and as currently planned to be conducted
requires no rights under Intellectual Property (as defined in Section 2.18
above) other than rights under Intellectual Property in which the Purchaser owns
all right, title and interest or which the Purchaser is otherwise authorized to
use. No claim adverse to the interests of the Purchaser in any such Intellectual
Property has been made in litigation. No such claim has been threatened or
asserted; and to the Purchaser's knowledge, no basis or alleged basis exists for
any such claim. The Purchaser has taken reasonable steps to safeguard and
maintain the secrecy and confidentiality of, and its proprietary rights in, its
Intellectual Property.
3.17 Compliance with Laws. The Purchaser is, will be, and at all times
since inception has been in compliance with all applicable Laws, except for such
non-compliance which has not and will not have a Material Adverse Effect on the
Purchaser. To the Purchaser's knowledge, there exists no event, occurrence,
condition or act which, with the giving of notice or the lapse of time, would
constitute a violation of any applicable Law the violation of which reasonably
could be expected to have a Material Adverse Effect on the Purchaser. Neither
the Purchaser nor, to the Purchaser's knowledge, any Person acting for or on
behalf of the Purchaser has at any time made or participated in any bribe,
kickback or illegal payment.
3.18 Employee Relations. The Purchaser is in substantial compliance with
all federal, state and other applicable Laws, domestic or foreign, respecting
employment and employment practices, terms and conditions of employment and
wages and hours, and has not and is not engaged in any unfair labor practice.
20
<PAGE>
3.19 Employee Benefit Plans.
(a) Set forth in Schedule 3.19 is an accurate and complete list of all
employee benefit plans of any variety whatsoever (the "Purchaser Employee
Benefit Plans"), including without limitation any within the meaning of Section
3(3) of ERISA (whether or not any such Purchaser Employee Benefit Plans are
otherwise exempt from the provisions of ERISA), established, maintained or
contributed to by or with respect to the Purchaser at any time. The Purchaser
has provided the Company with true and complete copies of all documents
governing or relating to each such Purchaser Employee Benefit Plan.
(b) Each Purchaser Employee Benefit Plan has been administered in all
material respects in accordance with its terms and is in compliance in all
material respects with the applicable provisions, if any, of ERISA and the Code.
All reports, returns and similar documents with respect to the Purchaser
Employee Benefit Plans required to be filed with any government agency or
distributed to any Purchaser Employee Benefit Plan participant have been duly
and timely filed or distributed. To the Purchaser's knowledge, there are no
investigations by any government agency, and no termination proceedings or other
claims, suits or proceedings against or involving any Purchaser Employee Benefit
Plan or asserting any rights or claims to benefits under any Purchaser Employee
Benefit Plan that could give rise to any liability to the Purchaser or such
Purchaser Employee Benefit Plan. All of the Purchaser Employee Benefit Plans
that are intended to be qualified under Section 401(a) of the Code have received
determination letters from the Internal Revenue Service to the effect that such
Purchaser Employee Benefit Plans are qualified; the Purchaser Employee Benefit
Plans and the trusts related thereto are exempt from federal income taxes; no
such determination letter has been revoked and revocation has not been
threatened; and no such Purchaser Employee Benefit Plan has been amended since
the date of its most recent determination letter or application therefor in any
respect that would adversely affect its qualification or increase its cost. No
Purchaser Employee Benefit Plans have been terminated; there have not been any
"reportable events" (as defined in Section 4043 of ERISA and the regulations
thereunder) with respect thereto; and no Purchaser Employee Benefit Plan has an
"accumulated funding deficiency" within the meaning of Section 412(a) of the
Code or any unfunded liability of any kind.
3.20 Environmental Matters. The Purchaser is in compliance with all
applicable Environmental Laws (as defined in Section 2.24 above), including
without limitation those relating to product registration, pollution control and
environmental contamination and those governing the generation, use, collection,
discharge, or disposal of Hazardous Materials and record keeping, notification
and reporting requirements respecting Hazardous Materials. The Purchaser has not
violated or been alleged to have violated any Environmental Law, nor has the
Purchaser been subject to any administrative or judicial proceeding pursuant to
any Environmental Law at any time. To the Purchaser's knowledge, there are no
facts or circumstances which could form the basis for the assertion of any Claim
(as defined in Section 2.24 above, with reference to the Purchaser) against the
Purchaser relating to environmental matters, including without limitation any
Claim arising from past or present environmental practices of the Purchaser
asserted under any Environmental Law, which could reasonably be expected to have
a Material Adverse Effect on the Purchaser.
21
<PAGE>
3.21 No Changes Since December 31, 1996. Except as described in Schedule
3.21, since December 31, 1996, the Purchaser has not (a) incurred any liability
or obligation of any nature (whether accrued, absolute, contingent or otherwise)
except in the ordinary course of business, (b) sold, transferred or otherwise
disposed of any assets except in the ordinary course of business, (c) made any
capital expenditure or commitment therefor except in the ordinary course of
business, (d) declared or paid any dividend or made any distribution on any
shares of its capital stock, or redeemed, purchased or otherwise acquired any
shares of its capital stock or any Stock Acquisition Right for any such shares,
(e) made any bonus or profit sharing distribution or payment of any kind, (f)
made any loan to any Person, (g) written off as uncollectible any notes or
accounts receivable except write-offs in the ordinary course of business charged
to applicable reserves, (h) granted any increase in the rate of wages, salaries,
bonuses or other remuneration of any executive employee or other employees, (i)
canceled or waived any material claims or rights, (j) made any change in any
method of accounting or auditing practice, (k) otherwise conducted its business
in any material respect or entered into any material transaction other than in
the ordinary course of business, or (l) agreed, whether or not in writing, to do
any of the foregoing.
3.22 Disclosure. Neither this Agreement, the financial statements referred
to in Section 3.4 hereof (including the notes thereto), or any schedule, exhibit
or certificate attached hereto or delivered in accordance with the terms hereof
or any document or statement in writing which has been supplied by or on behalf
of the Purchaser or Acquisition in connection with the transactions contemplated
by this Agreement contains any untrue statement of a material fact or omits any
statement of a material fact necessary in order to make the statements contained
herein or therein not misleading. There is no fact known to the Purchaser which
has or reasonably would be expected to have a Material Adverse Effect on the
Purchaser which has not been set forth in this Agreement, the financial
statements referred to in Section 3.4 hereof (including the notes thereto), or
any schedule, exhibit or certificate attached hereto or delivered in accordance
with the terms hereof or any document or statement in writing which has been
supplied by or on behalf of the Purchaser or Acquisition in connection with the
transactions contemplated by this Agreement.
3.23 Broker's or Finder's Fees. No agent, broker, person or firm acting on
behalf of the Purchaser or Acquisition is, or will be, entitled to any
commission or broker's or finder's fees from any of the parties hereto, or from
any Person controlling, controlled by or under common control with the Purchaser
or Acquisition, in connection with any of the transactions contemplated by this
Agreement.
3.24 Copies of Documents. The Purchaser has caused to be made available for
inspection and copying by the Company and its advisers true, complete and
correct copies of all documents referred to in this Article III or in any
corresponding schedule attached to this Agreement.
3.25 Absence of Certain Conditions. There exists no event, occurrence,
condition or act which, with the giving of notice, the lapse of time or the
occurrence of any further event or condition (including without limitation
consummation of the transactions contemplated by this Agreement and the other
Transaction Documents) would constitute a breach of or cause any of the
representations and warranties in this Article III to become untrue.
22
<PAGE>
3.26 Interim Operations of Acquisition. Acquisition was formed solely for
the purpose of engaging in the transactions contemplated hereby, has engaged in
no other business activities and has conducted its operations only as
contemplated hereby.
3.27 Disclosure Statement. None of the information provided by the
Purchaser for inclusion in any materials prepared by the Purchaser to be
delivered to the Company's shareholders in connection with their consideration
of the Merger, at the time such information is provided to the Company's
shareholders or at the time the Company's shareholders vote on the Merger, will
contain any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements contained therein, in light of
the circumstances under which are made, not misleading.
ARTICLE IV
CONDUCT OF BUSINESS; EXCLUSIVE DEALING; REVIEW
4.1 Conduct of Business.
(a) The Company. During the period from the date of this Agreement to the
Closing Date (or the earlier termination of this Agreement pursuant to Section
9.16 below), and except as otherwise specified in Schedule 4.1(a), the Company
shall conduct its operations only according to its ordinary and usual course of
business and preserve intact its business organization, keep available the
services of its officers and employees, maintain satisfactory relationships with
licensors, licensees, suppliers, distributors, clients and others having
business relationships with the Company, and perform in all material respects
all of the Company's obligations under all Contracts to which the Company is a
party or by which it or any of its assets or properties are bound.
Notwithstanding the immediately preceding sentence, prior to the Closing Date
(or the earlier termination of this Agreement pursuant to Section 9.16 below),
except as may be first approved in writing by the Purchaser or as is otherwise
permitted or required by this Agreement or specified in Schedule 4.1(a), the
Company and the Management Shareholders shall cause (a) the Company's
Organizational Documents to be maintained in their forms on the date of this
Agreement, (b) the compensation payable or to become payable by the Company to
each officer, employee or agent of the Company to be maintained at their levels
on the date of this Agreement, (c) the Company to refrain from making any bonus,
pension, retirement or insurance payment or arrangement to or with any such
persons except those that may have already been accrued, (d) the Company to
refrain from entering into any Contract except Contracts in the ordinary course
of business having a value of less than $25,000, (e) the Company to refrain from
making any change affecting any bank, safe deposit or power of attorney
arrangements of the Company, (f) the Company to refrain from issuing or selling,
or issuing any rights to purchase or subscribe for, or subdividing or otherwise
changing in any respect any shares of the Company's capital stock, and (g) the
Company to refrain from taking any of the actions referred to in Section 2.27
hereof. Neither the Company nor any Management Shareholder shall take or fail to
take any action which would cause the representations and warranties contained
in Article II of this Agreement to be or become untrue or incorrect. During the
period from the date of this Agreement to the Closing Date, the Company and the
Management Shareholders shall confer on a regular and frequent basis with a
designated representative of the Purchaser to report operational matters and to
report the general status of ongoing operations. The Company and the Management
23
<PAGE>
Shareholders shall notify the Purchaser of any unexpected emergency or other
material change in the normal course of the Company's business or in the
operation of its properties and of any governmental complaints, investigations
or hearings (or communications indicating that the same may be contemplated),
adjudicatory proceedings, budget meetings or submissions involving any property
of the Company, and keep the Purchaser fully informed of such events and permit
its representatives prompt access to all materials prepared in connection
therewith.
(b) The Purchaser. During the period from the date of this Agreement to the
Closing Date (or the earlier termination of this Agreement pursuant to Section
9.16 below), the Purchaser shall preserve intact its business organization, keep
available the services of its officers and employees, maintain satisfactory
relationships with licensors, licensees, suppliers, distributors, clients and
others having business relationships with the Purchaser, perform in all material
respects all of the Purchaser's obligations under all Contracts to which the
Purchaser is a party or by which it or any of its assets or properties are
bound, and notify the Company prior to taking any material action other than in
the Purchaser's ordinary and usual course of business. The Purchaser shall not
take or fail to take any action which would cause the representations and
warranties contained in Article III of this Agreement to be or become untrue or
incorrect. During the period from the date of this Agreement to the Closing
Date, the Purchaser shall confer on a regular and frequent basis with a
designated representative of the Company to report operational matters and to
report the general status of ongoing operations. The Purchaser shall notify the
Company of any unexpected emergency or other material change in the normal
course of the Purchaser's business or in the operation of its properties and of
any governmental complaints, investigations or hearings (or communications
indicating that the same may be contemplated), adjudicatory proceedings, budget
meetings or submissions involving any property of the Purchaser, and keep the
Company fully informed of such events and permit its representatives prompt
access to all materials prepared in connection therewith.
4.2 Exclusive Dealing. During the period from the date of this Agreement to
the Closing Date, the Company and the Management Shareholders shall refrain from
taking any action directly or indirectly to encourage, initiate or engage in
discussions or negotiations with, or provide any information to, any Person
other than the Purchaser concerning any proposal for the sale of the capital
stock or substantially all of the assets of, or merger or other business
combination involving the Company (an "Acquisition Transaction"); provided,
however, that nothing contained in this Section or elsewhere in this Agreement
(other than with respect to Section 7.2 below concerning approval of the Merger
and related transactions by the Management Shareholders) shall prevent the Board
of Directors of the Company, in the exercise of its fiduciary duties and after
consulting with counsel, from considering, negotiating, and approving an
unsolicited bona fide proposal or offer that the Board of Directors determines
in good faith may result in an Acquisition Transaction more favorable to the
Company's shareholders from a financial point of view than the transaction
contemplated by this Agreement; provided further, however, that no election by
the Board of Directors of the Company to consider, negotiate or approve any such
offer shall relieve the Management Shareholders of their obligations pursuant to
this Agreement, including without limitation those pursuant to Section 7.2 below
concerning approval and consummation of the Merger and related transactions
thereby. The Company shall notify the Purchaser immediately if any proposals
concerning any merger, consolidation, sale of assets, tender offer, sale of
shares or similar transaction involving the Company or any significant assets of
the Company is made or
24
<PAGE>
if any request for confidential information regarding the Company is received,
and shall provide to the Purchaser all such related information as the Purchaser
shall request.
4.3 Access to Information; Confidentiality.
(a) Subject to applicable Law, between the date hereof and the Effective
Time, (i) the Company and the Management Shareholders (A) shall give the
Purchaser and its authorized representatives reasonable access, during regular
business hours and upon reasonable advance notice, to all employees, all offices
and other facilities, and all books and records of the Company, (B) shall permit
the Purchaser and its authorized representatives to make such inspections
thereof as they may reasonably require to familiarize themselves with such
matters, and (C) shall cause the Company's officers to furnish the Purchaser and
its authorized representatives with such financial and operating data and other
information with respect to the Company as the Purchaser may from time to time
reasonably request; and (ii) the Purchaser (A) shall give the Company and its
authorized representatives reasonable access, during regular business hours and
upon reasonable advance notice, to all employees, all offices and other
facilities, and all books and records of the Purchaser, (B) shall permit the
Company and its authorized representatives to make such inspections thereof as
they may reasonably require to familiarize themselves with such matters, and (C)
shall cause the Purchaser's officers to furnish the Company and its authorized
representatives with such financial and operating data and other information
with respect to the Purchaser as the Company may from time to time reasonably
request; provided, however, that no investigation pursuant to this Section shall
affect the binding nature of any representation or warranty contained in this
Agreement or in any other Transaction Document; and provided further that each
party shall have the right to have a representative present at all times of any
such inspections, interviews, and examinations conducted at or on its offices or
other facilities or properties or those of its affiliates or representatives.
(b) The Purchaser and Acquisition agree that all Confidential Information
(as defined below) regarding the Company shall be kept confidential by the
Purchaser and Acquisition and shall not be disclosed by the Purchaser or
Acquisition in any manner whatsoever; provided, however, that (i) any of such
Confidential Information may be disclosed to such directors, officers,
employees, and authorized representatives (including without limitation
attorneys, accountants, consultants, bankers, and financial advisors) of the
Purchaser and Acquisition (collectively, for purposes of this Section,
"Purchaser Representatives") as need to know such information for the purpose of
evaluating the Merger (it being understood that such Purchaser Representatives
shall be informed by the Purchaser of the confidential nature of such
information and shall be required to treat such information confidentially),
(ii) any disclosure of such Confidential Information may be made to the extent
to which the Company consents in writing, and (iii) such Confidential
Information may be disclosed by the Purchaser, Acquisition, or any Purchaser
Representative to the extent that, in the opinion of counsel for the Purchaser
or such Purchaser Representative, the Purchaser, Acquisition or such Purchaser
Representative is legally compelled to do so, provided that, prior to making
such disclosure, the Purchaser, Acquisition or such Purchaser Representative, as
the case may be, advises and consults with the Company regarding such
disclosure, and provided further that the Purchaser, Acquisition or such
Purchaser Representative, as the case may be, discloses only that portion of
such Confidential Information as is legally required to be disclosed. The
Purchaser and
25
<PAGE>
Acquisition agree that none of the Confidential Information regarding the
Company will be used for any purpose other than in connection with the
transactions contemplated hereby.
The Company agrees to maintain the confidentiality of, not disclose, and
otherwise act and refrain from acting in respect of any Confidential Information
regarding the Purchaser to the same extent as the Purchaser, Acquisition and
Purchaser Representatives are required to do so in respect of Confidential
Information regarding the Company, as set forth in the preceding paragraph.
The term "Confidential Information", as used in this Section, means all
information (irrespective of the form of communication) obtained by or on behalf
of a party or its representatives from another party or its representatives
pursuant to this Section and all similar information obtained from a party or
its representatives by or on behalf of another party prior to the date of this
Agreement, other than information which (i) was or becomes generally available
to the public other than as a result of disclosure by the party acquiring such
information or any representative of such party, (ii) was or becomes available
to a party on a nonconfidential basis prior to disclosure to such party by the
other party or its representatives, (iii) was or becomes available to a party
from a source other than the party to which such information relates and its
representatives, provided that such source is not known by the party obtaining
such information to be bound by a confidentiality agreement with the party to
which such information relates, or (iv) is developed by the party acquiring such
information independent of the disclosure thereof by the party to which such
information relates, as reasonably evidenced by written development materials.
(c) If this Agreement is terminated, the Purchaser and Acquisition shall
promptly return, and shall use their reasonable best efforts to cause all
Purchaser Representatives to promptly return, all Confidential Information
regarding the Company to the Company without retaining any copies thereof,
provided that such portion of such Confidential Information as consists of
notes, compilations, analyses, reports, studies, or other documents prepared by
the Purchaser, Acquisition or Purchaser Representatives shall be destroyed.
The Company similarly shall return or destroy, as applicable, all
Confidential Information regarding the Purchaser.
4.4 Best Efforts. Each of the Management Shareholders, the Company, the
Purchaser and Acquisition shall use his or its respective best efforts in good
faith to satisfy the various conditions to Closing and to consummate the Merger
by the date specified in Section 1.5 above.
ARTICLE V
CONDITIONS TO PURCHASER'S AND ACQUISITION'S OBLIGATIONS
The Purchaser's and Acquisition's obligations pursuant to this Agreement
are conditioned upon satisfaction, on or prior to the Closing Date, of each of
the following conditions:
26
<PAGE>
5.1 Opinion of Counsel. The Company shall have furnished the Purchaser with
an opinion, dated the Closing Date, of Thompson & Knight, P.C., counsel to the
Company, reasonably satisfactory in form and substance to the Purchaser,
concerning matters relating to the Company and the Management Shareholders.
5.2 Good Standing and Other Certificates. The Company shall have delivered
to the Purchaser (a) a copy of the Company's articles of incorporation,
including all amendments thereto, certified by the Secretary of State of Texas
as of the Closing Date or any of the three preceding business days, (b) a
certificate from the Comptroller of Public Accounts of the State of Texas to the
effect that the Company is in good standing in Texas and listing all charter
documents of the Company on file as of the Closing Date or any of the three
preceding business days, (c) a copy of the bylaws of the Company, certified by
the Secretary of the Company as being true and correct and in effect on the
Closing Date, and (d) a copy of resolutions, certified as of the Closing Date by
the Secretary of the Company, adopted by the Board of Directors and shareholders
of the Company and authorizing the execution and delivery by the Company of this
Agreement and the other Transaction Documents, the performance by the Company of
its obligations hereunder and thereunder and the consummation by the Company of
the transactions contemplated hereby and thereby.
5.3 No Material Adverse Change. Since the date of this Agreement, no event,
fact, change, condition, circumstance or other development shall have occurred
that has had, or could reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect on the Company, and the Company and the
Management Shareholders shall have delivered to the Purchaser a certificate,
dated the Closing Date, to such effect.
5.4 Truth of Representations and Warranties. The representations and
warranties of the Company and the Management Shareholders contained in this
Agreement or in any schedule attached hereto shall be true and correct on and as
of the Closing Date with the same effect as though such representations and
warranties had been made on and as of such date, and (a) the Company and the
Management Shareholders shall have delivered to the Purchaser a certificate,
dated the Closing Date, to such effect, and (b) the Company's Chief Executive
Officer and Chief Financial Officer each shall have delivered to the Purchaser a
certificate, dated the Closing Date, to such effect as to the representations
and warranties contained in Section 2.5 above (Financial Statements).
5.5 Performance of Agreements. All of the agreements of the Management
Shareholders and the Company to be performed on or before the Closing Date
pursuant to the terms hereof shall have been duly performed, and the Company and
the Management Shareholders shall have delivered to the Purchaser a certificate,
dated the Closing Date, to such effect.
5.6 Performance Consistent with Budget and Projections. The Company's
actual revenues and net income (without regard to expenses relating to
consummation of the transactions contemplated hereby) for the period beginning
January 1, 1997 through the Closing Date and for the month immediately preceding
the Closing Date shall equal at least ninety percent (90%) of the Company's
revenues and net income set forth in the budget referred to in Section 2.5(c)
above and the Company Projections for such periods, and the
27
<PAGE>
Company and Management Shareholders shall have delivered to the Purchaser a
certificate, dated the Closing Date, to such effect.
5.7 No Litigation Threatened. No action or proceeding shall have been
instituted or threatened before a court or other government body or by any
public authority, and no claim shall have been asserted or threatened to be
asserted, to restrain or prohibit any of the transactions contemplated hereby,
and the Company and the Management Shareholders shall have delivered to the
Purchaser a certificate, dated the Closing Date, as to the Company's and the
Management Shareholders' lack of knowledge of any such action, proceeding or
claim.
5.8 Escrow Agreement. The Management Shareholders (or their representative)
and the Escrow Agent (as defined therein) shall have executed and delivered to
the Purchaser an escrow agreement substantially in the form of that attached as
Exhibit B, with such modifications thereto as are reasonably requested by the
Escrow Agent prior to execution thereof (the "Escrow Agreement," as defined in
Section 1.4 above).
5.9 Pooling Letter. The Company and each of its affiliates (within the
meaning of Rule 145 of the rules and regulations promulgated under the
Securities Act or applicable SEC accounting releases with respect to pooling of
interests accounting treatment) shall have executed and delivered to the
Purchaser's accountants a letter in form and substance reasonably satisfactory
to the Purchaser and its accountants relating to "pooling of interests"
accounting.
5.10 Opinion of Accountants. The Purchaser shall have received a letter,
dated the Closing Date, from Ernst & Young LLP, accountants for the Purchaser,
in form and substance satisfactory to the Purchaser, regarding the
appropriateness of pooling of interests accounting for the transactions
contemplated by this Agreement.
5.11 Governmental and Other Approvals and Consents. All governmental and
other consents and approvals, if any, necessary to permit the consummation by
the Company and the Management Shareholders of the transactions contemplated by
this Agreement and the other Transaction Documents, including without limitation
any necessary pursuant to or in connection with any License (as defined in
Section 2.19 above) or any Contract described in Schedule 2.10 or 2.11 or to
which the Company or any Management Shareholder otherwise is a party or by which
the Company or any Management Shareholder otherwise is bound, shall have been
received, and all applicable waiting periods (and any extensions thereof), if
any, under applicable Laws shall have expired or otherwise been terminated
satisfactorily to the Purchaser.
5.12 Resignations. The Purchaser shall have received a written resignation
from each officer and director of the Company requested by the Purchaser to
resign on or prior to the Closing Date.
5.13 Intra-Company Debt. All indebtedness, other than travel and similar
advances outstanding in the ordinary course of business, of the directors,
officers, employees and shareholders of the Company to the Company shall have
been repaid in full.
5.14 Current Employees. Except as specified in Schedule 5.14, all persons
employed by the Company as of the date of this Agreement in management,
programming or art shall
28
<PAGE>
continue to be employees of the Company, and none shall have expressed or
communicated to the Company or any Management Shareholder any intent to leave or
contemplation of leaving the Company's employ.
5.15 Purchaser's Due Diligence Review. The Purchaser's due diligence review
of the Company and the operation of the Company's business shall not have caused
the Purchaser or its representatives to become aware of any material facts
relating to the business, assets, properties, liabilities, financial condition,
results of operations or affairs of the Company which, in the good faith
judgment of the Purchaser, make it inadvisable for the Purchaser and Acquisition
to proceed with the transactions contemplated hereby; provided, however, that
this condition shall be deemed to have been satisfied unless the Purchaser shall
notify the Company in writing before 5:00 p.m. Eastern Time on the day seven (7)
days after the date of this Agreement of the Purchaser's determination that it
has become aware of any such material facts.
5.16 No Dissent. As of the Effective Time, the holders of not more than 5%
of the Company Shares shall have demanded or otherwise purported to exercise his
or her dissenter's rights, if any, pursuant to the Texas Code with respect to
any shares of Company Stock.
5.17 Shareholder Agreements. Each shareholder of the Company shall have
executed and delivered to the Purchaser a Shareholder Agreement in the form of
Exhibit C.
5.18 Plan of Merger. The Company shall have executed and delivered the Plan
of Merger to the Purchaser.
5.19 Patent Assignment. Dale H. Addink shall have executed and delivered to
the Purchaser an Assignment in the form of Exhibit D.
5.20 Terms of Option Plan and Agreements. The Company's Incentive Stock
Option Plan and each stock option agreement outstanding thereunder shall provide
for and permit the substitution of shares of the Purchaser's Class B Common
Stock for shares of the Company's Common Stock as the securities purchasable
upon exercise of the options outstanding thereunder as contemplated by Section
1.2 above; no agreement or other action of the holder of any such option shall
be necessary to effect the same; and the Company and the Management Shareholders
shall have delivered to the Purchaser a certificate, dated the Closing Date, to
such effect.
5.21 Confidentiality Agreements. Each person employed by the Company as of
the Closing Date shall have executed and delivered to the Purchaser a
confidentiality agreement in the then-current standard form required by the
Purchaser to be executed by all new employees of the Purchaser.
5.22 Non-Competition Agreements. Each of Dale H. Addink, Brian G. Holland
and Joseph R. Mannes shall have executed and delivered to the Purchaser a
non-competition agreement in form and substance reasonably satisfactory to the
Purchaser.
29
<PAGE>
ARTICLE VI
CONDITIONS TO THE COMPANY'S AND THE MANAGEMENT SHAREHOLDERS' OBLIGATIONS
The Company's and the Management Shareholders' obligations pursuant to this
Agreement are conditioned upon satisfaction, on or prior to the Closing Date, of
each of the following conditions:
6.1 Opinions of Counsel. The Purchaser shall have furnished the Company
with opinions, dated the Closing Date, of Smith, Anderson, Blount, Dorsett,
Mitchell & Jernigan, L.L.P., North Carolina counsel to the Purchaser and
Acquisition, and Richard W. Bowe, P.C., Maryland counsel to the Purchaser, each
reasonably satisfactory to the Company in form and substance, concerning matters
relating to the Purchaser and Acquisition.
6.2 Good Standing and Other Certificates.
(a) The Purchaser. The Purchaser shall have delivered to the Company (i) a
copy of the Purchaser's articles of incorporation, including all amendments
thereto, certified by the Secretary of State of Maryland as of the Closing Date
or any of the three preceding business days, (ii) a certificate from the
Secretary of State of Maryland to the effect that the Purchaser is in good
standing in Maryland and listing all charter documents of the Purchaser on file
as of the Closing Date or any of the three preceding business days, (iii) a copy
of the bylaws of the Purchaser, certified by the Secretary of the Purchaser as
being true and correct and in effect on the Closing Date, and (iv) a copy of
resolutions, certified as of the Closing Date by the Secretary of the Purchaser,
adopted by the Board of Directors of the Purchaser and authorizing the execution
and delivery by the Purchaser of this Agreement and the other Transaction
Documents, the performance by the Purchaser of its obligations hereunder and
thereunder and the consummation by the Purchaser of the transactions
contemplated hereby and thereby.
(b) Acquisition. Acquisition shall have delivered to the Company (i) a copy
of Acquisition's articles of incorporation, including all amendments thereto,
certified by the Secretary of State of North Carolina as of the Closing Date or
any of the three preceding business days, (ii) a certificate from the Secretary
of State of North Carolina to the effect that Acquisition is in good standing in
North Carolina and listing all charter documents of Acquisition on file as of
the Closing Date or any of the three preceding business days, (iii) a copy of
the bylaws of Acquisition, certified by the Secretary of Acquisition as being
true and correct and in effect on the Closing Date, and (iv) a copy of
resolutions, certified as of the Closing Date by the Secretary of Acquisition,
adopted by the Board of Directors and shareholder of Acquisition and authorizing
the execution and delivery by Acquisition of this Agreement and the other
Transaction Documents, the performance by Acquisition of its obligations
hereunder and thereunder and the consummation by Acquisition of the transactions
contemplated hereby and thereby.
6.3 Truth of Representations and Warranties. The representations and
warranties of the Purchaser and Acquisition contained in this Agreement shall be
true and correct on and as of the Closing Date with the same effect as though
such representations and warranties had been made on and as of such date, and
the Purchaser shall have delivered to the Company a certificate, dated the
Closing Date, to such effect.
30
<PAGE>
6.4 Governmental and Other Approvals and Consents. All governmental and
other consents and approvals, if any, necessary to permit the consummation by
the Purchaser and Acquisition of the transactions contemplated by this Agreement
and the other Transaction Documents shall have been received, and all applicable
waiting periods (and any extensions thereof), if any, under applicable Laws
shall have expired or otherwise been terminated satisfactorily to the Company.
6.5 Performance of Agreements. All of the agreements of the Purchaser and
Acquisition to be performed on or before the Closing Date pursuant to the terms
hereof shall have been duly performed, and the Purchaser shall have delivered to
the Company a certificate, dated the Closing Date, to such effect.
6.6 No Material Adverse Change. Since the date of this Agreement, no event,
fact, change, condition, circumstance or other development shall have occurred
that has had, or could reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect on the Purchaser, and the Purchaser shall
have delivered to the Company a certificate, dated the Closing Date, to such
effect.
6.7 No Litigation Threatened. No action or proceeding shall have been
instituted or threatened before a court or other government body or by any
public authority, and no claim shall have been asserted or threatened to be
asserted, to restrain or prohibit any of the transactions contemplated hereby,
and the Purchaser shall have delivered to the Company a certificate, dated the
Closing Date, as to the Purchaser's lack of knowledge of any such action,
proceeding or claim.
6.8 Company's Due Diligence Review. The Company's due diligence review of
the Purchaser and the operation of the Purchaser's business shall not have
caused the Company or its representatives to become aware of any material facts
relating to the business, assets, properties, liabilities, financial results of
operations or affairs of the Purchaser which, in the good faith judgment of the
Company, make it inadvisable for the Company to proceed with the transactions
contemplated hereby; provided, however, that this condition shall be deemed to
have been satisfied unless the Company shall notify the Purchaser in writing
before 5:00 p.m. Eastern Time on the day seven (7) days after the date of this
Agreement of the Company's determination that it has become aware of any such
material facts.
6.9 Pooling Letters. The Purchaser and each of its affiliates (within the
meaning of Rule 145 of the rules and regulations promulgated under the
Securities Act or applicable SEC accounting releases with respect to pooling of
interests accounting treatment) shall have executed and delivered to the
Purchaser's accountants a letter in form and substance reasonably satisfactory
to the Purchaser's accountants relating to "pooling of interests" accounting.
6.10 Opinions of Accountants. The Company shall have received a letter,
dated the Closing Date, from Ernst & Young LLP, accountants for the Purchaser,
in form and substance satisfactory to the Company, regarding the appropriateness
of pooling of interests accounting for the transactions contemplated by this
Agreement.
31
<PAGE>
6.11 Shareholder Approval. The Merger, this Agreement and the Plan of
Merger shall have been approved by the vote required of the shareholders of the
Company by applicable Law and the Company's articles of incorporation and
bylaws.
6.12 Plan of Merger. The Purchaser and Acquisition shall have executed and
delivered the Plan of Merger to the Company.
6.13 Purchaser Share Value. The Purchaser shall have delivered to the
Company a certificate, dated the Closing Date, specifying the amount determined
by the Purchaser's Board of Directors in good faith to be the fair market value
per Purchaser Share as of the Closing Date (the "Purchaser Share Value," as
defined in Section 8.2 below).
ARTICLE VII
CERTAIN COVENANTS AND AGREEMENTS OF THE PARTIES
7.1 Stock Transfer Restrictions and Related Matters; Tax-Free
Reorganization.
(a) Pooling of Interests Accounting. Each of the Purchaser, Acquisition,
the Company and each Management Shareholder shall refrain from taking any action
which would disqualify the transactions contemplated by this Agreement from
pooling of interests accounting treatment by the Purchaser.
(b) Legend. Each certificate representing any Purchaser Shares shall bear a
legend in substantially the following form:
TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO
COMPLIANCE WITH CERTAIN TRANSFER RESTRICTIONS SET FORTH IN A MERGER AGREEMENT
DATED AS OF [the date of this agreement] AMONG THE CORPORATION AND CERTAIN OTHER
PARTIES AND CERTAIN WRITTEN UNDERTAKINGS MADE IN CONNECTION THEREWITH, COPIES OF
WHICH ARE ON FILE IN THE OFFICE OF THE CORPORATION AND ARE AVAILABLE TO THE
HOLDER HEREOF UPON WRITTEN REQUEST THEREFOR.
(c) Tax-Free Reorganization. Each of the Purchaser, Acquisition, the
Company and each Management Shareholder shall refrain from taking any action
which would prevent the Merger from qualifying as a tax-free reorganization
under Section 368(a) of the Code.
7.2 Approval of Transactions. Each Management Shareholder, in such
Management Shareholder's capacity as a shareholder of the Company, shall approve
of the Company's execution, delivery and performance of this Agreement, the Plan
of Merger and the other Transaction Documents and the Company's consummation of
the transactions contemplated hereby and thereby. Notwithstanding any election
by the Board of Directors of the Company to consider, negotiate or approve any
other offer pursuant to Section 4.2 above, each Management Shareholder shall
take any and all such actions as are necessary to cause the consummation by the
Company and the Management Shareholders of the Merger and the other transactions
contemplated by this Agreement, the Plan of Merger and the other
32
<PAGE>
Transaction Documents (in lieu of those contemplated by any such other offer),
subject only to the conditions specified in Article VI above. No such election
by the Board of Directors of the Company shall relieve any Management
Shareholder of his obligations hereunder and pursuant to the other Transaction
Documents.
7.3 Stock Options. If (and only if) the Merger is consummated, the
Purchaser shall grant certain stock options as follows:
(a) In the event the Surviving Corporation achieves during the year ended
December 31, 1997 one hundred twenty-five percent (125%) of the revenues
projected for the Company in the projections set forth in Schedule 7.3 for such
year, on or before May 31, 1998 the Purchaser shall grant to those of the
persons listed in Schedule 7.3 who have been employed continuously since the
date hereof and remain employees of the Surviving Corporation as of the date of
such grant (each, a "1997 Eligible Optionee") options under the Purchaser's 1995
Employees' Incentive Stock Option Plan to purchase shares of the Purchaser's
Class B Common Stock (the "1997 Options") in amounts determined as provided
below in this Section 7.3(a), at an exercise price per share equal to the fair
market value per share of the Purchaser's Class B Common Stock on the date such
options are granted, as determined in good faith by the Purchaser's board of
directors. The aggregate number of shares purchasable under the 1997 Options
shall be 82,500. The 1997 Options shall be allocated among the 1997 Eligible
Optionees as follows:
(i) the Purchaser shall grant 1997 Options to purchase up to an
aggregate of 41,250 shares by granting to each 1997 Eligible Optionee a
1997 Option to purchase the number of shares set forth adjacent to such
Eligible Optionee's name on Schedule 7.3 as "1997 Options"; and
(ii) the Purchaser shall grant 1997 Options to purchase up to an
additional aggregate number of shares equal to 82,500 minus the number of
shares purchasable under options granted under Section 7.3(a)(i) by
granting to each 1997 Eligible Optionee a 1997 Option to purchase such
additional number of shares (if any) as is recommended to the Purchaser's
board of directors by those persons who are directors of the Company on the
date hereof and who are employees of the Surviving Corporation at the time
the 1997 Options are granted (or such additional number of shares (if any)
as is determined by the board of directors of the Purchaser, if no such
persons are then employees of the Surviving Corporation).
(b) In the event the Surviving Corporation achieves during the year ended
December 31, 1998 one hundred twenty-five percent (125%) of the revenues
projected for the Company in the projections set forth in Schedule 7.3 for such
year, on or before May 31, 1999 the Purchaser shall grant to those of the
persons listed in Schedule 7.3 who have been employed continuously since the
date hereof and remain employees of the Surviving Corporation as of the date of
such grant (each, a "1998 Eligible Optionee") options under the Purchaser's 1995
Employees' Incentive Stock Option Plan to purchase shares of the Purchaser's
Class B Common Stock (the "1998 Options") in amounts determined as provided
below in this Section 7.3(b), at an exercise price per share equal to the fair
market value per share of the Purchaser's Class B Common Stock on the date such
options are granted, as determined in good faith by the Purchaser's board of
directors. The aggregate number of
33
<PAGE>
shares purchasable under the 1998 Options shall be 82,500. The 1998 Options
shall be allocated among the 1998 Eligible Optionees as follows:
(i) the Purchaser shall grant 1998 Options to purchase up to an
aggregate of 41,250 shares by granting to each 1998 Eligible Optionee a
1998 Option to purchase the number of shares set forth adjacent to such
Eligible Optionee's name on Schedule 7.3 as "1998 Options"; and
(ii) the Purchaser shall grant 1998 Options to purchase up to an
additional aggregate number of shares equal to 82,500 minus the number of
shares purchasable under options granted under Section 7.3(b)(i) by
granting to each 1998 Eligible Optionee a 1998 Option to purchase such
additional number of shares (if any) as is recommended to the Purchaser's
board of directors by those persons who are directors of the Company on the
date hereof and who are employees of the Surviving Corporation at the time
the 1998 Options are granted (or such additional number of shares (if any)
as is determined by the board of directors of the Purchaser, if no such
persons are then employees of the Surviving Corporation).
(c) In the event the Purchaser takes any action inconsistent with the
assumptions underlying and expressed in the projections set forth in Schedule
7.3 which reasonably could be expected to affect the Surviving Corporation's
achievement of the revenue projections specified in subsections (a) and (b)
above, the Purchaser and the Management Shareholders (except any no longer
employed by the Surviving Corporation) shall negotiate in good faith appropriate
corresponding adjustments to such revenue projections in order to maintain their
relative likelihood of achievement.
(d) All share amounts and exercise prices referred to above in this Section
7.3 shall be subject to corresponding proportionate adjustments to reflect any
stock dividend, subdivision, reclassification, recapitalization, split,
combination or exchange of shares.
7.4 Tax Matters. The Purchaser covenants and agrees that during the
two-year period following the Merger it will not (a) cause or permit the
Surviving Corporation to sell or otherwise dispose of (other than in the
ordinary course of business) assets of the Company vested in the Surviving
Corporation as a result of the Merger having a fair market value in excess of 10
percent of the fair market value of the net assets or 30 percent of the fair
market value of the gross assets of the Company as of the Effective Time or (b)
liquidate the Surviving Corporation, merge the Surviving Corporation with or
into another corporation or sell or otherwise dispose of the stock of the
Surviving Corporation, without, in each case, first obtaining an opinion of
counsel that such transaction will not affect the qualification of the Merger as
a reorganization within the meaning of Section 368 (a) of the Code.
7.5 Special Meeting. The Company shall take all action necessary in
accordance with the Texas Code and the Company's articles of incorporation and
bylaws to duly call, give notice of, convene, and hold a special meeting of its
shareholders (the "Special Meeting") as promptly as practicable after the date
hereof to consider and vote upon the adoption and approval of this Agreement and
the Merger. The shareholder vote required for the adoption and approval of this
Agreement and the Merger shall be the vote required by the Texas Code and the
Company's articles of incorporation. The Board of Directors of the Company
shall,
34
<PAGE>
subject to its fiduciary obligation to the Company's shareholders under
applicable law as advised by counsel (i) recommend to the shareholders of the
Company that they vote in favor of the adoption and approval of this Agreement
and the Merger, and (ii) take all other action reasonably necessary to secure a
vote of the shareholders of the Company in favor of such adoption and approval.
7.6 Employee Benefits. After the Effective Time, the Purchaser shall
provide those employees of the Company who become employees of the Surviving
Corporation by virtue of the Merger employee benefits equivalent to those
provided by the Purchaser to its current regular employees of comparable
positions, experience and duration of employment, as such benefits may exist
from time to time, and subject to all applicable terms, conditions and
eligibility requirements of all applicable employee benefit plans. The Purchaser
and the Company further agree that any such employees of the Company shall be
credited for their service with the Company for purposes of eligibility, benefit
entitlement and accrual and vesting, as applicable, in the plans provided by the
Purchaser. Those employees' benefits under the Purchaser's medical benefit plan
shall not be subject to any exclusions for pre-existing conditions, and credit
shall be received for any deductibles or out-of-pocket amounts previously paid.
The provisions of this Section 7.6 are intended to be for the benefit of, and
shall be enforceable by, the parties hereto and each employee of the Company who
becomes an employee of the Surviving Corporation by virtue of the Merger.
7.7 Listing of Purchaser Shares. In the event the Purchaser completes a
public offering of shares of its Class A Common Stock (or of any other
securities issued or deemed to be issued by the Purchaser in respect thereof)
after the Effective Time, the Purchaser agrees at such time to take such actions
and pay such fees so as to cause the Purchaser Shares (or such other securities)
to be listed or admitted to trading on the stock exchange or trading system on
which the Purchaser's Class A Common Stock (or such other securities) are then
listed or admitted to trading.
7.8 Registration Rights.
(a) Notice. If at any time or from time to time the Purchaser shall
determine to register any shares of its capital stock, other than (i) any
registration relating to any employee benefit plan or (ii) any registration
relating solely to any transaction under Rule 145 of the Securities Act, the
Purchaser will promptly give written notice thereof to each recipient of
Purchaser Shares hereunder (each, a "Holder", and each such registration, a
"Registration"). The Purchaser shall address each Holder's notice to the address
provided by such Holder in such Holder's Shareholder Agreement delivered to the
Purchaser in connection with Section 5.17 above or to such other address as such
Holder shall have provided to the Purchaser in writing, indicated to be for such
purpose. In the event any Holder shall not have provided any such address, the
Purchaser shall address such Holder's notice to such Holder's address of record
in the Company's books.
(b) Registration. Subject to the limitations set forth in subsection (c)
below, the Purchaser shall include in each Registration (and in any related
qualification under or compliance with applicable blue sky or other securities
laws) and in any underwriting involved therein all such Purchaser Shares and
other securities of the Purchaser issued in respect of Purchaser Shares
(collectively, "Registrable Securities") as are specified in a written request
or
35
<PAGE>
requests made by any Holder or Holders to the Purchaser within twenty (20) days
after the mailing of such written notice by or on behalf of the Purchaser;
provided, however, that Purchaser Shares or other securities of the Purchaser
shall be treated as Registrable Securities only if and for so long as they have
not been (A) sold to or through a broker, dealer or underwriter in a public
distribution or a public securities transaction, or (B) sold or made available
for sale, in the opinion of counsel to the Purchaser, in a single transaction
exempt from the registration and prospectus delivery requirements of the
Securities Act, such that all transfer restrictions and restrictive legends with
respect thereto are or may be removed upon the consummation of such sale. The
Purchaser agrees to furnish each Holder with such number of copies of the
prospectus used in connection with such Registration as they may reasonably
request in order to facilitate the sale of their Registrable Securities.
Notwithstanding any provision herein to the contrary, no person shall have any
registration rights pursuant to this Section 7.8 unless and until the Merger is
consummated.
(c) Quantity. In no event (except with the Purchaser's written consent)
shall the aggregate number of Registrable Securities to be included in any
Registration exceed twenty-five percent (25%) of the total number of
corresponding securities to be sold by the Purchaser pursuant to such
Registration. In addition, if the managing underwriter for an offering involving
an underwriting determines, after taking into consideration marketing factors,
the number of securities to be included in the corresponding Registration by the
Purchaser, and the number of securities to be included in such registration for
the accounts of other security holders on the basis of mandatory registration
rights, that a limitation of the number of Registrable Securities to be
underwritten is necessary or appropriate, such underwriter may limit the
Registrable Securities to be included in such Registration; provided, however,
that in the event of such a limitation, the limitation on the Holders'
Registrable Securities to be included in such Registration (i) shall be on
parity with the limitation on the securities of all persons proposing to include
securities in such registration other than the Purchaser and persons including
securities on the basis of mandatory registration rights, and (ii) shall in no
event be greater proportionally than the corresponding limitation imposed on
securities proposed to be included in such registration by Mr. J. W. Stealey.
The Purchaser shall so advise all Holders, and the number of Registrable
Securities to be included in such Registration and underwriting shall be
allocated among all Holders in proportion, as nearly as practicable, to the
respective amounts of Registrable Securities proposed to be included by such
Holders in such Registration. To facilitate the allocation of securities in
accordance with these provisions, the Purchaser may round on a reasonable and
consistent basis the number of Registrable Securities included on behalf of each
Holder.
(d) Underwriting. If any Registration is for an offering involving an
underwriting, the Purchaser shall enter into an underwriting agreement in
customary form with the underwriters selected for such underwriting by the
Purchaser, and the Purchaser shall indemnify the Holders proposing to distribute
their Registrable Securities through such underwriting in the manner and to the
extent customary in such underwritten offerings. In such event, the right of any
Holder of Registrable Securities to registration pursuant to this Section 7.8
shall be conditioned upon such Holder's execution of such underwriting agreement
as a selling shareholder and participation in such underwriting and the
inclusion of such Holder's Registrable Securities therein.
36
<PAGE>
(e) Termination, Withdrawal or Delay. The Purchaser shall have the right in
its sole discretion to terminate, withdraw or delay any Registration prior to
its effectiveness, whether or not any Holder has elected to include securities
in such Registration. If any Registration is terminated, delayed or withdrawn,
the Purchaser shall have no liability to any Holder, except to pay expenses
incurred in respect of such Holder solely as a result of such Registration to
the date of termination, withdrawal or delay, in accordance with subsection (f)
below. No Holder shall have any right to obtain or seek an injunction
restraining or otherwise delaying any Registration as the result of any
controversy that might arise with respect to the interpretation or
implementation of this Section 7.8. This Agreement does not create any
obligation on the part of the Purchaser to undertake any Registration, and the
Purchaser retains complete and absolute discretion to determine whether and when
to do so.
(f) Expenses. All expenses incurred in connection with any and all
Registrations shall be borne by the Purchaser, except that all underwriting
discounts, selling commissions and stock transfer taxes applicable to securities
registered for the accounts of Holders and all fees and disbursements of counsel
for Holders relating thereto shall be borne respectively by such Holders.
(g) Beneficiaries. The provisions of this Section 7.8 are intended to be
for the benefit of, and shall be enforceable by, each Holder and their
respective successors and assigns.
ARTICLE VIII
SURVIVAL OF REPRESENTATIONS; INDEMNITY; SET-OFF
8.1 Survival of Representations. The respective representations and
warranties of the Company, the Management Shareholders, the Purchaser and
Acquisition contained in this Agreement or in any schedule attached hereto shall
survive the consummation of the Merger and the other transactions contemplated
hereby and shall remain in full force and effect until the date 365 days
following the Closing Date (the period ending on such date is referred to in
this Agreement as the "Representations Period"), notwithstanding any
investigation or examination of, or knowledge with respect to, the subject
matter thereof by or on behalf of the Company, the Management Shareholders, the
Purchaser or Acquisition, as the case may be, except that such representations
and warranties shall survive indefinitely as to fraud with respect thereto. No
claim for indemnification pursuant to Section 8.2(a) or 8.3(a) may be brought
after the expiration of the Representations Period, except for claims made in
good faith in writing and setting forth in reasonable detail the claim prior to
such expiration or actions (whether instituted before or after such expiration)
based on any claims made in good faith in writing and setting forth in
reasonable detail the claim prior to such expiration, regardless of whether any
action or demand has been commenced (it being understood, without limitation,
that any and all Losses arising after the expiration of the Representations
Period shall be recoverable upon notice properly given prior to the expiration
of the Representations Period in accordance with this Section 8.1).
37
<PAGE>
8.2 Indemnification of the Purchaser, Acquisition and the Surviving
Corporation.
(a) The Management Shareholders jointly and severally shall defend,
indemnify and hold harmless the Purchaser, Acquisition, the Surviving
Corporation and all of their respective officers, directors, employees (other
than the Management Shareholders (if employees)), agents and shareholders (other
than the Management Shareholders) (each, a "Purchaser Indemnitee") pursuant to
this Agreement and the Escrow Agreement, to the full extent permitted in law or
equity, from and against any and all losses, claims, actions, damages,
liabilities, costs and expenses (including reasonable attorneys' fees and
expenses) (collectively, "Losses") relating to or arising from or in connection
with (i) any misrepresentation or any non-fulfillment of any representation,
warranty, covenant, obligation or agreement by the Company or any Management
Shareholder contained in or made pursuant to this Agreement or any of the other
Transaction Documents or in any other agreement, officer's certificate or other
certificate delivered to the Purchaser or Acquisition in connection with this
Agreement, (ii) any litigation, action, claim, proceeding or investigation by
any third party relating to or arising out of the business or operations of the
Company or the actions of any Management Shareholder prior to the Closing Date,
or (iii) the enforcement of the Purchaser Indemnitees' rights pursuant to this
Section 8.2, or any litigation, proceeding or investigation relating to any of
the foregoing.
(b) Notwithstanding the foregoing provisions of this Section 8.2, and
except with respect to any breach of any post-Closing covenant contained in
Article VII above or any Losses resulting from or arising out of fraud or other
intentional or knowing misconduct or misrepresentation, as to which (in each
case) the party or parties breaching such representation, warranty or covenant
or responsible for such fraud, intentional or knowing misconduct or
misrepresentation shall be jointly and severally liable to the Purchaser and
Acquisition without limitation, (i) the maximum aggregate recourse by the
Purchaser Indemnitees against all of the Management Shareholders pursuant to
subsection (a) above shall not exceed the amount determined by multiplying the
Purchaser Share Value (as defined below) by the aggregate number of Purchaser
Shares placed in escrow pursuant to Section 1.4(a) above (such amount, the
"Liability Cap"); (ii) the maximum recourse by the Purchaser Indemnitees against
any particular Management Shareholder pursuant to subsection (a) above as to any
particular claim for Losses shall not exceed the amount determined by
multiplying the amount of such Losses by a fraction, the numerator of which
shall be the number of Purchaser Shares placed in escrow in respect of such
Management Shareholder pursuant to Section 1.4(a) above, and the denominator of
which shall be the aggregate number of Purchaser Shares placed in escrow in
respect of all Management Shareholders pursuant to Section 1.4(a) above; and
(iii) the maximum aggregate recourse by the Purchaser Indemnitees against any
particular Management Shareholder pursuant to subsection (a) above shall not
exceed the amount determined by multiplying the Purchaser Share Value by the
number of Purchaser Shares placed in escrow in respect of such Management
Shareholder pursuant to Section 1.4(a) above. Each Management Shareholder shall
have the option to satisfy any portion of any liability under subsection (a)
above in cash or by transferring and delivering to the appropriate Purchaser
Indemnitee Purchaser Shares having a value (calculated on the basis of a value
per share equal to the Purchaser Share Value, regardless of fair market value on
the date of transfer) equal to such portion of such liability. As used in this
Section 8.2, the term "Purchaser Share Value" shall mean the amount determined
by the Purchaser's Board of Directors in good faith to be the fair market value
per Purchaser Share as of the Closing Date, as certified by the
38
<PAGE>
Purchaser at or prior to the Closing. The Purchaser currently anticipates the
Purchaser Share Value to be Three Dollars ($3.00).
(c) Notwithstanding any other provision of this Agreement, as of and after
the Effective Time, the Company shall have no liability under this Agreement,
and no Management Shareholder shall threaten or bring any claim or action
whatsoever against the Company for contribution to any amounts payable under
this Section 8.2 by such Management Shareholder.
(d) The Purchaser Indemnitees' rights pursuant to this Section 8.2 shall
survive the consummation of the transactions contemplated by this Agreement, and
shall be secured, pursuant to the Escrow Agreement, by the Purchaser Shares
delivered to the Escrow Agent pursuant to Section 1.4(a) above.
8.3 Indemnification of the Company and the Management Shareholders.
(a) The Purchaser shall defend, indemnify and hold harmless the Company and
the Management Shareholders and all of their respective officers, directors,
employees, agents and shareholders (each a "Company Indemnitee") pursuant to
this Agreement, to the full extent permitted in law or equity, from and against
any and all Losses relating to or arising from or in connection with (i) any
misrepresentation or any non-fulfillment of any representation, warranty,
covenant, obligation or agreement by the Purchaser or Acquisition contained in
or made pursuant to this Agreement or any of the Transaction Documents or in any
other agreement, officer's certificate or other certificate delivered to the
Company or any Management Shareholder in connection with this Agreement, (ii)
any litigation, action, claim, proceeding or investigation by any third party
relating to or arising out of the business or operations of the Purchaser prior
to the Closing Date, or (iii) the enforcement of the Company Indemnitees' rights
pursuant to this Section 8.3 or any litigation, proceeding or investigation
relating to any of the foregoing.
(b) Notwithstanding the foregoing provisions of this Section 8.3, and
except with respect to any breach of any post-Closing covenant contained in
Article VII above or any Losses resulting from or arising out of fraud or other
intentional or knowing misconduct or misrepresentation, as to which (in each
case) the Purchaser shall be liable to the Company and the Management
Shareholders without limitation, the maximum aggregate recourse by the Company
Indemnitees pursuant to subsection (a) above shall not exceed the Liability Cap
(as defined in Section 8.2 above).
(c) Notwithstanding any other provision of this Agreement, as of and after
the Closing, the Purchaser shall have no further liability to the Company under
subsection (a) above.
8.4 Notice of Claims. Any Purchaser or Company Indemnitee asserting a claim
pursuant to Section 8.2 or 8.3 above, respectively, shall give notice of such
claim to the Company (if prior to the Closing Date) or the Representative (as
defined in the Escrow Agreement) (if after the Closing Date) or the Purchaser,
respectively, reasonably promptly after such Purchaser or Company Indemnitee (as
the case may be) becomes aware of the existence of such claim. The failure to
provide such notice shall relieve the indemnifying party or parties
39
<PAGE>
of their liability, if any, in respect of such claim, solely to the extent such
failure to provide such notice actually prejudices the indemnifying party's
ability to take appropriate responsive action with respect to such claim or to
minimize the injury resulting therefrom.
ARTICLE IX
MISCELLANEOUS
9.1. Definitions of Certain Terms. As used in this Agreement, the following
capitalized terms shall have the respective meanings set forth below:
(a) "Casualty" shall mean any fire, explosion, accident, casualty, labor
trouble, flood, drought, riot, storm, condemnation or act of God or other public
force.
(b) "Code" shall mean the United States Internal Revenue Code of 1986 and
all rules and regulations promulgated thereunder from time to time, in each case
as amended.
(c) "Contract" shall mean any contract, agreement, indenture, instrument or
other binding commitment or arrangement of any kind.
(d) "Encumbrance" shall mean any lien, encumbrance, security interest,
mortgage, pledge, lease, option, easement, servitude, covenant, condition,
restriction under any Contract, or other charge, restriction or claim of any
kind.
(e) "ERISA" shall mean the Federal Employee Retirement Income Security Act
of 1974 and all rules and regulations promulgated thereunder from time to time,
in each case as amended.
(f) "Law" shall mean any national, federal, state, local or foreign law,
rule, regulation, statute, ordinance, order, judgment, decree, permit,
franchise, license or other governmental restriction or requirement of any kind.
(g) "Material Adverse Effect" shall mean any material adverse effect on the
business, financial condition, results of operations, or prospects of the
affected party, including without limitation any effect which prevents or
impairs materially such party's performance of its obligations under, or the
consummation of, this Agreement.
(h) "Organizational Document" shall mean any certificate or articles of
incorporation, bylaw, board of directors' or shareholders' resolution, or other
corporate document or action comparable to any of the foregoing currently in
effect.
(i) "Person" shall mean any individual, partnership, joint venture,
corporation, trust, limited liability company, unincorporated organization,
government (or subdivision thereof) or other entity.
(j) "Securities Act" shall mean the United States Securities Act of 1933
and all rules and regulations promulgated thereunder from time to time, in each
case as amended.
40
<PAGE>
(k) "Stock Acquisition Right" shall mean any option, warrant, right
(pre-emptive or otherwise), call, commitment, conversion right, right of
exchange, plan or other agreement of any character providing for the purchase,
issuance or sale of any securities.
9.2 Expenses. Each party hereto shall pay all of its own expenses relating
to the transactions contemplated by this Agreement, including without limitation
the fees and expenses of its respective counsel.
9.3 Remedies Not Exclusive. Except as otherwise provided in Sections 8.2(b)
and 8.3(b) above, nothing in this Agreement shall limit or restrict in any
manner any other rights or remedies any party hereto may have against any other
party hereto at law, in equity or otherwise, including without limitation any
such rights pursuant to the Escrow Agreement.
9.4 Governing Law. The interpretation and construction of this Agreement,
and all matters relating hereto, shall be governed by the Laws of the State of
North Carolina, without regard to the choice of law provisions thereof.
9.5 Further Assurances. In addition to the actions, documents and
instruments specifically required by this Agreement or any other Transaction
Document to be taken or delivered on or before the Closing Date or from time to
time thereafter, each of the parties to this Agreement shall, before and after
the Closing Date, without further consideration, take such other actions and
execute and deliver such other documents and instruments as another party hereto
reasonably may request in order to effect the transactions contemplated by this
Agreement and the other Transaction Documents.
9.6 Captions. The Article and Section captions used herein are for
reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
9.7 Publicity. Except as otherwise required by applicable Law, no party
shall issue any press release or make any other public statement relating to,
connected with or arising out of this Agreement or the matters contained herein
without the Purchaser's (in the case of any proposed disclosure by the Company
or any Management Shareholder) or the Company's (in the case of any proposed
disclosure by the Purchaser or Acquisition) prior written approval of the
contents and the manner of presentation and publication thereof.
9.8 Notices. Any notice or other communication required or permitted
hereunder shall be sufficiently given if delivered in person or sent by telex,
telecopy or by registered or certified mail or by recognized overnight courier,
postage prepaid, addressed as follows:
If to the Purchaser, to:
Interactive Magic , Inc.
215 Southport Drive, Suite 100
Morrisville, North Carolina 27560
Attention: Mr. William J. Kaluza
Facsimile: (919) 461-0723
41
<PAGE>
with a copy to its counsel,
Smith, Anderson, Blount, Dorsett, Mitchell &
Jernigan, LLP
Post Office Box 2611
Raleigh, North Carolina 27602-2611
Attention: Gerald F. Roach, Esq.
Facsimile: (919) 821-6800
If to the Company, to:
Interactive Creations Incorporated
1701 W. Northwest Highway, Suite 220
Grapevine, Texas 76051
Attention: Mr. Joseph R. Mannes
Facsimile: (817) 251-2228
with a copy to its counsel:
Thompson & Knight, P.C.
1700 Pacific Avenue, Suite 3300
Dallas, Texas 75201
Attention: David L. Emmons, Esq.
Facsimile: (214) 969-1751
or to such other address or number as shall be furnished in writing by any such
party in such manner, and such notice or communication shall be deemed to have
been given as of the date so delivered, sent by telecopier, telex or mailed.
9.9 Parties in Interest. This Agreement may not be transferred, assigned,
pledged or hypothecated by any party hereto without the other parties' prior
written consent. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective heirs, executors,
administrators, successors and permitted assigns.
9.10 Counterparts. This Agreement may be executed in two or more
counterparts, all of which taken together shall constitute one instrument.
9.11 Entire Agreement. This Agreement, together with the other Transaction
Documents and the other documents referred to herein or therein which form a
part hereof or thereof, contains the entire understanding of the parties hereto
with respect to the subject matter contained herein and therein. This Agreement
supersedes all prior agreements and understandings between the parties with
respect to such subject matter. All exhibits and schedules referred to in this
Agreement are intended to be and hereby are specifically made a part of this
Agreement.
9.12 Construction of Certain Disclosures. No information disclosed in any
schedule to this Agreement shall be deemed to be disclosed for purposes of any
other section hereof or schedule hereto unless otherwise specifically stated
therein. The representations and
42
<PAGE>
warranties set forth in Articles II and III above, respectively, are cumulative.
The subject matter covered by any section of either such article shall not be
exclusive as to such subject matter to the extent covered by another section of
such article, and the specificity of any representation or warranty shall not
affect or limit the generality of any other representation or warranty made or
given by the same party.
9.13 Amendments. This Agreement may be waived, amended, supplemented or
modified only by a written agreement executed by each of the parties hereto.
9.14 Severability. In case any provision in this Agreement shall be held
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions hereof will not in any way be affected or impaired
thereby.
9.15 Third Party Beneficiaries. Except as specifically set forth in this
Agreement to the contrary, each party hereto intends that this Agreement shall
not benefit or create any right or cause of action in or on behalf of any Person
other than the parties hereto.
9.16 Termination of Agreement.
(a) The parties hereto shall be entitled to terminate this Agreement as
follows, upon which termination this Agreement shall become void and have no
effect, and there shall be no liability hereunder on the part of the Purchaser,
Acquisition, the Company, any Management Shareholder or any of their respective
directors, officers, employees, shareholders or representatives; provided,
however, that no such termination shall limit or terminate any liability of one
party to another for any breach hereof; and provided further that the provisions
of this Section and Sections 4.3 (as to confidentiality, but not access to
information), 8.2 and 8.3 (indemnification), 9.2 (expenses), 9.4 (governing
law), 9.7 (publicity) and 9.8 (notices) shall survive any such termination:
(i) the parties hereto may terminate this Agreement by mutual written
consent at any time;
(ii) the Purchaser may terminate this Agreement by written notice to
the Company prior to the Closing if any Management Shareholder or the
Company shall have breached in any material respect any representation,
warranty or covenant contained in this Agreement and such breach shall not
have been cured within five (5) business days following receipt by the
Company of the Purchaser's notice of such breach;
(iii) the Company may terminate this Agreement by written notice to
the Purchaser prior to the Closing if the Purchaser shall have breached in
any material respect any representation, warranty or covenant contained in
this Agreement and such breach shall not have been cured within five (5)
business days following receipt by the Purchaser of the Company's notice of
such breach;
(iv) the Purchaser or the Company may terminate this Agreement by
written notice to the other if the consummation of the transactions
contemplated hereby shall not have occurred on or before April 30, 1997,
unless such failure to close shall be
43
<PAGE>
due to a breach of this Agreement by the party seeking to terminate this
Agreement pursuant to this clause (iv); and
(v) any party may terminate this Agreement by written notice to the
other parties hereto on or prior to the Closing Date if any court or other
governmental instrumentality of competent jurisdiction shall have issued an
order, decree or ruling or taken any other action restraining, enjoining or
otherwise prohibiting the transactions contemplated by this Agreement.
(b) Notwithstanding approval of this Agreement and the Plan of Merger by
the shareholders of Acquisition and the Company, the parties hereto agree that
termination of this Agreement shall constitute mutual termination and
abandonment of the Plan of Merger and that, upon any such termination, neither
Acquisition nor the Company shall have any further rights or obligations under
or arising out of the Plan of Merger.
IN WITNESS WHEREOF, the Purchaser, Acquisition and the Company have caused
their respective corporate names to be hereunto subscribed by their respective
officers thereunto duly authorized, and each Management Shareholder has executed
this Agreement, all as of the day and year first above written.
INTERACTIVE MAGIC, INC.
By: /s/ Robert P. Pickens
-------------------------------------
Robert P. Pickens
President and Chief Operating Officer
44
<PAGE>
INTERACTIVE CREATIONS ACQUISITION CORP.
By: /s/ Robert P. Pickens
------------------------------------
Robert P. Pickens
Vice President
INTERACTIVE CREATIONS INCORPORATED
By: /s/ Dale H. Addink
------------------------------------
Dale H. Addink
Chief Executive Officer
MANAGEMENT SHAREHOLDERS:
/s/ Dale H. Addink
----------------------------------------
Dale H. Addink
/s/ John R. McCarthy
----------------------------------------
John R. McCarthy
/s/ John MacQueen
----------------------------------------
John MacQueen
/s/ Joseph R. Mannes
----------------------------------------
Joseph R. Mannes
/s/ Robert Salinas
----------------------------------------
Robert Salinas
45
<PAGE>
LIST OF SCHEDULES TO MERGER AGREEMENT
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Schedule No. Contains
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
<S> <C>
Schedule 2.2 Capital Stock
- -------------------------------------------------------------------------------------------------------
Schedule 2.4 Subsidiaries and Investments
- -------------------------------------------------------------------------------------------------------
Schedule 2.5 Financial Statements; No Material Changes; Budget and Projections
- -------------------------------------------------------------------------------------------------------
Schedule 2.7 Title to Properties; Encumbrances
- -------------------------------------------------------------------------------------------------------
Schedule 2.8 Tangible Assets
- -------------------------------------------------------------------------------------------------------
Schedule 2.10 Leases
- -------------------------------------------------------------------------------------------------------
Schedule 2.11 Contracts
- -------------------------------------------------------------------------------------------------------
Schedule 2.12 No Conflicts
- -------------------------------------------------------------------------------------------------------
Schedule 2.13 Litigation
- -------------------------------------------------------------------------------------------------------
Schedule 2.15 Independent Contractor Status
- -------------------------------------------------------------------------------------------------------
Schedule 2.16 Liabilities and Indebtedness
- -------------------------------------------------------------------------------------------------------
Schedule 2.17 Insurance
- -------------------------------------------------------------------------------------------------------
Schedule 2.18 Intellectual Property
- -------------------------------------------------------------------------------------------------------
Schedule 2.19 Licenses
- -------------------------------------------------------------------------------------------------------
Schedule 2.22 Employee Relations
- -------------------------------------------------------------------------------------------------------
Schedule 2.23 Employee Benefit Plans
- -------------------------------------------------------------------------------------------------------
Schedule 2.24 Environmental Matters
- -------------------------------------------------------------------------------------------------------
Schedule 2.25 Interests in Clients, Suppliers, Etc.
- -------------------------------------------------------------------------------------------------------
Schedule 2.26 Bank Accounts, Powers of Attorney
- -------------------------------------------------------------------------------------------------------
Schedule 2.27 No Changes Since Company Balance Sheet Date
- -------------------------------------------------------------------------------------------------------
Schedule 3.2 Capital Stock
- -------------------------------------------------------------------------------------------------------
Schedule 3.4 Financial Statements; Working Capital
- -------------------------------------------------------------------------------------------------------
Schedule 3.6 Title to Properties; Encumbrances
- -------------------------------------------------------------------------------------------------------
Schedule 3.9 Leases
- -------------------------------------------------------------------------------------------------------
Schedule 3.11 No Conflicts
- -------------------------------------------------------------------------------------------------------
Schedule 3.12 Litigation
- -------------------------------------------------------------------------------------------------------
Schedule 3.14 Liabilities
- -------------------------------------------------------------------------------------------------------
Schedule 3.19 Employee Benefit Plans
- -------------------------------------------------------------------------------------------------------
Schedule 3.21 No Changes Since December 31, 1996
- -------------------------------------------------------------------------------------------------------
Schedule 4.1(a) Conduct of Business
- -------------------------------------------------------------------------------------------------------
Schedule 5.14 Current Employees
- -------------------------------------------------------------------------------------------------------
Schedule 7.3 Stock Options
- -------------------------------------------------------------------------------------------------------
</TABLE>
46
<PAGE>
LIST OF EXHIBITS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Exhibit Contains
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
<S> <C>
Exhibit A Plan of Merger
- -------------------------------------------------------------------------------------------------------
Exhibit B Escrow Agreement
- -------------------------------------------------------------------------------------------------------
Exhibit C Shareholder Agreement
- -------------------------------------------------------------------------------------------------------
Exhibit D Patent Assignment
- -------------------------------------------------------------------------------------------------------
</TABLE>
47
<PAGE>
FIRST AMENDMENT TO MERGER AGREEMENT
This First Amendment to Merger Agreement (this "First Amendment") is made
and dated as of April 2, 1997 by and among Interactive Magic, Inc., a Maryland
corporation (the "Purchaser"), Interactive Creations Acquisition Corp., a North
Carolina corporation and wholly-owned subsidiary of the Purchaser
("Acquisition"), Interactive Creations Incorporated, a Texas corporation (the
"Company"), and the shareholders of the Company signatory hereto (the
"Management Shareholders"). The Purchaser, Acquisition, the Company and the
Management Shareholders sometimes are referred to collectively herein as the
"Parties."
WITNESSETH:
WHEREAS, the Parties entered into a Merger Agreement dated as of March 24,
1997 (the "Merger Agreement"); and
WHEREAS, the Parties now desire to amend the Merger Agreement to reflect
certain matters as provided herein.
NOW, THEREFORE, in consideration of the premises, covenants and agreements
set forth herein and of other good and valuable consideration, the receipt and
legal sufficiency of which they hereby acknowledge, and intending to be legally
bound hereby, the Parties hereby agree as follows:
1. Amendments to Merger Agreement. The Merger Agreement shall be, and it
hereby is, amended as follows:
a. Articles of Merger. The second sentence of Section 1.1(b) shall be,
and it hereby is, deleted in its entirety and replaced with the following
sentence:
The merger shall become effective at the time set forth in the articles of
merger, which shall be filed contemporaneously with the closing conducted
pursuant to Section 1.5 below or at such later time as the parties shall
mutually agree in writing.
b. Stock Options. Each reference to the Purchaser's Class "B" Common
Stock in Section 1.2 and in Section 5.20 shall be, and it hereby is,
deleted in its entirety and replaced with a corresponding reference to the
Purchaser's Class "A" Common Stock.
c. Closing Date. The reference to March 31, 1997 in Section 1.5 shall
be, and it hereby is, deleted in its entirety and replaced with a
corresponding reference to April 23, 1997.
d. Purchaser Capital Stock. The second and third sentences of Section
3.2(a) shall be, and they hereby are, deleted in their entirety and
replaced with the following sentences:
As of the date of this Agreement, 4,980,000 shares of the Purchaser's
Class A Common Stock, 13,500 shares of the Purchaser's Class B Common
Stock and 165,114 shares of the Purchaser's Series A Preferred Stock
are issued and
1
<PAGE>
outstanding; and no other shares of the Purchaser's capital stock are
issued or outstanding. As of the Effective Time, not more than
4,980,000 shares of the Purchaser's Class A Common Stock, 13,500
shares of the Purchaser's Class B Common Stock and 165,114 shares of
the Purchaser's Series A Preferred Stock, together with any other
securities issued upon the proper exercise of any Stock Acquisition
Rights described in Schedule 3.2, will be issued and outstanding; and
no other shares of the Purchaser's capital stock will be issued or
outstanding.
e. Indemnity. The second sentence of Section 8.2(b) shall be, and it
hereby is, deleted in its entirety and replaced with the following
sentence:
Subject to the foregoing limitations of liability, each Management
Shareholder shall satisfy any liability under subsection (a) above by
transferring and delivering to the appropriate Purchaser Indemnitee
Purchaser Shares having an aggregate value (calculated on the basis of
a value per share equal to the Purchaser Share Value, regardless of
fair market value on the date of transfer) equal to the amount of such
liability; provided, however, that if, on the date of payment of such
liability, such Management Shareholder shall not own Purchaser Shares
having an aggregate value (calculated on such basis) equal to the
amount of such liability, he shall transfer and deliver to such
Purchaser Indemnitee all of his Purchaser Shares (if any) (each of
which shall be deemed equal in value to the Purchaser Share Value,
regardless of fair market value on the date of transfer), then shall
pay the remaining balance of such liability in cash.
2. No Other Changes. The remainder of the Merger Agreement shall remain in
full force and effect and is hereby reaffirmed by the Parties.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
2
<PAGE>
IN WITNESS WHEREOF, the Purchaser, Acquisition and ICI have caused their
respective corporate names to be hereunto subscribed by their respective
officers thereunto duly authorized, and each Management Shareholder has executed
this First Amendment, all as of the day and year first above written.
INTERACTIVE MAGIC, INC.
By: /s/ Robert L. Pickens
--------------------------------------
Robert L. Pickens
President and Chief Operating Officer
INTERACTIVE CREATIONS ACQUISITION CORP.
By: /s/ Robert L. Pickens
--------------------------------------
Robert L. Pickens
Vice President
3
<PAGE>
INTERACTIVE CREATIONS INCORPORATED
By: /s/ Dale H. Addink
--------------------------------------
Dale H. Addink
Chief Executive Officer
MANAGEMENT SHAREHOLDERS:
/s/ Dale H. Addink
------------------------------------------
Dale H. Addink
/s/ John R. McCarthy
------------------------------------------
John R. McCarthy
/s/ John MacQueen
------------------------------------------
John MacQueen
/s/ Joseph R. Mannes
------------------------------------------
Joseph R. Mannes
/s/ Robert Salinas
------------------------------------------
Robert Salinas
4
SHAREHOLDER AGREEMENT
THIS SHAREHOLDER AGREEMENT (the "Agreement") is made between Interactive
Magic, Inc., a Maryland corporation (the "Corporation"), and the undersigned
(the "Shareholder") as of the date specified below. Capitalized terms used but
not defined in this Agreement shall have the meanings set forth in the Merger
Agreement referred to below.
WHEREAS, the Corporation, Interactive Creations Acquisition Corp.
("Acquisition"), Interactive Creations Incorporated ("ICI") and certain
shareholders of ICI are parties to a Merger Agreement dated as of March 24, 1997
(the "Merger Agreement") pursuant to which the Shareholder will receive, upon
consummation of the Merger, shares of Class A Common Stock of the Corporation
(the "Shares").
WHEREAS, each of the Corporation and the Shareholder desires to enter into
this Agreement in order to (i) provide certain information about the Shareholder
upon which the Corporation will rely for purposes of establishing the
applicability of certain exemptions from the registration or qualification
requirements of applicable securities laws, (ii) document the Shareholder's
general ability to bear the risk of an investment in the Corporation and
suitability as an investor for purposes of such exemption and (iii) impose
certain restrictions on transfers of Shares as provided herein; and
WHEREAS, the execution and delivery of this Agreement by the Shareholder is
a condition precedent to the Corporation's and Acquisition's obligations
pursuant to the Merger Agreement, including without limitation Acquisition's
obligation to engage in the Merger.
NOW THEREFORE, in consideration of the premises and the mutual covenants
contained herein, in partial consideration for the transactions contemplated by
and securities to be received by the Shareholder pursuant to the Merger
Agreement, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I
REPRESENTATIONS AND WARRANTIES
1.1. Shareholder's Representations and Warranties. The Shareholder hereby
makes the representations and warranties set forth below with the express
intention that they be relied upon by the Corporation in determining the
investment suitability of the Shareholder for purposes of the applicability of
an exemption from registration under applicable securities laws. If the
Shareholder is receiving the Shares in a fiduciary capacity, the representations
and warranties set forth herein are made on behalf of the person or persons for
whom the Shareholder is so receiving.
(a) The Shareholder is an individual (except as otherwise specified on
the signature page of this Agreement), a citizen of the United States, at
least 21 years of age (or represented for all purposes hereof by a
purchaser representative at least 21 years of age) and a bona fide resident
and domiciliary (not a temporary or a transient resident) of the state set
1
<PAGE>
forth adjacent to the Shareholder's name on the signature line hereto, and
has no intention of becoming a resident of any other state or jurisdiction.
(b) The Shareholder is the lawful owner of the number of shares of
Common Stock of ICI set forth adjacent to the Shareholder's name on the
signature line hereto, free and clear of all encumbrances of any variety
whatsoever. Except as specified adjacent to the Shareholder's name on the
signature line hereto, the Shareholder does not own any interest in any
other securities of ICI.
(c) The Shareholder has the legal right, power and authority to enter
into and deliver this Agreement, perform the Shareholder's obligations
hereunder and consummate the transactions contemplated hereby. This
Agreement constitutes the valid and legally binding obligation of the
Shareholder, enforceable against the Shareholder in accordance with its
respective terms.
(d) The Shareholder is fully aware that the Shares to be issued
pursuant to the Merger Agreement will not have been registered under the
Securities Act of 1933, as amended (the "Act"), or under any applicable
state securities law and that no federal or state agency has made any
finding or determination as to the fairness of an investment in the Shares,
nor any recommendation or endorsement of any such investment. The
Shareholder further understands that the Shares will be issued in reliance
on exemptions from the registration requirements of the Act and in reliance
on exemptions from the registration requirements of various state
securities laws, on the grounds, among others, that the proposed issuances
of Shares pursuant to the Merger Agreement will be limited generally to
investors who or which qualify as "accredited investors" under the
requirements of Rule 501(a) promulgated under the Act.
(e) Unless otherwise indicated adjacent to the Shareholder's signature
below, the Shareholder is an "accredited investor" as that term is defined
in Rule 501(a) promulgated under the Act, a copy of which is attached
hereto as Exhibit A. If the Shareholder is not at least 21 years of age,
the Shareholder is represented for all purposes hereof by a purchaser
representative who, unless otherwise indicated adjacent to his or her
signature below, is an "accredited investor." The Shareholder is acquiring
the Shares for the Shareholder's own account (or in such fiduciary capacity
as is indicated below) and not with a view to resale or distribution.
(f) Immediately prior to execution of this Agreement by the
Shareholder, the Shareholder was able to bear the economic risk of the
investment contemplated hereby, and either: (i) the Shareholder had such
knowledge and experience in financial and business matters as to be capable
of evaluating the merits and risks of the proposed transaction; or (ii) the
Shareholder and the Shareholder's purchaser representative together had
such knowledge and experience in financial and business matters that they
were capable of evaluating the merits and risks of the proposed
transaction. The Shareholder acknowledges that if a purchaser
representative has been utilized by the Shareholder in evaluating the
proposed transaction as contemplated hereby, the Shareholder has been
advised by such purchaser representative as to the merits and risks of the
proposed transaction in general and the suitability of the proposed
transaction for the Shareholder in particular, and such purchaser
representative has co-executed this Agreement. Execution of this Agreement
by the Shareholder and his or her purchaser representative (if so executed)
constitutes both the
2
<PAGE>
irrevocable appointment of such purchaser representative by the Shareholder
to act as such for all purposes hereunder and the acceptance of such
appointment by such purchaser representative.
(g) The Shareholder (or the Shareholder's purchaser representative, if
applicable): (i) has been furnished, has carefully read, and has relied
solely (except as indicated in subparagraph (ii) below) on the information
contained in the Corporation's disclosure memorandum and related materials
dated March 25, 1997 (including all exhibits and all amendments or
supplements thereto, if any) (collectively, the "Disclosure Memorandum")
and has sought such accounting, legal and tax advice as the Shareholder has
considered necessary to make an informed decision concerning the proposed
transaction; and (ii) has been given the opportunity to ask questions of,
and receive answers from, the officers of the Corporation concerning the
terms and conditions of the proposed transaction and to obtain such
additional information that the Corporation possesses or can acquire
without unreasonable effort or expense that is necessary to verify the
accuracy of the information contained in the Disclosure Memorandum or
information that was otherwise provided, and the Shareholder has not been
furnished any other offering literature or prospectus.
(h) The Shareholder acknowledges and is aware that an investment in
the Shares involves substantial risks, and the Shareholder has taken full
cognizance of and understands such risks and has weighed these risks
against the potential return. The Shareholder is aware that the potential
risks involved in engaging in the proposed transaction include, without
limitation, (i) that the Corporation has a limited financial or operating
history; (ii) the speculative nature of ownership of the Corporation's
securities; (iii) the risks set forth under the caption "Risk Factors" in
the Disclosure Memorandum; (iv) that, except as provided in Section 7.8 of
the Merger Agreement (the "Registration Rights"), the Corporation is under
no obligation to register the Shares or make an exemption from registration
available, (v) that the Corporation has not represented that it will make
any other attempt so to register the Shares or to make such an exemption
available and (vi) that the Shareholder must bear the economic risk of
owning the Shares for an indefinite period of time because, among other
reasons, (a) the Shares have not been registered under the Act or under
applicable state securities laws; (b) there is not now and may never be a
public market for the Shares; (c) there are substantial restrictions on the
transferability of the Shares; (d) the Shareholder may not be able to avail
himself of the provisions of Rule 144 promulgated under the Act; and (e) it
may not be possible for the Shareholder to liquidate this investment.
(i) The Shareholder has adequate means of providing for the
Shareholder's current needs (and, if an individual, possible personal
contingencies) and has no need in the foreseeable future for liquidity of
the Shares.
(j) The Shareholder has received, completed and returned to the
Corporation the Shareholder Questionnaire provided herewith relating to the
Shareholder's general ability to bear the risks of an investment in the
Corporation and suitability as an investor in a private offering, and the
Shareholder hereby affirms the correctness of the answers to the
Shareholder Questionnaire and all other written or oral information
concerning the Shareholder provided to the Corporation by, or on behalf of,
the Shareholder.
(k) The Shareholder agrees to ratify, confirm, and be bound by the
Corporation's bylaws (a copy of which will be provided to the Shareholder
upon request),
3
<PAGE>
including those that pertain to the Corporation's indemnification of
officers and directors of the Corporation to the fullest extent permitted
by applicable law.
(l) The Shareholder agrees to indemnify and hold harmless the
Corporation and its affiliates from any liability, loss or expense
(including reasonable attorney's fees, judgments, fines and amounts paid in
settlement, payable as incurred) if the Shareholder, alone or with others,
breaches any of the representations, warranties or covenants contained in
this Agreement. Notwithstanding the foregoing, however, no representation,
warranty, acknowledgment or agreement made herein by the Shareholder shall
in any manner be deemed to constitute a waiver of any rights granted to
such Shareholder under federal or state securities laws.
(m) The Shareholder has no plan or intention to sell, exchange, gift,
or otherwise dispose of any of the Shares received in the Merger.
(n) If the Shareholder is represented by a purchaser representative,
such purchaser representative is exercising sole investment control for all
purposes hereof, including for purposes of all applicable securities laws.
1.2. Entity Representations. If this Agreement is executed by a
corporation, partnership, limited liability company, association, joint stock
company, trust or unincorporated organization, or other entity, such entity
hereby represents that it was not organized for the purpose of acquiring the
Shares. If the Shareholder is a partnership or a limited liability company, each
partner or member of such respective entity hereby represents, through execution
hereof by the Shareholder, that each representation by the Shareholder set forth
herein is correct both as to the respective entity and as if made by such
partner or member personally.
1.3. Agent Representations. If this Agreement is executed by a person
acting in a representative capacity for a corporation or trust, or as an agent
for any person or entity, such person represents that it has full authority to
execute this Agreement in such capacity and on behalf of such corporation,
trust, person or entity.
ARTICLE II
SHARE TRANSFER RESTRICTIONS
2.1. Pooling of Interests Accounting. The Shareholder agrees that from and
after the date of this Agreement, the Shareholder shall not take any action, or
knowingly fail to take any action, which action or failure is reasonably likely
to disqualify the transactions contemplated by the Merger Agreement from pooling
of interests accounting treatment by the Corporation, and that the Shareholder
shall take all reasonable actions necessary to cause the transactions
contemplated by the Merger Agreement to qualify as a pooling of interests if
such characterization shall be jeopardized by action taken by the Shareholder.
Notwithstanding any other provision of this Article II, and without limiting the
foregoing, the Shareholder agrees that the Shareholder shall not sell, transfer,
pledge, or otherwise dispose of the Shareholder's interests in or reduce the
Shareholder's risk relative to any of the Shares until the Corporation shall
have published financial results covering at least thirty (30) days of combined
operations of ICI, Acquisition and the Company after consummation of the
transactions contemplated by
4
<PAGE>
the Merger Agreement. The Shareholder acknowledges and agrees with the
Corporation that the Shareholder is not a party to any agreement or arrangement
with any third party regarding the transactions contemplated by the Merger
Agreement and the other Transaction Documents or the subject matter thereof
other than the Merger Agreement and any other applicable Transaction Document.
2.2. Compliance With Laws. In no event shall the Shareholder sell,
transfer, pledge, or otherwise dispose of any securities of the Corporation
except in compliance with all applicable laws, including without limitation the
Securities Act of 1933, as amended.
2.3. Transfers in Violation. Any sale, assignment, transfer, pledge,
hypothecation, mortgage or disposition of any Shares or other securities of the
Corporation issued in respect thereof, by gift or otherwise, in violation of any
provision of this Agreement shall be void and of no effect and shall not be
recognized by the Corporation as transferring any interest in any of such
shares. In the case of any such violation, the Corporation shall have the right
to issue an oral or written order to the Corporation's transfer agent (if any)
not to transfer the Shares.
2.4. Certificates Legended. Until the expiration of all applicable transfer
restrictions established by this Agreement, each certificate representing any
Shares subject to any such restriction shall bear the following legend
conspicuously:
TRANSFER OF THE SHARES EVIDENCED BY THIS CERTIFICATE IS
SUBJECT TO A SHAREHOLDER AGREEMENT, DATED AS OF [the date of
this agreement], BETWEEN THE CORPORATION AND THE ORIGINAL
HOLDER HEREOF. A COPY OF SAID AGREEMENT IS ON FILE IN THE
OFFICE OF THE CORPORATION, AND A COPY THEREOF WILL BE MAILED
TO THE HOLDER HEREOF WITHOUT CHARGE UPON RECEIPT OF A
WRITTEN REQUEST THEREFOR.
ARTICLE III
CO-SALE RIGHTS
3.1 Notice to Shareholder. In the event Mr. J.W. Stealey proposes, at any
time prior to the initial public offering (if any) of securities of the
Corporation, to accept any offer from any person or entity to purchase ten
percent (10%) or more of the shares of Class A Common Stock (or other securities
issued or deemed to be issued by the Corporation in respect thereof) of the
Corporation then owned by Mr. Stealey (or an affiliate of and controlled by Mr.
Stealey (other than the Corporation or any parent or subsidiary of the
Corporation)), Mr. Stealey (or the Corporation, acting at Mr. Stealey's
direction) shall provide to the Shareholder, at the Shareholder's address
specified on the signature page below or at such other address as the
Shareholder shall provide to the Corporation in writing specified to be for such
purpose, written notice of such proposal (a "Co-Sale Notice"), setting forth (a)
the number of securities proposed to be sold by Mr. Stealey (or such affiliate,
as the case may be), (b) the principal terms of the proposed sale, including the
price at which he intends to sell such securities, and (c) an offer to cause the
inclusion (as described below) of certain of the Shareholder's shares of Class A
Common Stock (or other securities issued or deemed to be issued by the
Corporation in respect thereof) received by the Shareholder pursuant to the
Merger Agreement (collectively,
5
<PAGE>
the Shareholder's "Co-Sale Securities"). The Co-Sale Notice shall not be
required to identify the proposed purchaser.
3.2 Right to Participate. In the event the Shareholder provides written
notice to Mr. Stealey (in care of the Corporation), within five (5) business
days after receipt of the corresponding Co-Sale Notice, of the Shareholder's
desire to participate in such proposed transaction, if consummated, Mr. Stealey
shall not consummate such transaction without causing the inclusion therein of
not less than (a) the integral number of the Shareholder's Co-Sale Securities
determined by multiplying the aggregate number of shares specified in the
Co-Sale notice by a fraction, the numerator of which shall be the number of
shares of Class A Common Stock (or other securities issued or deemed to be
issued by the Corporation in respect thereof) then owned by the Shareholder, and
the denominator of which shall be the aggregate number of shares of Class A
Common Stock (or such other securities) then owned by Mr. Stealey, the
Shareholder, and all other persons and entities who received shares of Class A
Common Stock pursuant to the Merger Agreement and desire to participate in the
proposed transaction on the basis of comparable rights set forth in their
respective Shareholder Agreements, or (b) such lesser integral number of the
Shareholder's Co-Sale Securities as the Shareholder shall request to be included
in such transaction.
3.3 Negotiation of Terms; Certain Limitations. Notwithstanding Section 3.2
above, Mr. Stealey shall not be required to include any of the Shareholder's
Co-Sale Securities in any such proposed transaction if the Shareholder fails or
refuses timely to: (a) cooperate reasonably in respect thereof, including by
providing appropriate share certificates duly endorsed for transfer, or (b)
agree to the final terms therefor negotiated by Mr. Stealey. The Shareholder
shall not be entitled to participate in the negotiation of any such proposed
transaction except with Mr. Stealey's consent, nor shall Mr. Stealey be required
(by virtue of this Agreement) to consummate any such proposed transaction. The
Shareholder's participation rights described in this Article III shall not apply
with respect to any transfer of securities by Mr. Stealey to the Corporation
pursuant to repurchase rights, if any, held by the Corporation, or to any pledge
or bona fide gift or other charitable transaction by Mr. Stealey.
ARTICLE IV
INDEMNIFICATION
The Shareholder hereby acknowledges the registration rights provided by the
Corporation pursuant to Section(s) 7.8 of the Merger Agreement (the
"Registration Rights"). With respect to any registration in connection
therewith, each Shareholder will, if Registrable Securities held by such
Shareholder are included in the securities as to which registration,
qualification or compliance is being effected pursuant to the Merger Agreement,
indemnify the Corporation, each of the Corporation's directors and officers,
each underwriter, if any, of the Corporation's securities covered by such
registration statement, each person who controls the Corporation or any such
underwriter within the meaning of Section 15 of the Act, and each other such
shareholder, each of the other such shareholders' officers and directors and
each person controlling such other shareholders within the meaning of Section 15
of the Act, against all claims, losses, 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
6
<PAGE>
make the statements therein not misleading, and will reimburse the Corporation,
such shareholders, such directors, officers, persons, underwriters or control
persons for any legal or any other expenses reasonably incurred in connection
with investigating or defending any such claim, loss, damage, liability or
action, in each case to the extent, but only to the extent, that such untrue
statement (or alleged untrue statement) or omission (or alleged omission) is
made in such registration statement, prospectus, offering circular or other
document in conformity with information furnished in writing to the Corporation
by or on behalf of the Shareholder expressly for use in such registration
statement, prospectus, offering circular or other document. Notwithstanding the
foregoing, the liability of the Shareholder under this Article IV shall be
limited to an amount equal to the public offering price of the shares sold by
such Shareholder, unless such liability arises out of or is based on willful
misconduct by such Shareholder.
ARTICLE V
MISCELLANEOUS.
5.1. Entire Agreement. This Agreement, together with the other Transaction
Documents and the other documents referred to herein or therein which form a
part hereof or thereof, contains the entire understanding of the parties hereto
with respect to the subject matter contained herein and therein. This Agreement
supersedes all prior agreements and understandings between the parties with
respect to such subject matter.
5.2. Amendments. This Agreement may be waived, amended, supplemented or
modified only by a written agreement executed by each of the parties hereto.
5.3. Severability. In case any provision in this Agreement shall be held
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions hereof will not in any way be affected or impaired
thereby.
5.4. Third Party Beneficiaries. Except as specifically set forth in this
Agreement to the contrary, each party hereto intends that this Agreement shall
not benefit or create any right or cause of action in or on behalf of any Person
other than the parties hereto.
5.5. Governing Law. The interpretation and construction of this Agreement,
and all matters relating hereto, shall be governed by the Laws of the State of
Maryland, without regard to the choice of law provisions thereof.
7
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
set forth below.
Date of Agreement: .
------------------------
INTERACTIVE MAGIC, INC.
By:
--------------------------------------
Name:
Title:
----------------------------------------
J. W. Stealey
(solely for purposes of Article III)
SHAREHOLDER
----------------------------------------
Signature
----------------------------------------
Name (printed)
PURCHASER REPRESENTATIVE (If applicable)
----------------------------------------
Signature
----------------------------------------
Name (printed)
Shareholder's Home Address:
----------------------------------------
----------------------------------------
----------------------------------------
Check One:
___ The Shareholder is an
Accredited Investor.
___ The Shareholder is not an
Accredited Investor.
Shares of ICI Common Stock owned: ----------------------------------------
Other ICI securities owned: ----------------------------------------
8
<PAGE>
EXHIBIT A TO SHAREHOLDER AGREEMENT
(a) Accredited investor. "Accredited investor" shall mean any person who
comes within any of the following categories, or who the issuer reasonably
believes comes within any of the following categories, at the time of the sale
of the securities to that person:
(1) Any bank as defined in section 3(a)(2) of the Act, or any savings and
loan association or other institution as defined in section 3(a)(5)(A) of the
Act whether acting in its individual or fiduciary capacity; any broker or dealer
registered pursuant to section 15 of the Securities Exchange Act of 1934; any
insurance company as defined in section 2(13) of the Act; any investment company
registered under the Investment Company Act of 1940 or a business development
company as defined in section 2(a)(48) of the Act; Small Business Investment
Company licensed by the U.S. Small Business Administration under section 301(c)
or (d) of the Small Business Investment Act of 1958; any plan established and
maintained by a state, its political subdivisions, or any agency or
instrumentality of a state or its political subdivisions for the benefit of its
employees, if such plan has total assets in excess of $5,000,000, employee
benefit plan within the meaning of the Employee Retirement Income Security Act
of 1974 if the investment decision is made by a plan fiduciary, as defined in
section 3(21) of such Act, which is either a bank, savings and loan association,
insurance company, or registered investment advisor, or if the employee benefit
plan has total assets in excess of $5,000,000 or, if a self-directed plan, with
investment decisions made solely by persons that are accredited investors;
(2) Any private business development company as defined in section
202(a)(22) of the Investment Advisors Act of 1940;
(3) Any organization described in Section 501(c)(3) of the Internal Revenue
Code, corporation, Massachusetts or similar business trust, or partnership, not
formed for the specific purpose of acquiring the securities offered, with total
assets in excess of $5,000,000;
(4) Any director, executive officer, or general partner of the issuer of
the securities being offered or sold, or any director, executive officer, or
general partner of a general partner of that issuer;
(5) Any natural person whose individual net worth, or joint net worth with
that person's spouse, at the time of his purchase exceeds $1,000,000;
(6) Any natural person who had an individual income in excess of $200,000
in each of the two most recent years or joint income with that person's spouse
in excess of $300,000 in each of those years and has a reasonable expectation of
reaching the same income level in the current year;
(7) Any trust, with total assets in excess of $5,000,000, not formed for
the specific purpose of acquiring the securities offered, whose purchase is
directed by a sophisticated person as described in ss. 230.506(b)(2)(ii); and
(8) Any entity in which all of the equity owners are accredited
investors.
9
NEITHER THIS WARRANT NOR THE SHARES OF STOCK ISSUABLE UPON EXERCISE HEREOF HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND
NONE OF THE FOREGOING MAY BE SOLD, ASSIGNED OR TRANSFERRED EXCEPT (i) PURSUANT
TO A REGISTRATION STATEMENT UNDER THE ACT THAT HAS BECOME EFFECTIVE AND THAT IS
CURRENT WITH RESPECT THERETO, OR (ii) PURSUANT TO A SPECIFIC EXEMPTION FROM
REGISTRATION UNDER THE ACT, BUT ONLY IF THE HOLDER HEREOF FIRST HAS OBTAINED THE
WRITTEN OPINION OF COUNSEL TO THE COMPANY OR THE WRITTEN OPINION OF OTHER
COUNSEL (WHICH COUNSEL AND OPINION (IN FORM AND SUBSTANCE) SHALL BE REASONABLY
SATISFACTORY TO THE COMPANY) THAT THE PROPOSED DISPOSITION COMPLIES WITH ALL
APPLICABLE PROVISIONS OF THE ACT AND ANY AND ALL APPLICABLE "BLUE SKY" OR
SIMILAR SECURITIES LAWS.
_______________, 199__
WARRANT TO PURCHASE SHARES OF
CLASS A COMMON STOCK OF
INTERACTIVE MAGIC, INC.
THIS CERTIFIES THAT for value received, ________________________ (together
with [his] permitted successors and assigns, the "Holder") is entitled to
subscribe for and purchase ______________________ fully paid and non-assessable
shares (as adjusted pursuant to the provisions hereof, the "Shares") of Class A
Common Stock, par value $0.10 per share, of Interactive Magic, Inc., a Maryland
corporation (the "Company"), at an exercise price per share of $______ (such
exercise price, as adjusted from time to time pursuant to the provisions hereof,
the "Exercise Price"), subject to the provisions and upon the terms and
conditions set forth herein.
1. Term. This Warrant is exercisable at any time after ___________________
and prior to ___________________ (the "Exercise Period").
2. Exercise of Warrant.
2.1 This Warrant is exercisable at the option of the Holder hereof, in
whole or in part (but not as to fractional Shares), at any time and from
time to time during the Exercise Period by the surrender hereof (with the
annexed Subscription Form duly executed) at the principal office of the
Company, together with payment to the Company, in cash or by certified or
official bank check, of an amount equal to the Exercise Price multiplied by
the number of Shares then being purchased. Upon the purchase of less than
all of the Shares purchasable hereunder, the Company shall cancel this
Warrant upon the surrender hereof and shall execute and deliver to the
Holder hereof a new Warrant of like tenor for the balance of the Shares
purchasable hereunder.
2.2 In lieu of exercising this Warrant pursuant to Section 2.1 above,
the Company may permit the Holder to convert any then-existing rights to
purchase Class A Common Stock pursuant to this Warrant, in whole or in part
(but not as to fractional Shares), at any time and from time to time during
the Exercise Period into Shares (the "Conversion Right"), upon delivery of
written notice of intent to convert to the Company at the principal office
of the Company, together with this Warrant. Upon exercise of the Conversion
Right, the Company shall deliver to the Holder (without payment by the
1
<PAGE>
Holder of any Exercise Price) that number of Shares which is equal to the
quotient obtained by dividing (x) the value of the number of Shares with
respect to which the Conversion Right is being exercised (determined by
subtracting the aggregate Exercise Price for the Shares with respect to
which the Conversion Right is being exercised from a number equal to the
product of (i) the fair market value per Share as at such time, and (ii)
the number of Shares with respect to which the Conversion Right is being
exercised) by (y) the fair market value per Share. Any references in this
Warrant to the "exercise" of this Warrant, and the use of the term exercise
herein, shall be deemed to include (without limitation) any exercise of the
Conversion Right.
3. Issuance of Certificates. Upon the exercise of this Warrant, the
issuance of certificates for Shares underlying this Warrant shall be made
promptly without charge to the Holder hereof, and such certificates shall be
issued (subject to the provisions of Section 4 hereof) in the name of, or in
such names as may be directed by, the Holder hereof; provided, however, that the
Company shall not be required to pay any tax which may be payable in respect of
any transfer involved in the issuance and delivery of any such certificates in a
name other than that of the Holder, and the Company shall not be required to
issue or deliver such certificates unless or until the person or persons
requesting the issuance thereof shall have paid to the Company the amount of
such tax or shall have established to the satisfaction of the Company that such
tax has been paid. The person or persons in whose name(s) any certificate(s)
representing Shares shall be issued upon exercise hereof shall be deemed to have
become the holder(s) of record of, and shall be treated for all purposes as the
record holder(s) of, the Shares represented thereby, and such Shares shall be
deemed to have been issued, immediately prior to the close of business on the
date(s) upon which this Warrant is exercised.
4. Restrictions on Exercise and Transfer.
4.1 Exercise. The Company may reject any exercise of this Warrant if
the Company determines that the issuance of Shares upon such exercise or
the method of payment of consideration for such shares would constitute a
violation of any applicable securities or other law or regulation. As a
condition to the exercise of the Warrant, the Company may require the
Holder to make any representation and warranty to the Company as may be
required by any applicable law or regulation.
4.2 Holder's Intent. The Holder of this Warrant, by acceptance hereof,
represents and warrants to the Company that such Holder is acquiring this
Warrant and the Shares for investment for the Holder's own account and not
with a view to, or for resale in connection with, any distribution thereof.
4.3 Transfer. Neither this Warrant nor the Shares have been registered
under the Securities Act of 1933, as amended (the "Act"), and none of the
foregoing may be sold or transferred in whole or in part unless the Holder
shall have first given notice to the Company describing such sale or
transfer and furnished to the Company an opinion of counsel (which counsel
and opinion (in form and substance) shall be reasonably satisfactory to the
Company) to the effect that the proposed sale or transfer may be made
without registration under the Act; provided, however, that the foregoing
transfer restriction shall not apply if there is in effect a registration
statement with respect to this Warrant or the Shares, as the case may be,
at the time of the proposed sale or transfer. Each certificate representing
Shares purchased hereunder shall bear a legend to the foregoing effect.
5. Adjustment. The Purchase Price and the number of Shares purchasable
hereunder shall be adjusted as set forth in this Section 5 with the intent that
the rights of the Holder to exercise the
2
<PAGE>
Warrant shall not be impaired. For purposes of this Section 5, "Original Issue
Date" shall mean the date hereof.
5.1 Subdivision or Combination of Class A Common Stock.
(1) Subdivision. In the event that the Company at any time or
from time to time after the Original Issue Date shall declare or pay
any dividend on the shares of Class A Common Stock payable in shares
of Class A Common Stock or in any right to acquire shares of Class A
Common Stock, or shall effect a subdivision of the outstanding shares
of Class A Common Stock into a greater number of shares of Class A
Common Stock (by stock split, reclassification or otherwise), then the
Exercise Price in effect immediately prior to such event shall,
concurrently with the effectiveness of such event, be decreased
proportionately.
(2) Combination. In the event that at any time or from time to
time after the Original Issue Date the outstanding shares of Class A
Common Stock shall be combined or consolidated into a lesser number of
shares of Class A Common Stock (by reclassification or otherwise),
then the Exercise Price in effect immediately prior to such event
shall, concurrently with the effectiveness of such event, be increased
proportionately.
5.2 Reclassification, Exchange or Substitution. In the event of any
reorganization or any reclassification of the capital stock of the Company,
any consolidation or merger of the Company with or into another entity or
entities or the conveyance of all or substantially all of the Company's
assets to another entity (except for any such transaction that is treated
as a liquidation, dissolution or winding up of the Company), this Warrant
shall thereafter be exercisable for the number of shares of stock or other
securities or property (including cash) to which a holder of the number of
remaining Shares purchasable hereunder would have been entitled upon the
record date of (or date of, if no record date is fixed) such
reorganization, reclassification, consolidation, merger or conveyance; and,
in any case, appropriate adjustment (as determined by the Board of
Directors) shall be made in the application of the provisions herein set
forth with respect to the rights and interests thereafter of the Holder of
this Warrant to the end that the provisions set forth herein shall
thereafter be applicable, as nearly as equivalent as is practicable, in
relation to any shares of stock or the securities or property (including
cash) thereafter deliverable upon the exercise of this Warrant.
5.3 Number of Shares Purchasable Hereunder. Upon each adjustment of
the Exercise Price pursuant to the provisions of this Section 5, the number
of Shares purchasable upon the exercise hereof shall be adjusted to the
nearest whole number of Shares calculated by multiplying the Exercise Price
in effect immediately prior to such adjustment by the number of Shares
purchasable upon the exercise hereof immediately prior to such adjustment
and dividing the product so obtained by the Exercise Price in effect
immediately after such adjustment.
5.4 Certificate. Upon the occurrence of each adjustment or
readjustment of the Exercise Price and the number of Shares purchasable
hereunder pursuant to this Section 5, the Company at its expense promptly
shall compute such adjustments or readjustments in accordance with the
terms hereof, and the Company shall prepare and furnish to the Holder
hereof a certificate setting forth such adjustments or readjustments and
showing in detail the facts upon which such adjustments or readjustments
are based. The Company shall, upon the written request at any time of the
Holder, furnish or cause to be furnished to such Holder a like certificate
setting forth (i) such adjustments and readjustments, (ii) the applicable
Exercise Price at the time in effect, and (iii) the number of Shares and
the amount, if any, of other property that at the time would be received
upon the exercise hereof.
3
<PAGE>
6. Exchange and Replacement of Certificate.
6.1 This Warrant is exchangeable without expense, upon the surrender
hereof by the registered Holder at the principal office of the Company, for
a new Warrant of like tenor and date representing in the aggregate the
right to purchase the same number of Shares as are purchasable hereunder in
such denominations as shall be designated by the Holder hereof at the time
of such surrender.
6.2 Upon receipt by the Company of evidence reasonably satisfactory to
the Company of the loss, theft, destruction or mutilation of this Warrant,
and, in case of loss, theft or destruction, of indemnity or security
reasonably satisfactory to the Company, and reimbursement and cancellation
of this Warrant, if mutilated, the Company will make and deliver a new
Warrant of like tenor, in lieu of this Warrant.
7. Elimination of Fractional Interests. The Company shall not be required
to issue certificates representing fractions of Shares on the exercise of this
Warrant, nor shall it be required to issue scrip or pay cash in lieu of
fractional interests, it being the intent of the parties that all fractional
interests shall be eliminated.
8. Withholding Taxes.
8.1 Whenever Shares are to be issued upon the exercise of this
Warrant, the Company shall have the right to require the Holder to remit to
the Company in cash an amount sufficient to satisfy U.S. federal, state and
local withholding tax requirements, if any, prior to the delivery of any
certificate or certificates for such Shares.
8.2 Notwithstanding Section 8.1, at the election of a Holder, subject
to the approval of the Board of Directors of the Company, when Shares are
to be issued upon the exercise of this Warrant, the Holder may tender to
the Company a number of Shares, or the Company shall withhold a number of
such Shares, the fair market value of which is sufficient to satisfy the
tax requirements, if any, attributable to such exercise or occurrence.
9. Reservation of Securities. The Company shall at all times reserve and
keep available out of its authorized but unissued shares of Class A Common
Stock, solely for the purpose of issuance upon the exercise of this Warrant,
such number of shares of Class A Common Stock as shall be issuable upon the
exercise hereof. The Company covenants and agrees that, upon exercise of this
Warrant and payment of the Exercise Price therefor, all Shares issuable upon
such exercise shall be duly and validly issued, fully paid and non-assessable.
10. No Rights as Stockholders. Nothing contained in this Warrant confers or
shall be construed as conferring upon the Holder hereof the right to vote or to
consent or to receive notice as a stockholder in respect of any meetings of
stockholders for the election of directors or any other matter, or as having any
rights whatsoever as a stockholder of the Company.
11. Notices. All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been duly made when
delivered, when sent by a nationally recognized overnight courier or when mailed
by registered or certified mail, return receipt requested:
4
<PAGE>
(a) If to the registered Holder of this Warrant, to the address of
such Holder as shown on the books of the Company; or
(b) If to the Company, to 215 Southport Drive, Suite 1000,
Morrisville, North Carolina 27560 or to such other address as the Company
may designate by notice to the Holder.
12. Successors. All of the covenants, agreements, representations and
warranties contained in this Warrant shall bind the parties hereto and their
respective heirs, executors, administrators, distributees, successors and
assigns.
13. Headings. The headings in this Warrant are intended for convenience
only and shall have no substantive effect.
14. Law Governing. This Warrant shall be construed and enforced in
accordance with, and governed by, the laws of the State of North Carolina,
without giving effect to conflict of law principles.
15. Amendment. The provisions of this Warrant may only be waived, amended,
supplemented or modified (either prospectively or retroactively) by a written
agreement signed by the Company and the Holder.
INTERACTIVE MAGIC, INC.
By:
-------------------------------
Robert L. Pickens, President
5
<PAGE>
SUBSCRIPTION FORM
(To be Executed by the Registered Holder upon Exercise hereof)
The undersigned hereby irrevocably elects to exercise the right to purchase
______________ Shares pursuant to this Warrant and according to the conditions
hereof, and herewith makes payment of the Exercise Price of such Shares in full
in the manner prescribed herein.
___________________________________
Signature
___________________________________
Name (printed)
Date: ___________, 19__ ___________________________________
Social Security Number or
Taxpayer's Identification Number
6
CORPORATE AIRPLANE AGREEMENT
This agreement is to establish the boundaries and commitments between J. W.
Stealey, hereafter known as the Pilot, and Interactive Magic, hereafter known as
the Sponsor. In both parties signing this agreement, it is understood that the
Sponsor will be responsible for all relative expenses for the maintenance of the
Pilot's aircraft, a North American T-28 Trojan. These expenses shall include,
but are not limited to, the following:
-Local hangar rental
-All fuel
-Necessary mechanical updates such as navigational software and maps
-Parachute repacking and/or purchase
-All necessary schooling/training required to keep Pilot current with
skills
-New nose art for aircraft reflecting the Sponsor's logo
-All expenses related to participation in airshows such as the
Warbirds Show held annually in Oshkosh, Wisconsin.
-Annual inspections
The sponsor should note that FAA regulations and general wear and tear require
engine replacement after 900 flying hours. The current expense to do this is
approximately $40,000. At the time of the signing of this contract, the Pilot's
aircraft has accrued 350 hours of flight time, leaving 550 remaining until
replacement is neccessary. The Sponsor should either establish a reserve account
for this purpose, or simply be prepared to pay for the work when it is done. In
the event that this contract is cancelled before replacement occurs, the Sponsor
will pay the Pilot one lump sum in the amount corresponding to the number of
flight hours accrued during the life of the contract. This sum will be paid at
the rate of $100 per flying hour.
The Pilot, in turn, shall make sure the aircraft is always in top shape and
properly maintained. The Pilot will maintain currency in his piloting skills. He
will also provide rides to key public relations contacts and various other VIPs
as requested.
This contract should be considered open ended, until the Pilot is no longer
associated with the Sponsor in a business relationship.
/s/ Robert L. Pickens 1/3/95
- ------------------------------- Date
Sponsor Representative
/s/ J. W. Stealey 1/3/95
- ------------------------------- Date
Pilot
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT (the "Agreement"), dated as of the 24th
day of March, 1997, is made and entered into on the terms and conditions
hereinafter set forth, by and between INTERACTIVE MAGIC, INC., a Maryland
corporation ("Borrower"), and PETRA CAPITAL, LLC, a Georgia limited liability
company ("Lender").
RECITALS:
Borrower has requested that Lender make available to Borrower a loan in the
amount of Three Million and No/100 Dollars ($3,000,000.00), upon the terms and
conditions hereinafter set forth, and for the purposes hereinafter set forth
(the "Loan").
NOW, THEREFORE, in consideration of the agreement of Lender to make the
Loan, the mutual covenants and agreements hereinafter set forth, and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Borrower and Lender hereby agree as follows:
ARTICLE 1 - THE LOAN
1.1 Evidence of Loan Indebtedness and Repayment. Subject to the terms and
conditions set forth herein, Lender hereby agrees to make the Loan to Borrower.
The Loan shall be evidenced by a Secured Promissory Note substantially in the
form attached hereto as Exhibit A (the "Note"), executed by Borrower in favor of
Lender. The Loan shall be in the original principal amount indicated in the
Note, shall be payable in accordance with the terms of the Note, and shall be
prepayable at any time without penalty or premium. The proceeds of the Loan
shall be disbursed by Lender on the date hereof (the "Closing Date") by wire
transfer of immediately available funds in accordance with the written
instructions of Borrower.
1.2 Processing Fee. In connection with the making of the Loan, Borrower
shall pay to Lender a processing fee in the amount of $60,000 (the "Processing
Fee"). Lender hereby acknowledges that Borrower has prepaid one-half (1/2) of
the Processing Fee ($30,000). The balance of the Processing Fee is due and
payable on the Closing Date, and Borrower hereby authorizes and directs Lender
to deduct and retain for its account the sum of $30,000 as payment of the
outstanding balance of the Processing Fee.
1.3 Stock Purchase Warrants. In consideration for Lender's entering into
this Agreement and for making the Loan contemplated herein, Borrower shall
deliver to Lender a
1
<PAGE>
Stock Purchase Warrant substantially in the form attached hereto as Exhibit B
(the "Warrant"), executed by Borrower in favor of Lender.
1.4 Investment Representations. Lender represents and warrants that it is
purchasing the Warrant and any shares of common stock issuable upon exercise of
the Warrant for its own account, for investment purposes and not with a view to
the distribution thereof. The foregoing representations and warranties shall not
be construed as imposing any limitation on Lender's right to transfer the
Warrant or any of the shares of common stock issuable upon the exercise of the
Warrant that is not otherwise expressly set forth herein or in the Warrant or
required under applicable law.
1.5 Subordination. The obligations evidenced by the Note shall be
subordinate to "Senior Debt", as such term is defined in each of the
Subordination Agreements in the form attached hereto as Exhibits C-1 and C-2
(the "Subordination Agreements").
ARTICLE 2 - SECURITY
2.1 Security. As security for the Secured Obligations (as defined in
Section 2.2), Borrower hereby grants to Lender a security interest in the
following described property, and any and all proceeds and products thereof
(collectively, the "Collateral"):
(a) Equipment. All machinery and equipment, all data processing and
office equipment, all computer equipment, hardware, firmware and software,
all furniture, fixtures, appliances and all other goods of every type and
description, whether now owned or hereafter acquired and wherever located,
together with all parts, accessories and attachments and all replacements
thereof and additions thereto; and
(b) Inventory. All inventory and goods, whether held for lease, sale
or furnishing under contracts of service, all agreements for lease of same
and rentals therefrom, whether now in existence or owned or hereafter
acquired and wherever located; and
(c) General Intangibles. All rights, interests, choses in action,
causes of action, claims and all other intangible property of every kind
and nature, in each instance whether now owned or hereafter acquired but
not limited to, all corporate and business records; all loans, royalties,
and other obligations receivable; all trade secrets, inventions, designs,
patents, patent applications, registered or unregistered service marks,
trade names, trademarks, copyrights and the goodwill associated therewith
and incorporated therein, and all registrations and applications for
registration related thereto; all goodwill, licenses, permits, franchises,
customer lists and credit files; all customer and supplier contracts, firm
sale orders, rights under license and franchise agreements, and other
contracts and contract rights; all right, title and interest under leases,
subleases, licenses and concessions and other agreements relating to real
or personal
2
<PAGE>
property and any security agreements relating thereto; all rights to
indemnification; all proceeds of insurance of which Borrower is
beneficiary; all letters of credit, guarantees, liens, security interests
and other security held by or granted to Borrower; and all other intangible
property, whether or not similar to the foregoing; and
(d) Accounts, Chattel Paper, Instruments and Documents. All accounts,
accounts receivable, chattel paper, instruments and documents, whether now
in existence or owned or hereafter acquired, entered into, created or
arising, and wherever located; and
(e) Other Property. All other personal property or interests in
property now owned or hereafter acquired.
2.2 Secured Obligations. Without limiting any of the provisions thereof,
the Security Instruments (as defined in Section 2.3) shall secure the following
indebtedness and other obligations (the "Secured Obligations"):
(a) the full and timely payment of the indebtedness evidenced by the
Note, together with interest thereon, and any extensions, modifications,
consolidations or renewals thereof, and any notes given in payment thereof;
(b) the full and prompt performance of all of the obligations of
Borrower to Lender under the Loan Documents (as defined in Section 2.3) to
which Borrower is a party; and
(c) the full and prompt payment of all court costs and other
reasonable costs and expenses of whatever kind incident to the collection
of the indebtedness evidenced by the Note, the enforcement or protection of
the security interests of the Security Instruments or the exercise of any
rights or remedies of Lender with respect to the indebtedness evidenced by
the Note, including without limitation the reasonable attorney and
paralegal fees and costs incurred by Lender, all of which Borrower agrees
to pay to Lender upon demand.
2.3 Security Instruments. The Secured Obligations shall be further secured
by the Trademark and Patent Security Agreement in substantially the form
attached hereto as Exhibit D (the "Trademark and Patent Security Agreement").
This Agreement, the Trademark and Patent Security Agreement, and any other
instruments, documents or agreements now or hereafter securing the Secured
Obligations are herein collectively referred to as the "Security Instruments".
The Security Instruments, together with the Note and any other instruments and
documents now or hereafter evidencing, securing or in any way related to the
indebtedness evidenced by the Note are herein individually referred to as a
"Loan Document" and collectively referred to as the "Loan Documents".
3
<PAGE>
ARTICLE 3 - REPRESENTATIONS AND WARRANTIES OF BORROWER
Borrower hereby represents and warrants to Lender as follows:
3.1 Corporate Status.
(a) Borrower is a corporation duly organized, validly existing and in
good standing under the laws of the State of Maryland, and has the
corporate power to own and operate its properties, to carry on its business
as now conducted and to enter into and to perform its obligations under
this Agreement and the other Loan Documents to which it is a party.
Borrower is duly qualified to do business and is in good standing in each
state or other jurisdiction in which a failure to be so qualified could
give rise to a Material Adverse Event, as hereinafter defined. The states
or other jurisdictions in which Borrower is so qualified are set forth on
Schedule 3.1(a). For purposes of this Agreement, "Material Adverse Event"
means any event or circumstance, or set of events or circumstances,
individually or collectively, that reasonably could be expected to result
in (i) an adverse effect upon the validity or enforceability of any Loan
Document or (ii) a material and adverse effect on the condition (financial
or otherwise), business, operations, properties or prospects of Borrower.
(b) Except as set forth on Schedule 3.1(b), Borrower does not own,
directly or indirectly, any capital stock or other equity interest of any
corporation, partnership, joint venture, limited liability company or other
business organization in which Borrower holds or owns, directly or
indirectly, 50% or more of the outstanding shares of capital stock or other
equity interest having ordinary voting power for the election of directors
(or others performing similar functions) or, in the case of a partnership,
joint venture, limited liability company or similar entity, which has the
power, directly or indirectly, to effect the management or policies thereof
(any such corporation, partnership, joint venture, limited liability
company or other business organization, a "Subsidiary").
(c) The authorized capital stock of Borrower consists solely of
25,000,000 shares of common stock, $ 0.10 par value, of which 5,158,614
shares (the "Shares") are issued and outstanding in the following amounts,
and to the following shareholders:
- --------------------------------------------------------------------------------
Shareholders # of Shares % Ownership
- --------------------------------------------------------------------------------
John W. Stealey 4,688,000 90.88
- --------------------------------------------------------------------------------
Southeast Interactive 165,114 3.20
- --------------------------------------------------------------------------------
Robert L. Pickens 120,000 2.33
- --------------------------------------------------------------------------------
Jeffrey G. Stealey 72,000 1.40
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
Shareholders # of Shares % Ownership
- --------------------------------------------------------------------------------
Raymond E. Rutledge 50,000 0.97
- --------------------------------------------------------------------------------
William J. Kaluza 40,000 0.76
- --------------------------------------------------------------------------------
Joseph F. Rutledge 10,000 0.19
Bruce C. Milligan 6,000 0.12
- --------------------------------------------------------------------------------
Jeffrey A. Gosztyla 5,000 0.10
- --------------------------------------------------------------------------------
Anne C. Sprague 2,500 0.05
- --------------------------------------------------------------------------------
TOTAL 5,158,614 100%
- --------------------------------------------------------------------------------
In addition, there are 3,490,548 shares of such common stock reserved for
issuance upon exercise of the Warrant and the Additional Warrants; provided
that the number of shares so reserved shall be increased in accordance with
the terms of the Warrant and the Additional Warrants. Except for the
Shares, there are no shares of capital stock or other securities of
Borrower issued or outstanding. Except as specified in Schedule 3.1(c),
there are no outstanding options, warrants or rights to purchase or acquire
from Borrower any securities of Borrower, and there are no contracts,
commitments, agreements, understandings, arrangements or restrictions
relating to any shares of capital stock or other securities of Borrower,
whether or not outstanding, to which Borrower is a party or by which it is
bound or, to the best knowledge of Borrower, to which any of its
shareholders is a party or by which any such shareholder is bound. All of
the Shares are validly issued, fully paid and non-assessable and were not
issued in violation of any preemptive rights, rights of first refusal,
anti-dilution rights or any similar rights held by any party. Borrower has
not violated any federal or state securities laws in connection with the
issuance of any securities.
(d) The issuance of the Warrant has been duly authorized and, upon
delivery to Lender, will be validly issued, fully paid and nonassessable,
free and clear of all liens and other encumbrances. Except as set forth in
Schedule 3.1(d), there are no statutory or contractual preemptive rights,
rights of first refusal, anti-dilution rights or any similar rights held by
any party with respect to the issuance of the Warrant or the issuance of
common stock upon exercise of the Warrant. The issuance of shares of common
stock upon exercise of the Warrant has been duly authorized and, when
issued upon exercise of the Warrant in accordance with the terms thereof,
such shares of common stock will be validly issued, fully paid and
nonassessable. The offer, sale and issuance of the Warrant do not require
registration under the Securities Act of 1933, as amended, or any
applicable state securities laws.
3.2 Authorization. Borrower has full legal right, power and authority to
enter into and perform its obligations under the Loan Documents, without the
consent or approval of any
5
<PAGE>
other person, firm, governmental agency or other legal entity, other than
consents listed on Schedule 3.2, which consents have previously been obtained.
Borrower has all necessary right, power and authority to grant to Lender a valid
and enforceable security interest in the Collateral. The execution and delivery
of this Agreement, the borrowing hereunder, the execution and delivery of each
Loan Document to which Borrower is a party, and the performance by Borrower of
its obligations hereunder and thereunder are within the corporate powers of
Borrower and have been duly authorized by all necessary corporate action
properly taken, have received all necessary governmental approvals, if any were
required, and do not and will not contravene or conflict with the articles of
incorporation or bylaws of Borrower or any material agreement binding upon
Borrower or its properties or any provision of law, any applicable judgment,
ordinance, regulation or order of any court or governmental agency. The
officer(s) executing this Agreement, the Note and all of the other Loan
Documents to which Borrower is a party, are duly authorized to act on behalf of
Borrower.
3.3 Validity and Binding Effect. This Agreement and the other Loan
Documents are the legal, valid and binding obligations of Borrower, enforceable
in accordance with their respective terms, subject to limitations imposed by
bankruptcy, insolvency, moratorium, or similar laws or provisions affecting the
rights of creditors generally and further subject to the discretion of the court
in the exercise of equitable remedies.
3.4 Priority of Liens; Title to Property. Except as disclosed on Schedule
3.4, there are no outstanding loans, liens, pledges, security interests,
agreements or other financings which provide any third person with a lien
against any of the collateral securing the Secured Obligations, whether such
collateral is pledged pursuant to this Agreement or any other Security
Instruments. Borrower has good and marketable title to all of its real and
personal property, free and clear of any and all claims, liens, encumbrances,
equities and restrictions of every kind and nature whatsoever, except as
disclosed on Schedule 3.4.
3.5 Location of Collateral. The records with respect to all intangible
personal property constituting the collateral security for the Secured
Obligations are maintained at one or more of the addresses set forth on Schedule
3.5. None of the Collateral comprised of tangible personal property is located
at any address other than at one of the addresses set forth on Schedule 3.5.
3.6 Litigation. Except as set forth on Schedule 3.6, there are no actions,
suits or proceedings pending, or, to the knowledge of Borrower, threatened,
against or affecting Borrower or involving the validity or enforceability of any
of the Loan Documents or the priority of the liens thereof, at law or in equity,
or before any governmental or administrative agency, except actions, suits and
proceedings that are fully covered by insurance and that, if adversely
determined, would not impair materially the ability of Borrower to perform each
and every one of its obligations under and by virtue of the Loan Documents; and
to Borrower's knowledge, Borrower is not in default with respect to any order,
writ, injunction, decree or demand of any court or any governmental authority.
6
<PAGE>
3.7 Financial Statements. The financial statements of Borrower heretofore
delivered to Lender are true and correct in all material respects, have been
prepared on the basis of generally accepted accounting principles ("GAAP")
consistently applied (except that the unaudited financial statements do not
include footnotes and are subject to normal year-end adjustments), and fairly
present the financial condition of the subjects thereof as of the date(s)
thereof. No material adverse change has occurred in the condition (financial or
otherwise), business, operations, properties or, to the best of Borrower's
knowledge, prospects of Borrower since the date(s) thereof, and no additional
Debt as defined in Section 4.4 has been incurred by Borrower since the date(s)
thereof.
3.8 No Defaults. Consummation of the transactions hereby contemplated and
the performance of the obligations of Borrower under and by virtue of the Loan
Documents will not result in any breach of, or constitute a default under, the
charter documents or bylaws of Borrower or any mortgage, security deed or
agreement, deed of trust, lease, loan or credit agreement, partnership
agreement, license, franchise or any other material instrument or agreement to
which Borrower is a party or by which Borrower or its properties may be bound
or, to the knowledge of Borrower, affected.
3.9 Compliance With Law. Borrower is in compliance with all laws,
regulations, decrees and orders applicable to it (including but not limited to
laws, regulations, decrees and orders relating to environmental, occupational
and health standards and controls, antitrust, monopoly, restraint of trade or
unfair competition).
3.10 Environmental Matters. Borrower has no actual knowledge of (i) the
presence of any Hazardous Substances (as defined below) on any property owned,
leased or otherwise controlled by Borrower (collectively, the "Property"); (ii)
any spills, releases, discharges, or disposal of Hazardous Substances that have
occurred or are presently occurring on or onto any of the Property; (iii) the
presence on any of the Property of underground or above-ground storage tanks or
pipelines which are required to be licensed by any local, state or federal
agency; (iv) any spills or disposal of Hazardous Substances that have occurred
or are occurring off the Property as a result of any construction on or
operation and use of the Property; (v) any failure by Borrower to comply with
any Applicable Environmental Laws (as defined below); (vi) any notices related
to Borrower or any of the Property claiming a violation of any Applicable
Environmental Laws, or the commencement of any action or proceeding against
Borrower or related to any of the Property alleging a violation of Applicable
Environmental Laws; (vii) any notices related to Borrower or any of the Property
requiring compliance with Applicable Environmental Laws, or demanding payment or
contribution for injury to the environment or human health; or (viii) any
outstanding notices or citations relating to violations by any former owner or
operator of any of the Property. For the purposes of this Agreement, "Hazardous
Substances" means any substance or material defined or designated as a hazardous
or toxic waste, material or substance, or other similar term, by any federal,
state, or local environmental statute, regulation, or ordinance presently in
effect, including, without limitation, asbestos in any form, urea formaldehyde
foam
7
<PAGE>
insulation, petroleum products, and polychlorinated biphenyls. For the purposes
of this Agreement, "Applicable Environmental Laws" means any and all applicable
local, state, and federal environmental laws, regulations, ordinances, and
administrative and judicial orders relating to the generation, recycling, reuse,
sale, storage, handling, transport, or disposal of any Hazardous Substances.
3.11 Taxes. Borrower has filed or caused to be filed all tax returns
required to be filed (except for returns that have been appropriately extended),
and has paid all taxes shown to be due and payable on said returns and all other
taxes, impositions, assessments, fees or other charges imposed on it by any
governmental authority, agency or instrumentality, prior to any delinquency with
respect thereto (other than taxes, impositions, assessments, fees and charges
currently being contested in good faith by appropriate proceedings, for which
appropriate amounts have been reserved). No tax liens have been filed against
Borrower or any of its properties.
3.12 Certain Transactions. Except as set forth on Schedule 3.12(a), (i)
Borrower is not indebted, directly or indirectly, to any of its respective
officers or directors, or to their respective spouses or children, and (ii) none
of said officers or directors or any members of their immediate families are
indebted to Borrower or have any direct or indirect ownership interest in any
firm or corporation with which Borrower is affiliated or with which Borrower has
a business relationship, or any firm or corporation which competes with
Borrower, except that officers and directors of Borrower may own no more than 1%
of the outstanding stock of any publicly traded company which competes directly
with Borrower. Except as set forth on Schedule 3.12(b), no officer or director
or any member of their immediate families is, directly or indirectly, interested
in any material contract with Borrower and each such contract has been fully
disclosed to and approved by the Board of Directors of Borrower and is on arm's
length terms. Except as set forth on Schedule 3.12(c), Borrower is not a
guarantor or indemnitor of any indebtedness of any other person, firm or
corporation.
3.13 Intellectual Property. Borrower is the lawful owner of or has the
lawful right to use all of its proprietary information free and clear of any
claim, right, trademark, patent or copyright protection of any third party. As
used herein, "proprietary information" includes without limitation (i) any
computer software and related documentation, inventions, technical data and
nontechnical data related thereto, and (ii) other documentation, inventions and
data related to patterns, plans, methods, techniques, drawings, finances,
customer lists, suppliers, products, special pricing and cost information,
designs, processes, procedures, formulas, research data owned or used by
Borrower or marketing studies conducted by Borrower, all of which is
commercially important and competitively sensitive and which generally has not
been disclosed to third parties other than customers in the ordinary course of
business. Borrower has good and valid title to or has a valid and subsisting
license to use all patents, trademarks, trade names, service marks, copyrights
or other intangible property rights, and registrations or applications for
registration thereof, owned by Borrower or used or required by Borrower in the
operation of its business as presently being conducted. To the actual knowledge
of Borrower, there is no
8
<PAGE>
infringement or conflict with rights of others with respect to copyrights,
patents, trademarks, service marks, trade names, trade secrets or other
intangible property rights or know-how utilized by Borrower. To the actual
knowledge of Borrower, no products or processes of Borrower infringe or conflict
with any rights of patent or copyright, or any discovery, invention, product or
process, that is the subject of a patent or copyright application or
registration. Borrower follows such procedures as are necessary or appropriate
to provide reasonable protection of Borrower's trade secrets and proprietary
rights in intellectual property of all kinds. To the actual knowledge of
Borrower, no person employed by or affiliated with Borrower has employed or
proposes to employ any trade secret or any information or documentation
proprietary to any former employer and, to the knowledge of Borrower, no person
employed by or affiliated with Borrower has violated any confidential
relationship that such person may have had with any third person, in connection
with the development, manufacture, sale or lease of any product or proposed
product or the development or sale of any service or proposed service of
Borrower.
3.14 Regulatory Compliance. Borrower possesses all licenses, permits and
other authorizations from federal, state or local regulatory bodies necessary
for the conduct of its business and for the ownership, maintenance and operation
of its properties and assets. All such licenses, permits and authorizations are
in full force and effect.
3.15 ERISA. With respect to the Employee Retirement Income Security Act of
1974, as amended from time to time, and the regulations promulgated and rulings
issued thereunder ("ERISA"):
(a) Plans. Schedule 3.15 sets forth any and all "employee benefit
plans" maintained by or on behalf of Borrower or any ERISA Affiliate as
defined in Section 3(3) of ERISA (a "Plan"), including, but not limited to,
any defined benefit pension plan, profit sharing plan, money purchase
pension plan, savings or thrift plan, stock bonus plan, employee stock
ownership plan, Multiemployer Plan, or any plan, fund, program, arrangement
or practice providing for medical (including post-retirement medical),
hospitalization, accident, sickness, disability, or life insurance
benefits. For purposes of this Agreement, "ERISA Affiliate" shall mean each
trade or business (whether or not incorporated) which, together with
Borrower, is treated as a single employer under Section 414(b), (c), (m) or
(o) of the Internal Revenue Code of 1986, as amended from time to time, and
the regulations promulgated and the rulings issued thereunder (the "Code");
and "Multiemployer Plan" shall mean a "multiemployer plan" as defined in
Section 4001(a)(3) of ERISA. Neither Borrower nor any ERISA Affiliate
maintains or contributes to, or has maintained or contributed to, any
defined benefit pension plan or Multiemployer Plan.
(b) Compliance. Each Plan has at all times been maintained, by its
terms and in operation, in accordance in all material respects with all
applicable laws.
(c) Liabilities. Except for liabilities and expenses which become
payable and
9
<PAGE>
are timely paid pursuant to the terms and usual operations of the Plans,
Borrower is not currently and, to the best of its knowledge, will not
become subject to any material liability (including withdrawal liability),
tax or penalty whatsoever to any person whomsoever with respect to any Plan
including, but not limited to, any material tax, penalty or liability
arising under Title I or Title IV of ERISA or Chapter 43 of the Code.
(d) Funding. Borrower and each ERISA Affiliate has made full and
timely payment of all amounts (i) required to be contributed under the
terms of each Plan and applicable law and (ii) required to be paid as
expenses of each Plan. No Plan or Plans have an "amount of unfunded benefit
liabilities" (as defined in Section 4001(a)(18) of ERISA) which, in the
aggregate, exceed $100,000.
3.16 Regulations G, T, U and X. Borrower is not engaged in the business of
extending credit for the purposes of purchasing or carrying margin stock, and no
proceeds of the Loan will be used for a purpose which violates, or would be
inconsistent with, Regulations G, T, U or X of the Board of Governors of the
Federal Reserve System.
3.17 Government Regulation. Borrower is not an "investment company" within
the meaning of the Investment Company Act of 1940, as amended, or a "holding
company" or a "subsidiary company" of a "holding company" or an "affiliate" of a
"holding company" within the meaning of the Public Utility Holding Company Act
of 1935, as amended, or subject to regulation under the Federal Power Act, the
Interstate Commerce Act or any other federal law or state laws limiting its
ability to incur indebtedness or to execute, deliver or perform the Loan
Documents.
3.18 Statements Not False or Misleading. No representation or warranty
given as of the date hereof by Borrower contained in this Agreement or any
schedule attached hereto or any statement in any document, certificate or other
instrument furnished or to be furnished to Lender pursuant hereto, taken as a
whole, contains or will (as of the time so furnished) contain any untrue
statement of a material fact, or omits or will (as of the time so furnished)
omit to state any material fact which is necessary in order to make the
statements contained therein not misleading.
3.19 Survival. The representations and warranties of Borrower contained in
this Agreement or any schedule attached hereto or any statement in any document,
certificate or other instrument furnished or to be furnished to Lender pursuant
hereto, shall survive until this Agreement terminates in accordance with Article
7 hereof.
ARTICLE 4 - COVENANTS AND AGREEMENTS OF BORROWER
Until payment in full of the Loan, Borrower covenants and agrees as
follows:
10
<PAGE>
4.1 Sales of and Encumbrances on Collateral. Borrower will not sell,
exchange, lease, negotiate, pledge, assign or grant any security interest in or
otherwise dispose of any Collateral, nor will Borrower permit any other lien of
any kind to attach thereto, except that (i) Borrower may sell or lease inventory
in the ordinary course of business, (ii) Borrower may sell or otherwise dispose
of obsolete or retired equipment in the ordinary course of business, (iii)
Borrower may grant security interests to secure "Senior Debt" as such term is
defined in the Subordination Agreements, (iv) Borrower may grant to Branch
Banking & Trust Company a security interest in certain of its assets pursuant to
the Promissory Note dated January 24, 1995, and (v) Borrower may grant security
interests to Lender.
4.2 Use of Proceeds. Borrower shall use the proceeds of the Loan to finance
expansion of the Borrower's existing business and for general operating
expenditures.
4.3 Further Assurances. Borrower will take all actions reasonably requested
by Lender to create and maintain in Lender's favor valid liens upon and
perfected security interests in any Collateral secured pursuant to this
Agreement or the other Security Instruments and all other security for the
Secured Obligations now or hereafter held by or for Lender. Without limiting the
foregoing, Borrower agrees to execute such further instruments (including
financing statements and continuation statements) as may be required or
permitted by any law relating to notices of, or affidavits in connection with,
the perfection of Lender's liens and security interests, and to cooperate with
Lender in the filing or recording and renewal thereof.
4.4 Limitations on Debt and Obligations. Borrower shall not incur, assume
or otherwise suffer to exist any Debt except (i) Debt reflected on Borrower's
balance sheet dated as of December 31, 1996 and delivered to Lender in
connection with the making of the Loan, (ii) "Senior Debt" as such term is
defined in the Subordination Agreements, and (iii) Debt incurred pursuant to
this Agreement and evidenced by the Note. For purposes of this Agreement, "Debt"
of any person means, without duplication, (a) all obligations of such person for
borrowed money and all obligations of such person evidenced by bonds,
debentures, notes or other similar instruments on which interest charges are
customarily paid, (b) all obligations, contingent or otherwise, relative to the
face amount of all letters of credit, whether or not drawn, and banker's
acceptances issued for the account of such person, (c) all capitalized lease
obligations of such person (to the extent required by generally accepted
accounting principles to be included on the balance sheet of such person) and
(d) all obligations of such person (contingent or otherwise) to guarantee,
purchase or otherwise acquire, or otherwise assure a creditor against loss in
respect of, Debt of another person.
4.5 Financial Statements and Reports. Borrower shall furnish to Lender the
following financial information:
(i) within one hundred and twenty (120) days after the end of each
fiscal year of Borrower, audited consolidated financial statements of
Borrower, including a balance
11
<PAGE>
sheet as of the close of such fiscal year, an income statement and
statements of changes in stockholders' equity, and of cash flows for such
fiscal year, all in reasonable detail, prepared in accordance with GAAP
consistently applied, and with the report thereon of independent public
accountants acceptable to Lender (provided any "Big 6" accounting firm
shall be deemed acceptable);
(ii) within one hundred and twenty (120) days after the end of each
fiscal year of Borrower, a certificate of the chief executive or chief
financial officer of Borrower stating that to the best knowledge of such
officer, (A) Borrower has kept, observed, performed and fulfilled each
covenant, term and condition of this Agreement and the other Loan Documents
during the preceding fiscal year and (B) no Event of Default hereunder has
occurred and is continuing (or if such officer has knowledge that an Event
of Default has occurred and is continuing, specifying the nature of same,
the period of existence of same and the action Borrower proposes to take in
connection therewith);
(iii) within forty-five (45) days after the end of each calendar month
ending on or before September 30, 1997, a consolidated balance sheet of
Borrower as of the close of such month and consolidated statements of
earnings and retained earnings of Borrower for such month and for the prior
months of the current fiscal year (on a year to date basis), all in
reasonable detail and unaudited but prepared on the basis of GAAP
consistently applied (except for the absence of footnotes and subject to
year-end adjustments), together with a report of Borrower's management with
respect to such financial statements;
(iv) within thirty (30) days after the end of each calendar month
ending after September 30, 1997, a consolidated balance sheet of Borrower
as of the close of such month and consolidated statements of earnings and
retained earnings of Borrower for such month and for the prior months of
the current fiscal year (on a year to day basis), each compared to the same
period in the previous fiscal year, all in reasonable detail, and unaudited
but prepared on the basis of GAAP consistently applied (except for the
absence of footnotes and subject to year-end adjustments), together with a
report of Borrower's management with respect to such financial statements;
and
(v) with reasonable promptness, such other financial data as Lender
may reasonably request.
4.6 Maintenance of Books and Records; Inspection. Borrower shall maintain
its books, accounts and records on the basis of GAAP consistently applied, and
permit a representative of Lender to visit and inspect any of its properties
(including but not limited to the collateral security described in Section 2.1
or the Security Instruments), corporate books and financial records, and to
discuss its accounts, affairs and finances with Borrower or the principal
officers of Borrower during reasonable business hours, all at such times as
Lender may reasonably request; provided, however, should there exist no Event of
Default, Lender shall
12
<PAGE>
provide reasonable notice to the Borrower and will conduct such visits and
inspections without material interruption of the business of the Borrower.
4.7 Insurance. Without limiting any of the requirements of any of the other
Loan Documents, Borrower shall maintain, in amounts customary for entities
engaged in comparable business activities, fire, liability and other forms of
insurance on its properties (including but not limited to the collateral now or
hereafter securing payment and performance of the Secured Obligations), against
such hazards and in at least such amounts as is customary in Borrower's
business. Lender shall be named as an additional insured with respect to
liability insurance and an additional loss payee with respect to hazard
insurance (subject to the interests of any holder of "Senior Debt" as such term
is defined in the Subordination Agreements). Each such insurance policy shall
require the insurer to notify Lender in writing at least thirty (30) days prior
to any cancellation or material reduction or limitation of such policy. At the
request of Lender, Borrower will deliver forthwith a certificate specifying the
details of such insurance in effect.
4.8 Taxes and Assessments. Borrower shall (i) file all tax returns and
appropriate schedules thereto that are required to be filed under applicable
law, prior to the date of delinquency, (ii) pay and discharge all taxes,
assessments and governmental charges or levies imposed upon Borrower upon its
income and profits or upon any properties belonging to it, prior to the date on
which penalties attach thereto, and (iii) pay all taxes, assessments and
governmental charges or levies that, if unpaid, might become a lien or charge
upon any of its properties; provided that Borrower shall have the right to
contest in good faith and by appropriate proceedings the applicability or
validity of any such tax, assessment, charge or levy without paying such tax,
assessment, charge or levy so long as adequate reserves with respect thereto are
maintained in accordance with generally accepted accounting principles.
4.9 Corporate Existence. Borrower shall maintain its corporate existence in
the state indicated in Section 3.1 hereof, and its qualification and good
standing as a foreign corporation in each jurisdiction in which such
qualification is required by applicable law; provided, however, that Borrower
shall be permitted to merge with and into a Delaware or North Carolina
corporation for the sole purpose of changing its state of incorporation to the
State of Delaware or the State of North Carolina provided that (i) the
shareholders of the surviving corporation immediately prior to such merger are
the sole shareholders of Borrower immediately after to such merger, (ii) the
number of authorized and issued and authorized and unissued shares, and the
respective classes and series, of capital stock of the surviving corporation
shall be the same as the number of authorized and issued and authorized and
unissued shares, and the respective classes and series of capital stock of
Borrower immediately prior to such merger, (iii) the voting powers,
designations, preferences and relative, participating, optional and other
special rights, qualifications, limitations and restrictions of all classes and
series of capital stock of the surviving corporation shall be identical to the
voting powers, designations, preferences and relative, participating, optional
and other special rights, qualifications, limitations and restrictions of the
respective classes and series of capital stock of Borrower as in effect
immediately prior to such merger, (iv) Lender shall have received (A) an
assumption agreement in form and substance
13
<PAGE>
satisfactory to Lender, duly executed by the surviving corporation and pursuant
to which the surviving corporation shall expressly assume all of the obligations
of Borrower under this Agreement and the other Loan Documents, and (B) such
acknowledgments, certificates, instruments and legal opinions relating to such
merger and assumption agreement as the Lender shall reasonably request, and (v)
the provisions of Section 203 of the Delaware General Corporation Law or [insert
any similarly North Carolina provision] would not apply to Borrower or the
authorization or issuance of the shares of capital stock to be issued pursuant
to the Warrant.
4.10 Compliance with Law and Agreements. Except where failure to do so does
not and would not constitute a Material Adverse Event, Borrower shall maintain
its business operations and property owned or used in connection therewith in
compliance with (i) all applicable federal, state and local laws, regulations
and ordinances, and such laws, regulations and ordinances of foreign
jurisdictions, governing such business operations and the use and ownership of
such property, and (ii) all agreements, licenses, franchises, indentures and
mortgages to which Borrower is a party or by which Borrower or any of its
properties is bound. Without limiting the foregoing, Borrower shall pay all of
its indebtedness promptly and substantially in accordance with the terms
thereof.
4.11 Environmental Requirements. In addition to, and not in derogation of,
the requirements of Section 4.10, Borrower will comply with all laws,
governmental standards and regulations applicable to Borrower or to properties
owned or leased by Borrower, in respect of occupational health and safety and
Applicable Environmental Laws (unless such laws, standards or regulations are
being contested in good faith by appropriate proceedings and adequate reserves
therefor have been established), promptly notify Lender of its receipt of any
notice of a violation of any such law, standard or regulation, and indemnify and
hold Lender harmless from all loss, cost, damage, liability, claim and expense
incurred by or imposed upon Lender on account of Borrower's failure to perform
its obligations under this Section 4.11.
4.12 Notice of Default. Borrower shall give written notice to Lender of the
occurrence of any default or Event of Default under this Agreement or default or
event of default under any other Loan Document promptly upon knowledge of the
occurrence thereof. Borrower shall give written notice to Lender of the
occurrence of any default under any of the documents evidencing, governing or
otherwise relating to "Senior Debt" as such term is defined in the Subordination
Agreements (the "Senior Debt Documents").
4.13 Notice of Litigation. Borrower shall give notice, in writing, to
Lender of (i) any actions, suits or proceedings instituted by any persons
whomsoever against Borrower or materially affecting any of the assets of
Borrower, and (ii) any dispute between Borrower on the one hand and any
governmental regulatory body on the other hand, which dispute might interfere
with the normal operations of Borrower, except where such actions, suits,
proceedings and disputes do not and would not reasonably be expected to
constitute a Material Adverse Event.
14
<PAGE>
4.14 ERISA. If Borrower has in effect, or hereafter institutes, a Plan,
then the following warranty and covenants shall be applicable during such period
as any such Plan shall be in effect: (i) Borrower hereby warrants that no fact
that might constitute grounds for the involuntary termination of the Plan, or
for the appointment by the appropriate United States District Court of a trustee
to administer the Plan, exists at the time of execution of this Agreement; (ii)
Borrower hereby covenants that throughout the existence of the Plan, Borrower's
contributions under the Plan will meet the minimum funding standards required by
ERISA and Borrower will not institute a distress termination of the Plan; and
(iii) Borrower hereby covenants that it will send to Lender a copy of any notice
of a reportable event (as defined in ERISA) required by ERISA to be filed with
the Labor Department or the Pension Benefit Guaranty Corporation, at the time
that such notice is so filed.
4.15 Key Man Insurance. Borrower will maintain in full force and effect, at
all times during the term of this Agreement and at its sole cost and expense, an
insurance policy in the amount of at least the amount of the Loan insuring the
life of J. W. Stealey, issued by an insurance company having an A.M. Best Rating
of "A" or better and a financial size category of not less than VIII, the
proceeds of which policy shall be assigned to Lender.
4.16 Name Change. Borrower will not change its name or conduct its business
under any name other than its legal name and any name set forth on Schedule
4.16, unless Borrower shall have given Lender thirty (30) days prior written
notice and delivered to Lender such executed Uniform Commercial Code financing
statements and financing statement amendments and opinions of counsel as Lender
shall reasonably request.
4.17 Merger, Consolidation and Sale of Assets. Borrower will not (a)
acquire the business of or a substantial portion of the assets of, or merge or
consolidate with any other person or entity or sell, lease or transfer or
otherwise dispose of all or a substantial portion of its assets to any person or
entity, other than sales or leases of inventory in the ordinary course of
business, or (b) acquire or create any Subsidiaries; provided, however, that
Borrower may acquire the business of or a substantial portion of the assets of,
any other person or entity or acquire a Subsidiary provided that the value of
the aggregate consideration paid by Borrower therefor (whether in cash,
securities or other property) for all such acquisitions made during the term of
this Agreement shall not exceed $500,000.
4.18 Liability for Other Parties. Borrower will not become liable, directly
or indirectly, for any obligation of any other person, by guaranty, endorsement,
or otherwise, except by endorsement in the ordinary course of business of
negotiable instruments payable at sight for deposit or collection, and except
for those guarantees set forth on Schedule 3.12(c).
4.19 Dividends; Redemptions. Borrower will not (i) declare, set aside, or
pay any dividend or make any other distribution, whether in cash, in kind, or
otherwise, on account of or with respect to, or (ii) apply any of its funds,
property or assets to the purchase, redemption or other retirement of, any class
of its capital stock or any warrants, options or other rights with
15
<PAGE>
respect to any class of its capital stock; provided, however, that Borrower may
apply its funds to the purchase, redemption or other retirement of its capital
stock held by former employees of Borrower or options to purchase its capital
stock held by former employees of Borrower provided the aggregate amount of
funds applied to all such purchases, redemptions and other retirements during
the term of this Agreement does not exceed $100,000.
4.20 Liquidation. Borrower will not permit the dissolution or liquidation
of Borrower.
4.21 Loans and Investments. Borrower will not (i) make any loans other than
deposits required by government agencies or public utilities, or (ii) make any
investments (which term shall include the purchase of any ownership or similar
interest in any corporation, partnership, joint venture, limited liability
company or other business organization or the purchase of any debt or equity
securities or instruments issued by any such entity) other than cash equivalent
investments; provided, however, that Borrower may make any such investments
provided that the aggregate consideration paid by Borrower in respect of all
such investments (whether in cash, securities or other property) made during the
term of this Agreement shall not exceed $250,000.
4.22 Notice of Issuance of Stock. Upon the issuance of additional shares of
capital stock of Borrower, Borrower shall promptly disclose to Lender, in
writing, the number of shares issued, the price therefor, and such other
information as Lender may from time to time reasonably request.
4.23 Change in Business. Borrower will not engage in any line of business
other than the business conducted by Borrower as of the date of this Agreement
or such related or incidental lines of business as its Board of Directors shall
approve.
4.24 Location of Business and Collateral. Borrower shall give written
notice to Lender (i) thirty (30) days prior to the opening of any new business
office, setting forth the address (including county) of such new location, (ii)
thirty (30) days prior to changing the location of records with respect to
intangible personal property constituting collateral security for the Secured
Obligations and (iii) whenever any Collateral comprised of tangible personal
property will be located in a county or state that is not set forth on Schedule
3.5 hereof for a period of four months or longer. Prior to establishing any new
business office location or locating any collateral in a county or state that is
not set forth on Schedule 3.5 hereof for a period of four months or longer,
Borrower shall have (i) executed and delivered to Lender all financing
statements and financing statement amendments which Lender may reasonably
request in connection therewith in order to perfect and protect the security
interests and priority of Lender in such Collateral, (ii) paid in full all
filing fees and taxes, if any, payable in connection with such filings and (iii)
complied with any other requirement in this Agreement or any other Loan Document
relating to the location of any Collateral.
16
<PAGE>
4.25 The Interactive Creations Incorporated Merger. Upon consummation of
the merger by and among ICI Acquisition Corp., a North Carolina corporation and
wholly-owned subsidiary of Borrower and Interactive Creations Incorporated, a
Texas corporation, Borrower will (a) cause the surviving corporation to execute
a subsidiary guaranty and security agreement, in each case in form and substance
satisfactory to Lender, guaranteeing on an unconditional basis the due and
punctual payment of all Secured Obligations and granting a security interest in
substantially all of the assets of the surviving corporation, (b) pledge the
surviving corporation's stock to Lender as security for the Secured Obligations
pursuant to a pledge agreement in form and substance satisfactory to Lender, and
(c) provide such opinions of Borrower's counsel as Lender shall reasonably
request.
4.26 Information; Post-Closing Review. Borrower will furnish to Lender such
financial data and other information relating to the business of Borrower as
Lender may from time to time reasonably request. In addition to the foregoing,
at Lender's request, no later than ninety (90) days after the Loan is advanced,
Borrower shall furnish Lender a certificate executed by the president itemizing
the use of proceeds from the Loan, and, at Lender's request, Borrower shall
cooperate with Lender in connection with a post-closing review with respect to
the use of the proceeds of the Loan and such other matters relating to the Loan
as Lender shall reasonably request.
ARTICLE 5 - CONDITIONS TO CLOSING
5.1 Deliveries. The obligation of Lender to make the Loan is subject to the
receipt by Lender of the following documents, each of which shall be reasonably
satisfactory to Lender in form and substance:
(a) Corporate Documents. A copy of the Articles of Incorporation of
Borrower, as certified by the Secretary of State of Maryland, and a
certificate of existence or good standing from the Secretary of State of
Maryland and each other State in which Borrower is legally required to
qualify to transact business as a foreign corporation, each as of a recent
date.
(b) Security Instruments. Each of the Security Instruments, duly
executed by Borrower.
(c) Officer's Certificate. A certificate of the President of Borrower
to the effect set forth in Exhibit E.
(d) Opinion of Counsel. The favorable written opinion of Smith,
Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P., counsel to
Borrower, in form reasonably satisfactory to King & Spalding, counsel to
Lender, and substantially in the form of
17
<PAGE>
Exhibit F hereto.
(e) The Note. The Note, duly completed and executed by Borrower.
(f) UCC-1 Financing Statements. Financing statements on Form UCC-1,
duly completed and executed by Borrower.
(g) Stock Purchase Warrant. The Warrant duly completed and executed by
Borrower.
(h) Subordination Agreements. The Subordination Agreements, duly
executed by Borrower and each of High Point Capital, LLC and Cupertino
National Bank and Trust.
(i) Consents and Approvals. True copies of all consents and required
governmental approvals, if any, necessary to the execution, delivery and
performance of the Loan Documents and the transactions contemplated hereby
and thereby.
(j) Closing Certificate. A certificate of a duly authorized officer of
Borrower, substantially in the form of Exhibit G hereto, certifying that,
after giving effect to this Agreement, all representations and warranties
herein are true and correct and there is no default or Event of Default in
existence as of such date, nor any event which, given the passage of time,
would constitute an Event of Default.
(k) Shareholder Subordination Agreements. Shareholder Subordination
Agreements, duly executed by Borrower, J.W. Stealey, Robert L. Pickens,
Laura M. Stealey and any other holder of capital stock of Borrower that has
extended credit to Borrower.
(l) Additional Deliveries. Such additional documents, certificates and
instruments as are deemed reasonably necessary or appropriate by Lender.
5.2 Other Conditions to Lender's Obligation to make Loan. The obligation of
the Lender to make the Loan is subject to the satisfaction of each of the
additional conditions precedent set forth in this Section 5.2:
(a) Compliance with Warranties, No Default, etc. The representations
and warranties set forth in this Agreement and the Security Instruments
shall have been true and correct in all material respects, both before and
after giving effect to the making of the Loan.
(b) No Default. No Event of Default shall have occurred and be
continuing, and no event shall have occurred that with the giving of notice
or the passage of time or
18
<PAGE>
both would constitute an Event of Default.
(c) Material Adverse Event. In the reasonable judgment of Lender, no
Material Adverse Event shall have occurred.
ARTICLE 6 - DEFAULT AND REMEDIES
6.1 Events of Default. The occurrence of any of the following shall
constitute an Event of Default hereunder:
(a) default in the punctual payment of any portion of the principal
amount of the indebtedness evidenced by the Note, or default in the payment
of any interest on the indebtedness evidenced by the Note which is not
cured within five (5) days;
(b) any representation by Borrower hereunder or under any of the other
Loan Documents, or delivery by Borrower of any schedule, statement,
resolution, report, certificate, notice or writing to Lender, is untrue in
any material respect on the date as of which made, stated or certified;
(c) a default or event of default (not covered by Section 6.1(a) or
(b)) shall occur under, or there shall occur such other failure by Borrower
to perform its obligations under, any of the Loan Documents and such
default or event of default shall not be cured within thirty (30) days;
(d) Borrower (i) shall admit in writing its inability to pay its debts
generally as they become due; or (ii) shall make an assignment for the
benefit of creditors or petition or apply to any tribunal for the
appointment of a custodian, receiver or trustee for it or a substantial
part of its assets; or (iii) shall commence any proceeding under any
bankruptcy, reorganization, arrangement, readjustment of debt, dissolution
or liquidation law or statute of any jurisdiction, whether now or hereafter
in effect; or (iv) shall have had any such petition or application filed or
any such proceeding commenced against it in which an order for relief is
entered or an adjudication or appointment is made that remains undismissed
for sixty (60) days; or (v) shall indicate, by any act or omission, its
consent to, approval of, or acquiescence in any such petition, application,
proceeding or order for relief or the appointment of a custodian, receiver
or trustee for it or a substantial part of its assets; or (vi) shall suffer
any such custodianship, receivership or trusteeship to continue
undischarged for a period of thirty (30) days or more;
(e) Borrower shall be liquidated, dissolved, partitioned or
terminated, or the articles or certificate of incorporation of Borrower
shall expire or be revoked;
19
<PAGE>
(f) Borrower shall default in the timely payment or performance of any
obligation now or hereafter owed to Lender in connection with any
indebtedness of Borrower now or hereafter owed to Lender, other than the
Loan, subject to any applicable grace period; or
(g) (i) Borrower shall fail to pay any principal of or premium or
interest on any Debt owed by Borrower (other than the Loan), which is
outstanding in a principal amount of at least $100,000 in the aggregate,
when the same becomes due and payable (whether by scheduled maturity,
acceleration, demand or otherwise), and such failure shall continue after
any cure period applicable thereto; or (ii) any other event shall occur or
condition shall exist under any agreement or instrument relating to any
such indebtedness and shall continue after any applicable cure period, if
the effect of such event or condition is to accelerate or permit the
acceleration of such indebtedness; or (iii) any such indebtedness shall be
accelerated or otherwise declared to be due and payable prior to the stated
maturity thereof; or (iv) any such indebtedness shall be required to be
prepaid, redeemed, purchased or defeased, or an offer to repay, redeem,
purchase or defease such indebtedness shall be required to be made, in each
case prior to the stated maturity thereof;
(h) the occurrence of any default or event of default under the Senior
Debt Documents which is not cured within any applicable grace period;
(i) any person set forth on Schedule 6.1(i) shall have sold,
transferred or otherwise disposed of record or beneficial ownership of more
than ten percent (10%) of the shares of common stock of Borrower held by
such person on the date hereof;
(j) any person set forth on Schedule 6.1(j) attached hereto shall
cease to hold the office of Borrower set forth opposite such person's name
on said Schedule; or
(k) Borrower shall fail to provide the documents required under
Section 4.25 of this Agreement within 30 days of consummation of the merger
by and among ICI Acquisition Corp., a North Carolina corporation and
wholly-owned subsidiary of Borrower and Interactive Creations Incorporated,
a Texas corporation.
6.2 Acceleration of Maturity; Remedies. Upon the occurrence of any Event of
Default described in Section 6.1(d), the indebtedness evidenced by the Note as
well as any and all other indebtedness of Borrower to Lender shall be
immediately due and payable in full; and upon the occurrence of any other Event
of Default described in Section 6.1, Lender at any time thereafter while such
Event of Default is continuing may at its option accelerate the maturity of the
indebtedness evidenced by the Note, whereupon such indebtedness shall be and
become immediately due and payable; all without notice of any kind. Upon the
occurrence of any such Event of Default and the acceleration of the maturity of
the indebtedness evidenced by the Note:
20
<PAGE>
(a) Lender shall be immediately entitled to exercise any and all
rights and remedies possessed by Lender pursuant to the terms of this
Agreement (including without limitation, those remedies set forth in
Sections 6.3 and 6.4), the Security Instruments and all of the other Loan
Documents;
(b) Lender shall have all of the rights and remedies of a secured
party under the Uniform Commercial Code as in effect in any applicable
jurisdiction (the "UCC"); and
(c) Lender shall have any and all other rights and remedies that
Lender may now or hereafter possess at law, in equity or by statute.
6.3 Lender's Rights.
(a) Power of Attorney. Borrower hereby irrevocably constitutes and
appoints Lender and any officer or agent thereof, with full power of
substitution, as its true and lawful attorney-in-fact with full irrevocable
power and authority in the place and stead of Borrower and in the name of
Borrower or in its own name, from time to time after the occurrence, and
during the continuation of, an Event of Default, in Lender's discretion,
for the purpose of carrying out the terms of this Agreement, to take any
and all appropriate action and to execute any and all documents and
instruments which may be necessary or desirable to accomplish the purposes
of this Agreement, and, without limiting the generality of the foregoing,
Borrower hereby gives Lender the power and right, on behalf of Borrower,
without notice to or assent by Borrower, to do the following:
(i) in the name of Borrower or its own name, or otherwise, to
take possession of and endorse and collect any checks, drafts, notes,
acceptances or other instruments for the payment of moneys due under,
or with respect to, any Collateral and to file any claim or to take
any other action or proceeding in any court of law or equity or
otherwise deemed appropriate by Lender for the purpose of collecting
any and all such moneys due with respect to such Collateral whenever
payable;
(ii)to pay or discharge taxes and liens levied or placed on or
threatened against the Collateral, to effect any repairs or any
insurance called for by the terms of this Agreement and to pay all or
part of the premiums therefor and the reasonable costs thereof; and
(iii) to direct any party liable for any payment under any of the
Collateral to make payment of any and all monies due or to become due
thereunder directly to Lender or as Lender shall direct, to ask or
demand for, collect, receive payment of and receipt for, any and all
moneys, claims and other amounts due or to become due at any time in
respect of or arising out of any Collateral, to sign and endorse any
invoices, freight or express bills, bills of lading, storage or
warehouse receipts, drafts
21
<PAGE>
against debtors, assignments, verifications, notices and other documents in
connection with any of the Collateral, to commence and prosecute any suits,
actions or proceedings at law or in equity in any court of competent
jurisdiction to collect the Collateral or any portion thereof and to
enforce any other right in respect of any Collateral, to defend any suit,
action or proceeding brought against Lender with respect to any Collateral,
to settle, compromise or adjust any suit, action or proceeding described in
the preceding clause and, in connection therewith, to give such discharges
or releases as Lender may deem appropriate, to assign any trademark (along
with goodwill of the business to which such trademark pertains), throughout
the world for such term or terms, on such conditions, and in such manner,
as Lender shall in its sole discretion determine, and generally, to sell,
transfer, pledge and make any agreement with respect to or otherwise deal
with any of the Collateral as fully and completely as though Lender were
the absolute owner thereof for all purposes, and to do, at Lender's option
and Lender's expense, at any time, or from time to time, all acts and
things which Lender deems necessary to protect, preserve or realize upon
the Collateral and the liens of Lender thereon and to effect the intent of
this Agreement, all as fully and effectively as Borrower might do.
Borrower hereby ratifies all that said attorneys shall lawfully do or cause
to be done by virtue hereof. This power of attorney is a power coupled with
an interest and shall be irrevocable, except upon repayment in full of all
Secured Obligations, at which time this power of attorney shall terminate
without further action of Borrower or Lender.
(b) Other Powers. Borrower also authorizes Lender, at any time and
from time to time, to execute, in connection with any sale provided for in
Section 6.4, any endorsements, assignments or other instruments of
conveyance or transfer with respect to the Collateral.
(c) No Duty on the Part of Lender. The powers conferred on Lender
hereunder are solely to protect the interests of Lender in the Collateral
and shall not impose any duty upon Lender to exercise any such powers.
Lender shall be accountable only for amounts that it actually receives as a
result of the exercise of such powers, and neither it nor any of its
partners, officers, directors, employees or agents shall be responsible to
Borrower for any act or failure to act hereunder, except for their own
gross negligence or willful misconduct.
6.4 Remedies with respect to Collateral. If an Event of Default shall occur
and be continuing, Lender may exercise, in addition to all other rights and
remedies granted to it in this Agreement and in any other instrument or
agreement securing, evidencing or relating to the Secured Obligations, all
rights and remedies of a secured party under the UCC. Without limiting the
generality of the foregoing, Lender without demand of performance or other
demand, presentment, protest, advertisement or notice of any kind (except any
notice required by law referred to below) to or upon Borrower or any other
person (all and each of which demands, defenses, advertisements and notices are
hereby waived), may in such circumstances forthwith
22
<PAGE>
collect, receive, appropriate and realize upon the Collateral, or any part
thereof, and may forthwith sell, lease, assign, give an option or options to
purchase, or otherwise dispose of and deliver the Collateral or any part thereof
(or contract to do any of the foregoing), in one or more parcels at public or
private sale or sales, at any office of Lender or elsewhere upon such terms and
conditions as it may deem advisable and at such prices as it may deem best, for
cash or on credit or on future delivery without assumption of any credit risk.
Lender shall have the right upon any such public sale or sales, and, to the
extent permitted by law, at any private sale or sales, to purchase the whole or
any part of the Collateral so sold, free of any right or equity of redemption in
Borrower, which right of equity is hereby waived or released. Borrower further
agrees, at Lender's request, to assemble the Collateral and make it available to
Lender at places which Lender shall reasonably select, whether at Borrower's
premises or elsewhere. Lender shall apply the net proceeds of any such
collection, recovery, receipt, appropriation, realization or sale, after
deducting all reasonable costs and expenses of every kind incurred therein or
incidental to the care or safekeeping of any of the Collateral or in any way
relating to the Collateral or the rights of Lender hereunder, including, without
limitation, reasonable attorneys' fees and disbursements, to the payment in
whole or in part of the Secured Obligations, in such order as Lender may elect,
and only after such application and after the payment by Lender of any other
amount required by any provision of law, including, without limitation, Section
9-504(1)(c) of the UCC, need Lender account for the surplus, if any, to the
Borrower. To the extent permitted by applicable law, Borrower waives all claims,
damages and demands it may acquire against Lender arising out of the exercise by
Lender of any rights hereunder. If any notice of a proposed sale or other
disposition of Collateral shall be required by law, such notice shall be deemed
reasonable and proper if given at least five days before such sale or other
disposition. Borrower shall remain liable for any deficiency if the proceeds of
any sale or other disposition of the Collateral are insufficient to pay the
Secured Obligations and the reasonable fees and expenses of any attorneys
employed by Lender to collect such deficiency.
6.5 Remedies Cumulative; No Waiver. No right, power or remedy conferred
upon or reserved to Lender by this Agreement or any of the other Loan Documents
is intended to be exclusive of any other right, power or remedy, but each and
every such right, power and remedy shall be cumulative and concurrent and shall
be in addition to any other right, power and remedy given hereunder, under any
of the other Loan Documents or now or hereafter existing at law, in equity or by
statute. No delay or omission by Lender to exercise any right, power or remedy
accruing upon the occurrence of any Event of Default shall exhaust or impair any
such right, power or remedy or shall be construed to be a waiver of any such
Event of Default or an acquiescence therein, and every right, power and remedy
given by this Agreement and the other Loan Documents to Lender may be exercised
from time to time and as often as may be deemed expedient by Lender.
6.6 Proceeds of Remedies. Any or all proceeds resulting from the exercise
of any or all of the foregoing remedies shall be applied as set forth in the
Loan Document(s) providing the remedy or remedies exercised; if none is
specified, or if the remedy is provided by this Agreement, then as follows:
23
<PAGE>
(a) First, to the costs and expenses, including reasonable attorney
and paralegal fees and costs, incurred by Lender in connection with the
exercise of its remedies;
(b) Second, to the expenses of curing the default that has occurred,
in the event that Lender elects, in its sole discretion, to cure the
default that has occurred;
(c) Third, to the payment of accrued and unpaid interest on the
indebtedness evidenced by the Note;
(d) Fourth, to the payment of the unpaid principal of the Note;
(e) Fifth, to the payment of all other Secured Obligations that are
due and payable; and
(f) Sixth, the remainder, if any, to Borrower or to any other person
lawfully thereunto entitled.
ARTICLE 7 - TERMINATION
This Agreement shall remain in full force and effect until the payment in
full by Borrower of all amounts owed to Lender under the Loan Documents, at
which time Borrower will prepare all documents necessary to release Lender's
security interest in the Collateral, including appropriate UCC-3 termination
statements. Within thirty (30) days after receipt by Lender of all such
documents, Lender will execute and deliver to Borrower all such documents to
release its security interests in the Collateral.
ARTICLE 8 - MISCELLANEOUS
8.1 Performance By Lender. If Borrower shall default in the payment,
performance or observance of any covenant, term or condition of this Agreement,
Lender may, at its option, pay, perform or observe the same, and all payments
made or costs or expenses reasonably incurred by Lender in connection therewith
(including but not limited to reasonable attorney and paralegal fees and costs),
with interest thereon at the highest default rate provided in the Note, shall be
immediately repaid to Lender by Borrower and shall constitute a part of the
Secured Obligations and be secured hereby until fully repaid. Lender, in its
sole and complete discretion and without any liability therefor, shall determine
the necessity for any such actions and of the amounts, if any, to be paid.
24
<PAGE>
8.2 Successors and Assigns Included in Parties. Whenever in this Agreement
one of the parties hereto is named or referred to, the heirs, legal
representatives, successors, successors-in-title and assigns of such parties
shall be included, and all covenants and agreements contained in this Agreement
by or on behalf of Borrower or by or on behalf of Lender shall bind and inure to
the benefit of their respective heirs, legal representatives,
successors-in-title and assigns, whether so expressed or not.
8.3 Costs and Expenses. Borrower agrees to pay all costs and expenses
incurred by Lender in connection with the making of the Loan, including but not
limited to filing fees, recording taxes and reasonable attorney and paralegal
fees and costs, promptly upon demand of Lender. Borrower further agrees to pay
all of the out-of-pocket costs and expenses incurred by Lender in connection
with the maintenance of its security interest in the Collateral, protection of
the Collateral, and collection of the Loan, including but not limited to
reasonable attorney and paralegal fees and costs related thereto (including any
such incurred in connection with any appellate litigation), promptly upon demand
of Lender.
8.4 Assignment. The Note, this Agreement and the other Loan Documents may
be endorsed, assigned and transferred in whole or in part by Lender and any such
subsequent holder or assignee of the same shall succeed to and be possessed of
the rights and powers of Lender under all of the same to the extent transferred
and assigned. Lender may grant participations in the Note, this Agreement and
the other Loan Documents (or any portion thereof). Lender shall notify Borrower
in writing of any such endorsement, assignment or transfer by Lender. Borrower
shall not assign any of its rights nor delegate any of its duties hereunder or
under any of the other Loan Documents without the prior express written consent
of Lender.
8.5 Time of the Essence. Time is of the essence with respect to each and
every covenant, agreement and obligation of Borrower hereunder and under all of
the other Loan Documents.
8.6 Severability. If any provisions of this Agreement or the application
thereof to any person or circumstance shall be invalid or unenforceable to any
extent, the remainder of this Agreement and the application of such provisions
to other persons or circumstances shall not be affected thereby nor shall the
validity and enforceability thereof be affected.
8.7 Interest and Loan Charges Not to Exceed Maximum Allowed by Law.
Anything in this Agreement, the Note, the Security Instruments or any of the
other Loan Documents to the contrary notwithstanding, in no event whatsoever,
whether by reason of advancement of proceeds of the Loan, acceleration of the
maturity of the unpaid balance of the Loan or otherwise, shall the interest and
other consideration agreed to be paid to Lender for the use of the money
advanced or to be advanced hereunder exceed the maximum amounts collectible
under applicable laws in effect from time to time. It is understood and agreed
by the parties that, if for any reason whatsoever the interest or other
consideration paid or contracted to be paid by Borrower in respect of the
indebtedness evidenced by the Note shall exceed the
25
<PAGE>
maximum amounts collectible under applicable laws in effect from time to time,
then ipso facto, the obligation to pay such interest and other consideration
shall be reduced to the maximum amounts collectible under applicable laws in
effect from time to time, and any amounts collected by Lender that exceed such
maximum amounts shall be applied to the reduction of the principal balance of
the indebtedness evidenced by the Note or refunded to Borrower, in Lender's sole
discretion, so that at no time shall the interest and other consideration paid
or payable in respect of the indebtedness evidenced by the Note exceed the
maximum amounts permitted from time to time by applicable law.
8.8 Article and Section Headings; Defined Terms. Numbered and titled
article and section headings and defined terms are for convenience only and
shall not be construed as amplifying or limiting any of the provisions of this
Agreement.
8.9 Notices. Any and all notices, elections or demands permitted or
required to be made under this Agreement shall be in writing, signed by the
party giving such notice, election or demand and shall be delivered personally,
or sent by certified mail or nationally recognized overnight courier service
(such as Federal Express) to the other party at the address set forth below, or
at such other address as may be supplied in writing and of which receipt has
been acknowledged in writing. The date of personal delivery, the third day after
the date of mailing, or the business day after the date of delivery to such
courier service, as the case may be, shall be the date of such notice, election
or demand. For the purposes of this Agreement, notices, elections or demands
made pursuant hereto shall be made to the following addresses:
If to Lender: Petra Capital, LLC
150 Fourth Avenue North, Suite 1050
Nashville, TN 37219
Fax: 615-313-5990
Attention: John S. Stein, III
with a copy to: King & Spalding
191 Peachtree Street
Atlanta, GA 30303-1763
Fax: 404-572-5149
Attention: Hector E. Llorens, Jr.
If to Borrower: Interactive Magic, Inc.
215 Southport Drive, Suite 1000
Morrisville, NC 27560
Fax: 919-461-0723
Attention: William J. Kaluza
with a copy to: Smith, Anderson, Blount, Dorsett,
Mitchell & Jernigan, L.L.P.
26
<PAGE>
2500 First Union Capitol Center
Raleigh, North Carolina 27601
Fax: 919/821-6800
Attention: Gerald F. Roach
8.10 Entire Agreement. This Agreement and the other written agreements
between Borrower and Lender executed contemporaneously herewith represent the
entire agreement between the parties concerning the subject matter hereof, and
all oral discussions and prior agreements are merged herein.
8.11 Counterparts. This Agreement may be executed in multiple originals or
counterparts, each of which shall be deemed an original and all of which when
taken together shall constitute but one and the same instrument.
8.12 Governing Law. This Agreement shall be construed and enforced under
the internal laws of the State of Georgia, without reference to the conflict of
laws principles thereof.
8.13 Amendments; Incorporation. No amendment or modification hereof shall
be effective except in a writing executed by each of the parties hereto. All
schedules, exhibits, riders, and other documents and instruments referenced
herein shall be deemed to be incorporated herein and made a part hereof.
8.14 Waiver of Jury Trial. LENDER AND BORROWER EACH HEREBY KNOWINGLY,
VOLUNTARILY AND INTENTIONALLY WAIVE (TO THE EXTENT PERMITTED BY APPLICABLE LAW)
ANY RIGHT TO A TRIAL BY JURY OF ANY DISPUTE ARISING UNDER, RELATING TO, OR
CONNECTED WITH THIS AGREEMENT, THE COLLATERAL OR ANY OTHER AGREEMENT, INSTRUMENT
OR DOCUMENT CONTEMPLATED HEREBY OR DELIVERED IN CONNECTION HEREWITH AND AGREE
THAT ANY SUCH DISPUTE SHALL BE TRIED BEFORE A JUDGE SITTING WITHOUT A JURY. THIS
PROVISION IS A MATERIAL INDUCEMENT FOR THE PARTIES TO ENTER INTO THIS AGREEMENT.
27
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Loan and Security
Agreement, or have caused this Agreement to be executed by their duly authorized
officers, as of the day and year first above written.
BORROWER:
INTERACTIVE MAGIC, INC.
By: /s/J. W. Stealey, Sr.
-------------------------------------
Name: J. W. Stealey, Sr.
Title:
Attest:
--------------------------------
Name:
Title: Secretary
LENDER:
PETRA CAPITAL, LLC
By: Petra Capital Management, LLC,
-------------------------------------
Manager
By: /s/John S. Stein, III
-------------------------------------
Name: John S. Stein, III
Title: Member
[SIGNATURE PAGE TO LOAN AND SECURITY AGREEMENT]
28
<PAGE>
Index of Attachments
Exhibit A Form of Secured Promissory Note
Exhibit B Form of Stock Purchase Warrant
Exhibit C-1 Form of High Point Subordination Agreement
Exhibit C-2 Form of Cupertino Subordination Agreement
Exhibit D Form of Patent and Trademark Security Agreement
Exhibit E Form of Officer's Certificate
Exhibit F Form of Opinion of Borrower's Counsel
Exhibit G Form of Closing Certificate
Schedule 3.1(a) Jurisdictions in Which Borrower is Qualified
Schedule 3.1(b) Subsidiaries
Schedule 3.1(c) Options, Warrants, Etc.
Schedule 3.1(d) Preemptive Rights, Etc.
Schedule 3.2 Required Consents
Schedule 3.4 Outstanding Loans, Liens, Security Interests, Etc.
Schedule 3.5 Location of Collateral
Schedule 3.6 Litigation
Schedule 3.12(a) Insider Debt
Schedule 3.12(b) Insider Transactions
Schedule 3.12(c) Guarantees of Insider Debt
Schedule 3.15 ERISA
Schedule 4.16 Other Names
Schedule 6.1(i) Chance of Ownership
Schedule 6.1(j) Change of Management
-Index of Attachments-
29
NEITHER THIS STOCK PURCHASE WARRANT NOR THE SECURITIES PURCHASABLE HEREUNDER,
HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"),
OR ANY APPLICABLE STATE SECURITIES LAW, AND NEITHER MAY BE TRANSFERRED UNTIL (I)
A REGISTRATION STATEMENT UNDER THE ACT OR SUCH APPLICABLE STATE SECURITIES LAWS
SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR (II) IN THE OPINION OF
COUNSEL ACCEPTABLE TO THE COMPANY, REGISTRATION UNDER SUCH SECURITIES ACTS OR
SUCH APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED IN CONNECTION WITH SUCH
PROPOSED TRANSFER.
STOCK PURCHASE WARRANT
This Warrant is issued as of this 24th day of March, 1997 by INTERACTIVE
MAGIC, INC., a Maryland corporation (the "Company"), to PETRA CAPITAL, LLC, a
Georgia limited liability company (Petra Capital, LLC and any subsequent
assignee or transferee hereof are hereinafter referred to collectively as
"Holder" or "Holders").
AGREEMENT:
1. Issuance of Warrant; Term.
(a) For and in consideration of Petra Capital, LLC making a loan to the
Company in an amount of Three Million and No/100 Dollars ($3,000,000.00)
pursuant to the terms of a secured promissory note of even date herewith
(together with any and all extensions, replacements and renewals thereof, the
"Note") and related loan and security agreement of even date herewith (as
amended, supplemented or otherwise modified from time to time, the "Loan
Agreement"), and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company hereby grants to
Holder the right to purchase 324,344 shares of the Company's Class A voting
common stock (the "Common Stock"), which the Company represents to equal 3.75%
of the shares of Common Stock outstanding on the date hereof, calculated on a
Fully Diluted Basis (as defined below, but without giving effect to the right to
purchase 56,546 shares granted to Holder upon consummation of the merger by and
among ICI Acquisition Corp., a North Carolina corporation and wholly owned
subsidiary of the Company and Interactive Creations Incorporated, a Texas
corporation).
(b) In addition to the right to purchase shares of Common Stock granted
under Section 1(a), the Company hereby grants to Holder the right to purchase
704,481 additional shares of Common Stock, which the Company represents to equal
10.9992% of the Common
<PAGE>
Stock outstanding on the date hereof, calculated on a Fully Diluted Basis (as
defined below), on the terms and conditions set forth below:
(i) if on September 21, 1997, any indebtedness evidenced by the Note
or any other monetary obligation under the Loan Agreement is outstanding,
the Holder shall have the right to purchase an additional 111,644 shares of
Common Stock;
(ii) if on March 21, 1998, any indebtedness evidenced by the Note or
any other monetary obligation under the Loan Agreement is outstanding, the
Holder shall have the right to purchase an additional 113,855 shares of
Common Stock;
(iii) if on March 21, 1999, any indebtedness evidenced by the Note or
any other monetary obligation under the Loan Agreement is outstanding, the
Holder shall have the right to purchase an additional 116,135 shares of
Common Stock;
(iv) if on March 21, 2000, any indebtedness evidenced by the Note or
any other monetary obligation under the Loan Agreement is outstanding, the
Holder shall have the right to purchase an additional 118,489 shares of
Common Stock;
(v) if on March 21, 2001, any indebtedness evidenced by the Note or
any other monetary obligation under the Loan Agreement is outstanding, the
Holder shall have the right to purchase an additional 120,922 shares of
Common Stock; and
(vi) if on March 21, 2002, any indebtedness evidenced by the Note or
any other monetary obligation under the Loan Agreement is outstanding, the
Holder shall have the right to purchase an additional 123,436 shares of
Common Stock.
(c) In addition to the rights granted to Holder under subsection (a) and
(b) of this Section 1, if on September 21, 1997, any indebtedness evidenced by
the Note or any other monetary obligation under the Loan Agreement is
outstanding, the Holder shall have the right to purchase 56,546 shares of Common
Stock; provided, however, that the Holder will not be entitled to the rights
granted to Holder under this subsection (c) of Section 1 if the merger by and
among ICI Acquisition Corp., a North Carolina corporation and wholly owned
subsidiary of the Company and Interactive Creations Incorporated, a Texas
corporation, has not been consummated prior to the time of any exercise of this
Warrant pursuant to Section 3 hereof.
-2-
<PAGE>
(d) For purposes of this Agreement, "Fully Diluted Basis" means, as of any
date of determination (the date of determination for purposes of Section 1(a),
(b) and (c) being the date of this Warrant), the shares of Common Stock
outstanding on such date, together with all shares of Common Stock that would be
outstanding on such date assuming the issuance of all shares of Common Stock
issuable upon the exercise, exchange or conversion of (i) any securities
outstanding as of such date and convertible into or exchangeable for Common
Stock (whether or not the rights to exchange or convert thereunder are
immediately exercisable) (such convertible or exchangeable securities being
herein called "Convertible Securities"), (ii) any rights outstanding as of such
date to subscribe for or to purchase, or any warrants or options outstanding
(but specifically excluding options for up to 1,265,000 shares of Class B Common
Stock to be granted upon the achievement of certain performance objectives
pursuant to the Company's 1995 Employees' Incentive Stock Option Plan (the "1995
Incentive Plan")) for the purchase of, Common Stock or Convertible Securities
(whether or not immediately exercisable) (such rights, warrants or options being
herein called "Option Securities") and (iii) any such Convertible Securities
issued upon the exercise of such Option Securities; provided, however, that
whenever "Fully Diluted Basis" is used in connection with (A) the right granted
to the Holder under subsection (a) of Section 1 of this Warrant, the calculation
of Fully Diluted Basis shall be made after giving effect to such right but
without giving effect to any rights granted to the Holder under subsection (b)
or (c) of Section 1 of this Warrant, (B) the right granted to the Holder under
subsection (b)(i) of Section 1 of this Warrant, the calculation of Fully Diluted
Basis shall be made after giving effect to the rights granted to the Holder
under subsections (a) and (b)(i) of Section 1 of this Warrant, but without
giving effect to the rights granted to the Holder under subsections (b)(ii),
(b)(iii), (b)(iv), (b)(v), (b)(vi) and (c) of Section 1 of this Warrant, (C) the
right granted to the Holder under subsection (b)(ii) of Section 1 of this
Warrant, the calculation of Fully Diluted Basis shall be made after giving
effect to the rights granted to the Holder under subsections (a), (b)(i) and
(b)(ii) of Section 1 of this Warrant, but without giving effect to the rights
granted to the Holder under subsections (b)(iii), (b)(iv), (b)(v), (b)(vi) and
(c) of Section 1 of this Warrant, (D) the right granted to the Holder under
subsection (b)(iii) of Section 1 of this Warrant, the calculation of Fully
Diluted Basis shall be made after giving effect to the rights granted to the
Holder under subsections (a), (b)(i), (b)(ii) and (b)(iii) of Section 1 of this
Warrant, but without giving effect to the rights granted to the Holder under
subsections (b)(iv), (b)(v), (b)(vi) and (c) of Section 1 of this Warrant, (E)
the right granted to the Holder under subsection (b)(iv) of Section 1 of this
Warrant, the calculation of Fully Diluted Basis shall be made after giving
effect to the rights granted to the Holder under subsections (a), (b)(i),
(b)(ii), (b)(iii), and (b)(iv) of Section 1 of this Warrant, but without giving
effect to the rights granted to the Holder under subsections (b)(v), (b)(vi) and
(c) of Section 1 of this Warrant, (F) the right granted to the Holder under
subsection (b)(v) of Section 1 of this Warrant, the calculation of Fully Diluted
Basis shall be made after giving effect to the rights granted to the Holder
under subsections (a), (b)(i), (b)(ii), (b)(iii), (b)(iv), and (b)(v) of Section
1 of this Warrant, but without giving effect to the rights granted to the Holder
under subsections (b)(vi) and (c) of Section 1 of
-3-
<PAGE>
this Warrant, and (G) the right granted to the Holder under subsection (b)(vi)
of Section 1 of this Warrant, the calculation of Fully Diluted Basis shall be
made after giving effect to the rights granted to the Holder under subsections
(a), (b)(i), (b)(ii), (b)(iii), (b)(iv), (b)(v), and (b)(vi) of Section 1 of
this Warrant, but without giving effect to the rights granted to the Holder
under subsection (c) of Section 1 of this Warrant. The Company represent and
warrants that, as of the date of this Warrant the outstanding shares of Common
Stock, calculated on a Fully Diluted Basis, are as set forth on Schedule ___.
(e) The shares of Common Stock issuable upon exercise of this Warrant are
hereinafter referred to as the "Shares." This Warrant shall be exercisable at
any time and from time to time on or after March __, 1998 until ten (10) years
from the date hereof.
(f) The Company represents and warrants that the number of shares issuable
to Laura Stealey pursuant to that certain letter agreement by and between John
W. Stealey and Laura M. Stealey dated as of October 31, 1996 (the "Laura Stealey
Agreement"), as of the date hereof, is 19,588. If for any reason the number of
shares issuable as of the date hereof pursuant to the Laura Stealey Agreement is
greater than 19,588, the rights to purchase shares granted to Holder pursuant to
this Section 1 shall be increased appropriately based upon the increase in the
number of shares of Common Stock outstanding as of the date hereof calculated on
a Fully Diluted Basis and giving effect to such greater number of shares
issuable as of the date hereof pursuant to the Laura Stealey Agreement.
2. Exercise Price. The exercise price per share for which all or any of the
Shares may be purchased pursuant to the terms of this Warrant shall be one cent
($.01) (as adjusted from time to time pursuant to Section 5, the "Exercise
Price").
3. Exercise. (a) This Warrant may be exercised by the Holder hereof (but
only on the conditions hereafter set forth) as to all or any increment or
increments of one hundred (100) Shares (or the balance of the Shares if less
than such number), upon delivery of written notice of intent to exercise to the
Company at the following address: Interactive Magic, Inc., 215 Southport Drive,
Suite 1000, Morrisville, North Carolina 27560, Attention: William J. Kaluza, or
such other address as the Company shall designate in a written notice to the
Holder hereof, together with this Warrant and payment to the Company of the
aggregate Exercise Price of the Shares so purchased. The Exercise Price shall be
payable, at the option of the Holder, (i) by certified or bank check, or (ii) by
the surrender of the Note or portion thereof having an outstanding principal
balance equal to the aggregate Exercise Price. Upon exercise of this Warrant as
aforesaid, the Company shall as promptly as practicable, and in any event within
fifteen (15) days thereafter, execute and deliver to the Holder of this Warrant
a certificate or certificates for the total number of whole Shares for which
this Warrant is being exercised in such denominations as are requested by such
Holder. If this Warrant shall be exercised with respect to less than all of the
Shares, the Holder shall be entitled to receive a new Warrant
-4-
<PAGE>
covering the number of Shares in respect of which this Warrant shall not have
been exercised, which new Warrant shall in all other respects be identical to
this Warrant. The Company covenants and agrees that it will pay when due any and
all state and federal issue taxes which may be payable in respect of the
issuance of this Warrant or the issuance of any Shares upon exercise of this
Warrant.
(b) In lieu of exercising this Warrant pursuant to Section 3(a) above, the
Holder shall have the right to require the Company to convert any then existing
rights to purchase Common Stock pursuant to this Warrant, in whole or in part
and at any time or times into Shares (the "Conversion Right"), upon delivery of
written notice of intent to convert to the Company at its address in Section
3(a) or such other address as the Company shall designate in a written notice to
the Holder hereof, together with this Warrant. Upon exercise of the Conversion
Right, the Company shall deliver to the Holder (without payment by the Holder of
any Exercise Price) that number of Shares which is equal to the quotient
obtained by dividing (x) the value of the number of Shares with respect to which
the Conversion Right is being exercised (determined by subtracting the aggregate
Exercise Price for the Shares with respect to which the Conversion Right is
being exercised from a number equal to the product of (i) the Fair Market Value
per Share (as such term is defined in Section 5(b)) as at such time, multiplied
by (ii) the number of Shares with respect to which the Conversion Right is being
exercised), by (y) such Fair Market Value per Share. Any references in this
Warrant to the "exercise" of this Warrant, and the use of the term exercise
herein, shall be deemed to include (without limitation) any exercise of the
Conversion Right.
4. Covenants and Conditions. The above provisions are subject to the
following:
(a) Neither this Warrant nor the Shares have been registered under the
Securities Act of 1933, as amended ("Securities Act") or any state
securities laws ("Blue Sky Laws"). This Warrant has been acquired for
investment purposes and not with a view to distribution or resale and may
not be pledged, hypothecated, sold, made subject to a security interest, or
otherwise transferred without (i) an effective registration statement for
such Warrant under the Securities Act and such applicable Blue Sky Laws, or
(ii) an opinion of counsel, which opinion and counsel shall be reasonably
satisfactory to the Company and its counsel, that registration is not
required under the Securities Act or under any applicable Blue Sky Laws
(the Company hereby acknowledges that King & Spalding is acceptable
counsel). Transfer of Shares issued upon the exercise of this Warrant shall
be restricted in the same manner and to the same extent as the Warrant and
the certificates representing such Shares shall, subject to Section 6
hereof, bear substantially the following legend:
THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), OR ANY
-5-
<PAGE>
APPLICABLE STATE SECURITIES LAW AND MAY NOT BE TRANSFERRED UNTIL (I) A
REGISTRATION STATEMENT UNDER THE ACT AND SUCH APPLICABLE STATE
SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR
(II) IN THE OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY, REGISTRATION
UNDER SUCH SECURITIES ACTS OR SUCH APPLICABLE STATE SECURITIES LAWS IS
NOT REQUIRED IN CONNECTION WITH SUCH PROPOSED TRANSFER.
The Holder hereof and the Company agree to execute such other documents and
instruments as counsel for the Company reasonably deems necessary to effect
the compliance of the issuance of this Warrant and any shares of Common
Stock issued upon exercise hereof with applicable federal and state
securities laws. In furtherance of the foregoing, the Holder represents and
warrants that:
(i) the Holder has substantial experience in evaluating and
investing in private placement transactions of securities in companies
similar to the Company so that the Holder is capable of evaluating the
merits and risks of its investment in the Company and has the capacity
to protect its own interests;
(ii) the Holder is acquiring this Warrant, and will acquire the
Shares, for investment for its own account and not with a view to, or
for resale in connection with, any distribution thereof;
(iii) the Holder understands that this Warrant has not been, and
upon issuance the Shares may not be, registered under the Securities
Act or any blue sky laws and may not be transferred unless they are
subject to an effective registration statement under the Securities
Act or unless an exemption from the registration provisions of the
Securities Act and such blue sky laws exists, which depend upon, among
other things, the bona fide nature of the investment intent and the
accuracy of the transferee's representations;
(iv) the Holder is familiar with the provisions of Rule 144 under
the Securities Act which permits the limited resale of restricted
securities, subject to the satisfaction of certain conditions;
(v) the Holder has had an opportunity to discuss the Company's
business, management and financial affairs with the Company's
management and the opportunity to review the Company's facilities, and
to ask questions of
-6-
<PAGE>
officers of the Company, which were answered to its satisfaction; and
(vi) the Holder is an "accredited investor" as that term is
defined in Rule 501(a) of Regulation D under the Securities Act.
(b) The Company covenants and agrees that all Shares which may be
issued upon exercise of this Warrant will, upon issuance and payment
therefor, be legally and validly issued and outstanding, fully paid and
nonassessable, free from all taxes, liens, charges and preemptive rights,
if any, with respect thereto or to the issuance thereof. The Company shall
at all times reserve and keep available for issuance upon the exercise of
this Warrant such number of authorized but unissued shares of Common Stock
as will be sufficient to permit the exercise in full of this Warrant.
(c) The Company covenants and agrees that it will not issue any Option
Securities or Convertible Securities (as such terms are defined in Section
5(c)) to any officer, director or holder of Common Stock, Option Securities
or Convertible Securities; provided, however, that the Company may issue
such Option Securities and Convertible Securities pursuant to which the
maximum number of shares of Common Stock issuable do not exceed 10% of the
outstanding shares of Common Stock calculated on a Fully Diluted Basis of
the date hereof.
5. Adjustment of Exercise Price and Number of Shares Issuable. The Exercise
Price and the number of Shares (or other securities or property) issuable upon
exercise of this Warrant shall be subject to adjustment from time to time upon
the occurrence of any of the events enumerated in this Section 5.
(a) Common Stock Reorganization. If the Company shall (i) subdivide or
consolidate its outstanding shares of Common Stock (or any class thereof)
into a greater or smaller number of shares, (ii) pay a dividend or make a
distribution on its Common Stock (or any class thereof) in shares of its
capital stock, or (iii) issue by reclassification of its Common Stock (or
any class thereof) any shares of its capital stock (any such event
described in clauses (i), (ii) or (iii) being called a "Common Stock
Reorganization"), then the Exercise Price and the type of securities for
which this Warrant is exercisable shall be adjusted immediately such that
the Holder thereafter shall be entitled to receive upon exercise of this
Warrant the aggregate number and type of securities that it would have
received if this Warrant had been exercised immediately prior to such
Common Stock Reorganization.
(b) Common Stock Distribution. If the Company shall issue, sell,
distribute or otherwise grant any shares of Common Stock, other than
pursuant to a Common Stock Reorganization (any such issuance, sale,
distribution or grant being herein called a "Common Stock Distribution"),
for a consideration per share less than the Fair Market Value per Share
-7-
<PAGE>
immediately prior to such Common Stock Distribution, then the Exercise
Price shall be reduced to the price determined by multiplying such Exercise
Price by a fraction, the numerator of which shall be the sum of (A) the
number of shares of Common Stock outstanding immediately prior to such
Common Stock Distribution calculated on a Fully Diluted Basis plus (B) the
quotient obtained by dividing the aggregate consideration, if any, received
by the Company upon such Common Stock Distribution by such Fair Market
Value per Share, and the denominator of which shall be the total number of
shares of Common Stock outstanding immediately after such Common Stock
Distribution calculated on a Fully Diluted Basis. "Fair Market Value per
Share" as of any time means the fair market value of the Company as of such
time divided by the number of outstanding shares of Common Stock as of such
time calculated on a Fully Diluted Basis.
(c) Convertible Securities and Option Securities. If the Company shall
issue, sell, distribute or otherwise grant (including by assumption)
Convertible Securities, or Option Securities, and the lowest aggregate
consideration per share for which Common Stock is issuable upon the
exercise of such Convertible Securities or Option Securities (and, if
applicable, upon conversion or exchange of Convertible Securities issuable
upon exercise of Option Securities) shall be less than the Fair Market
Value per Share at such time, then the Exercise Price shall be reduced to
the price determined by multiplying such Exercise Price by a fraction, the
numerator of which shall be the sum of (A) the number of shares of Common
Stock then outstanding plus the number of shares issuable upon exercise of
this Warrant plus (B) the quotient obtained by dividing the aggregate
consideration, if any, received or receivable by the Company upon such
issuance, sale, distribution or grant by such Fair Market Value per Share,
and the denominator of which shall be the total number of shares of Common
Stock then outstanding plus the number of shares issuable upon exercise of
this Warrant plus the total maximum number of shares issuable upon exercise
or conversion of such Convertible Securities or Option Securities and, in
the case of Option Securities to acquire Convertible Securities, upon
conversion or exchange of the total maximum amount of such Convertible
Securities issuable upon the exercise of such Option Securities. If any of
such Convertible Securities or Option Securities shall have terminated,
lapsed or expired prior to exercise, exchange or conversion, the Exercise
Price then in effect shall forthwith be readjusted (effective only with
respect to any exercise of Warrants after such readjustment) to the
Exercise Price which would then be in effect had the adjustment not been
made upon the issuance, sale, distribution or grant of such Convertible
Securities or Option Securities.
(d) Adjustment in Number of Shares. Upon each adjustment to the
Exercise Price pursuant to subsections (a), (b) or (c) of this Section 5,
this Warrant shall thereafter evidence the right to receive upon payment of
the adjusted Exercise Price that number of Shares obtained by multiplying
the number of Shares previously issuable upon exercise of this Warrant by a
fraction the numerator of which is the Exercise Price prior to adjustment
and the denominator of which is the adjusted Exercise Price.
-8-
<PAGE>
(e) Non-Cash Consideration. If any shares of Common Stock, Option
Securities or Convertible Securities shall be issued, sold, distributed or
granted for a consideration other than cash, the amount of the
consideration other than cash received by the Company shall be deemed to be
the fair market value of such consideration. If any shares of Common Stock,
Option Securities or Convertible Securities shall be issued in connection
with any merger in which the Company is the surviving corporation, the
amount of consideration therefor shall be deemed to be the fair market
value of such portion of the assets and business of the non-surviving
corporation as shall be attributable to such Common Stock, Option
Securities or Convertible Securities, as the case may be.
(f) Capital Reorganizations. If there shall be any consolidation,
merger or amalgamation of the Company with another person or entity or any
acquisition of capital stock of the Company by means of a share exchange,
other than a consolidation, merger or share exchange in which the Company
is the continuing corporation or any sale or conveyance of the property of
the Company as an entirety or substantially as an entirety, or any
reorganization or recapitalization of the Company (any such event being
called a "Capital Reorganization"), then the Holder of this Warrant shall
no longer have the right to purchase Common Stock, but shall have instead
the right to purchase, upon exercise of this Warrant, the kind and amount
of shares of stock and other securities and property (including cash) which
the Holder would have owned or have been entitled to receive pursuant to
such Capital Reorganization if this Warrant had been exercised immediately
prior to the effective date of such Capital Reorganization. As a condition
to effecting any Capital Reorganization, the Company or the successor or
surviving corporation, as the case may be, shall assume by a supplemental
agreement, reasonably satisfactory in form, scope and substance to the
Holder (which shall be mailed or delivered to the Holder of this Warrant at
the last address of such Holder appearing on the books of the Company) the
obligation to deliver to such Holder such shares of stock, securities, cash
or property as, in accordance with the foregoing provisions, such Holder
may be entitled to purchase, and all other obligations of the Company set
forth in this Warrant.
(g) Determination of Fair Market Value. Subject to the provisions set
forth below, the fair market value of the Company or of any non-cash
consideration received by the Company upon any Common Stock Distribution
shall be determined in good faith by the Board of Directors of the Company.
Upon each such determination, the Company shall promptly give notice
thereof to the Holder, setting forth in reasonable detail the calculation
of such fair market value and the method and basis of determination thereof
(the "Company Determination"). If the Holder shall disagree with the
Company Determination and shall, by notice to the Company given within
thirty (30) days after the Company's notice of the Company Determination,
elect to dispute the Company Determination, the Company shall, within
thirty (30) days after such notice, engage an investment bank or other
qualified appraisal firm reasonably acceptable to the Holder to make an
independent determination of the fair market value of the Company or of any
-9-
<PAGE>
non-cash consideration received by the Company upon any Common Stock
Distribution (the "Appraiser Determination"). The Appraiser Determination
shall be final and binding on the Company and the Holder. In the event such
Appraiser Determination is greater than the Company Determination, the cost
of such Appraiser Determination shall be borne by the Company; otherwise,
the cost of such Appraiser Determination shall be borne by the Holder. In
determining the fair market value of the Company pursuant to this Section
5(g), neither the Board of Directors of the Company nor any appraiser shall
take into account or otherwise make any discount in respect of (i) any
restriction on the transfer of shares of Common Stock of the Company or
this Warrant, (ii) any minority interest, (iii) any lack of liquidity of
shares of Common Stock of the company or this Warrant due to the fact that
there may be no public or private market for such shares or this Warrant,
or (iv) the voting status of this Warrant or any share of Common Stock of
the Company, whether under the articles of incorporation or bylaws of the
Company, by agreement or otherwise.
(h) Adjustment Rules. Any adjustments pursuant to this Section 5 shall
be made successively whenever an event referred to herein shall occur. No
adjustment shall be made pursuant to this Section 5 in respect of the
issuance from time to time of shares of Common Stock upon the exercise of
this Warrant or upon the exercise or conversion of any other Option
Securities or Convertible Securities.
(i) Proceedings Prior to Any Action Requiring Adjustment. As a
condition precedent to the taking of any action which would require an
adjustment pursuant to this Section 5, the Company shall take any action
which may be necessary, including obtaining regulatory approvals or
exemptions, in order that (a) the Company may thereafter validly and
legally issue as fully paid and nonassessable all shares of Common Stock
which the Holder of this Warrant is entitled to receive upon exercise
thereof.
(j) Notice of Adjustment. Not less than 10 days prior to the record
date or effective date, as the case may be, of any action which requires an
adjustment or readjustment pursuant to this Section 5, the Company shall
give notice to the Holder of such event, describing such event in
reasonable detail and specifying the record date or effective date, as the
case may be, and, if determinable, the required adjustment and the
computation thereof. If the required adjustment is not determinable at the
time of such notice, the Company shall give notice to the Holder of such
adjustment and computation promptly after such adjustment becomes
determinable.
6. Transfer of Warrant. Subject to the provisions of Section 4 hereof, this
Warrant may be transferred, in whole or in part, to any person or business
entity, by presentation of the Warrant to the Company with written instructions
for such transfer. Upon such presentation for transfer, the Company shall
promptly execute and deliver a new Warrant or Warrants in the form hereof in the
name of the assignee or assignees and in the denominations specified in such
-10-
<PAGE>
instructions. The Company shall pay all expenses incurred by it in connection
with the preparation, issuance and delivery of Warrants under this Section.
7. Warrant Holder Not Shareholder; Rights Offering; Preemptive Rights.
Except as otherwise provided herein, this Warrant does not confer upon the
Holder, as such, any right whatsoever as a shareholder of the Company including,
but not limited to, any right to vote. Notwithstanding the foregoing, if the
Company should offer to all of the Company's shareholders the right to purchase
any securities of the Company, then all shares of Common Stock that are subject
to this Warrant shall be deemed to be outstanding and owned by the Holder and
the Holder shall be entitled to participate in such offer. The Company shall not
grant any preemptive rights with respect to any of its capital stock if such
preemptive rights are exercisable upon exercise of this Warrant.
8. Observation Rights; Interim Dividends.
(a) Observation Rights. The Holder of this Warrant shall receive notice of
and be entitled to attend or may send a representative to attend all meetings of
the Company's Board of Directors in a non-voting observation capacity and shall
receive a copy of all correspondence and information delivered to the Company's
Board of Directors. The Holder agrees to abide by all written rules and policies
of the Company regarding confidential information to the extent such rules and
policies are generally applicable to the directors of the Company and the
Company has given such Holder notice of and a copy of such rules and policies.
(b) Interim Dividends. If the Company pays a dividend or makes a
distribution to the holders of its capital stock of any securities (other than
capital stock) or property (including cash and securities of other companies) of
the Company, or any rights, options or warrants to purchase securities (other
than capital stock) or property (including securities of other companies) of the
Company, then, simultaneously with the payment of such dividend or the making of
such distribution, and as a condition precedent to its right to do so, it will
pay or distribute to the Holder of this Warrant an amount of property (including
without limitation cash) and/or securities (including without limitation
securities of other companies) of the Company as would have been received by
such Holder had it exercised this Warrant and received all of the Shares of
Common Stock issuable upon the exercise of this Warrant immediately prior to the
record date (or other applicable date) used for determining stockholders of the
Company entitled to receive such dividend or distribution. Anything in Section 5
to the contrary notwithstanding, no adjustment to the Exercise Price shall be
made for any distribution of Convertible Securities of the Company to the Holder
pursuant to the provisions of this Section 8.
9. Financial Statements and Reports.
-11-
<PAGE>
(a) Unless the Company is otherwise furnishing such information to the
Holder hereof, from the date hereof until the earlier to occur of (i) the
exercise in full of this Warrant, (ii) its termination, or (iii) an initial
public offering of Common Stock, the Company shall deliver to the Holder the
following financial information:
(i) within one hundred and twenty (120) days after the end of each
fiscal year of Company, audited consolidated financial statements of
Company, including a balance sheet as of the close of such fiscal year, an
income statement, statements of changes in stockholders equity, and of cash
flows for such fiscal year, all in reasonable detail, prepared in
accordance with generally accepted accounting principles consistently
applied, and with the report thereon of independent public accountants
acceptable to the Holder (provided any "Big 6" accounting firm shall be
deemed acceptable);
(ii) within forty-five (45) days after the end of each calendar month
ending on or before September 30, 1997, a consolidated balance sheet of the
Company as of the close of such month and consolidate each statements of
earnings and retained earnings of the Company for such month and for the
prior months of the current fiscal year (on a year-to-date basis), all in
reasonable detail and unaudited but prepared on the basis of GAAP
consistently applied (except for the absence of footnotes and subject to
year-end adjustments), together with a report of the Company's management
with respect to such financial statements;
(iii) within thirty (30) days after the end of each calendar month
ending after September 30, 1997, a consolidated balance sheet of Company as
of the close of such month and consolidated statements of earnings and
retained earnings of Company for such month and for the prior months of the
current fiscal year (on a year to date basis), each compared to the same
period in the previous fiscal year, all in reasonable detail, and unaudited
but prepared on the basis of generally accepted accounting principles
consistently applied (except for the absence of footnotes and subject to
year-end adjustments), together with a report of Company's management with
respect to such financial statements; and
(iv) with reasonable promptness, such other financial data as the
Holder may reasonably request.
(b) At any time subsequent to an initial public offering of Common Stock,
the Company shall deliver to the Holder, promptly upon its becoming available, a
copy of each report, notice or proxy statement sent by the Company to its
stockholders generally, and of each
-12-
<PAGE>
regular or periodic report filed pursuant to the Securities Exchange Act of 1934
and any registration statement, prospectus or written communication (other than
transmittal letters) pursuant to the Securities Act filed by the Company with
the Securities and Exchange Commission (the "Commission") or any national
securities exchange.
10. Registration.
(a) If the Company shall receive from any Holders at any time, but in no
event earlier than one (1) year after the Company's initial public offering of
Common Stock pursuant to a firm commitment underwriting (the "Company's IPO"), a
written request that the Company effect any registration with respect to the
Shares, in an offering to be firmly underwritten by underwriters selected by the
initiating Holders and subject to the consent of the Company, which consent
shall not be unreasonably withheld, the Company will as soon as practicable, use
its best efforts to effect such registration (including, without limitation,
filing post-effective amendments, appropriate qualifications under applicable
blue sky or other state securities laws, and appropriate compliance with the
Securities Act) and as would permit or facilitate the sale and distribution of
all or such portion of such Shares as are specified in such request.
Notwithstanding the foregoing, the Company shall not be required to effect, or
take any action to effect, a registration pursuant to this subparagraph (a) if
the Company has effected two (2) prior registrations pursuant to this
subparagraph.
(b) The Company agrees that if at any time after the date hereof the
Company shall propose to file a registration statement with respect to any of
its Common Stock on a form suitable for a secondary offering (including the
Company's IPO), it will give notice in writing to such effect to the Holders at
least thirty (30) days prior to such filing, and, at the written request of any
such registered holder, made within ten (10) days after the receipt of such
notice, will use its best efforts to include therein at the Company's cost and
expense (including the fees and expenses of counsel to such Holders, but
excluding underwriting discounts, commissions and filing fees attributable to
the Shares included therein) such of the Shares as such Holders shall request;
provided, however, that if the offering being registered by the Company is
underwritten and if the representative of the underwriters certifies in writing
that the inclusion therein of the Shares would materially and adversely affect
the sale of the securities to be sold by the Company thereunder, then the
Company shall be required to include in the offering only that number of
securities owned by shareholders, including the Shares issuable upon exercise of
this Warrant, which the underwriters determine in their sole discretion will not
jeopardize the success of the offering (such securities so included to be
apportioned pro rata among all selling shareholders according to the total
amount of such securities entitled to be included therein (but for this proviso
and any other similar cutback provisions to which other selling shareholders are
subject), but in no event shall the total amount of Shares included in the
offering by less than the number of securities included in the offering by any
other single selling shareholder). Nothing in this subparagraph (b) shall be
deemed to require the Company to proceed under this subparagraph
-13-
<PAGE>
with any registration of its securities after giving the notice herein provided.
(c) Whenever required under this Agreement to use its best efforts to
effect the registration of any of the Shares, the Company shall, as
expeditiously as reasonably possible:
(i) Prepare and file with the Securities and Exchange Commission (the
"Commission") a registration statement covering such Shares and use its
best efforts to cause such registration statement to be declared effective
by the Commission as expeditiously as possible and to keep such
registration effective until the earlier of (A) the date when all Shares
covered by the registration statement have been sold or (B) two hundred
seventy (270) days from the effective date of the registration statement;
provided, that before filing a registration statement or prospectus or any
amendment or supplements thereto, the Company will furnish to each Holder
of Shares covered by such registration statement and the underwriters, if
any, copies of all such documents proposed to be filed (excluding exhibits,
unless any such person shall specifically request exhibits), which
documents will be subject to the review of such Holders and underwriters,
and the Company will not file such registration statement or any amendment
thereto or any prospectus or any supplement thereto (including any
documents incorporated by reference therein) with the Commission if (A) the
underwriters, if any, shall reasonably object to such filing or (B) if
information in such registration statement or prospectus concerning a
particular selling Holder has changed and any Holder of Shares or the
underwriters, if any, shall reasonably object.
(ii) Prepare and file with the Commission such amendments and
post-effective amendments to such registration statement as may be
necessary to keep such registration statement effective during the period
referred to in Section 10(c)(i) and to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by
such registration statement, and cause the prospectus to be supplemented by
any required prospectus supplement, and as so supplemented to be filed with
the Commission pursuant to Rule 424 under the Securities Act.
(iii) Furnish to the selling Holder(s) of Shares such numbers of
copies of such registration statement, each amendment thereto, the
prospectus included in such registration statement (including each
preliminary prospectus), each supplement thereto and such other documents
as they may reasonably request in order to facilitate the disposition of
the Shares owned by them.
(iv) Use its best efforts to register and qualify under such other
securities laws of such jurisdictions as shall be reasonably requested by
any selling Holder of Shares and do any and all other acts and things which
may be reasonably necessary or advisable to enable such selling Holder to
consummate the disposition of the Shares
-14-
<PAGE>
owned by such Holder, in such jurisdictions; provided, however, that the
Company shall not be required in connection therewith or as a condition
thereto to qualify to transact business or to file a general consent to
service of process in any such states or jurisdictions.
(v) Promptly notify each selling Holder of Shares of the happening of
any event as a result of which the prospectus included in such registration
statement contains an untrue statement of a material fact or omits any fact
necessary to make the statements therein not misleading and, at the request
of any such Holder, the Company will prepare a supplement or amendment to
such prospectus so that, as thereafter delivered to the purchasers of such
Shares, such prospectus will not contain an untrue statement of a material
fact or omit to state any fact necessary to make the statements therein not
misleading.
(vi) Provide a transfer agent and registrar for all such Shares not
later than the effective date of such registration statement.
(vii) Enter into such customary agreements (including underwriting
agreements in customary form for such offering) and take all such other
actions as the underwriters, if any, reasonably request in order to
expedite or facilitate the disposition of such Shares (including, in
connection with a registration statement requested pursuant to Section
10(a), effecting a stock split or a combination of shares).
(viii) Subject to execution of customary confidentiality undertakings,
make available for inspection by any selling Holder of Shares or any
underwriter participating in any disposition pursuant to such registration
statement and any attorney, accountant or other agent retained by any such
selling Holder or underwriter, all financial and other records, pertinent
corporate documents and properties of the Company, and cause the officers,
directors, employees and independent accountants of the Company to supply
all information reasonably requested by any such seller, underwriter,
attorney, accountant or agent in connection with such registration
statement.
(ix) Promptly notify the selling Holder(s) of Shares and the
underwriters, if any, of the following events and (if requested by any such
person) confirm such notification in writing: (A) the filing of the
prospectus or any prospectus supplement and the registration statement and
any amendment or post-effective amendment thereto and, with respect to the
registration statement or any post-effective amendment thereto, the
declaration of the effectiveness of such documents, (B) any requests by the
Commission for amendments or supplements to the registration statement or
the prospectus or for additional information, (C) the issuance or threat of
issuance by the
-15-
<PAGE>
Commission of any stop order suspending the effectiveness of the
registration statement or the initiation of any proceedings for that
purpose and (D) the receipt by the Company of any notification with respect
to the suspension of the qualification of the Shares for sale in any
jurisdiction or the initiation or threat of initiation of any proceeding
for such purposes.
(x) Make every reasonable effort to prevent the entry of any order
suspending the effectiveness of the registration statement and obtain at
the earliest possible moment the withdrawal of any such order, if entered.
(xi) Cooperate with the selling Holder(s) of Shares and the
underwriters, if any, to facilitate the timely preparation and delivery of
certificates representing the Shares to be sold and not bearing any
restrictive legends if so permitted by the relevant warrant, shareholder
and other agreements, and enable such Shares to be in such lots and
registered in such names as the underwriters may request at least two (2)
business days prior to any delivery of the Shares to the underwriters.
(xii) Provide a CUSIP number for all the Shares not later than the
effective date of the registration statement.
(xiii) Prior to the effectiveness of the registration statement and
any post-effective amendment thereto and at each closing of an underwritten
offering, (A) make such representations and warranties to the selling
Holder(s) of Shares and the underwriters, if any, with respect to the
Shares and the registration statement as are customarily made by issuers in
similar offerings; (B) use its best efforts to obtain "cold comfort"
letters and updates thereof from the Company's independent certified public
accountants addressed to the selling Holders of Shares and the
underwriters, if any, such letters to be in customary form and covering
matters of the type customarily covered in "cold comfort" letters by
underwriters in connection with similar offerings; (C) deliver such
documents and certificates as may be reasonably requested (1) by the
Holders of a majority of the Shares being sold, and (2) by the
underwriters, if any, to evidence compliance with clause (A) above and with
any customary conditions contained in the underwriting agreement or other
agreement entered into by the Company; and (D) obtain opinions of counsel
to the Company and updates thereof (which counsel and which opinions shall
be reasonably satisfactory to the underwriters, if any), covering the
matters customarily covered in opinions requested in similar offerings and
such other matters as may be reasonably requested by the selling Holders of
Shares and underwriters or their counsel. If customary for similar
offerings, such counsel shall also state that no facts have come to the
attention of such counsel which cause them to believe that such
registration statement, the prospectus contained therein, or any amendment
or supplement thereto, as of their respective effective or issue dates,
-16-
<PAGE>
contains any untrue statement of any material fact or omits to state any
material fact necessary to make the statements therein not misleading
(except that no statement need be made with respect to any financial
statements, notes thereto or other financial data or other expertized
material contained therein). If for any reason the Company's counsel is
unable to give such opinion, the Company shall so notify the Holders of the
Shares and shall use its best efforts to remove expeditiously all
impediments to the rendering of such opinion.
(xiv) Otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission, and make generally available to
its security holders earnings statements satisfying the provisions of
Section 11(a) of the Securities Act, no later than forty-five (45) days
after the end of any twelve-month period (or ninety (90) days, if such
period is a fiscal year) (A) commencing at the end of any fiscal quarter in
which the Shares are sold to underwriters in a firm or best efforts
underwritten offering, or (B) if not sold to underwriters in such an
offering, beginning with the first month of the first fiscal quarter of the
Company commencing after the effective date of the registration statement,
which statements shall cover such twelve-month periods.
(d) After the date hereof, the Company shall not grant to any holder of
securities of the Company any registration rights which have a priority greater
than or equal to those granted to Holder(s) pursuant to this Warrant without the
prior written consent of the Holder(s).
(e) The Company's obligations under Sections 10(a) and (b) above with
respect to each Holder of Shares are expressly conditioned upon such Holder's
furnishing to the Company in writing such information concerning such Holder and
the terms of such Holder's proposed offering as the Company shall reasonably
request for inclusion in the registration statement. If any registration
statement including any of the Shares is filed, then the Company shall indemnify
each Holder thereof (and each underwriter for such Holder and each person, if
any, who controls such underwriter within the meaning of the Securities Act)
from any loss, claim, damage or liability arising out of or based upon any
untrue statement of a material fact contained in such registration statement or
any omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except for any such
statement or omission based on information furnished in writing by such Holder
of the Shares expressly for use in connection with such registration statement;
and such Holder shall indemnify the Company (and each of its officers and
directors who has signed such registration statement, each other director and
each other person, if any, who controls the Company within the meaning of the
Securities Act, each underwriter for the Company and each person, if any, who
controls such underwriter within the meaning of the Securities Act) and each
other such Holder against any loss, claim, damage or liability arising out of or
based upon any such statement or omission which was made in reliance upon
information furnished in writing to the
-17-
<PAGE>
Company by such Holder of the Shares expressly for use in connection with such
registration statement.
(f) For purposes of this Section 10, all of the Shares shall be deemed to
be issued and outstanding, and all Holders shall be deemed to be holders of such
Shares.
11. Certain Notices. In case at any time the Company shall propose to:
(a) declare any cash dividend upon its Common Stock;
(b) declare any dividend upon its Common Stock payable in stock or
make any special dividend or other distribution to the holders of its
Common Stock;
(c) offer for subscription to the holders of any of its Common Stock
any additional shares of stock in any class or other rights;
(d) reorganize, or reclassify the capital stock of the Company, or
consolidate, merge or otherwise combine with, or sell all or substantially
all of its assets to, another corporation; or
(e) voluntarily or involuntarily dissolve, liquidate or wind up of the
affairs of the Company;
then, in any one or more of said cases, the Company shall give to the Holder, by
certified or registered mail, (i) at least ten (10) days' prior written notice
of the date on which the books of the Company shall close or a record shall be
taken for such dividend, distribution or subscription rights or for determining
rights to vote in respect of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up, and (ii) in
the case of such reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation or winding up, at least ten (10) days' prior written
notice of the date when the same shall take place. Any notice required by clause
(i) shall also specify, in the case of any such dividend, distribution or
subscription rights, the date on which the holders of Common Stock shall be
entitled thereto, and any notice required by clause (ii) shall specify the date
on which the holders of Common Stock shall be entitled to exchange their Common
Stock for securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up, as the case may be.
12. Co-Sale Rights.
(a) Co-Sale Right. J. W. Stealey (the "Selling Shareholder") shall not
enter into any transaction that would result in the sale by him of any Common
Stock now or hereafter owned by him, unless prior to such sale he shall give
notice to the Holder of his intention to
-18-
<PAGE>
effect such sale in order that Holder may exercise its rights under this Section
12 as hereinafter described. Such notice shall set forth (i) the number of
shares to be sold by the Selling Shareholder, (ii) the principal terms of the
sale, including the price at which the shares are intended to be sold, and (iii)
an offer by the Selling Shareholder to cause to be included with the shares to
be sold by him in the sale, on the same terms and conditions, the Shares
issuable or issued to the Holder pursuant to this Warrant.
(b) Rejection of Co-Sale Offer. If Holder has not accepted such offer in
writing within a period of ten (10) days from the date of receipt of the notice
specified in subsection (a) of this Section, then the Selling Shareholder shall
thereafter be free for a period of ninety (90) days to sell the number of shares
specified in such notice, at a price no greater than the price set forth in such
notice and on otherwise no more favorable terms to the Selling Shareholder than
as set forth in such notice, without any further obligation to Holder in
connection with such sale. In the event that the Selling Shareholder fails to
consummate such sale within such ninety-day period, the shares specified in such
notice shall continue to be subject to this Section.
(c) Acceptance of Co-Sale Offer. If the Holder accepts such offer in
writing within a period of ten (10) days from the date of receipt of the notice
specified in subsection (a) of this Section, such acceptance shall be
irrevocable unless the Selling Shareholder shall be unable to cause to be
included in his sale the number of Shares of stock held by the Holder and set
forth in the written acceptance. In that event, the Selling Shareholder and the
Holder shall participate in the sale on the basis of the Selling Shareholder and
the Holder (if more than one Holder such Holders as a group) each selling a pro
rata portion of the total number of such shares to be sold in the sale based
upon the number of shares that the Selling Shareholder and the Holder desire to
sell in such sale.
-19-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have set their hands as of the date
first above written.
INTERACTIVE MAGIC, INC.
a Maryland corporation
By: /s/ Robert L. Pickens
------------------------------------
Name: Robert L. Pickens
-------------------------------
Title: President
------------------------------
Attest: /s/ Nina Rutledge
-------------------------------
Name: Nina Rutledge
--------------------------
Title: Assistant Secretary
-------------------------
PETRA CAPITAL, LLC, a Georgia limited
liability company
By: Petra Capital Management, LLC,
Manager
By: /s/ John S. Stein III
------------------------------------
Name: John S. Stein III
-------------------------------
Title: Member
------------------------------
[SIGNATURE PAGE TO STOCK PURCHASE WARRANT]
<PAGE>
ANNEX A
Section 12 of this Warrant is hereby acknowledged and agreed to by the
undersigned shareholders of the Company as of the date first above written.
/s/ J.W. Stealey (SEAL)
- -----------------------------
J. W. STEALEY
<PAGE>
January 31, 1998
Interactive Magic, Inc.
215 Southport Drive, Suite 1000
Morrisville, North Carolina 27560
Attention: Mr. William J. Kaluza
Gentlemen:
We refer to the Loan and Security Agreement dated March 24, 1997, between
Interactive Magic, Inc. (the "Company") and Petra Capital, LLC, the warrant
dated March 24, 1997, granted to Petra Capital, LLC exercisable for shares of
Class A Common Stock (the "Warrant"), which provides demand and piggyback
registration rights with respect to the underlying shares of Class A Common
Stock of the Company, the Subordination Agreement dated March 19, 1997, between
J.W. Stealey and Petra Capital, LLC (the "Stealey Agreement"), and the
Subordination Agreement dated March 19, 1997, between Robert L. Pickens and
Petra Capital, LLC (the "Pickens Agreement").
Petra Capital, LLC hereby consents to the Company's offering and sale of
$3,500,000 of Series B Preferred Stock to Vertical Financial Holdings and the
related agreements attached hereto and to the conversion of $2,000,000 of debt
by J.W. Stealey into shares of the Company's Class A Common Stock, the
conversion of $600,000 of debt by Robert L. Pickens into shares of the Company's
Series C Preferred Stock and the granting of registration rights to Vertical
Financial Holdings (the "Offering"). Petra Capital, LLC waives any and all
breaches and defaults that have or may occur under Section 10(d) of the Warrant,
Section 2.2, 2.3, 2.5 or 2.6 of the Stealey Agreement or Section 2.2, 2.3, 2.5
or 2.6 of the Pickens Agreement. Petra Capital, LLC further agrees to amend
Section 10(b) of the Warrant by deleting Section 10(b) thereof in its entirety
and substituting the following in lieu thereof:
(b) If (but without any obligation to do so) the Company proposes
to register (including for this purpose a registration effected by
the Company for shareholders other than the Holders) any of its
stock or other securities under the Act in connection with the
public offering of such securities (on a form suitable for a
secondary offering), the Company shall, at such time, promptly
give each Holder written notice of such registration. Upon the
written request of each Holder given within twenty (20) days after
giving of such notice by the Company, the Company shall, subject
to the following, use its best efforts at the Company's cost and
expense (including the fees and expenses of counsel to such
Holders, but excluding underwriting discounts, commissions and
filing fees attributable to the Shares included therein), to cause
to be registered under the Act such of the Shares as such Holders
shall
<PAGE>
Interactive Magic, Inc.
January 31, 1998
Page 2
request. The Company shall not be required to include any Shares
unless the Holder thereof accepts the terms of the underwriting
agreement in customary form for selling shareholders, and then
only in such quantity as the underwriters determine in their sole
discretion will not jeopardize the success of the Offering by the
Company. If the total amount of securities, including Shares,
requested by shareholders and the Company to be included in such
offering exceeds the amount of securities that the underwriters
determine in their sole discretion is compatible with the success
of the offering, then the following priorities shall govern:
(i) If the underwritten offering has been initiated by the
Company, the Company shall include in such underwriting
(x) first, the securities the Company proposes to sell,
(y) second, the Shares and other securities entitled to
the benefit of registration rights existing on January 31,
1998, ("Third Party Registrable Securities") requested to
be included in such registration, and up to 15 % of the
then outstanding shares of Common Stock to the extent that
such shares are owned by directors or employees of the
Company ("Management Registrable Securities") and are
requested to be included in such registration, pro rata to
the extent practicable, on the basis of the number of
Shares, Third Party Registrable Securities and Management
Registrable Securities requested to be registered among
the participating holders of such securities, and (z)
third, any other securities requested to be included in
such registration, including Management Registrable
Securities that exceed the 15% threshold above, all as is
necessary in the opinion of the managing underwriter(s) to
reduce the size of the offering; and
(ii) If the underwritten offering has been initiated by
any holder of Third Party Registrable Securities entitled
to the benefit of any duly exercised demand registration
right, the Company shall include in such underwriting (x)
first, the securities requested to be included therein by
the holder of Third Party Registrable Securities
requesting such registration, (y) second, the Shares and
any other Third Party
<PAGE>
Interactive Magic, Inc.
January 31, 1998
Page 3
Registrable Securities or Management Registrable
Securities (provided that such Management Registrable
Securities shall not exceed 15% of the then outstanding
shares of Common Stock) requested to be included in such
registration, pro rata to the extent practicable, on the
basis of the number of Shares and such other Third Party
Registrable Securities and Management Registrable
Securities requested to be registered among the
participating holders of such securities, and (z) third,
any other securities, including Management Registrable
Securities that exceed the 15% threshold above, requested
to be included in such registration, all as is necessary
in the opinion of the managing underwriter(s) to reduce
the size of the offering.
Nothing in this subparagraph (b) shall be deemed to require
the Company to proceed under this subparagraph with any
registration of its securities after giving the notice herein
provided.
Section 10(a) of the Warrant is hereby amended by substituting 180
days for one year in the second line and adding the following proviso at the
end of the first sentence: provided, that, if requested in writing by the
managing underwriter of the Company's IPO, the Holders shall agree to
refrain from exercising their rights pursuant to this Section 10(a) until
the first annual anniversary of the effective date of the Company's IPO.
Please countersign in the space provided below to acknowledge your
concurrence with the foregoing.
Sincerely yours,
PETRA CAPITAL, LLC.
By: /s/ Rob Shuler
-------------------------
Name: Rob Shuler
Title:
Acknowledged and Agreed
this ___ day of ____, 1998
INTERACTIVE MAGIC, Inc.
By:
------------------------------
Name:
Title:
FIRST AMENDMENT TO
LOAN AND SECURITY AGREEMENT AND STOCK PURCHASE WARRANT
THIS FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT AND STOCK PURCHASE
WARRANT dated as of April 1, 1997 (the "Amendment") by INTERACTIVE MAGIC, INC.,
a Maryland corporation ("Borrower"), and PETRA CAPITAL, LLC, a Georgia limited
liability company ("Lender").
W I T N E S S E T H:
WHEREAS, Borrower and Lender are parties to that certain Loan and Security
Agreement, dated as of March 24, 1997 (as heretofore amended or modified, the
"Loan Agreement"; capitalized terms used herein and not otherwise defined shall
have the meanings ascribed to such terms in the Loan Agreement), pursuant to
which Borrower has borrowed and Lender has made a loan in the amount of Three
Million and No/100 Dollars ($3,000,000.00), upon the terms and conditions set
forth in the Loan Agreement;
WHEREAS, Borrower and Lender are parties to that certain Stock Purchase
Warrant, dated as of March 24, 1997 (as heretofore amended or modified, the
"Stock Warrant"; capitalized terms used herein and not otherwise defined shall
have the meanings ascribed to such terms in the Stock Warrant);
WHEREAS, the Lender and the Borrower, at the request of Borrower,
desire to amend certain terms of the Loan Agreement and the Stock Warrant;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth, and other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the Borrower and the Lender
hereto, intending to be legally bound, hereby agree to amend the Loan Agreement
as follows:
1. Section 4.25 of the Loan Agreement is hereby amended by replacing said
Section with the following:
4.25 The Interactive Creations Incorporated Merger. Upon consummation
of the merger by and among Interactive Creations Acquisition Corp., a North
Carolina corporation and wholly-owned subsidiary of Borrower and
Interactive Creations Incorporated, a Texas corporation, Borrower will (a)
cause the surviving corporation to execute a subsidiary guaranty and
security agreement, in each case in form and substance satisfactory to
Lender, guaranteeing on an unconditional basis the due and punctual payment
of all Secured Obligations and granting a security interest in
substantially all of the assets of the surviving corporation, (b) pledge
the surviving corporation's stock to Lender as security for the Secured
Obligations pursuant to a pledge agreement in form
-1-
<PAGE>
and substance satisfactory to Lender, and (c) provide such opinions of
Borrower's counsel as Lender shall reasonably request.
2. Section 6.1(k) of the Loan Agreement is hereby amended by replacing said
Section with the following:
(k) Borrower shall fail to provide the documents required under
Section 4.25 of this Agreement within thirty (30) days of consummation of
the merger by and among Interactive Creations Acquisition Corp., a North
Carolina corporation and wholly-owned subsidiary of Borrower, and
Interactive Creations Incorporated, a Texas corporation.
3. Section 1(c) of the Stock Warrant is hereby amended by replacing said Section
with the following:
(c) In addition to the rights granted to Holder under subsection (a)
and (b) of this Section 1, if on September 21, 1997, any indebtedness
evidenced by the Note or any other monetary obligation under the Loan
Agreement is outstanding, the Holder shall have the right to purchase
56,546 shares of Common Stock; provided, however, that the Holder will not
be entitled to the rights granted to Holder under this subsection (c) of
Section 1 if the merger by and among Interactive Creations Acquisition
Corp., a North Carolina corporation and wholly owned subsidiary of the
Company and Interactive Creations Incorporated, a Texas corporation, has
not been consummated prior to the time of any exercise of this Warrant
pursuant to Section 3 hereof.
4. Except as expressly provided herein, the Loan Agreement and the Stock Warrant
shall continue in full force and effect, and the amended terms and conditions of
the Loan Agreement and the Stock Warrant are expressly incorporated herein and
ratified and confirmed in all respects. This Amendment is not intended to be or
to create, nor shall it be construed as, a novation or an accord and
satisfaction.
5. From and after the date hereof, references to the Loan Agreement shall be
references to the Loan Agreement as amended hereby and references to the Stock
Warrant shall be references to the Stock Warrant as amended hereby.
6. Borrower hereby affirms that no Event of Default (as defined in the Loan
Agreement) has occurred and is continuing under the Loan Agreement as amended
hereby.
7. THIS AMENDMENT SHALL BE GOVERNED IN ALL RESPECTS BY AND CONSTRUED IN
ACCORDANCE WITH GEORGIA LAW.
8. This Amendment may be executed in any number of counterparts, each of which
shall be deemed to be an original and all of which, taken together, shall
constitute one and the same document.
-2-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment, or
have caused this Amendment to be executed by the duly authorized officers, as of
the day and year first above written.
BORROWER:
INTERACTIVE MAGIC, INC.
By: /s/ Robert L. Pickens
--------------------------
Name: Robert L. Pickens
Title: President
Attest: /s/ Nina Jo C. Rutledge
--------------------------
Name: Nina Jo C. Rutledge
Title: Assistant Secretary
[SIGNATURE PAGE
FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT AND STOCK
PURCHASE WARRANT]
-3-
<PAGE>
LENDER:
PETRA CAPITAL, LLC
By: PETRA CAPITAL MANAGEMENT, LLC
By: /s/ John S. Stein, III
--------------------------
John S. Stein, III
Member
[SIGNATURE PAGE
FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT AND STOCK
PURCHASE WARRANT]
-4-
Borrower: INTERACTIVE MAGIC
Account Number: 432-0041770 Note Number: 00013
Address: 215 SOUTHPORT DR STE 1000 ______________, North Carolina
MORRISVILLE, NC 27560 Date: AUGUST 25, 1997
BB&T
PROMISSORY NOTE
THE UNDERSIGNED REPRESENTS THAT THE LOAN EVIDENCED HEREBY IS BEING OBTAINED FOR
BUSINESS/COMMERCIAL OR AGRICULTURAL PURPOSES. For value received, the
undersigned, jointly and severally, if more then one, promises to pay to BRANCH
BANKING AND TRUST COMPANY, a North Carolina banking corporation (the "Bank"), or
order, at any of Bank's offices in the above referenced city (or such other
place or places that may be hereafter designated by Bank), the sum of
TWO MILLION SEVEN HUNDRED FIFTY THOUSAND DOLLARS & 00/100
Dollars ($2,750,000.00), in immediately available coin or currency of the United
States of America. Interest shall accrue from the date hereof on the unpaid
principal balance outstanding from time to time at the:
[ ] Fixed rate of _____________% per annum.
|X| Variable rate of the Bank's Prime Rate plus 0.000% per annum to be adjusted
Daily as the Bank's Prime Rate changes. If checked here [ ], the interest
rate will not exceed a(n) [ ] fixed [ ] average maximum rate of ________%
or a [ ] floating maximum rate of the greater of ______% of the Bank's
Prime Rate; and the interest rate will not decrease below a fixed minimum
rate of ______%. If an average maximum rate is specified, a determination
of any required reimbursement of interest by Bank will be made: [ ] when
Note is repaid in full by Borrower [ ] annually beginning on
______________.
[ ] ___________________________________________________________________________
Principal and interest is payable as follows:
|X| Principal (plus any accrued interest not otherwise scheduled herein) is due
in full at maturity on AUGUST 14, 1998
[ ] Principal plus accrued interest
[ ] Payable in consecutive ______ investments of [ ] Principal )
[ ] Principal )commencing on
and interest)
___________________________________________________________________________
and continued on the same day of each calendar period thereafter, in _____
equal payments of $_______, with one final payment of all remaining
principal and accrued interest due on _______________.
[ ] Business ChoiceLine Payment Option: 2% of outstanding balance is payable
monthly commencing on _______________ and continuing on the same day of
each calendar period thereafter, with one final payment of all remaining
principal and accrued interest due on __________________.
|X| Accrued interest is payable Monthly commencing on SEPTEMBER 14, 1997 and
continuing on the same day of each calendar period thereafter, with one
final payment of all remaining interest due on AUGUST 14, 1998.
|X| Prior to an event of default, Borrower may borrow, repay, and reborrow
hereunder pursuant to the terms of the Loan Agreement, hereinafter defined.
[ ] ___________________________________________________________________________
In addition, the undersigned promises to pay to Bank, or order, a late fee
in the amount of four percent (4%) of any installment past due for fifteen (15)
or more days. When any installment payment is past due for fifteen (15) or more
days, subsequent payments shall first be applied to the past due balance. All
interest shall be computed and charged for the actual number of days elapsed on
the basis of a year consisting of three hundred sixty (360) days. In the event
periodic accruals of interest shall exceed any periodic fixed payment amount
described above, the fixed payment amount shall be immediately increased, or
additional supplemental interest payments required on the same periodic basis as
specified above (increased fixed payments or supplemental payments to be
determined in the Bank's sole discretion), in such amounts and at such times as
shall be necessary to pay all accruals of interest for the period and all
accruals of unpaid interest from previous periods. Such adjustments to the fixed
payment amount or supplemental payments shall remain in effect for so long as
the interest accruals shall exceed the original fixed payment amount and shall
be further adjusted upward or downward to reflect changes in the variable
interest rate. In no event shall the fixed payment amount be reduced below the
original fixed payment amount specified above.
-1-
<PAGE>
This note ("NOTE") is given by the undersigned in connection with the
following agreements (if any) between the undersigned and the Bank: Deed(s) of
Trust / S.C. Mortgage(s) granted in favor of Bank as beneficiary / mortgagee:
[ ] dated ______________ in the maximum principal amount of $_______ granted by
___________________________________________________________________________
[ ] dated ______________ in the maximum principal amount of $_______ granted by
___________________________________________________________________________
Security Agreement(s) conveying a security Interest in favor of Bank:
[ ] dated _________________ given by __________________________________________
___________________________________________________________________________
[ ] dated _________________ given by __________________________________________
___________________________________________________________________________
[ ] Loan Agreement dated ____________ executed by _____________________________
[ ] ___________________________________________________________________________
All of the terms, conditions and covenants of the above described agreements
(the "Agreements") are expressly made a part of this Note by reference in the
same manner and with the same effect as if set forth herein at length and any
holder of this Note is entitled to the benefits of and remedies provided in the
Agreements and any other agreements by and between the undersigned and the Bank.
In addition to collateral pledged pursuant to the terms of the Agreements
(if any) described above, the undersigned, as collateral security for the
indebtedness evidenced by this note, hereby grants the Bank a security interest
and lien in and to all deposit accounts, certificates of deposit, securities and
stocks now or hereafter in Bank's possession or on deposit with the Bank
Including but not limited to the following pledged to Bank: BB&T Savings
Account(s)/Instruments(s), including all renewals, amendments, and proceeds
thereof (if applicable):
[ ] #______________ in the amount of $_______________ in the name(s) of
___________________________________________________________________________
[ ] #______________ in the amount of $_______________ in the name(s) of
___________________________________________________________________________
|X| Pledge of Investment Account and Notice of Security Interest in Investment
Securities Account of John W. Stealey Account #120-686928 held at Piper
Jaffray, Inc. and dated August 25, 1997.
If any stock or securities are pledged to Bank herein, the security
interest includes all stock splits, reissued shares, substituted shares, and all
proceeds thereof, which the undersigned promises to deliver to Bank.
No delay or omission on the part of the holder in exercising any right
hereunder shall operate as a waiver of such right or of any other right of such
holder, nor shall any delay, omission or waiver on any one occasion be deemed a
bar to or waiver of the same or of any other right on any future occasion. Every
one of the undersigned and every endorser or guarantor of this note regardless
of the time, order or place of signing waives presentment, demand, protest and
notices of every kind and assents to any one or more extensions or postponements
of the time of payment or any other indulgences, to any substitutions, exchanges
or releases of collateral if at any time there be available to the holder
collateral for this note, and to the additions or releases of any other parties
or persons primarily or secondarily liable.
The failure to pay any part of the principal or interest when due on this
Note or to fully perform any covenant, obligation or warranty on this or on any
other liability to the Bank by any one or more of the undersigned, by any
affiliate of the undersigned (as defined in 11 USC Section (101) (2)), or by any
guarantor or surety of this Note (said affiliate, guarantor, and surety are
herein called Obligor), or if any financial statement or other representation
made to the Bank by any of the undersigned or any Obligor shall be found to be
materially incorrect or incomplete, or in the event the default pursuant to any
of the Agreements or any other obligation of any of the undersigned of any
Obligor in favor of the Bank, or in the event the Bank demands that the
undersigned secure or provide additional security for its obligations under this
Note and security deemed adequate and sufficient by the Bank is not given when
demanded, or in the event one or more of the undersigned or any Obligor shall
die, terminate its existence, allow the appointment of a receiver for any part
of its property, make an assignment for the benefit of creditors, or where a
proceeding under bankruptcy or
-2-
<PAGE>
insolvency laws is initiated by or against any of the undersigned or any
Obligor, or in the event the Bank should otherwise deem itself, its security
interest, or any collateral unsafe or insecure; or should the Bank in good faith
believe that the prospect of payment or other performance is impaired, or if
there is an attachment, execution, or other judicial seizure of all or any
portion of the Borrower's or any Obligor's assets, including an action or
proceeding to seize any funds on deposit with the Bank, and such seizure is not
discharged within 20 days, or if final judgment for the payment of money shall
be rendered against the Borrower or any Obligor which is not covered by
insurance and shall remain undischarged for a period of 30 days unless such
judgment or execution thereon is effectively stayed, or the termination of any
guaranty agreement given in connection with this Note, then any one of the same
shall be a material default hereunder and this Note and other debts due the Bank
by any one or more of undersigned shall immediately become due and payable
without notice, at the option of the Bank. From and after any event of default
hereunder, interest shall accrue on the sum of the principal balance and accrued
interest then outstanding at the variable rate equal to the Bank's Prime Rate
plus 5% per annum ("Default Rate"), provided that such rate shall not exceed at
any time the highest rate of interest permitted by the laws of the State of
North Carolina; and further provided that such rate shall apply after judgment.
In the event of any default, the then remaining unpaid principal amount and
accrued but unpaid interest then outstanding shall bear interest at the Default
Rate called for hereunder until such principal and interest have been paid in
full. In addition, upon default, the Bank may pursue its full legal remedies at
law or equity, and the balance due hereunder may be charged against any
obligation of the Bank to any party including any Obligor. Bank shall not be
obligated to accept any check, money order, or other payment instrument marked
"payment in full" on any disputed amount due hereunder, and Bank expressly
reserves the right to reject all such payment instruments. Borrower agrees that
tender of its check or other payment instrument so marked will not satisfy or
discharge its obligation under this Note, disputed or otherwise, even if such
check or payment instrument is inadvertently processed by Bank unless in fact
such payment is in fact sufficient to pay the amount due hereunder.
The term "Prime Rate," if used herein, means the rate of interest per annum
announced by the Bank from time to time and adopted as its Prime Rate. The Prime
Rte is one of several rate indexes employed by the Bank when extending credit.
Any change in the interest rate resulting from a change in the Bank's Prime Rate
shall become effective as of the opening of business on the effective date of
the change. If this Note is placed with an attorney for collection, the
undersigned agrees to pay, in addition to principal and interest, all costs of
collection, including but not limited to reasonable attorneys' fees. All
obligations of the undersigned and of any Obligor shall bind his heirs,
executors, administrators, successors, and/or assigns. Use of the masculine
pronoun herein shall include the feminine and the neuter, and also the plural.
If more than one party shall execute this Note, the term "undersigned" as used
herein shall mean all the parties signing this Note and each of them, and all
such parties shall be jointly and severally obligated hereunder. Wherever
possible, each provision of this Note shall be interpreted in such a manner to
be effective and valid under applicable law, but if any provision of this Note
shall be prohibited by or invalid under such law, such provision shall be
ineffective but only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Note. All of the undersigned hereby waive all exemptions and homestead laws. The
proceeds of the loan evidenced by this Note may be paid to any one or more of
the undersigned. From time to time the maturity date of this Note may be
extended, or this Note may be renewed in whole or in part, or a new note of
different form may be substituted for this Note, or the rate of interest may be
modified, or changes may be made in consideration of loan extensions, and the
holder hereof, from time to time may waive or surrender, either in whole or in
part any rights, guaranties, secured interest, or liens, given for the benefit
of the holder in connection with the payment and the securing the payment of
this Note; but no such occurrence shall in any manner affect, limit, modify, or
otherwise impair any rights, guaranties or security of the holder not
specifically waived, released, or surrendered in writing, nor shall the
undersigned makers, or any guarantor, endorser, or any person who is or might be
liable hereon, either primarily or contingently, be released from such event.
The holder hereof, from time to time, shall have the unlimited right to release
any person who might be liable hereon, and such release shall not affect or
discharge the liability of any other person who is or might be liable hereon,
either primarily or contingently, be released from such event. The holder
hereof, from time to time, shall have the unlimited right to release any person
who might be liable hereon, and such release shall not affect or discharge the
liability of any other person who is or might be liable hereon. No waivers and
modifications shall be valid unless in writing and signed by the Bank. The Bank
may, at its option, charge any fees for the modification, renewal, extension, or
amendment of any of the terms of the Note permitted by N.C.G.S. ss. 24-1.1. In
case of a conflict between the terms of this Note and the Loan Agreement or
Commitment Letter issued in connection herewith, the priority of controlling
terms shall be first this Note, then the Loan Agreement, and then the Commitment
Letter. This Note shall be governed by and construed in accordance with the laws
of North Carolina; provided however that any Mortgage encumbering the Borrower's
property in South Carolina shall be governed by and construed in accordance with
the laws of South Carolina, and the Borrower hereby submits to the jurisdiction
of South Carolina in connection with any foreclosure or enforcement proceeding
undertaken in connection with the Borrower's property situated in South
Carolina.
CREDIT LIFE AND DISABILITY INSURANCE
-3-
<PAGE>
Subject to contain underwriting criteria and limitations, INDIVIDUAL BORROWERS
AND ADDITIONAL CO-MAKERS HAVE THE RIGHT TO REQUEST CREDIT LIFE AND DISABILITY
INSURANCE PROTECTION FOR THIS LOAN. One or two Borrowers/Co-makers may be
covered by BB&T Credit Life Insurance, and one Borrower/Co-maker may be covered
by BB&T Credit Disability Insurance. However, the purchase of credit life and
credit disability insurance from the Bank is not a condition of obtaining this
loan.
I, the undersigned, desire the credit insurance with the cost and terms
described below and promise to pay the premium of such insurance coverage.
I understand that I may cancel this credit insurance at any time. I
represent that, to the best of my knowledge, I am in good health and am
insurable.
[ ] Product I: Complete the following: [ ] Product II: Indicate Product II
and complete a separate
application only.
<TABLE>
<CAPTION>
CREDIT LIFE INSURANCE Effective Date Term in Mos. Initial Ins. Amount Credit Life Premium
<S> <C> <C> <C> <C> <C>
[ ] Single [ ] Level
[ ] Joint [ ] Decreasing ______________ ___________ $__________________ $__________________
</TABLE>
CREDIT DISABILITY INSURANCE Monthly Benefit Amount Credit Disability Premium
Effective Date and Terms in Mos.
Some as Credit Life Insurance Above
_______________________ $____________________ $________________________
Credit Disability insurance is subject to a 14-day elimination period and a
60-month maximum benefit period. Only the Borrower or Co-Maker who signs the
first line under "Signature(s) of Insured" is covered by Credit Disability
Insurance.
Date of Birth Signature(s) of Insured Total Credit Life and Disability
Insurance Premium
_____________ ____________________________
Signature of Primary Insured
_____________ ____________________________ $___________________________
Signature of Secondary Insured
(SIGNATURES ON FOLLOWING PAGE)
-4-
<PAGE>
BB&T
PROMISSORY NOTE SIGNATURE PAGE
Borrower: Interactive Magic
Account Number: 432-0041770 Note Number: 00013
Note Amount: 2,750,000.00 Date: August 25, 1997
Notice of Right to Copy of Appraisal: If a 1-4 family residential dwelling is
pledged as collateral for this Note, you, the undersigned, have a right to a
copy of the real estate appraisal report used in connection with your
application for credit. If you wish to receive a copy, please notify in writing
the branch office where you applied for credit. You must forward your request to
the Bank no later than 90 days after the date of this Note. In your request
letter, please provide your name, mailing address, appraised property address,
the date of this Note, and the Account and Note numbers shown on the front of
this Note.
IN WITNESS WHEREOF, the undersigned, on the day and year first written above,
has caused this note to be executed under seal.
If Borrower is a Corporation:
ATTEST: /s/ Nina Jo C. Rutledge Interactive Magic
----------------------- -----------------
NAME OF CORPORATION
Title: Assistant Secretary By: /s/ J. W. Stealey
-----------------
Title: CEO
[Affix seal or insert name of
corporation in seal to adopt By:____________________________________
as seal of Borrower]
Title:_________________________________
-5-
<PAGE>
If Borrower is a Partnership, Limited Liability Company, or Limited
Liability Partnership:
WITNESS:
NAME OF PARTNERSHIP, LLC, OR LLP
______________________________ By:______________________________ (SEAL)
GENERAL PARTNER OR MANAGER
______________________________ By:______________________________ (SEAL)
GENERAL PARTNER OR MANAGER
______________________________ By:______________________________(SEAL)
GENERAL PARTNER OR MANAGER
If Borrower Is an Individual
WITNESS:
______________________________ _________________________________ (SEAL)
Additional Co-makers
WITNESS:
______________________________ _________________________________ (SEAL)
______________________________ _________________________________ (SEAL)
______________________________ _________________________________ (SEAL)
______________________________ _________________________________ (SEAL)
-6-
[BB&T Letterhead]
March 24, 1998
Mr. John W. Stealey
215 Southport Drive, Suite 1000
Morrisville, NC 27560
RE: Secured Loan In The Original Principal Amount Of $2,750,000.00,
Loan #432-0041770, Note #00013
Dear Mr. Stealey:
This letter sets forth certain of the terms under which BRANCH BANKING AND
TRUST COMPANY (the "Bank") has agreed to make a loan to Interactive Magic, Inc.
("Borrower") in the principal amount of Two Million Seven Hundred Fifty Thousand
and 00/100 Dollars ($2,750,000.00) (the "Loan"). The Loan shall be secured by
the pledge and assignment of, and the grant of a security interest to the Bank
in your securities account with NationsBank Montgomery Securities LLC (the
"Broker"), Account No. 110-70541, together with all securities entitlements and
other financial assets and investment property held therein at any time (whether
now owned or hereafter acquired), including, without limitation, stocks, bonds,
units, mutual funds, government securities, instruments, debentures, and
property of every kind comprising the Account, whether certificated,
uncertificated or otherwise representing a book entry position, right, interest
or claim thereto, and all proceeds and noncash proceeds therefrom, including,
without limitation, interest, cash dividends, stock dividends and other
distributions paid on or in connection with any such security entitlement,
financial asset and other investment property, and any cash or cash equivalents
held at any time in the Account (collectively, the "Securities Account").
1. To evidence the Loan, Borrower has executed and delivered to the Bank a
promissory note in the form of Exhibit "A" attached hereto (the "Note").
2. To secure payment of all indebtedness and obligations evidenced by the
Note (including all extensions, renewals, modifications and substitutions
thereof), you hereby pledge and assign, and grant a first priority security
interest to the Bank in all of your right, title, and interest in the Securities
Account. You hereby represent and warrant to the Bank that you are the only
owner of the Securities Account, that you have not assigned, pledged or granted
a security interest in the Securities Account, or any part thereof, to any other
person or entity, and that assigning, pledging and granting a security interest
in the Securities Account to the Bank does not and will not violate any
provision of any contract executed by you in connection with the Securities
Account. You shall execute the Broker's Control Agreement/Pledged Collateral
Account Agreement in the form attached hereto which upon execution by all of the
parties
1
<PAGE>
thereto shall serve to perfect the Bank's security interest in and confirm the
Bank's right of exclusive control over the Securities Account.
3. If requested by the Bank, you agree to take any and all actions,
including your execution of any other agreements, instruments or documents in
form and content satisfactory to the Bank, which the Bank deems necessary and
proper, in its sole discretion, to further perfect and/or maintain the Bank's
perfected security interest in the Securities Account. In the event you should
receive during the term of the Loan any investment properties or other financial
assets which comprise any part of the principal assets of the Securities
Account, you agree to immediately deliver the same, in the exact form received,
to the Bank to be held by the Bank as collateral for the Loan.
4. You hereby agree to indemnify and hold the Broker, its officers and
employees, harmless from and against any and all claims, causes of action,
liabilities, lawsuits, demands and/or damages, including, without limitation,
any and all costs, including court costs and reasonable attorneys' fees, that
may arise or result from the Broker complying, without your further consent,
with the instructions and orders of the Bank, as secured creditor, given in
connection with the Bank's exercise of its control over and secured rights in
the Securities Account.
5. Prior to an event of default hereunder or under the Note or related Loan
documents thereto, you and your agent, if any, may exercise voting rights and
execute trades (both purchases and sales) with respect to any securities
entitlements and other financial assets and investment property that are
credited to or held in the Securities Account; provided, however, that you and
your agent, if any, may not withdraw any securities entitlements or other
financial assets and investment properties, including any proceeds therefrom, or
any cash or cash equivalents credited to or held in the Securities Account
without the prior written consent of the Bank. Notwithstanding the foregoing
withdrawal restriction, you may, prior to an event of default, receive (i)
ordinary cash dividends declared and paid from time to time on any securities
entitlements or other financial assets and investment properties credited to or
held in the Securities Account and (ii) interest paid on cash or cash
equivalents credited to or held in the Securities Account. Upon an event of
default, however, the Bank shall have the right to cause the Broker to cease all
trading in the Securities Account by you or your agent, if any, and to
accumulate any and all cash dividends, interest and other profits and proceeds
realized therein from time to time for the benefit of the Bank, as secured
creditor.
6. Without the prior written consent of the Bank, you and your agent, if
any, shall not margin (including, selling short, borrowing securities or
otherwise causing credit to be extended), encumber, pledge, or hypothecate the
Securities Account, or any part thereof, except to the Bank. Further, without
the prior written consent of the Bank, you and your agent, if any, shall not
engage in the trading of commodity future contracts or options with respect to
the Securities Account. Should the market value of the Securities Account at any
time fall below $3,300,000.00 and you are unable to deposit such cash and/or
financial assets as may be required to restore the Securities Account's market
value to the aforementioned level within five (5) days, the Bank shall have the
right to declare the Note in default and cause the Broker to
2
<PAGE>
cease all trading in the Securities Account by you and your agent, if any,
and/or cause the Broker (i) to pay to the Bank sufficient cash or cash
equivalents from the Securities Account, and/or sell sufficient securities
entitlements or other financial assets and investment properties credited or
held therein, and pay the proceeds therefrom to the Bank, to pay the outstanding
indebtedness due under the Note, and/or (ii) to transfer or deliver to the Bank
or its agent any or all of the securities entitlements or other financial assets
and investment properties credited or held in the Securities Account at any
time.
7. In addition to the failure to comply with the terms of paragraph 6
above, any of the following events shall also constitute a default under this
letter agreement: (i) failure of Borrower to pay to the Bank when due the
indebtedness evidenced by the Note or the occurrence of any other default under
the terms of the Note or related Loan documents thereto, (ii) should the Bank's
security interest in the Securities Account fail to be a first priority,
perfected security interest therein, or should such security interest be deemed
invalid for any reason, (iii) should you assign, pledge or grant a security
interest in the Securities Account to any third party, or (iv) should any
representation or warranty made to the Bank in connection with the Loan
evidenced by the Note prove to be false or misleading in any material respect.
Upon the occurrence of any such event of default, the Bank may, in its sole
discretion and upon notification to the Broker, cause the Broker (i) to pay to
the Bank sufficient cash or cash equivalents from the Securities Account and/or
sell sufficient securities entitlements or other financial assets and investment
properties credited or held therein, and pay the proceeds therefrom to the Bank,
to pay the outstanding indebtedness due under the Note, and/or (ii) to transfer
or deliver to the Bank any or all of the securities entitlements or other
financial assets and investment properties credited or held in the Securities
Account at any time. In addition to the legal rights specified in this letter
agreement, the Bank shall have all rights of a secured creditor under the North
Carolina Uniform Commercial Code.
8. This letter agreement shall be binding upon you and your heirs, personal
representatives, executors, administrators, and assigns, and upon the Bank and
its successors and assigns.
9. This letter agreement is made in and shall be governed by the laws of
the State of North Carolina.
3
<PAGE>
When you have read and understand the terms of this letter agreement,
including the attachments hereto, please so acknowledge by signing your name in
the space provided below, and return an executed original of this agreement to
the Bank. Your business is greatly appreciated and we look forward to a strong
and mutually beneficial banking relationship.
Yours truly,
BRANCH BANKING AND TRUST COMPANY
By /s/ Philip M. Rudisill
-------------------------------------
Philip M. Rudisill, Vice President
Read and agreed to this 2nd
day of April, 1998.
/s/ J. W. Stealey
- -----------------------------------
John W. Stealey, Borrower/Pledgor
Tax I.D. No. ###-##-####
4
<PAGE>
Notice of the foregoing letter agreement, and the assignment, pledge and
security interest created in the Account and Investment Property held therein
(whether now owned or hereafter acquired) in favor of Branch Banking and Trust
Company is acknowledged hereby, and the undersigned Broker has noted the same
upon its records of the Account. The undersigned Broker herewith agrees that, in
accordance with the Broker's Collateral Account Agreement attached hereto and
without further consent of the above referenced owners of the Account, it will
comply with the instructions and orders of the Bank with respect to the exercise
by the Bank of its secured rights in the Account and Investment Property held
therein at any time.
Dated: ________________,19__.
NationsBank Montgomery Securities, LLC
By
-------------------------------------
Jon T. Dayton, Managing Director
5
<PAGE>
Notary Public of
I, Carole L. Mays, Notary Public of Wake County, do hereby certify that John W.
Stealey personally appeared before me this day and acknowledged the due
execution of the foregoing instrument in writing.
Witness my hand and seal, this 2nd day of April, 1998.
My Commission Expires: 8-11-98 /s/ Carole L. Mays
-------------------------
Notary Public
6
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT ("Agreement"), dated as of the 29th day of
September 1997, is made and entered into on the terms and conditions hereinafter
set forth, among INTERACTIVE MAGIC, INC., a Maryland corporation ("Borrower"),
iMAGICONLINE Corporation, a North Carolina Corporation ("iMagicOnline"), and
OBERLIN CAPITAL, L.P., a Delaware limited partnership ("Lender").
RECITALS:
WHEREAS, Borrower has requested that Lender make available to Borrower a
loan in the principal amount of up to $1,200,000 (the "Loan") on the terms and
conditions hereinafter set forth, and for the purposes hereinafter set forth;
and
WHEREAS, in order to induce Lender to make the Loan to Borrower, Borrower
and iMagicOnline have made certain representations to Lender and Borrower has
agreed to issue and sell to Lender a warrant to purchase shares of Borrower's
common stock; and
WHEREAS, Lender, in reliance upon the representations and inducements of
Borrower and iMagicOnline, has agreed to make the Loan upon the terms and
conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the agreement of Lender to make the
Loan, the mutual covenants and agreements hereinafter set forth, and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Borrower, iMagicOnline and Lender hereby agree as follows.
ARTICLE I
DEBENTURE AND WARRANT
1.01 Authorization of Debenture and Warrant. Borrower has authorized the
issue and sale of (a) its Junior Subordinated Debenture due August 30, 2002, in
the aggregate principal amount of up to $1,200,000 (the "Debenture"), which
shall be in substantially the form attached hereto as Exhibit A, and (b) a Stock
Purchase Warrant (the "Warrant"), which shall be in substantially the form
attached hereto as Exhibit B.
1.02 Description of Debenture. The Debenture shall be dated the date of
issue, to mature on August 30, 2002, and shall bear interest from the date of
issuance at the rate of 11%
1
<PAGE>
per annum for the 12-month period ending August 30, 1998, 12.0% per annum for
the 12-month period ending August 30, 1999, and 12.5% per annum thereafter to
maturity, payable in arrears every six months from the date of issue (with the
first such interest payment being due on February 28, 1998) and at maturity, and
to bear interest on overdue principal (including any overdue required or
optional prepayment of principal) and premium, if any, and on any overdue
installment of interest at the rate of 15.5% per annum after maturity, whether
by acceleration or otherwise, until paid. Interest on the Debenture shall be
computed on the basis of a 360-day year of twelve 30-day months. The Debenture
is not subject to prepayment or redemption prior to its expressed maturity dates
except on the terms and conditions and in the amounts and with the premium, if
any, set forth in the Debenture. The term "Debenture" as used herein shall
include each Debenture delivered pursuant to this Agreement.
1.03 Sale and Purchase of Debenture and Warrant.
(a) Closing. Subject to the terms and conditions hereof and on the basis of
the representations and warranties hereinafter set forth, Borrower agrees to
issue and sell to Lender and Lender agrees to purchase from Borrower upon the
purchase and sale of the Debenture and Warrant hereunder (the "Closing"), (i)
the Debenture in the aggregate principal amount of $1,200,000 at a price of 100%
of the principal amount thereof, and (ii) the Warrant, at a price of $100, which
shall entitle Lender to purchase shares of Borrower's Common Stock (the "Warrant
Shares").
(b) Delivery. Delivery of the Debenture and the Warrant will be made at the
office of Borrower against payment therefore by federal funds wire transfer to
Borrower's account in immediately available funds and to the accounts and in the
amounts in accordance with Borrower's written instructions, at 10:00 a.m. on
September 29th, 1997, or such later date as Borrower and Lender shall agree (the
"Closing Date"). The Debenture and the Warrant delivered to Lender on the First
Closing Date will be delivered to Lender in the form of a single Debenture and a
single Warrant for the full amount of such purchase (unless different
denominations are specified by Lender, each registered in Lender's name or in
the name of such nominee as Lender may specify and, with appropriate insertions)
all as Lender may specify at least 24 hours prior to the date fixed for
delivery.
(c) Investment Representations. Lender represents and warrants that it is
purchasing the Warrant and the Warrant Shares for its own account, for
investment purposes and not with a view to the distribution thereof. The
foregoing representations and warranties shall not be construed as imposing any
limitation on Lender's right to transfer the Warrant or any of the Warrant
Shares that is not otherwise expressly set forth herein or in the Warrant or
required by applicable law.
1.04 Closing Fee. Borrower agrees to pay to Lender on or before the Closing
Date a closing fee in an amount equal to $24,000, payable $12,000 in cash and
$12,000 by crediting Borrower's application fee held by Lender.
2
<PAGE>
ARTICLE II
SECURITY; SUBORDINATION
2.01 Security. The Secured Obligations (as hereinafter defined) are and
shall continue to be secured as follows.
Borrower and iMagicOnline hereby grant, assign and pledge to Lender a
security interest in the following described property and interests in property,
together with all proceeds thereof (collectively, "the Collateral"):
(a) Equipment. All machinery and equipment, all data processing and office
equipment, all computer equipment, hardware and firmware, all furniture,
fixtures, appliances and all other goods of every type and description, whether
now owned or hereafter acquired and wherever located, together with all parts,
accessories and attachments and all replacements thereof and additions thereto;
and
(b) Inventory. All inventory and goods of Borrower and iMagicOnline,
whether held for lease, sale or furnishing under contracts of service, all
agreements for lease of same and rentals therefrom, whether now in existence or
owned or hereafter acquired and wherever located; and
(c) General Intangibles. All rights, interests, choses in action, causes of
action, claims and all other intangible property of Borrower and iMagicOnline of
every kind and nature, in each instance whether now owned or hereafter acquired
including, but not limited to, all corporate and business records; all loans,
royalties, and other obligations receivable; all trade secrets, inventions,
designs, patents, patent applications, registered or unregistered service marks,
trade names, trademarks, copyrights and the goodwill associated therewith and
incorporated therein, and all registrations and applications for registration
related thereto; goodwill, licenses, permits, franchises, customer lists and
credit files; all customer and supplier contracts, firm sale orders, rights
under license and franchise agreements, and other contracts and contract rights;
all right, title and interest under leases, subleases, licenses and concessions
and other agreements relating to real or personal property and any security
agreements relating thereto; all rights to indemnification; all proceeds of
insurance of which Borrower and iMagicOnline are beneficiaries; all letters of
credit, guarantees, liens, security interests and other security held by or
granted to Borrower and iMagicOnline; and all other intangible property, whether
or not similar to the foregoing; and
(d) Accounts, Chattel Paper, Instruments and Documents. All Borrower's and
iMagicOnline's accounts, accounts receivable, chattel paper, instruments and
documents, whether now in existence or owned or hereafter acquired, entered
into, created or arising, and wherever located; and
(e) Other Property. All property or interests in any other property now
owned or hereafter acquired by Borrower and iMagicOnline.
3
<PAGE>
This Agreement and any other instruments, documents or agreements now or
hereafter securing the Secured Obligations, including, without limitation
documents to be filed with the U.S. Copyright Office and/or the Patent and
Trademark Office, are herein collectively referred to as the "Security
Instruments." The Security Instruments, together with the Debenture and any
other instruments and documents now or hereafter evidencing, securing or
delivered to Lender by Borrower and iMagicOnline in connection with the
indebtedness evidenced by the Debenture are herein individually referred to as a
"Loan Document" and collectively referred to as the "Loan Documents".
2.02 Secured Obligations. Without limiting any of the provisions thereof,
the Security Instruments shall secure:
(a) The full and timely payment of the indebtedness evidenced by the
Debenture, together with interest thereon, and any extensions,
modifications, consolidations, and/or renewals thereof, and any notes given
in payment thereof;
(b) The full and prompt performance of all of the obligations of
Borrower and iMagicOnline to Lender under the Loan Documents to which
Borrower and iMagicOnline are parties; and
(c) The full and prompt payment of all court costs, and other
reasonable expenses and costs of whatever kind incident to the collection
of the indebtedness evidenced by the Debenture, the enforcement or
protection of the security interests of the Security Instruments or the
exercise by Lender of any rights or remedies of Lender with respect to the
indebtedness evidenced by the Debenture, including without limitation
reasonable attorney's fees incurred by Lender, all of which Borrower and
iMagicOnline agree to pay to Lender upon demand.
All of the foregoing indebtedness and other obligations are herein collectively
referred to as the "Secured Obligations".
2.03 Subordination. Notwithstanding anything to the contrary in this
Agreement or in the Debenture, the indebtedness evidenced by the Debenture,
including principal and interest, shall be subordinate and junior to the prior
payment of the indebtedness of Borrower for borrowed money (except such
indebtedness of Borrower other than the Debenture that is expressly stated to be
subordinate or junior in any respect to indebtedness of Borrower to Lender),
whether outstanding as of the date of this Agreement (including any obligations
of Borrower under any guaranty or suretyship agreement relating to indebtedness
for borrowed money by subsidiaries of Borrower), or hereafter created,
constituting borrowed money from Coast Business Credit, a division of Southern
Pacific Thrift and Loan Association, but only up to $7,000,000, or from
federally or state chartered banks, to the extent that such indebtedness (a)
does not exceed the amounts permitted by Section 4.22 hereof, (b) is approved by
the Board of Directors of Borrower and (c) is designated as being senior to the
Debenture (but only to the extent so designated), together with all obligations
issued in renewal, deferral, extension, refunding, amendment or modification of
any such indebtedness, all to the extent not exceeding
4
<PAGE>
the amounts permitted by Section 4.22 hereof (collectively, the "Senior
Indebtedness"). Nothing herein shall be deemed to preclude payments of principal
and interest or other amounts pursuant to the Security Obligations to the extent
that no event of default has occurred with respect to the Senior Indebtedness
such that the Senior Indebtedness has become due in full.
2.04 Liquidation, etc. (a) Upon any distribution of assets of Borrower in
connection with any dissolution, winding up, liquidation or reorganization of
the Company (whether in bankruptcy, insolvency, or receivership proceedings or
upon an assignment for the benefit of creditors or otherwise), the holders of
all Senior Indebtedness shall first be entitled to receive payment in full of
the principal thereof, premium, if any, and interest due thereon, and all costs
and expenses (including reasonable attorneys' fees) related thereto, before the
holders of the Debenture shall be entitled to receive any payment on account of
the principal of or interest on or any other amount owing with respect to the
Debenture (other than payment in shares of capital stock of Borrower as
reorganized or readjusted, or securities of Borrower or any other corporation
provided for by a plan of reorganization or readjustment, which stock and
securities are subordinated to the payment of all Senior Indebtedness and
securities received in lieu thereof that may at the time be outstanding). Under
the circumstances provided herein, the holders of the Senior Indebtedness shall
have the right to receive and collect any distributions made with respect to the
Debenture until such time as the Senior Indebtedness is paid in full, and shall
have the further right to take such actions as may be deemed necessary or
required to so receive and collect such distributions including making or filing
any proofs of claim relating thereto.
(b) Without in any way modifying the provisions of this Article II or
affecting the subordination effected hereby if such notice is not given,
Borrower shall give prompt written notice to Lender of any dissolution, winding
up, liquidation or reorganization of Borrower (whether in bankruptcy, insolvency
or receivership proceedings or upon an assignment for the benefit of creditors
or otherwise).
2.05 Senior Indebtedness Default. Borrower shall not declare or pay any
dividends or make any distributions to the holders of capital stock of Borrower
or purchase or acquire for value any of the Debenture if any default has
occurred and is continuing with respect to the payment of principal of, or
premium (if any) or interest on any Senior Indebtedness.
2.06 Subrogation. Upon the prior payment in full of all Senior
Indebtedness, Lender shall be subrogated to the rights of the holders of the
Senior Indebtedness to receive payments or distributions of assets of Borrower
applicable to the Senior Indebtedness until all amounts owing on the Debenture
shall be paid in full, and for the purpose of such subrogation, no payments or
distributions to Lender otherwise payable or distributable to the holders of
Senior Indebtedness shall, as between Borrower, its creditors (other than the
holders of Senior Indebtedness) and Lender, be deemed to be payment by Borrower
to or on account of the Debenture, it being understood that the provisions of
this Article II are and are intended solely for the purpose of defining the
relative rights of Lender, on the one hand, and the holders of the Senior
Indebtedness, on the other hand.
5
<PAGE>
2.07 Borrower's Obligations Not Impaired. (a) Nothing contained in this
Article II or in the Debenture is intended to or shall impair, as between
Borrower and Lender, the obligation of Borrower, which is absolute and
unconditional, to pay Lender the principal of and interest on the Debenture as
and when the same shall become due and payable in accordance with the terms of
the Debenture or is intended to or shall affect the relative rights of Lender
other than with respect to the holders of the Senior Indebtedness, nor, except
as expressly provided in this Article II shall anything herein or therein
prevent Lender from exercising all remedies otherwise permitted by applicable
law upon the occurrence of an Event of Default under this Agreement or under the
Debenture.
(b) If any payment or distribution shall be received in respect of the
Debenture in contravention of the terms of this Article II, such payment or
distribution shall be held in trust for the holders of the Senior Indebtedness,
and shall be immediately delivered to such holders in the same form as received.
2.08 Power of Attorney. Borrower and iMagicOnline hereby appoint Lender as
Borrower's and iMagicOnline's true and lawful attorney, with full power of
substitution, to do any or all of the following, in the name, place and stead of
Borrower and iMagicOnline, as the case may be: (a) file this Agreement (or an
abstract hereof) or any other document describing lender's interest in the
Collateral, including without limitation filings with the U.S. Patent and
Trademark Office (the "PTO"), and (b) take any action and execute any instrument
that Lender may reasonably deem necessary or advisable to accomplish the
purposes of this Agreement after providing prior notice to Borrower.
2.09 Further Assurances. If reasonably requested by Borrower or a holder or
proposed holder of Senior Indebtedness, Lender hereby agrees to negotiate in
good faith with such holder or proposed holder of Senior Indebtedness the terms
and conditions of a subordination or intercreditor agreement that would
supersede the provisions for subordination set forth herein.
ARTICLE III
WARRANTIES
Borrower and iMagicOnline hereby warrant to Lender as follows:
3.01 Corporate Status. Borrower and iMagicOnline each is a corporation duly
organized, validly existing and in good standing under the laws of its state of
incorporation, and has the corporate power to own and operate its properties, to
carry on its business as now conducted and to enter into and to perform its
obligations under this Agreement and the other Loan Documents to which it is a
party. Borrower and iMagicOnline each is duly qualified to do business and is in
good standing in each state in which a failure to be so qualified would have a
materially adverse effect on such entity's financial position or its ability to
conduct its business in the manner now conducted.
6
<PAGE>
3.02 Subsidiaries. Except as disclosed on Schedule 3.02, Borrower and
iMagicOnline each has no subsidiaries and has no direct or indirect ownership
interests in any other entity.
3.03 Authorization. Except as disclosed on Schedule 3.05, Borrower and
iMagicOnline each has full legal right, power and authority to enter into and
perform its obligations under the Loan Documents, without the consent or
approval of any other person, firm, governmental agency or other legal entity
other than such consents and approvals as have or shall have been obtained as of
the Closing. The execution and delivery of this Agreement, the borrowing
hereunder, the execution and delivery of each Loan Document to which Borrower
and iMagicOnline each is a party, and the performance by Borrower of its
obligations hereunder and/or thereunder are within its corporate powers and have
been duly authorized by all necessary corporate action properly taken, have
received all necessary governmental approvals, if any were required, and do not
and will not contravene or conflict with any provision of law, any applicable
judgment, ordinance, regulation or order of any court or governmental agency,
the charter or bylaws of Borrower or iMagicOnline, as the case may be, or any
agreement binding upon it or its properties. The officer(s) executing this
Agreement, the Debenture and all of the other Loan Documents to which Borrower
and iMagicOnline each is a party, is (are) duly authorized to act on behalf of
Borrower.
3.04 Validity and Binding Effect. This Agreement and the other Loan
Documents are the legal, valid and binding obligations of Borrower and
iMagicOnline, enforceable in accordance with their terms.
3.05 No Consent Required. Except as disclosed on Schedule 3.05, the
execution, delivery and performance of the Loan Documents by Borrower and
iMagicOnline do not require the consent or approval of or the giving of notice
to any person or entity other than the approval of the Board of Directors of
Borrower and iMagicOnline and such other consents or approvals as have or shall
have been obtained as of the Closing.
3.06 Other Transactions. Except as disclosed on Schedule 3.06, there are no
outstanding loans, liens, pledges, security interests, agreements or other
facilities upon which Borrower and iMagicOnline are obligated or by which
Borrower and iMagicOnline each are bound that will in any way permit any third
person to have or obtain priority over Lender as to any of the collateral
security granted to Lender pursuant to this Agreement and the other Security
Instruments. Consummation of the transactions hereby contemplated and the
performance of the obligations of Borrower and iMagicOnline under and by virtue
of the Loan Documents to which Borrower is a party will not result in any breach
of, or constitute a default under, any mortgage, security deed or agreement,
deed of trust, lease, bank loan or credit agreement, corporate charter or
bylaws, license, franchise or any other instrument or agreement to which
Borrower or iMagicOnline is a party or by which Borrower or iMagicOnline or
their properties may be bound or affected or as to which Borrower or
iMagicOnline has not obtained an effective waiver.
3.07 Capitalization. As of the date hereof, and upon consummation of the
transactions contemplated by the Loan Documents, Borrower will have a total
authorized capitalization consisting of ten million (10,000,000) shares of Class
A Common Stock (voting), par value
7
<PAGE>
$0.10 per share (the "Class A Common Stock"), of which 6,291,392 shares will be
outstanding, and ten million (10,000,000) shares of Class B Common Stock
(non-voting), par value $0.10 per share (the "Class B Common Stock"), of which
13,500 shares will be outstanding, and five million (5,000,000) shares of Series
A Preferred Stock, par value $100 per share (the "Preferred Stock"), of which
165,268 shares will be outstanding. The Class A Common Stock and the Class B
Common Stock will be referred to collectively herein as the "Common Stock". As
of September 29, 1997 the Company has reserved sufficient shares of Class A
Common Stock for issuance upon exercise of the Warrant, and 983,980 shares of
Class A Common Stock for issuance upon exercise of other outstanding warrants as
set forth in Schedule 3.07. A complete list of all outstanding shares of Common
Stock, Preferred Stock and warrants, options and other rights to purchase or
otherwise acquire Common Stock, Preferred Stock or other securities or
instruments exchangeable for or convertible into Common Stock or Preferred
Stock, and the names in which they are or will be registered is set forth in
Schedule 3.07. All the outstanding shares of capital stock of Borrower have been
duly authorized, are validly issued and are fully paid and nonassessable. Except
as set forth in Schedule 3.07 hereto, there are no options, warrants or rights
to acquire shares of the capital stock or other securities of Borrower
authorized, issued or outstanding, nor is Borrower obligated in any other manner
to issue shares of its capital stock or other securities, and there are no
restrictions on the transfer of shares of capital stock of Borrower other than
those imposed by relevant state and federal securities laws. Except as set forth
in Schedule 3.07 hereto, no holder of any security of Borrower is entitled to
preemptive or similar statutory or contractual rights, either arising pursuant
to any agreement or instrument to which Borrower is a party or that are
otherwise binding upon Borrower.
3.08 Places of Business. The records with respect to all intangible
personal property constituting the collateral security for the Secured
Obligations are maintained at the offices of Borrower at 215 Southport Drive,
Suite 1000, Morrisville, North Carolina 27560 or at 1701 West Northwest Highway,
Suite 220, Grapevine, Texas 76051.
3.09 Litigation. Except as disclosed on Schedule 3.09, there are no
actions, suits or proceedings pending, or, to the knowledge of Borrower,
threatened, against or affecting Borrower or involving the validity or
enforceability of any of the Loan Documents or the priority of the liens
thereof, at law or in equity, or before any governmental or administrative
agency, except actions, suits and proceedings that are fully covered by
insurance and that, if adversely determined, would not impair the ability of
Borrower to perform each and every one of its obligations under and by virtue of
the Loan Documents; and Borrower is not in default with respect to any order,
writ, injunction, decree or demand of any court or any governmental authority.
3.10 Financial Statements. The financial statement(s) of Borrower as of and
for the year ended March 31, 1997, and heretofore delivered to Lender have been
prepared on the basis of generally accepted accounting principles consistently
applied ("GAAP"), and fairly present the financial condition of the subjects
thereof as of the date(s) thereof. No materially adverse change has occurred in
the financial condition of Borrower since the date(s) thereof, and no additional
borrowings have been made by Borrower since the date(s) thereof.
8
<PAGE>
3.11 No Defaults. Consummation of the transactions hereby contemplated and
the performance of the obligations of Borrower under and by virtue of the Loan
Documents will not result in any breach of, or constitute a default under, the
charter documents or bylaws of Borrower or iMagicOnline or any mortgage,
security deed or agreement, deed of trust, lease, loan or credit agreement,
partnership agreement, license, franchise or any other material instrument or
agreement to which Borrower or iMagicOnline is a party or by which Borrower or
iMagicOnline or its properties may be bound or, to the knowledge of Borrower or
iMagicOnline, affected.
3.12 Compliance With Law. Borrower and iMagicOnline each has obtained all
material licenses, permits and governmental approvals and authorizations
necessary or proper in order to conduct its business and affairs as heretofore
conducted and as hereafter intended to be conducted. Borrower and iMagicOnline
each is in compliance with all laws, regulations, decrees and orders applicable
to it (including but not limited to laws, regulations, decrees and orders
relating to environmental, occupational and health standards and controls,
antitrust, monopoly, restraint of trade or unfair competition) and any
noncompliance, in the aggregate, cannot reasonably be expected to have a
materially adverse effect on its business, operations, property or financial
condition and will not adversely affect its ability to perform its obligations
under the Loan Documents.
3.13 No Burdensome Restrictions. No instrument, document or agreement to
which Borrower or iMagicOnline is a party or by which Borrower or iMagicOnline,
or its properties may be bound or affected materially adversely affects, or may
reasonably be expected so to affect, the business, operations, property or
financial condition thereof.
3.14 Taxes. Except as disclosed on Schedule 3.14 hereto, Borrower and
iMagicOnline each has filed or caused to be filed all tax returns that are
required to be filed (except for returns that have been appropriately extended),
and has paid all taxes shown to be due and payable on said returns and all other
taxes, impositions, assessments, fees or other charges imposed on it by any
governmental authority, agency or instrumentality, prior to any delinquency with
respect thereto (other than taxes, impositions, assessments, fees and charges
currently being contested in good faith by appropriate proceedings, for which
appropriate amounts have been reserved). No tax liens have been filed against
Borrower or iMagicOnline or any of their property.
3.15 Collateral. Borrower and iMagicOnline each has all necessary right,
power and authority to grant to Lender a valid and enforceable security interest
in the collateral security for the Secured Obligations. Except as provided on
Schedule 3.06, Lender's security interest in such collateral security
constitutes a first and prior lien upon and security interest in such
collateral, and, except for liens arising by operation of law in the ordinary
course of Borrower's or iMagicOnline's business, and that do not materially
impair, in the aggregate, Lender's rights or priority in such collateral, no
other person or entity has any right, title, interest, security interest, claim
or lien with respect thereto.
3.16 Certain Transactions. Except as provided on Schedule 3.16, Borrower
and iMagicOnline each is not indebted, directly or indirectly, to any of its
officers or directors or to their spouses or children; none of said officers or
directors or any members of their immediate
9
<PAGE>
families are indebted to Borrower or iMagicOnline or have any direct or indirect
ownership interest in any firm or corporation with which Borrower or
iMagicOnline is affiliated or with which Borrower or iMagicOnline has a business
relationship, or any firm or corporation that competes with Borrower or
iMagicOnline, except that officers and/or directors of Borrower or iMagicOnline
may own no more than one percent (1%) of the outstanding stock of publicly
traded companies that compete directly with Borrower or iMagicOnline. Except as
provided on Schedule 3.16, no officer or director or any member of their
immediate families, is, directly or indirectly, interested in any material
contract with Borrower or iMagicOnline, and Borrower or iMagicOnline is not a
guarantor or indemnitor of any indebtedness.
3.17 Title to Property. Borrower and iMagicOnline each does not own any
real property. As of the date hereof, Borrower and iMagicOnline each has good
and marketable title to all of its personal property, free and clear of any and
all claims, liens, encumbrances, equities and restrictions of every kind and
nature whatsoever, except as disclosed on Schedule 3.17 hereto and except for
such claims, liens, encumbrances, equities and restrictions as are not in the
aggregate material to the business, operations or financial condition of
Borrower taken as a whole.
3.18 Intellectual Property. Except as disclosed in Schedule 3.17, Borrower
and iMagicOnline each is the lawful owner of its proprietary information (as
defined herein), free and clear of any claim, right, trademark, patent or
copyright protection of any third party. As used herein, "proprietary
information" includes without limitation any computer software and related
documentation, inventions, technical and nontechnical data related thereto, and
other documentation, inventions and data related to patterns, plans, methods,
techniques, drawings, finances, customer lists, suppliers, products, pricing and
cost information, designs, processes, procedures, formulas, research data owned
or used by Borrower or iMagicOnline or marketing studies conducted by Borrower
or iMagicOnline, all of which Borrower or iMagicOnline considers to be
commercially important and competitively sensitive and which generally has not
been disclosed to third parties other than customers in the ordinary course of
business. Borrower and iMagicOnline each has good and marketable title to all
patents, trademarks, trade names, service marks, copyrights and registrations or
applications for registration with respect to any of the foregoing, all of which
are described on Schedule 3.18 hereto, owned by Borrower or iMagicOnline or used
or required by Borrower or iMagicOnline in the operation of its business. There
is no infringement of or conflict with rights of others with respect to
copyrights, patents, trademarks, service marks, trade names, trade secrets or
other intangible property rights or know-how that could result in any materially
adverse effect upon Borrower or iMagicOnline. No products or processes of
Borrower or iMagicOnline infringe or conflict with any rights of patent or
copyright, or any discovery, invention, product or process, that is the subject
of a patent or copyright application or registration known to Borrower or
iMagicOnline. Borrower and iMagicOnline each has no knowledge or belief that any
third party's proprietary information infringes Borrower's proprietary
information. Borrower and iMagicOnline each follows such procedures as are
necessary or appropriate to protect Borrower's trade secrets and proprietary
rights in intellectual property of all kinds. To the knowledge of Borrower and
iMagicOnline, no person employed by or affiliated with Borrower or iMagicOnline
has employed or proposes to employ any trade secret or any information or
documentation proprietary to any former employer,
10
<PAGE>
and to the knowledge of Borrower and iMagicOnline, no person employed by or
affiliated with Borrower or iMagicOnline has violated any confidential
relationship that such person may have had with any third person, in connection
with the development, manufacture or sale of any product or proposed product or
the development or sale of any service or proposed service of Borrower or
iMagicOnline.
3.19 Investment Company Act. Borrower and iMagicOnline each is not an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940, as amended.
3.20 Margin Requirements. Without expanding the limited uses of proceeds of
the Loan set forth in Section 4.03 of this Agreement, Borrower agrees that
Borrower shall not use any of the funds advanced under the Loan for the purpose
of acquiring or carrying "margin stock" for the purposes of Regulations G, T, X
or U of the Federal Reserve Board.
3.21 Solvency. Borrower and iMagicOnline each is solvent as of the date of
this Agreement. For purposes of this Section 3.21, "solvent" shall mean Borrower
and iMagicOnline each (i) has capital sufficient to carry on its business and
transactions and all business and transactions in which it is about to engage,
(ii) is able to pay its debts as they mature, and (iii) owns assets having
present fair saleable value greater than the amount required to pay its debts.
3.22 Environmental Compliance. To the best of its knowledge, Borrower and
iMagicOnline each has duly complied with, and its properties are owned and
operated in compliance with all federal, state and local environmental laws and
regulations. There have been no citations, notices or orders of noncompliance
issued to Borrower or iMagicOnline or relating to their respective businesses or
properties. To the best of its knowledge, Borrower and iMagicOnline each has
obtained all federal, state and local licenses, certificates or permits required
by such environmental laws and regulations relating to Borrower and iMagicOnline
and their respective properties.
3.23 OSHA Compliance. To the best of its knowledge, Borrower and
iMagicOnline each is in compliance in all material respects with the Federal
Occupational Safety and Health Act, as amended, and all regulations thereunder.
3.24. ERISA Compliance. With respect to the Employee Retirement Income
Security Act of 1974, as amended from time to time, and the regulations
promulgated and rulings issued thereunder ("ERISA"):
(a) Plans. Schedule 3.24 sets forth any and all "employee benefit
plans" maintained by or on behalf of Borrower or iMagicOnline or any ERISA
Affiliates as defined in Section 3(3) of ERISA (a "Plan"), including, but
not limited to, any defined benefit pension plan, profit sharing plan,
money purchase pension plan, savings or thrift plan, stock bonus plan,
employee stock ownership plan, Multiemployer Plan, or any plan, fund,
program, arrangement or practice providing for medical (including
post-retirement medical), hospitalization, accident, sickness, disability,
or life insurance benefits. For purposes of this Agreement, "ERISA
Affiliate" shall
11
<PAGE>
mean each trade or business (whether or not incorporated) which, together
with Borrower or iMagicOnline, is treated as a single employer under
Section 414(b), (c), (m) or (o) of the Internal Revenue Code of 1986, as
amended from time to time, and the regulations promulgated and the rulings
issued thereunder (the "Code"); and "Multiemployer Plan" shall mean a
"multiemployer plan" as defined in Section 4001(a)(3) of ERISA. Neither
Borrower or iMagicOnline nor any ERISA Affiliate maintains or contributes
to, or has maintained or contributed to, any defined benefit pension plan
or Multiemployer Plan.
(b) Compliance. To the best of its knowledge, Borrower has at all
times maintained each Plan, by its terms and in operation, in accordance in
all materials respects with all applicable laws.
(c) Liabilities. Except for liabilities and expenses which become
payable and are timely paid pursuant to the terms and usual operations of
the Plans, Borrower and iMagicOnline each is not currently and, to the best
of its knowledge, will not become subject to any material liability
(including withdrawal liability), tax or penalty whatsoever to any person
whomsoever with respect to any Plan including, but not limited to, any
material tax, penalty or liability arising under Title I or Title IV or
ERISA or Chapter 43 of the Code.
(d) Funding. Borrower and iMagicOnline and each of their ERISA
Affiliates has made full and timely payment of all amounts (i) required to
be contributed under the terms of each Plan and applicable law and (ii)
required to be paid as expenses of each Plan. No Plan or Plans have an
"amount of unfunded benefit liabilities" (as defined in Section 4001(a)(18)
of ERISA) which, in the aggregate, exceed $100,000.
3.25 Small Business Concern. Borrower and iMagicOnline each, together with
its "affiliates" (as that term is defined in 13 C.F.R. Section 121.401), if any,
is a "Smaller Business" within the meaning of 15 U.S.C. Section 662(5), that is
Section 103(5) of the Small Business Investment Act of 1958, as amended (the
"SBIC Act"), and the regulations thereunder, including 13 C.F.R. Section
107.710, and meets the applicable size eligibility criteria set forth in 13
C.F.R. Section 121.301(c)(1) or the industry standard covering the industry in
which the Borrower is primarily engaged as set forth in 13 C.F.R. Section
121.301(c)(2). Neither the Borrower or iMagicOnline each, nor any of its
subsidiaries, presently engages in any activities for which a small business
investment company is prohibited from providing funds by the SBIC Act and the
regulations thereunder, including 13 C.F.R. Section 107.
3.26 Statements Not False or Misleading. Borrower and iMagicOnline each has
fully advised Lender of all matters involving Borrower's and iMagicOnline's
financial condition, operations, properties or industry that management of
Borrower and iMagicOnline reasonably expects might have a materially adverse
effect on Borrower or iMagicOnline. No representation or warranty given as of
the date hereof by Borrower or iMagicOnline contained in this Agreement or any
schedule attached hereto or any statement in any document, certificate or other
instrument furnished or to be furnished to Lender pursuant hereto, taken as a
whole, contains or will (as of the
12
<PAGE>
Closing) contain any untrue statement of a material fact, or omits or will (as
of the Closing) omit to state any material fact that is necessary in order to
make the statements contained therein not misleading.
3.27 Survival. The representations and warranties of Borrower and
iMagicOnline each contained in this Agreement shall survive until this Agreement
terminates in accordance with Article VIII hereof.
ARTICLE IV
COVENANTS AND AGREEMENTS
4.01 Payment of Secured Obligations. Borrower shall pay the indebtedness
evidenced by the Debenture according to the terms thereof, and shall timely pay
or perform, as the case may be, all the other Secured Obligations.
4.02 Transfer of Collateral. Except in the ordinary course of business,
Borrower and iMagicOnline each will not sell, exchange, lease, negotiate,
pledge, assign or otherwise dispose of the collateral security described in
Section 2.01 or the Security Instruments to anyone other than Lender, except as
permitted by Section 4.18, and except that (i) Borrower and iMagicOnline each
may sell or lease inventory in the ordinary course of business, and (ii)
Borrower and iMagicOnline each may sell or otherwise dispose of obsolete or
retired equipment in the ordinary course of business.
4.03 Use of Proceeds; Restrictions on Activities.
(a) Neither Borrower nor any of its subsidiaries will engage in any
activities or use directly or indirectly the proceeds from the Loan for any
purpose for which a small business investment company is prohibited from
providing funds by the SBIC Act and the regulations promulgated thereunder,
including 13 C.F.R. ss.107.
(b) Borrower will use the proceeds from the Loan for the purposes and in
the amounts set forth on Schedule 4.03 attached to this Agreement. Borrower will
deliver within ninety (90) days of the Closing to Lender a written report,
certified as correct by Borrower's chief executive officer or chief financial
officer, verifying the purposes and the amounts for which proceeds from the Loan
have been disbursed, and, if the proceeds have not been fully disbursed within
that 90-day period, an additional report also so certified, delivered not later
than the end of each succeeding 90-day period, verifying the purposes and the
amounts for which proceeds have been disbursed. Borrower will supply to Lender
such additional information and documents as Lender reasonably requests with
respect to use of proceeds and will permit Lender to have reasonable access to
any and all Company records and information and personnel as Lender reasonably
deems necessary to verify how proceeds have been or are being used and to assure
that the proceeds have been used for the purposes specified.
13
<PAGE>
(c) Borrower will not, without obtaining the prior written approval of
Lender, change within one year of the Closing hereunder Borrower's business
activity from that described in Schedule 4.03 to a business activity for which a
small business investment company is prohibited from providing funds by the SBIC
Act and the regulations promulgated thereunder. Borrower agrees that any such
changes in its business activity without such prior written consent of Lender
will constitute an event of default under the Debenture (an "Activity Event of
Default"). If an Activity Event of Default occurs, the affected SBIC Purchaser
has the right to demand immediate repayment of the Debenture with interest to
the date of repayment, and Borrower will immediately make such payment within
three (3) days of receipt of a demand. The payment remedy is in addition to any
and all other rights and remedies against Borrower and others to which Lender
may be entitled.
4.04 Further Assurances. Borrower and iMagicOnline each will take all
actions reasonably requested by Lender to create and maintain in Lender's favor
valid liens upon, security titles to and/or perfected security interests in any
collateral security described in Section 2.01 or the Security Instruments and
all other security for the Secured Obligations now or hereafter held by or for
Lender. Without limiting the foregoing, Borrower and iMagicOnline each agrees to
execute such further instruments (including financing statements and
continuation statements) as may reasonably be required or permitted by any law
relating to notices of, or affidavits in connection with, the perfection of
Lender's security interests, and to cooperate with Lender in the filing or
recording and renewal thereof.
4.05 Limitations on Debt and Obligations. Borrower and iMagicOnline each
shall not issue, assume, guarantee or otherwise become liable or permit to exist
any indebtedness except: (i) indebtedness permitted under Section 4.22 hereof;
(ii) the indebtedness incurred pursuant to the Debenture; (iii) accounts payable
and other trade payables incurred in the ordinary course of business; (iv)
obligations of Borrower or iMagicOnline pursuant to capitalized leases and/or
purchase money financing of equipment, (v) indebtedness that refinances secured
indebtedness under clause (i) above, provided that the collateral for such new
indebtedness is the collateral from the refinanced secured indebtedness and the
aggregate principal amount of such indebtedness does not exceed the principal
amount outstanding under the refinanced indebtedness; or (vi) indebtedness
incurred in connection with the acquisition of a business (including the assets
of a business) provided such indebtedness is secured solely by the assets of the
business so acquired. Notwithstanding the foregoing, the aggregate principal
amount of any indebtedness secured by the accounts receivable and/or inventory
of Borrower and its subsidiaries (whether such indebtedness is permitted under
clause (i) or in clause (v)), may be increased based upon the amount of the
accounts receivable and/or inventory eligible as collateral, so long as the
ratio of outstanding principal amount of such indebtedness to "eligible
receivables" (howsoever defined) and/or "inventory" does not exceed eighty
percent (80%).
4.06 Financial Statements and Reports. Until such time as the Loan is no
longer outstanding, Borrower shall furnish to Lender (i) within one hundred
twenty (120) days after the end of each fiscal year of Borrower, an audited,
consolidated balance sheet of Borrower as of the close of such fiscal year, an
audited income statement of Borrower for such fiscal year, and audited
statements of cash flows for Borrower for such fiscal year, all in reasonable
detail,
14
<PAGE>
prepared in accordance with generally accepted accounting principles
consistently applied, and in such form as has customarily been prepared by
Borrower; (ii) within forty-five (45) days of the end of each calendar month,
balance sheets of Borrower as of the close of such month and an income statement
of Borrower for such month, all in reasonable detail, and prepared on the basis
of accounting principles consistently applied, together with a certificate of
Borrower's Chief Executive Officer and/or Chief Financial Officer confirming the
Borrower's compliance (or lack thereof) with all the terms and conditions of the
Loan Documents; and (iii) with reasonable promptness, such other financial data
as Lender may reasonably request.
4.07 Maintenance of Books and Records; Inspection. Borrower and
iMagicOnline each shall maintain its books, accounts and records on the basis of
accounting principles consistently applied, and permit a representative of
Lender, at Lender's expense and upon ten (10) days' prior written notice to
Borrower or iMagicOnline, as the case may be, to visit and inspect any of its
properties (including but not limited to the collateral security described in
Section 2.01 or the Security Instruments), corporate books and financial
records, and to discuss its accounts, affairs and finances with Borrower or
iMagicOnline or the principal officers of Borrower or iMagicOnline during
business hours, and without interruption of Borrower's or iMagicOnline's
business, all at such times as Lender may reasonably request.
4.08 Insurance. Without limiting any of the requirements of any of the
other Loan Documents, Borrower and iMagicOnline each shall maintain, in amounts
customary for entities engaged in comparable business activities, life, fire,
liability and other forms of insurance on its properties (including but not
limited to the collateral security now or hereafter securing payment and
performance of the Secured Obligations), against such hazards and in at least
such amounts as is customary in Borrower's business. At the request of Lender,
Borrower and iMagicOnline each will deliver forthwith a certificate specifying
the details of such insurance in effect.
4.09 Taxes and Assessments. Borrower and iMagicOnline each shall (a) file
all tax returns and appropriate schedules thereto that are required to be filed
under applicable law, prior to the date of delinquency, (b) pay and discharge
all taxes, assessments and governmental charges or levies imposed upon it, upon
its income and profits or upon any properties belonging to it, prior to the date
on which penalties attach thereto, and (c) pay all taxes, assessments and
governmental charges or levies that, if unpaid, might become a lien or charge
upon any of its properties; provided, however, that Borrower or iMagicOnline in
good faith may contest any such tax, assessments and governmental charge or levy
described in the foregoing clauses (b) and (c) so long as adequate reserves are
maintained with respect thereto.
4.10 Corporate Existence. Borrower and iMagicOnline each shall maintain its
corporate existence and good standing in the state of its incorporation and its
qualification and good standing as a foreign corporation in each jurisdiction in
which such qualification is required by applicable law.
4.11 Compliance with Law and Agreements. Borrower and iMagicOnline each
shall maintain its business operations and property owned or used in connection
therewith in compliance with (i) all applicable federal, state and local laws,
regulations and ordinances
15
<PAGE>
governing such business operations and the use and ownership of such property,
and (ii) all agreements, licenses, franchises, indentures and mortgages to which
Borrower or iMagicOnline is a party or by which Borrower or iMagicOnline or any
of its properties is bound. Without limiting the foregoing, Borrower and
iMagicOnline each shall pay all of its indebtedness promptly in accordance with
the terms thereof.
4.12 Notice of Default. Borrower and iMagicOnline each shall give written
notice to Lender of the occurrence of any default, event of default or Event of
Default (as defined below) under this Agreement or any other Loan Document
promptly upon the occurrence thereof.
4.13 Notice of Litigation. Borrower and iMagicOnline each shall give
notice, in writing, to Lender of (i) any actions, suits or proceedings
instituted by any persons whomsoever against Borrower or iMagicOnline or
materially affecting any of the assets of Borrower or iMagicOnline, and (ii) any
dispute between Borrower or iMagicOnline on the one hand and any governmental
regulatory body on the other hand, which dispute might interfere with the normal
operations of Borrower or iMagicOnline; provided, however, that Lender shall not
disclose any such information to any third party other than Lender's counsel and
except to the extent compelled by legal process or law or otherwise authorized
by Borrower or iMagicOnline.
4.14 Informational Covenant. Borrower will furnish or cause to be furnished
to the U.S. Small Business Administration (the "SBA") information required by
the SBA concerning the economic impact of Lender's investment, including but not
limited to information concerning federal, state, and local income taxes paid,
number of employees, gross revenues, source of revenue growth, after tax profit
or loss, and federal, state and employee income tax withholding. Borrower will
furnish annually all information required on the appropriate SBA Forms. Borrower
will also furnish or cause to be furnished to the SBA such other information
regarding the business, affairs and condition of Borrower as the SBA may from
time to time reasonably request. Borrower will permit SBA examiners to inspect
the books and any of the properties or assets of Borrower and its subsidiaries
and to discuss Borrower's business with senior management employees at such
reasonable times as the SBA may from time to time request.
4.15 ERISA Plan. If Borrower has in effect, or hereafter institutes, a
pension plan that is subject to the requirements of Title IV of the Employee
Retirement Income Security Act of 1974, Pub. L. No. 93-406, September 2, 1974,
88 Stat. 829, 29 U.S.C.A. 1001 et. seq. (1975), as amended from time to time
("ERISA"), then the following warranty and covenants shall be applicable during
such period as any such plan (the "Plan") shall be in effect: (i) Borrower
hereby warrants that no fact that might constitute grounds for the involuntary
termination of the Plan, or for the appointment by the appropriate United States
District Court of a trustee to administer the Plan, exists at the time of
execution of this Agreement, (ii) Borrower hereby covenants that throughout the
existence of the Plan, Borrower's contributions under the Plan will meet the
minimum funding standards required by ERISA and Borrower will not institute a
distress termination of the Plan, and (iii) Borrower covenants that it will send
to Lender a copy of any notice of a reportable event (as defined in ERISA)
required by ERISA to be filed with the Labor Department or the Pension Benefit
Guaranty Corporation, at the time that such notice is so filed.
16
<PAGE>
4.16 Observer Rights. Borrower shall invite one representative of Lender to
attend, at Lender's expense, all meetings of Borrower's Board of Directors and
all committees of Borrower's Board of Directors in a nonvoting capacity and, in
this respect, shall give such representative copies of all notices and other
materials provided to directors in preparation for such or as part of meetings.
4.17 Information. Borrower will furnish to Lender such financial data and
other information relating to the business of Borrower as Lender may from time
to time reasonably request. Borrower will cooperate fully with Lender, Lender's
representatives and counsel in the preparation of any document or other material
which may be required by the United States Small Business Administration or any
other governmental agency as a predicate to or result of the transaction herein
contemplated.
4.18 Limitation on Liens. Without the prior written consent of Lender,
which consent shall not unreasonably be withheld, Borrower and iMagicOnline each
will not, and will not permit any subsidiary to, create or incur, or suffer to
be incurred or to exist, any mortgage, pledge, security interest, encumbrance,
lien or charge of any kind (collectively, "Liens") on its or their property or
assets, whether now owned or hereafter acquired, or upon any income or profits
therefrom, or transfer any property for the purpose of subjecting the same to
the payment of obligations in priority to the payment of its or their general
creditors, or acquire or agree to acquire, or permit any subsidiary to acquire,
any property or assets upon conditional sales agreement or other title retention
devices, except (i) those Liens which exist as of the date hereof; (ii) Liens
hereafter created on Senior Indebtedness; or (iii) in the case of Borrower,
purchase money security interests or leasehold interests on property acquired by
Borrower or any subsidiary in an amount not to exceed in the aggregate 10% more
than the amount approved by the Board of Directors for such expenditures in
Borrower's annual budget provided to Lender.
4.19 Dividends; Redemptions. Borrower and iMagicOnline each will not (i)
declare, set aside, or pay any dividend or make any other distribution, whether
in cash, in kind, or otherwise, on account of or with respect to, or (ii) apply
any of its funds, property or assets to the purchase, redemption or other
retirement of, any class of its capital stock or any warrants, options or other
rights with respect to any class of its capital stock; provided, however, that
Borrower and iMagicOnline each may apply its funds to the purchase, redemption
or other retirement of its capital stock held by former employees of Borrower or
iMagicOnline or options to purchase its capital stock held by former employees
of Borrower or iMagicOnline provided the aggregate amount of funds applied to
all such purchases, redemptions and other retirements during the term of this
Agreement does not exceed $100,000.
4.20 Investments. Borrower will not, and will not permit any subsidiary to,
make any investments (including acquisitions) outside the ordinary course of
business for Borrower or any subsidiary, without the prior written consent of
Lender, not to be unreasonably withheld, except:
(a) Investments in direct obligations of the United States of America,
or any agency or instrumentality of the United States of America, the
payment or guaranty of which constitutes
17
<PAGE>
a full faith and credit obligation of the United States of America, in
either case maturing in twelve months or less from the date of acquisition
thereof;
(b) Investments in certificates of deposit maturing within one year
from the date of origin, issued by a bank or trust company organized under
the laws of the United States of any state thereof, having capital, surplus
and undivided profits aggregating at least $100,000,000 and whose long-term
certificates of deposit are, at the time of acquisition thereof, rated AA
or better by Standard & Poor's Corporation or AA or better by Moody's
Investors Service, Inc.;
(c) Investments in commercial paper maturing in two hundred seventy
(270) days or less from the date of issuance which, at the time of
acquisition by Borrower or any subsidiary is accorded the highest rating by
Standard & Poor's Corporation, Moody's Investors Service, Inc. or another
nationally recognized credit rating agency of similar standing;
(d) Loans or advances in the usual and ordinary course of business to
officers, directors and employees for expenses incidental to carrying on
the business of Borrower or any subsidiary;
(e) Receivables arising from the sale of goods and services in the
ordinary course of business of Borrower and its subsidiaries; and
(f) Investments that do not exceed $250,000 in the aggregate during
the term of this Agreement.
4.21 Mergers, Consolidations and Sales of Assets. Without Lender's prior
written consent, which consent shall not be withheld unreasonably, (a) Borrower
will not, and will not permit any subsidiary to (1) consolidate with or be a
party to a merger or share exchange with any other corporation or (2) sell,
lease or otherwise dispose of all or any substantial part (as defined in
paragraph (d) of this Section 4.21) of the assets of Borrower and its
subsidiaries; provided, however, that:
(i) any subsidiary may merge or consolidate with or into Borrower or
any wholly owned subsidiary so long as in any merger or consolidation
involving Borrower, Borrower shall be the surviving or continuing
corporation;
(ii) any subsidiary may sell, lease or otherwise dispose of all or any
substantial part of its assets to Borrower or any wholly owned subsidiary;
and
(iii) any subsidiary may merge or consolidate with or into another
entity, provided that the value of the aggregate consideration paid by
Borrower therefor (whether in cash, securities or other property) for all
such acquisitions made during the term of this Agreement shall not exceed
$500,000.
(b) Without Lender's prior written consent, which consent shall not be
withheld unreasonably, Borrower will not permit any subsidiary to issue or sell
any shares of stock of any
18
<PAGE>
class (including as "stock" for the purposes of this Section 4.21, any warrants,
rights or options to purchase or otherwise acquire stock or other securities
exchangeable for or convertible into stock) of such subsidiary to any person
other than Borrower or a wholly owned subsidiary.
(c) Without Lender's prior written consent, which consent shall not be
withheld unreasonably, Borrower will not sell, transfer or otherwise dispose of
any shares of stock in any subsidiary (except to dispose of any shares of stock
in any subsidiary or any indebtedness of any subsidiary, and will not permit any
subsidiary to sell, transfer or otherwise dispose of (except to Borrower or a
wholly owned subsidiary) any shares of stock or any indebtedness of any other
subsidiary, unless:
(i) simultaneously with such sale, transfer or disposition, all shares
of stock and all indebtedness of such subsidiary at the time owned by
Borrower and by every other subsidiary shall be sold, transferred or
disposed of as an entirety;
(ii) the Board of Directors of Borrower shall have determined, as
evidenced by a resolution thereof, that the retention of such stock and
indebtedness is no longer in the best interests of Borrower;
(iii) such stock and indebtedness is sold, transferred or otherwise
disposed of to a Borrower for a cash consideration and on terms reasonably
deemed by the Board of Directors to be adequate and satisfactory;
(iv) the subsidiary being disposed of shall not have any continuing
investment in Borrower or any other subsidiary not being simultaneously
disposed of; and
(v) such sale or other disposition does not involve a substantial part
(as hereinafter defined) of the assets of Borrower and its subsidiaries.
4.22 Maintenance of Certain Financial Conditions. As long as the Loan or
any portion thereof is outstanding, Borrower shall at all times maintain the
following financial condition: Borrower's total debt from asset based lenders
shall not exceed eighty percent (80%) of Borrower's eligible United States
accounts receivable, where eligible accounts receivable shall include those
accounts receivable reflected in Borrower's books and records, excluding any
accounts that are more than one hundred twenty (120) days' past due or that are
due more than one hundred twenty (120) days from the date in question, plus
forty percent (40%) of Borrower's finished goods inventory reflected on
Borrower's books and records, plus forty percent (40%) of Borrower's
fully-insured foreign accounts receivable all of which shall be maintained in
accordance with GAAP. In no event shall Borrower's (i) Senior Indebtedness
exceed $5,000,000 and (ii) total indebtedness including the Debenture (but not
including shareholder debt subordinate to Lender and unsecured indebtedness of
Borrower to Branch Bank and Trust Company) exceed the greater of (A) $9,200,000,
and (B) three and one-half (3-1/2) times Borrower's earnings before interest,
taxes, depreciation and amortization, determined in accordance with GAAP, for
the preceding twelve-month period.
19
<PAGE>
4.23 Transactions with Affiliates.
(a) Except as set forth on Schedule 4.23, Borrower will not, and will not
permit any subsidiary to, enter into or be a party to any transaction or
arrangement with any officer, director or affiliate (including, without
limitation, the purchase from, sale to or exchange of property with, or the
rendering of any service by or for, any affiliate), except in the ordinary
course of and pursuant to the reasonable requirements of Borrower's or such
subsidiary's business and upon fair and reasonable terms no less favorable to
Borrower or such subsidiary than would obtain in a comparable arm's-length
transaction with a person other than an affiliate, in each case as determined in
good faith by a majority of the disinterested directors of Borrower (as the term
"disinterested" is used in Section 144 of the Delaware General Corporation Law).
(b) Borrower will not, and will not permit any subsidiary to, make any
payments on or with respect to any indebtedness of Borrower to any shareholder
of Borrower (excluding High Point Capital, LLC, and Petra Capital, LLC), or any
family member of any such shareholder, or repurchase or retire any such
indebtedness, so long as the Loan shall be outstanding.
4.24 Change in Control. Borrower will not, without Lender's prior written
approval, which approval shall not be withheld unreasonably, permit to occur any
(a) transaction, or series of related transactions, in which any person or
entity that is not a shareholder on the date hereof acquires securities
representing greater than 50% of the voting power with respect to Borrower's
capital stock; (b) change in the composition of Borrower's Board of Directors in
connection with any series of related transactions such that a majority of the
Board shall not have served previously as directors of the Company; or (c)
termination of status of Robert L. Pickens, William Stealey or William Kaluza as
President, Chief Executive Officer or Chief Financial Officer, respectively of
Borrower.
4.25 Changes in Equity; No Impairment of Warrant. Borrower will not, so
long as the Warrant remains outstanding:
(a) without at least ten (10) days' prior written notice to Lender,
amend or repeal any provision of, or add any provision to, Borrower's
Articles of Incorporation or Bylaws;
(b) without the prior written consent of Lender, which consent will
not be withheld unreasonably, authorize or issue any new or existing class
or classes or series of capital stock having any preference or priority as
to dividends, voting or assets to the Common Stock, or authorize or issue
shares of stock of any class or any bonds, debentures, notes or other
obligations convertible into or exchangeable for, or having option rights
to purchase, any shares of stock of Borrower having any preference or
priority as to dividends, voting or assets superior to the Common Stock;
(c) without the prior written consent of Lender, which consent will
not be withheld unreasonably, reclassify any Common Stock into shares
having any preference or priority as to dividends, voting or assets
superior to the Common Stock;
20
<PAGE>
(d) establish or suffer to exist a par value for the Common Stock that
results in the shares issuable upon exercise of the Warrant to being issued
or issuable at less than the par value per share of such Common Stock; or
(e) avoid or seek to avoid the observance or performance of any of the
terms to be observed or performed under the Warrant, and Borrower will at
all times in good faith assist in the carrying out of all of the provisions
of the Warrant and in the taking of all such action as may be necessary or
appropriate in order to protect the rights of the holders of the Warrant
against impairment.
4.26 Key-Man Insurance. Borrower will obtain within 90 days after the
Closing Date and maintain $1,200,000 in term insurance, naming Borrower as
beneficiary, and Lender as an additional loss payee, on the life of William
Stealey.
ARTICLE V
CONDITIONS TO CLOSING
The obligation of Lender to purchase and pay for the Debenture on any
Closing Date shall be subject to the fulfillment on or before such Closing Date
of each of the following conditions.
5.01 Representations and Warranties. The representations and warranties of
Borrower and iMagicOnline each contained in this Agreement and in any Schedule
hereto or any document or instrument delivered to Lender or its representatives
hereunder, shall have been true and correct when made and shall be true and
correct as of the Closing Date as if made on such date, except to the extent
such representations and warranties expressly relate to a specific date.
Borrower and iMagicOnline each shall have duly performed all of the covenants
and agreements to be performed by it hereunder on or prior to the Closing Date.
5.02 Satisfactory Proceedings. All proceedings taken in connection with the
transactions contemplated by this Agreement, and all documents necessary to the
consummation thereof, shall be satisfactory in form and substance to Lender and
Lender's counsel.
5.03 Required Consents. Any consents or approvals required to be obtained
from any third party, including any holder of indebtedness or any outstanding
security of Borrower, and any amendments of agreements which shall be necessary
to permit the consummation of the transactions contemplated hereby on the
Closing Date, shall have been obtained and all such consents or amendments shall
be satisfactory in form and substance to Lender and Lender's counsel.
5.04 Conditions of Lender's Obligations. Lender shall have received the
following documents, in form and substance satisfactory to Lender in its sole
discretion.
21
<PAGE>
(a) Corporate Documents. A copy of the Articles of Incorporation of each of
Borrower and iMagicOnline, as amended, and restated, certified by the Secretary
of State of Maryland and the Secretary of the State of North Carolina
respectively, and certificates of good standing from the Secretaries of State of
each state where Borrower and iMagicOnline is required to be qualified to do
business, all as of a recent date.
(b) Officer's Certificate. A certificate of the President and Chief
Executive Officer of each of Borrower and iMagicOnline to the effect set forth
in Exhibit C hereto.
(c) Opinion of Counsel. The opinion of counsel to Borrower, in form
reasonably satisfactory to Lender, substantially in the form of Exhibit D
hereto.
(d) Debenture. The Debenture, duly completed and executed.
(e) Stock Purchase Warrant. The Warrant duly completed and executed.
(f) UCC-1 Financial Statements. Financing Statements on Form UCC-1 duly
completed and executed by Borrower securing the rights of Lender to the
collateral security listed in Section 2.01.
(g) SBA Documentation. SBA Form 480 (Size Status Declaration) and SBA Form
652 (Assurance of Compliance), which have been completed and executed by
Borrower, and SBA Form 1031 (portfolio Finance Report), Part A and Part B of
which have been completed by Borrower.
(h) Closing Fee. Evidence that the Closing Fee provided in Section 1.04 has
been or is being paid in full.
ARTICLE VI
DEFAULT AND REMEDIES
6.01 Events of Default. The occurrence of any of the following shall
constitute an Event of Default hereunder:
(a) Default in the payment of the principal of or interest on the
indebtedness evidenced by the Debenture in accordance with the terms of the
Debenture, which default is not cured within ten (10) business days;
(b) Any material misrepresentation by Borrower or iMagicOnline as to
any matter hereunder or under any of the other Loan Documents, or delivery
by Borrower or iMagicOnline of any material schedule, statement,
resolution, report, certificate, notice or writing to Lender that is untrue
in any material respect on the date as of which the facts set forth therein
are stated or certified;
22
<PAGE>
(c) Failure of Borrower and iMagicOnline each to perform any of its
material obligations under this Agreement, any of the Security Instruments
or any of the other Loan Documents;
(d) Borrower's or iMagicOnline's (i) admission in writing of its
inability to pay its debts generally as they become due; or (ii) assignment
for the benefit of creditors or petition or application to any tribunal for
the appointment of a custodian, receiver or trustee for it or a substantial
part of its assets; or (iii) voluntary commencement of any proceeding under
any bankruptcy, reorganization, arrangement, readjustment of debt,
dissolution or liquidation law or statute of any jurisdiction, whether now
or hereafter in effect, or the involuntary commencement of any such
proceeding that is not dismissed within ninety (90) days; or (iv) suffering
to exist any such petition or application or any such proceeding against it
in which an order for relief is entered or an adjudication or appointment
is made; or (v) indication, by any act or omission, of its consent to,
approval of or acquiescence in any such petition, application, proceeding
or order for relief or the appointment of a custodian, receiver or trustee
for it or a substantial part of its assets; or (vi) permitting any such
custodianship, receivership or trusteeship to continue undischarged for a
period of ninety (90) days or more;
(e) Borrower's or iMagicOnline's liquidation, dissolution, partition
or termination;
(f) A default or event of default under any of the other Loan
Documents that, if subject to a cure right, is not cured within any
applicable cure period;
(g) Borrower's default in the timely payment or performance of any
obligation now or hereafter owed to Lender in connection with any
indebtedness of Borrower now or hereafter owed to Lender other than the
Loan;
(h) Borrower's default in the timely payment or performance of any
principal of or premium or interest on any debt owed by Borrower (other
than the Loan), which is outstanding in a principal amount of at least
$100,000 in the aggregate, when the same becomes due and payable (whether
by scheduled maturity, acceleration, demand or otherwise), if such failure
shall continue after any cure period applicable thereto; or (ii) the
occurrence of any other event or condition under any agreement or
instrument relating to any such indebtedness that continues after any
applicable cure period, if the effect of such event or condition is to
accelerate or permit the acceleration of such indebtedness; or (iii) the
acceleration of any such indebtedness or otherwise declaration to be due
and payable prior to the stated maturity thereof of any such indebtedness;
or (iv) requirement that any such indebtedness be prepaid, redeemed,
purchased or defeased prior to the stated maturity thereof;
(i) The termination of employment of any of the persons set forth on
Schedule 6.01 from the positions set forth opposite their names; or
(j) The sale, transfer or disposal by any of the persons set forth on
Schedule 6.01 of more than ten percent (10%) of shares of Common Stock held
by such person as of the date hereof.
23
<PAGE>
With respect to any Event of Default described above that is capable of being
cured and that does not already provide its own cure procedure (a "Curable
Default"), the occurrence of such curable Default shall not constitute an Event
of Default hereunder if such Curable Default is fully cured and/or corrected
within thirty (30) days (ten (10) days, if such Curable Default may be cured by
payment of a sum of money) of notice thereof to Borrower.
6.02 Acceleration of Maturity; Remedies. Upon the Occurrence of any Event
of Default described in subsection 6.01, the indebtedness evidenced by the
Debenture shall be immediately due and payable in full; and Lender at any time
thereafter may at its option accelerate the maturity of the indebtedness
evidenced by the Debenture. Upon the occurrence of any such Event of Default and
the acceleration of the maturity of the indebtedness evidenced by the Debenture,
as set forth herein:
(a) Lender immediately shall be entitled to exercise any and all
rights and remedies possessed by Lender pursuant to the terms of the
Security Instruments and all of the other Loan Documents;
(b) Lender shall have all of the rights and remedies of a secured
party under the Uniform Commercial Code; and
(c) Lender shall have any and all other rights and remedies that
Lender may now or hereafter possess at law, in equity or by statute.
6.03 Remedies Cumulative; No Waiver. No right, power or remedy conferred
upon or reserved to Lender by this Agreement or any of the other Loan Documents
is intended to be exclusive of any other right, power or remedy, but each and
every such right, power and remedy shall be cumulative and concurrent and shall
be in addition to any other right, power and remedy given hereunder, under any
of the other Loan Documents or now or hereafter existing at law, in equity or by
statute. No delay or omission by Lender to exercise any right, power or remedy
accruing upon the occurrence of any Event of Default shall exhaust or impair any
such right, power or remedy or shall be construed to be a waiver of any such
Event of Default or an acquiescence therein, and every right, power and remedy
given by this Agreement and the other Loan Documents to Lender may be exercised
from time to time and as often as may be deemed expedient by Lender.
6.04 Proceeds of Remedies. Any or all proceeds resulting from the exercise
of any or all of the foregoing remedies shall be applied as set forth in the
Loan Document(s) providing the remedy or remedies exercised; if none is
specified, or if the remedy is provided by this Agreement, then as follows:
First, to the costs and expenses, including reasonable attorney's
fees, incurred by Lender in connection with the exercise of its remedies;
24
<PAGE>
Second, to the expenses of curing the default that has occurred, in
the event that Lender elects, in its reasonable discretion, to cure the
default that has occurred;
Third, to the payment of the Secured Obligations, including but not
limited to the payment of the principal of and interest on the indebtedness
evidenced by the Debenture, in such order of priority as Lender shall
determine in its sole discretion; and
Fourth, the remainder, if any, to Borrower or to any other person
lawfully thereunto entitled.
ARTICLE VII
RIGHTS WITH RESPECT TO WARRANT SHARES
7.01 Put Option.
(a) Grant of Put Option. Borrower hereby grants to Lender an option to sell
to Borrower, and Borrower is obligated to purchase from Lender under such option
(the "Put Option"), all (but not less than all) of the Warrant Shares (including
shares issuable upon exercise of the Warrant) (the "Put Shares"). The Put Option
will be effective beginning on the fifth anniversary of the Closing Date, or at
any time prior to such date upon the occurrence but only during the continuance
of an Event of Default (as defined in Section 6.01 hereof) (the "Put Option
Period").
(b) Put Price. In the event that Lender exercises the Put Option, the price
(the "Put Price") to be paid to Lender pursuant to this Section 7.01 shall be
the higher of the following amounts:
(i) the product of five times Borrower's per-share earnings before
interest, taxes, depreciation and amortization for Borrower's most
recent 12-month period before exercise of the Put Option, determined
in accordance with generally accepted accounting principles ("GAAP")
by Borrower's independent auditors, less debt per share of Borrower's
outstanding Common Stock on a fully diluted basis for borrowed money
as at the end of such 12-month period, plus Cash (as hereinafter
defined) per share of Borrower's outstanding Common Stock on a fully
diluted basis as at the end of such 12-month period all multiplied by
the number of Put Shares. For purposes of this Section 7.01, "Cash"
shall include currency, funds in deposit accounts, certificates of
deposit with maturities of one year or less from the date of
determination, readily marketable securities and other similar assets
of Borrower; or
25
<PAGE>
(ii) Borrower's book value per share at the end of the most recently
completed month before exercise of the Put Option, determined in
accordance with GAAP, multiplied by the number of Put Shares.
For purposes of this Agreement "fully diluted basis" means, as of any date of
determination the shares of Common Stock outstanding on such date, such number
of shares of Class A Common Stock as actually are issued and outstanding on such
date, plus the number of shares of Class B Common Stock as actually are issued
and outstanding on such date (such Class A Common Stock and Class B Common Stock
being referred to hereinafter collectively as the "Common Stock"), together with
all shares of Common Stock that would be outstanding on such date assuming the
issuance of all shares of Common Stock issuable upon the exercise, exchange or
conversion of (i) any securities outstanding as of such date and convertible
into or exchangeable for Common Stock (whether or not the rights to exchange or
convert thereunder are immediately exercisable) (such convertible or
exchangeable securities being herein called "Convertible Securities"), (ii) any
rights outstanding as of such date to subscribe for or to purchase, or any
warrants or options outstanding (but specifically excluding options for up to
1,215,000 shares, subject to adjustment for stock splits, stock dividends and
the like, of Class B Common Stock to be granted upon the achievement of certain
performance objectives pursuant to the company's 1995 Employees' Incentive Stock
Option Plan (the "1995 Incentive Plan")) for the purchase of, Common Stock or
Convertible Securities (whether or not immediately exercisable) (such rights,
warrants or options being herein called "Option Securities") and (iii) any such
Common Stock and/or Convertible Securities issued upon the exercise of such
Option Securities. The Company represents and warrants that, as of the date of
this Agreement the outstanding shares of Common Stock, calculated on a fully
diluted basis, are 10,232,040.
(c) Exercise of Put Option. The Put Option may be exercised during the Put
Option Period with respect to all (but not less than all) of the Put Shares by
notice in writing given by Lender to Borrower of Lender's election to exercise
the Put Option. Lender and Borrower shall complete the exercise of the Put
Option and payment of the Put Price as soon as practicable and in no event later
than thirty (30) days following the giving of such notice. The Put Price shall
be payable in cash, or, at Borrower's option by delivery to Lender of a
promissory note, in form and substance reasonably satisfactory to Lender,
bearing interest at 12.5% per annum, due in one year, amortized in twelve (12)
equal monthly installments of principal and interest, and bearing interest at
15.5% per annum in case of any default by Borrower.
(d) Warrant Shares. For purposes of this Article VII below, "Warrant
Shares" shall be deemed to include shares issued or issuable upon exercise of
the Warrant and any securities into or for which the Warrant or Warrant Shares
are converted or exchanged, or which are issued with respect thereto as a result
of any stock split, recapitalization, reorganization, combination of shares,
merger, consolidation or otherwise, if any, with proper adjustment to the price
at which such securities shall be repurchased to eliminate the effect of such
capital change.
26
<PAGE>
(e) Termination. The Put Option shall terminate upon the earliest to occur
of (i) the initial public offering of Borrower's Common Stock generating net
proceeds to Borrower, after deducting underwriters' discounts and commissions,
of at least $15,000,000 or (ii) any event in which (A) Borrower sells all or a
majority of its assets or income generating capacity; or (B) Borrower
participates in any merger, consolidation, reorganization, share exchange or
similar transaction or series of related transactions involving a change of
control of Borrower (a "Liquidating Event").
7.02 Registration.
(a) Borrower agrees that if at any time after the date hereof Borrower
shall propose to file a registration statement with respect to any of its Common
Stock on a form suitable for a secondary offering (including Borrower's IPO), it
will give notice in writing to such effect to the Holders at least thirty (30)
days prior to such filing and, at the written request of any such Holder, made
within ten (10) days after the receipt of such notice, will use its best efforts
to include therein at Borrower's cost and expense (including the fees and
expenses of counsel to such Holders, but excluding underwriting discounts,
commissions and filing fees attributable to the Warrant Shares included therein)
such of the Warrant Shares as such Holders shall request; provided, however,
that if the offering being registered by Borrower is underwritten and if the
representative of the underwriters certifies in writing that the inclusion
therein of the Warrant Shares would materially and adversely affect the sale of
the securities to be sold by Borrower thereunder, then Borrower shall be
required to include in the offering only that number of securities owned by
shareholders, including the Warrant Shares, which the underwriters determine in
their sole discretion will not jeopardize the success of the offering (such
securities so included to be apportioned pro rata among all selling shareholders
not exercising demand registration rights according to the total amount of such
securities entitled to be included therein (but for this proviso and any other
similar cutback provisions to which other selling shareholders are subject).
Nothing in this subparagraph (b) shall be deemed to require Borrower to proceed
under this subparagraph with any registration of its securities after giving the
notice herein provided.
(b) Whenever required under this Agreement to use its best efforts to
effect the registration of any of the Warrant Shares, Borrower shall, as
expeditiously as reasonably possible:
(i) Prepare and file with the Securities and Exchange Commission (the
"Commission") a registration statement covering such Warrant Shares and use
its best efforts to cause such registration statement to be declared
effective by the Commission as expeditiously as possible and to keep such
registration effective until the earlier of (A) the date when all Warrant
Shares covered by the registration statement have been sold or (B) two
hundred seventy (270) days from the effective date of the registration
statement; provided, however, the Company may suspend such offering for
ninety (90) days in any twelve month period; and further provided, however,
that before filing a registration statement or prospectus or any amendment
or supplements thereto, Borrower will furnish to each Holder of Warrant
Shares covered by such registration statement and the underwriters, if any,
copies of all such documents proposed to be filed (excluding
27
<PAGE>
exhibits, unless any such person shall specifically request exhibits),
which documents will be subject to the review of such Holders and
underwriters, and Borrower will not file such registration statement or any
amendment thereto or any prospectus or any supplement thereto (including
any documents incorporated by reference therein) with the Commission if (A)
the underwriters, if any, shall reasonably object to such filing or (B) if
information in such registration statement or prospectus concerning a
particular selling Holder has changed and any such Holder or the
underwriters, if any, shall reasonably object;
(ii) Prepare and file with the Commission such amendment and
post-effective amendments to such registration statement as may be
necessary to keep such registration statement effective until the
transaction is consummated or the registration statement is suspended in
accordance with Section 7.02(c)(i) and to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by
such registration statement, and cause the prospectus to be supplemented by
any required prospectus supplement, and as so supplemented to be filed with
the Commission pursuant to Rule 424 under the Securities Act;
(iii) Furnish to the selling Holder(s) such numbers of copies of such
registration statement, each amendment thereto, the prospectus included in
such registration statement (including each preliminary prospectus), such
supplement thereto and such other documents as they may reasonably request
in order to facilitate the disposition of the Warrant Shares owned by them;
(iv) Use its best efforts to register and qualify under such other
securities laws of such jurisdictions as shall be reasonably requested by
any selling Holder and do any and all other acts and things which may be
reasonably necessary or advisable to enable such selling Holder to
consummate the disposition of the Warrant Shares owned by such Holder in
such jurisdictions; provided, however, that Borrower shall not be required
in connection therewith or as a condition thereto to qualify to transact
business or to file a general consent to service of process in any such
states or jurisdictions;
(v) Promptly notify each selling Holder of the happening of any event
as a result of which the prospectus included in such registration statement
contains any untrue statement of a material fact or omits any fact
necessary to make the statements therein not misleading and, at the request
of any such Holder, Borrower will prepare a supplement or amendment to such
prospectus so that, as thereafter delivered to the purchasers of such
Warrant Shares, such prospectus will not contain an untrue statement of a
material fact or omit to state any fact necessary to make the statements
therein not misleading;
(vi) Provide a transfer agent and registrar for all such Warrant
Shares not later than the effective date of such registration statement;
28
<PAGE>
(vii) Enter into such customary agreements (including underwriting
agreements in customary form for such offering) and take all such other
actions as the underwriters, if any, reasonably request in order to
expedite or facilitate the disposition of such Warrant Shares (including,
in connection with a registration statement requested pursuant to Section
7.02(a), effecting a stock split or a combination of shares);
(viii) Subject to customary confidentiality undertakings, make
available for inspection by any selling Holder or any underwriter
participating in any disposition pursuant to such registration statement
and any attorney, accountant or other agent retained by any such selling
Holder or underwriter, all financial and other records, pertinent corporate
documents and properties of Borrower, and cause the officers, directors,
employees and independent accountants of Borrower to supply all information
reasonably requested by any such seller, underwriter, attorney, accountant
or agent in connection with such registration statement;
(ix) Promptly notify the selling Holder(s) of Warrant Shares and the
underwriters, if any, of the following events and (if requested by any such
person) confirm such notification in writing: (A) the filing of the
prospectus or any prospectus supplement and the registration statement and
any amendment or post-effective amendment thereto and, with respect to the
registration statement or any post-effective amendment thereto, the
declaration of the effectiveness of such documents, (B) any requests by the
Commission for amendments or supplements to the registration statement or
the prospectus or for additional information, (C) the issuance or threat of
issuance by the Commission of any stop order suspending the effectiveness
of the registration statement or the initiation of any proceedings for that
purpose and (D) the receipt by Borrower of any notification with respect to
the suspension of the qualification of the Warrant Shares for sale in any
jurisdiction or the initiation or threat of initiation of any proceeding
for such purposes;
(x) Make every reasonable effort to prevent the entry of any order
suspending the effectiveness of the registration statement and obtain at
the earliest possible moment the withdrawal of any such order, if entered;
(xi) Cooperate with the selling Holder(s) and the underwriters, if
any, to facilitate the timely preparation and delivery of certificates
representing the Warrant Shares to be sold without restrictive legends if
so permitted by applicable warrant, shareholder and other agreements, and
enable such Warrant Shares to be in such lots and registered in such names
as the underwriters may request at least three (3) business days prior to
any delivery of the Warrant Shares to the underwriters;
(xii) Provide a CUSIP number for all the Warrant Shares not later than
the effective date of the registration statement;
(xiii) Prior to the effectiveness of the registration statement and
any post-effective amendment thereto and at each closing of an underwritten
offering, (A) make
29
<PAGE>
such representations and warranties to the selling Holder(s) and the
underwriters, if any, with respect to the Warrant Shares and the
registration statement as are customarily made by issuers in similar
offerings; (B) use its best efforts to obtain "cold comfort" letters and
updates thereof from Borrower's independent certified public accountants
addressed to the selling Holders and the underwriters, if any, such letters
to be in customary form and covering matters of the type customarily
covered in "cold comfort" letters by underwriters in connection with
similar offerings; (C) deliver such documents and certificates as may be
reasonably requested (1) by the Holders of a majority of the Warrant Shares
being sold, and (2) by the underwriters, if any, to evidence compliance
with clause (A) above and with any customary conditions contained in the
underwriting agreement or other agreement entered into by Borrower; and (D)
obtain opinions of counsel to Borrower and updates thereof (which counsel
and which opinions shall be reasonably satisfactory to the underwriters, if
any), covering the matters customarily covered in opinions requested in
similar offerings and such other matters as may be reasonably requested by
the selling Holders and underwriters or their counsel. If customary for
similar offerings, such counsel shall also state that no facts have come to
the attention of such counsel which cause them to believe that such
registration statement, the prospectus contained therein, or any amendment
or supplement thereto, as of their respective effective or issue dates,
contains any untrue statement of any material fact or omits to state any
material fact necessary to make the statements therein not misleading. If
for any reason Borrower's counsel is unable to give such opinion, Borrower
shall so notify the Holders of the Warrant Shares and shall use its best
efforts to remove expeditiously all impediments to the rendering of such
opinion; and
(xiv) Otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission, and make generally available to
its security holders earnings statements satisfying the provisions of
Section 11(a) of the Securities Act, no later than forty-five (45) days
after the end of any 12-month period (or ninety (90) days, if such period
is a fiscal year) (A) commencing at the end of any fiscal quarter in which
the Warrant Shares are sold to underwriters in a firm or best efforts
underwritten offering, or (B) if not sold to underwriters in such an
offering beginning with the first month of the first fiscal quarter of
Borrower commencing after the effective date of the registration statement,
which statements shall cover such 12-month periods.
(c) After the date hereof, Borrower shall not grant to any holder of
securities of Borrower any registration rights which have a priority greater
than or equal to those granted to Holder(s) pursuant to this Warrant, unless
granted to holders of the Company's equity securities acquired in connection
with sales of such securities after the date hereof for an aggregate purchase
price of at least $1,000,000.
(d) Borrower's obligations under Sections 7.02(a) and (b) above with
respect to each Holder of Warrant Shares are expressly conditioned upon such
Holder furnishing to Borrower in writing such information concerning such Holder
and the terms of such Holder's proposed offering as Borrower shall reasonably
request for inclusion in the registration statement. If any registration
statement including any of the Warrant Shares is filed, then
30
<PAGE>
Borrower shall indemnify each Holder thereof (and each underwriter for such
Holder and each person, if any, who controls such underwriter within the meaning
of the Securities Act) from any loss, claim, damage or liability arising out of
or based upon any untrue statement of a material fact contained in such
registration statement or any omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
except for any such statement or omission based on information furnished in
writing by such Holder of the Warrant Shares expressly for use in connection
with such registration statement; and such Holder shall indemnify Borrower (and
each of its officers and directors who has signed such registration statement,
each other director and each other person, if any, who controls Borrower within
the meaning of the Securities Act, each underwriter for Borrower and each
person, if any, who controls such underwriter within the meaning of the
Securities Act) and each other such Holder against the loss, claim, damage or
liability arising out of or based upon any such statement or omission which was
made in reliance upon information furnished in writing to Borrower by such
Holder expressly for use in connection with such registration statement.
(e) For purposes of this Section 7.02, all of the Warrant Shares shall be
deemed to be issued and outstanding, and all Holders shall be deemed to be
holders of such Warrant Shares.
7.03 Co-Sale Rights.
(a) Co-Sale Rights. J.W. Stealey (the "Selling Shareholder") shall not
enter into any transaction that would result in the sale by him of any Common
Stock now or hereafter owned by him, unless prior to such sale he shall give
notice to Lender of his intention to effect such sale in order that Lender may
exercise its rights under this Section 7.03 as hereinafter described. Such
notice shall set forth (i) the number of shares to be sold by the Selling
Shareholder (ii) the principal terms of the sale, including the price at which
the shares are intended to be sold, and (iii) an offer by the Selling
Shareholder to cause to be included with the shares to be sold by him in the
sale, on the same terms and conditions, the Warrant Shares issuable or issued to
Lender.
(b) Rejection of Co-Sale Offer. If Lender has not accepted such offer in
writing within a period of ten (10) days from the date of receipt of the notice
specified in Section 7.03(a), then the Selling Shareholder shall thereafter be
free for a period of ninety (90) days to sell the number of shares specified in
such notice, at a price no greater than the price set forth in such notice on
the terms set forth in such notice, without any further obligation to Lender in
connection with such sale. In the event that the Selling Shareholder fails to
consummate such sale within such 90-day period, the shares specified in such
notice shall continue to be subject to this Section 7.03.
(c) Acceptance of Co-Sale Offer. If Lender accepts such offer in writing
within a period of ten (10) days from the date of receipt of the notice
specified in Section 7.03(a), such acceptance shall be irrevocable unless the
Selling Shareholder shall be unable to cause to be included in his sale the
number of shares of Warrant Stock held by Lender set forth in the written
acceptance. In that event, the Selling Shareholder and Lender shall participate
in the sale
31
<PAGE>
pro rata, based upon their respective percentage interests in Borrower on a
fully diluted basis in which the Warrant shall be deemed fully exercised;
provided that the number of shares to be sold by Lender shall be reduced to the
lesser of (a) the number of shares that Lender desires to sell and (b) a number
of shares that will not conflict with Selling Shareholder's obligations under
Section 12 of that Stock Purchase Warrant dated March 24, 1997, and issued by
Borrower to Petra Capital, LLC.
ARTICLE VIII
TERMINATION
This Agreement shall remain in full force and effect until the earlier of
September 29, 2007, or the repayment in full of the Debenture, provided that
Section 4.25 and Articles VII through IX of this Agreement shall survive any
such termination until the earlier of September 29, 2007, or the repurchase in
full of the Warrant and/or all Warrant Shares.
ARTICLE IX
MISCELLANEOUS
9.01 Performance By Lender. If Borrower shall default in the payment,
performance or observance of any covenant, term or condition of this Agreement,
Lender may, at its option, pay, perform or observe the same, and all payments
made or costs or expenses incurred by Lender in connection therewith (including
but not limited to reasonable attorney's fees), with interest thereon at the
highest default rate provided in the Debenture (if none, then at the maximum
rate from time to time allowed by applicable law), shall be immediately repaid
to Lender by Borrower and shall constitute a part of the Secured Obligations and
be secured hereby until fully repaid. Lender, in its reasonable discretion,
shall determine the necessity for any such actions and of the amounts to be
paid.
9.02 Successors and Assigns Included in Parties. Whenever in this Agreement
one of the parties hereto is named or referred to, the heirs, legal
representatives, successors, successors-in-title and assigns of such parties
shall be included, and all covenants and agreements contained in this Agreement
by or on behalf of Borrower or iMagicOnline or by or on behalf of Lender shall
bind and inure to the benefit of their heirs, legal representatives,
successors-in-title and assigns, whether so expressed or not.
9.03 Costs and Expenses. Borrower agrees to pay all costs and expenses
incurred by Lender in connection with the making of the Loan that is the subject
of this Agreement, including but not limited to filing fees, recording taxes and
reasonable attorneys fees, promptly upon demand of Lender. Borrower further
agrees to pay all premiums for insurance required to be maintained pursuant to
the terms of the Loan Documents and all of the out-of-pocket costs and
32
<PAGE>
expenses incurred by Lender in connection with the collection of the Loan upon
an Event of Default, including but not limited to reasonable attorneys fees,
promptly upon demand of Lender.
9.04 Assignment. The Debenture, this Agreement and the other Loan Documents
may be endorsed, assigned and/or transferred in whole but not in part by Lender,
and any such holder and/or assignee of the same shall succeed to and be
possessed of the rights and powers of Lender under all of the same to the extent
transferred and assigned. Notwithstanding the foregoing, the Debenture may be
transferred, at Lender's option, to one or more persons, in whole or in part, so
long as such transferees (a) are members, partners, shareholders or affiliates
of Lender, or members, partners or shareholders of any of the foregoing; (b)
agree to hold the Debenture subject to all the terms hereof; and (c) shall
appoint Lender as its sole agent for exercising the rights of such transferees
hereunder, excepting the right to collect amounts due on the Debenture (or part
thereof) held by such transferee, which collection rights may be exercised by
any transferee. Borrower and iMagicOnline each shall not assign any of its
rights nor delegate any of its duties hereunder or under any of the other Loan
Documents without the prior express written consent of Lender, which consent
shall not be withheld unreasonably.
9.05 Time of the Essence. Time is of the essence with respect to each and
every covenant, agreement and obligation of Borrower, iMagicOnline and Lender
hereunder and under all of the other Loan Documents.
9.06 Severability. If any provision(s) of this Agreement or the application
thereof to any person or circumstance shall be invalid or unenforceable to any
extent, the remainder of this Agreement and the application of such provisions
to other persons or circumstances shall not be affected thereby and shall be
enforced to the greatest extent permitted by law.
9.07 Interest and Loan Charges Not to Exceed Maximum Allowed by Law.
Anything in this Agreement, the Debenture, the Security Instruments or any of
the other Loan Documents to the contrary notwithstanding, in no event
whatsoever, whether by reason of advancement of proceeds of the loan made
pursuant to this Agreement, acceleration of the maturity of the unpaid balance
of the loan or otherwise, shall the interest and loan charges agreed to be paid
to Lender for the use of the money advanced or to be advanced hereunder exceed
the maximum amounts collectible under applicable laws in effect from time to
time. It is understood and agreed by the parties that, if for any reason
whatsoever the interest or loan charges paid or contracted to be paid by
Borrower in respect of the indebtedness evidenced by the Debenture shall exceed
the maximum amounts collectible under applicable laws in effect from time to
time, then ipso facto, the obligation to pay such interest and/or loan charges
shall be reduced to the maximum amounts collectible under applicable laws in
effect from time to time, and any amounts collected by Lender that exceed such
maximum amounts shall be applied to the reduction of the principal balance of
the indebtedness evidenced by the Debenture and/or refunded to Borrower so that
at no time shall the interest or loan charges paid or payable in respect of the
indebtedness evidenced by the Debenture exceed the maximum amounts permitted
from time to time by applicable law.
33
<PAGE>
9.08 Article and Section Headings; Defined Terms. Numbered and titled
article and section headings and defined terms are for convenience only and
shall not be construed as amplifying or limiting any of the provisions of this
Agreement.
9.09 Notices. Any and all notices, elections or demands permitted or
required to be made under this Agreement shall be in writing, signed by the
party giving such notice, election or demand and shall be delivered personally,
telecopied, telexed, or sent by certified mail or nationally recognized courier
service (such as Federal Express), to the other party at the address set forth
below, or at such other address as may be supplied in writing and of which
receipt has been acknowledged in writing, The date of personal delivery,
telecopy or telex or the date of mailing (or delivery to such courier service),
as the case may be, shall be the date of such notice, election or demand. For
the purposes of this Agreement:
The Address of
Lender is: Oberlin Capital, L.P.
702 Oberlin Road
Suite 150
Raleigh, North Carolina 27605
Attention: Robert G. Shepley
with a copy to: Wyrick Robbins Yates & Ponton LLP
4101 Lake Boone Trail, Suite 300
Raleigh, North Carolina 27607
Attention: J. Christopher Lynch, Esq.
The Address of
iMagicOnline and
Borrower is: Interactive Magic, Inc.
215 Southport Drive, Suite 1000
Morrisville, North Carolina 27560
Attention: William J. Kaluza
with a copy to: Smith, Anderson, Blount, Dorsett,
Mitchell & Jernigan, L.L.P.
2500 First Union Capital Center
Raleigh, North Carolina 27601
Attention: Amos U. Priester, IV, Esq.
9.10 Entire Agreement. This Agreement and the other written agreements
between Borrower and Lender represent the entire agreement between the parties
concerning the subject matter hereof, and all oral discussions and prior
agreements are merged herein.
9.11 Miscellaneous. This Agreement shall be construed and enforced under
the laws of the State of North Carolina. No amendment or modification hereof
shall be effective except in a writing executed by each of the parties hereto.
34
<PAGE>
[THE NEXT PAGE IS THE SIGNATURE PAGE]
35
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, or
have caused this Agreement to be executed by their duly authorized officers, as
of the day and year first above written.
LENDER:
OBERLIN CAPITAL, L.P.
By: /s/ Robert G. Shepley, Jr.
_________________________________________
Robert G. Shepley, Jr.
President of the General Partner
BORROWER:
INTERACTIVE MAGIC, INC.
By: /s/ Robert L. Pickens
_________________________________________
Name: Robert L. Pickens
_______________________________________
Title: President
______________________________________
iMAGICONLINE CORPORATION
By: /s/ Robert L. Pickens
_______________________________________
Name: Robert L. Pickens
_______________________________________
Title: Vice President
______________________________________
36
Greyrock
Business
Credit
A NationsBank Company
Loan and Security Agreement
Borrower: Interactive Magic, Inc. and
iMagic Online Corporation
Address: 215 Southport Drive, Suite 1000
Morrisville, North Carolina 27560
Date: April 30, 1998
This Loan and Security Agreement is entered into on the above date between
GREYROCK BUSINESS CREDIT, a Division of NationsCredit Commercial Corporation
("GBC"), whose address is 10880 Wilshire Boulevard, Suite 950, Los Angeles,
California 90024 and the borrower named above ("Borrower"),* whose chief
executive office is located at the above address ("Borrower's Address"). The
Schedule to this Agreement (the "Schedule") being signed concurrently is an
integral part of this Agreement. (Definitions of certain terms used in this
Agreement are set forth in Section 8 below.)
*All references to "Borrower" herein shall mean and be each of Interactive
Magic, Inc. ("IMI") and U.S. Related Company (as defined in Section 8 below).
1. LOANS.
1.1 Loans. GBC will make loans to Borrower (the "Loans"), in amounts
determined by GBC in its sole discretion, up to the amounts (the "Credit Limit")
shown on the Schedule, provided no Default or Event of Default has occurred and
is continuing. If at any time or for any reason the total of all outstanding
Loans and all other Obligations exceeds the Credit Limit, Borrower shall
immediately pay the amount of the excess to GBC, without notice or demand.
1.2 Interest. All Loans and all other monetary Obligations shall bear
interest at the rate shown on the Schedule, except where expressly set forth to
the contrary in this Agreement or in another written agreement signed by GBC and
Borrower. Interest shall be payable monthly, on the last day of the month.
Interest may, in GBC's discretion, be charged to Borrower's loan account, and
the same shall thereafter bear interest at the same rate as the other Loans.
1.3 Fees. Borrower shall pay GBC the fee(s) shown on the Schedule, which
are in addition to all interest and other sums payable to GBC and are not
refundable.
2. SECURITY INTEREST.
2.1 Security Interest. To secure the payment and performance of all of the
Obligations when due, Borrower hereby grants to GBC a security interest in all
of Borrower's interest in the following, whether now owned or hereafter
acquired, and wherever located (collectively, the "Collateral"): All Inventory,
Receivables, Investment Property and General Intangibles, including, without
limitation, all of Borrower's Deposit Accounts, all money, all
collateral in which GBC is granted a security interest pursuant to any other
present or future agreement, all property now or at any time in the future in
GBC's possession, and all proceeds (including proceeds of any insurance
policies, proceeds of letters of credit, proceeds of proceeds and claims against
third parties), all products of the foregoing, and all books and records related
to any of the foregoing.*
*Borrower's payment and performance of all of the Obligations when due
shall be secured also by the Additional Collateral.
-1-
<PAGE>
Greyrock Business Credit Loan and Security Agreement
- --------------------------------------------------------------------------------
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER.
In order to induce GBC to enter into this Agreement and to make Loans,
Borrower represents and warrants to GBC as follows, and Borrower covenants that
the following representations will continue to be true, and that Borrower will
at all times comply with all of the following covenants:
3.1 Corporate Existence and Authority. Borrower, if a corporation, is and
will continue to be, duly organized, validly existing and in good standing under
the laws of the jurisdiction of its incorporation. Borrower is and will continue
to be qualified and licensed to do business in all jurisdictions in which any
failure to do so would have a material adverse effect on Borrower. The
execution, delivery and performance by Borrower of this Agreement, and all other
documents contemplated hereby (i) have been duly and validly authorized, (ii)
are enforceable against Borrower in accordance with their terms (except as
enforcement may be limited by equitable principles and by bankruptcy,
insolvency, reorganization, moratorium or similar laws relating to creditors'
rights generally), (iii) do not violate Borrower's articles or certificate of
incorporation, or Borrower's by-laws, or any law or any material agreement or
instrument which is binding upon Borrower or its property, and (iv) do not
constitute grounds for acceleration of any material indebtedness or obligation
under any material agreement or instrument which is binding upon Borrower or its
property.
3.2 Name; Trade Names and Styles. The name of Borrower set forth in the
heading to this Agreement is its correct name. Listed on the Schedule are all
prior names of Borrower and all of Borrower's present and prior trade names.
Borrower shall give GBC 30 days'prior written notice before changing its name or
doing business under any other name. Borrower has complied, and will in the
future comply, with all laws relating to the conduct of business under a
fictitious business name.
3.3 Place of Business; Location of Collateral. The address set forth in the
heading to this Agreement is Borrower's chief executive office. In addition,
Borrower has places of business and Collateral is located only at the locations
set forth on the Schedule. Borrower will give GBC at least 30 days' prior
written notice before opening any additional place of business, changing its
chief executive office, or moving any of the Collateral to a location other than
Borrower's Address or one of the locations set forth on the Schedule.
3.4 Title to Collateral; Permitted Liens. Borrower is now, and will at all
times in the future be, the sole owner of all the Collateral, except for items
of Equipment which are leased by Borrower. The Collateral now is and will remain
free and clear of any and all liens, charges, security interests, encumbrances
and adverse claims, except for Permitted Liens. GBC now has, and will continue
to have, a first-priority perfected and enforceable security interest in all of
the Collateral, subject only to the Permitted Liens, and Borrower will at all
times defend GBC and the Collateral against all claims of others. So long as any
Loan is outstanding which is a term loan, none of the Collateral now is or will
be affixed to any real property in such a manner, or with such intent, as to
become a fixture. * prohibit, restrain or impair Borrower's right to remove any
Collateral from the leased premises. Whenever any Collateral is located upon
premises in which any third party has an interest (whether as owner, mortgagee,
beneficiary under a deed of trust, lien or otherwise), Borrower shall, whenever
requested by GBC, use its best efforts to cause such third party to execute and
deliver to GBC, in form acceptable to GBC, such waivers and subordinations as
GBC shall specify, so as to ensure that GBC's rights in the Collateral are, and
will continue to be, superior to the rights of any such third party. Borrower
will keep in full force and effect, and will comply with all the terms of, any
lease of real property where any of the Collateral now or in the future may be
located.
* Borrower will not store Inventory valued at more than $50,000 in any property
leased by Borrower where such lease would
3.5 Maintenance of Collateral. Borrower will maintain the Collateral in
good working condition, ordinary wear and tear excepted, and Borrower will not
use the Collateral for any unlawful purpose. Borrower will immediately advise
GBC in writing of any material loss or damage to the Collateral. Borrower will
maintain the validity of, and otherwise maintain, preserve and protect, its
patents, trademarks, copyrights and other intellectual property in accordance
with prudent business practices.
3.6 Books and Records. Borrower has maintained and will maintain at
Borrower's Address complete and accurate books and records, comprising an
accounting system in accordance with generally accepted accounting principles.
3.7 Financial Condition, Statements and Reports. All financial statements
now or in the future delivered to GBC have been, and will be, prepared in
conformity with generally accepted accounting principles and now and in
-2-
<PAGE>
Greyrock Business Credit Loan and Security Agreement
- --------------------------------------------------------------------------------
the future will completely and fairly reflect the financial condition of
Borrower, at the times and for the periods therein stated. Between the last date
covered by any such statement provided to GBC and the date hereof, there has
been no material adverse change in the financial condition or business of
Borrower. Borrower is now and will continue to be solvent.
3.8 Tax Returns and Payments; Pension Contributions. Borrower has timely
filed, and will timely file, all tax returns and reports required by applicable
law, and Borrower has timely paid, and will timely pay, all applicable taxes,
assessments, deposits and contributions now or in the future owed by Borrower.
Borrower may, however, defer payment of any contested taxes, provided that
Borrower (i) in good faith contests Borrower's obligation to pay the taxes by
appropriate proceedings promptly and diligently instituted and conducted, (ii)
notifies GBC in writing of the commencement of, and any material development in,
the proceedings, and (iii) posts bonds or takes any other steps required to keep
the contested taxes from becoming a lien upon any of the Collateral. Borrower is
unaware of any claims or adjustments proposed for any of Borrower's prior tax
years which could result in additional taxes becoming due and payable by
Borrower. Borrower has paid, and shall continue to pay all amounts necessary to
fund all present and future pension, profit sharing and deferred compensation
plans in accordance with their terms, and Borrower has not and will not withdraw
from participation in, permit partial or complete termination of, or permit the
occurrence of any other event with respect to, any such plan which could result
in any liability of Borrower, including any liability to the Pension Benefit
Guaranty Corporation or any other governmental agency. Borrower shall, at all
times, utilize the services of an outside payroll service providing for the
automatic deposit of all payroll taxes payable by Borrower.
3.9 Compliance with Law. Borrower has complied, and will comply, in all
material respects, with all provisions of all applicable laws and regulations,
including, but not limited to, those relating to Borrower's ownership of real or
personal property, the conduct and licensing of Borrower's business, and all
environmental matters.
3.10 Litigation. Except as disclosed in the Schedule, there is no claim,
suit, litigation, proceeding or investigation pending or (to best of Borrower's
knowledge) threatened by or against or affecting Borrower in any court or before
any governmental agency (or any basis therefor known to Borrower) which may
result, either separately or in the aggregate, in any material adverse change in
the financial condition or business of Borrower, or in any material impairment
in the ability of Borrower to carry on its business in substantially the same
manner as it is now being conducted. Borrower will promptly inform GBC in
writing of any claim, proceeding, litigation or investigation in the future
threatened or instituted by or against Borrower involving any single claim of
$50,000 or more, or involving $100,000 or more in the aggregate.
3.11 Use of Proceeds. All proceeds of all Loans shall be used solely for
lawful business purposes.
4. RECEIVABLES AND INVESTMENT PROPERTY.
4.1 Representations Relating to Receivables. Borrower* represents and
warrants to GBC that each Receivable with respect to which Loans are requested
by Borrower shall, on the date each Loan is requested and made, represent an
undisputed, bona fide, existing, unconditional obligation of the Account Debtor
created by the sale, delivery, and acceptance of goods or the rendition of
services, in the ordinary course of Borrower's business**.
* and U.K. Related Company
** or U.K. Related Company's business (except as disclosed to and approved by
GBC)
4.2 Representations Relating to Documents and Legal Compliance. Borrower*
represents and warrants to GBC as follows: All statements made and all unpaid
balances appearing in all invoices, instruments and other documents evidencing
the Receivables are and shall be true and correct and all such invoices,
instruments and other documents and all of Borrower's ** books and records are
and shall be genuine and in all respects what they purport to be, and all
signatories and endorsers have the capacity to contract. All sales and other
transactions underlying or giving rise to each Receivable shall comply with all
applicable laws and governmental rules and regulations. All signatures and
indorsements on all documents, instruments, and agreements relating to all
Receivables are and shall be genuine, and all such documents, instruments and
agreements are and shall be legally enforceable in accordance with their terms.
* and U.K. Related Company each
** (or U.K. Related Company's, as the case may be)
4.3 Schedules and Documents Relating to Receivables and Investment
Property. Borrower shall deliver to GBC transaction reports and loan requests,
schedules and assignments of all Receivables, and schedules of collections, all
on GBC's standard forms; provided, however, that Borrower's failure to execute
and deliver the same shall not affect or limit GBC's security interest and other
rights in all of Borrower's*
-3-
<PAGE>
Greyrock Business Credit Loan and Security Agreement
- --------------------------------------------------------------------------------
Receivables, nor shall GBC's failure to advance or lend against a specific
Receivable affect or limit GBC's security interest and other rights therein.
Together with each such schedule and assignment, or later if requested by GBC,
Borrower shall furnish GBC with copies (or, at GBC's request, originals) of all
contracts, orders, invoices, and other similar documents, and all original
shipping instructions, delivery receipts, bills of lading, and other evidence of
delivery, for any goods the sale or disposition of which gave rise to such
Receivables, and Borrower warrants the genuineness of all of the foregoing.
Borrower shall also furnish to GBC an aged accounts receivable trial balance in
such form and at such intervals as GBC shall request. **, Borrower shall deliver
to GBC the originals of all instruments, chattel paper, security agreements,
guarantees and other documents and property evidencing or securing any
Receivables, and in the same form as received, with all necessary indorsements,
and, upon the request of GBC, Borrower shall deliver to GBC all letters of
credit and also all certificated securities with respect to any Investment
Property, with all necessary indorsements, and obtain such account control
agreements with securities intermediaries and take such other action with
respect to any Investment Property, as GBC shall request, in form and substance
satisfactory to GBC. Upon request of GBC Borrower additionally shall obtain
consents from any letter of credit issuers with respect to the assignment to GBC
of any letter of credit proceeds.
* and U.K. Related Company's
** Upon request
4.4 Collection of Receivables and Investment Property Income. Borrower*
shall have the right to collect all Receivables and retain all Investment
Property payments and distributions, unless and until a Default or an Event of
Default has occurred. Borrower shall hold all payments on, and proceeds of, and
distributions with respect to, Receivables and Investment Property in trust for
GBC, and Borrower shall deliver all such payments, proceeds and distributions to
GBC, within one business day after receipt of the same, in their original form,
duly endorsed, to be applied to the Obligations in such order as GBC shall
determine.** Upon the request of GBC, any such distributions and payments with
respect to any Investment Property held in any securities account shall be held
and retained in such securities account as part of the Collateral.
* and U.K. Related Company each
** Except to the extent otherwise provided in the Schedule or as otherwise
agreed with GBC, U.K. Related Company shall hold all payments on, and proceeds
of, and distributions with respect to, U.K. Related Company's Receivables in
trust for GBC, and U.K. Related Company shall deliver all such payments,
proceeds and distributions to GBC, within one business day after receipt of the
same, in their original form, duly endorsed, to be applied to the Obligations in
such order as GBC shall determine.
4.5 Disputes. Borrower* shall notify GBC promptly of all disputes or claims
relating to Receivables on the regular reports to GBC. Borrower shall not
forgive, or settle any Receivable for less than payment in full, or agree to do
any of the foregoing**, except that*** Borrower may do so, provided that: (i)
Borrower**** does so in good faith, in a commercially reasonable manner, in the
ordinary course of business, and in arm's length transactions, which are
reported to GBC on the regular reports provided to GBC; (ii) no Default or Event
of Default has occurred and is continuing; and (iii) taking into account all
such settlements and forgiveness, the total outstanding Loans and other
Obligations will not exceed the Credit Limit.
* and U.K. Related Company each
** (nor shall U.K. Related Company agree to do any of the foregoing)
*** each of U.K. Related Company and
**** or U.K. Related Company, as the case may be,
4.6 Returns. Provided no Event of Default has occurred and is continuing,
if any Account Debtor returns any Inventory to Borrower in the ordinary course
of its business, Borrower shall promptly determine the reason for such return
and promptly issue a credit memorandum to the Account Debtor in the appropriate
amount (sending a copy to GBC).
4.7 Verification. GBC may, from time to time, verify directly with the
respective Account Debtors the validity, amount and other matters relating to
the Receivables, by means of mail, telephone or otherwise, in the name of
Borrower* or GBC or such other name as GBC may choose, and GBC or its designee
may, at any time, notify Account Debtors that it has a security
-4-
<PAGE>
Greyrock Business Credit Loan and Security Agreement
- --------------------------------------------------------------------------------
interest in the Receivables.
* , U.K. Related Company
4.8 No Liability. GBC shall not under any circumstances be responsible or
liable for any shortage or discrepancy in, damage to, or loss or destruction of,
any goods, the sale or other disposition of which gives rise to a Receivable, or
for any error, act, omission, or delay of any kind occurring in the settlement,
failure to settle, collection or failure to collect any Receivable, or for
settling any Receivable in good faith for less than the full amount thereof, nor
shall GBC be deemed to be responsible for any of Borrower's* obligations under
any contract or agreement giving rise to a Receivable. Nothing herein shall,
however, relieve GBC from liability for its own gross negligence or willful
misconduct.
* or U.K. Related Company's
5. ADDITIONAL DUTIES OF THE BORROWER.
5.1 Insurance. Borrower shall, at all times, insure all of the tangible
personal property Collateral* and carry such other business insurance, with
insurers reasonably acceptable to GBC, in such form and amounts as GBC may
reasonably require, and Borrower shall provide evidence of such insurance to
GBC, so that GBC is satisfied that such insurance is, at all times, in full
force and effect. All such insurance policies shall name GBC as an additional
loss payee, and shall contain a lenders loss payee endorsement in form
reasonably acceptable to GBC. Upon receipt of the proceeds of any such
insurance, GBC shall apply such proceeds in reduction of the Obligations as GBC
shall determine in its sole discretion, except that, provided no Default or
Event of Default has occurred and is continuing, GBC shall release to Borrower
insurance proceeds with respect to Equipment totaling less than $100,000, which
shall be utilized by Borrower for the replacement of the Equipment with respect
to which the insurance proceeds were paid. GBC may require reasonable assurance
that the insurance proceeds so released will be so used. If Borrower fails to
provide or pay for any insurance, GBC may, but is not obligated to, obtain the
same at Borrower's expense. Borrower shall promptly deliver to GBC copies of all
reports made to insurance companies.
* (but not with respect to any Receivable)
5.2 Reports. Borrower, at its expense, shall provide GBC with the written
reports set forth in the Schedule, and such other written reports with respect
to Borrower* (including budgets, sales projections, operating plans and other
financial documentation), as GBC shall from time to time reasonably specify.
* and U.K. Related Company
5.3 Access to Collateral, Books and Records. At reasonable times, and on
one business day's notice, GBC, or its agents, shall have the right to inspect
the Collateral, and the right to audit and copy Borrower's* books and records.
GBC shall take reasonable steps to keep confidential all information obtained in
any such inspection or audit, but GBC shall have the right to disclose any such
information to its auditors, regulatory agencies, and attorneys, and pursuant to
any subpoena or other legal process. The foregoing inspections and audits shall
be at Borrower's expense and the charge therefor shall be $600 per person per
day (or such higher amount as shall represent GBC's then current standard charge
for the same), plus reasonable out-of-pockets expenses. Borrower shall not be
charged more than $3,000 per audit (plus reasonable out-of-pockets expenses),
nor shall audits be done more frequently than four times per calendar year,
provided that the foregoing limits shall not apply **, nor shall they restrict
GBC's right to conduct audits at its own expense (whether or not a Default or
Event of Default has occurred). Borrower will not enter into any agreement with
any accounting firm, service bureau or third party to store Borrower's books or
records at any location other than Borrower's Address, without first obtaining
GBC's written consent, which may be conditioned upon such accounting firm,
service bureau or other third party agreeing to give GBC the same rights with
respect to access to books and records and related rights as GBC has under this
Agreement.
* and U.K. Related Company's
** while Borrower is in Default
5.4 Remittance of Proceeds. All proceeds arising from the sale or other
disposition of any Collateral shall be delivered, in kind, by Borrower* to GBC
in the original form in which received by Borrower not later than the following
business day after receipt by Borrower**, to be applied to the Obligations in
such order as GBC shall determine; provided that, if no Default or Event of
Default has occurred and is continuing, and if no term loan is outstanding
hereunder, then Borrower shall not be obligated to remit to GBC the proceeds of
the sale of Equipment which is sold in the ordinary course of business, in a
good-faith arm's length transaction. Except for the proceeds of the sale of
Equipment as set forth above***, Borrower**** shall not commingle proceeds of
Collateral with any of Borrower's* other funds or property, and shall hold such
proceeds separate and apart from such other funds and property and in an express
trust for GBC. Nothing in this Section limits the restrictions on disposition of
Collateral set forth elsewhere in this Agreement.
-5-
<PAGE>
Greyrock Business Credit Loan and Security Agreement
- --------------------------------------------------------------------------------
* or U.K. Related Company's
** or U.K. Related Company
*** and except as provided in the Schedule as to U.K. Related Company
**** and U.K. Related Company
5.5 Negative Covenants. Except as may be permitted in the Schedule,
Borrower shall not, without GBC's prior written consent, do any of the
following: (i) merge or consolidate with another corporation or entity*; (ii)
acquire any assets, except in the ordinary course of business; (iii) enter into
any other transaction outside the ordinary course of business; (iv) sell or
transfer any Collateral, except that, provided no Default or Event of Default
has occurred and is continuing, Borrower may (a) sell finished Inventory in the
ordinary course of Borrower's business, (b) if no term loan is outstanding
hereunder, sell Equipment in the ordinary course of business, in good-faith
arm's length transactions, and (c) license or sublicense intellectual property
in the ordinary course of Borrower's business; (v) store any Inventory or other
Collateral with any warehouseman or other third party**; (vi) sell any Inventory
on a sale-or-return, guaranteed sale, consignment, or other contingent basis***;
(vii) make any loans of money or other assets****; (viii) incur any debts,
outside the ordinary course of business, which would have a material, adverse
effect on Borrower or on the prospect of repayment of the Obligations; (ix)
guarantee or otherwise become liable with respect to the obligations of another
party or entity*****; (x) pay or declare any dividends on Borrower's stock
(except for dividends payable solely in stock of Borrower)+; (xi) redeem,
retire, purchase or otherwise acquire, directly or indirectly, any of Borrower's
stock; (xii) make any change in Borrower's capital structure which would have a
material adverse effect on Borrower or on the prospect of repayment of the
Obligations; or (xiii) dissolve or elect to dissolve; or (xiv) agree to do any
of the foregoing.
* (except that Borrower may merge into another corporation for purposes of
effecting a reincorporation into another state after GBC has notified Borrower
in writing that all steps necessary to protect the validity and perfection of
GBC's first-priority security interest in the Collateral, subject to Permitted
Liens, have been taken)
** except as disclosed to and approved by GBC and after delivery to GBC of such
documents as GBC may reasonably require
*** , except in accordance with Borrower's normal business practices as
disclosed to GBC
**** , other than to employees in the ordinary course of business or any
software developer not exceeding $100,000 in the aggregate
***** which is not a Subsidiary of Borrower
+ other than to U.K. Related Company
5.6 Litigation Cooperation. Should any third-party suit or proceeding be
instituted by or against GBC with respect to any Collateral or in any manner
relating to Borrower, Borrower shall, without expense to GBC, make available
Borrower and its officers, employees and agents, and Borrower's books and
records, without charge, to the extent that GBC may deem them reasonably
necessary in order to prosecute or defend any such suit or proceeding.
5.7 Notification of Changes. Borrower will promptly notify GBC in writing
of any change in its officers or directors, the opening of any new bank account
or other deposit account, the opening of any new securities account, and any
material adverse change in the business or financial affairs of Borrower.
5.8 Further Assurances. Borrower agrees, at its expense, on request by GBC,
to execute all documents and take all actions, as GBC may deem reasonably
necessary or useful in order to perfect and maintain GBC's perfected security
interest in the Collateral, and in order to fully consummate the transactions
contemplated by this Agreement.
5.9 Indemnity. Borrower hereby agrees to indemnify GBC and hold GBC
harmless from and against any and all claims, debts, liabilities, demands,
obligations, actions, causes of action, penalties, costs and expenses (including
attorneys' fees), of every nature, character and description, which GBC may
sustain or incur based upon or arising out of any of the Obligations, any actual
or alleged failure to collect and pay over any withholding or other tax relating
to Borrower or its employees, any relationship or agreement between GBC and
Borrower, any actual or alleged failure of GBC to comply with any writ of
attachment or other legal process relating to Borrower or any of its property,
or any other matter, cause or thing whatsoever occurred, done, omitted or
suffered to be done by GBC relating to Borrower or the Obligations (except any
such amounts sustained or incurred as the result of the gross negligence or
willful misconduct of GBC or any of its directors, officers, employees, agents,
attorneys, or any other person affiliated with or representing GBC).
Notwithstanding any provision in this Agreement to the
-6-
<PAGE>
Greyrock Business Credit Loan and Security Agreement
- --------------------------------------------------------------------------------
contrary, the indemnity agreement set forth in this Section shall survive any
termination of this Agreement and shall for all purposes continue in full force
and effect.
6. TERM.
6.1 Maturity Date. This Agreement shall continue in effect until the
maturity date set forth on the Schedule (the "Maturity Date"); provided that the
Maturity Date shall automatically be extended, and this Agreement shall
automatically and continuously renew, for successive additional terms of one
year each, unless one party gives written notice to the other, not less than
sixty days prior to the next Maturity Date, that such party elects to terminate
this Agreement effective on the next Maturity Date.
6.2 Early Termination. This Agreement may be terminated prior to the
Maturity Date as follows: (i) by Borrower, effective three business days after
written notice of termination is given to GBC; or (ii) by GBC at any time after
the occurrence of an Event of Default, without notice, effective immediately. If
this Agreement is terminated by Borrower or by GBC under this Section 6.2,
Borrower shall pay to GBC a termination fee (the "Termination Fee") in the
amount shown on the Schedule. The Termination Fee shall be due and payable on
the effective date of termination and thereafter shall bear interest at a rate
equal to the highest rate applicable to any of the Obligations.
6.3 Payment of Obligations. On the Maturity Date or on any earlier
effective date of termination, Borrower shall pay and perform in full all
Obligations, whether evidenced by installment notes or otherwise, and whether or
not all or any part of such Obligations are otherwise then due and payable.
Without limiting the generality of the foregoing, if on the Maturity Date, or on
any earlier effective date of termination, there are any outstanding letters of
credit issued based upon an application, guarantee, indemnity or similar
agreement on the part of GBC, then on such date Borrower shall provide to GBC
cash collateral in an amount equal to 110% of the face amount of all such
letters of credit plus all interest, fees and costs due or (in GBC's estimation)
likely to become due in connection therewith, to secure all of the Obligations
relating to said letters of credit, pursuant to GBC's then standard form cash
pledge agreement. Notwithstanding any termination of this Agreement, all of
GBC's security interests in all of the Collateral and all of the terms and
provisions of this Agreement shall continue in full force and effect until all
Obligations have been paid and performed in full; provided that, without
limiting the fact that Loans are subject to the discretion of GBC, GBC may, in
its sole discretion, refuse to make any further Loans after termination. No
termination shall in any way affect or impair any right or remedy of GBC, nor
shall any such termination relieve Borrower of any Obligation to GBC, until all
of the Obligations have been paid and performed in full. Upon payment and
performance in full of all the Obligations and termination of this Agreement,
GBC shall promptly deliver to Borrower termination statements, requests for
reconveyances and such other documents as may be reasonably required to
terminate GBC's security interests.
7. EVENTS OF DEFAULT AND REMEDIES.
7.1 Events of Default. The occurrence of any of the following events shall
constitute an "Event of Default" under this Agreement, and Borrower shall give
GBC immediate written notice thereof: (a) Any warranty, representation,
statement, report or certificate made or delivered to GBC by Borrower or any
Guarantor or any of Borrower's or any Guarantor's officers, employees or agents,
now or in the future, shall be untrue or misleading in a material respect; or
(b) Borrower shall fail to pay when due any Loan or any interest thereon or any
other monetary Obligation; or (c) the total Loans and other Obligations
outstanding at any time shall exceed the Credit Limit; or (d) Borrower shall
fail to perform any non-monetary Obligation which by its nature cannot be cured;
or (e) Borrower shall fail to perform any other non-monetary Obligation, which
failure is not cured within * days after the date performance is due; or (f) any
levy, assessment, attachment, seizure, lien or encumbrance (other than a
Permitted Lien) is made on all or any part of the Collateral which is not cured
within 10* days after the occurrence of the same; or (g) any default or event of
default occurs under any obligation secured by a Permitted Lien, which is not
cured within any applicable cure period or waived in writing by the holder of
the Permitted Lien**; or (h) Borrower or any Guarantor breaches any material
contract or obligation, which has or may reasonably be expected to have a
material adverse effect on Borrower's or such Guarantor's business or financial
condition***; or (i) dissolution, termination of existence, insolvency or
business failure of Borrower or any Guarantor; or appointment of a receiver,
trustee or custodian, for all or any part of the property of, assignment for the
benefit of creditors by, or the commencement of any proceeding by Borrower or
any Guarantor under any reorganization, bankruptcy, insolvency, arrangement,
readjustment of debt, dissolution or liquidation law or statute of any
jurisdiction, now or in the future in effect; or (j) the commencement of any
proceeding against Borrower or any Guarantor under any reorganization,
bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or
liquidation law or statute of any jurisdiction, now or in the future in effect,
which is not cured by the dismissal thereof within 45 days after the date
commenced; or (k) revocation or termination of, or limitation or denial of
liability upon, any guaranty of the
-7-
<PAGE>
Greyrock Business Credit Loan and Security Agreement
- --------------------------------------------------------------------------------
Obligations or any attempt to do any of the foregoing or any defined "Event of
Default" shall occur under any Security Agreement entered into by any Guarantor
in favor of GBC; or (l) revocation or termination of, or limitation or denial of
liability upon, any pledge of any certificate of deposit, securities or other
property or asset pledged by any other Person to secure any or all of the
Obligations, or any attempt to do any of the foregoing, or commencement of
proceedings by or against any such Person under any reorganization, bankruptcy,
insolvency, arrangement, readjustment of debt, dissolution or liquidation law or
statute of any jurisdiction, now or in the future in effect; or (m) Borrower or
any Guarantor makes any payment on account of any indebtedness or obligation
which has been subordinated to the Obligations other than as permitted in the
applicable subordination agreement, or if any Person who has subordinated such
indebtedness or obligations terminates or in any way limits or terminates its
subordination agreement; or (n) there shall be a change in the record or
beneficial ownership of an aggregate of more than 20% of the outstanding shares
of stock of **** in one or more transactions, compared to the ownership of
outstanding shares of stock of **** in effect on the date hereof, without the
prior written consent of GBC*****; or (o) Borrower or any Guarantor shall
generally not pay its debts as they become due, or Borrower or any Guarantor
shall conceal, remove or transfer any part of its property, with intent to
hinder, delay or defraud its creditors, or make or suffer any transfer of any of
its property which may be fraudulent under any bankruptcy, fraudulent conveyance
or similar law; or (p) there shall be a material adverse change in Borrower's or
any Guarantor's business or financial condition. GBC may cease making any Loans
hereunder during any of the above cure periods, and thereafter if an Event of
Default has occurred.
* 15
**, provided that if the amount involved is less than $25,000 then the same
shall not be an Event of Default unless and until the holder of the Permitted
Lien commences any action to enforce its lien against any Collateral
*** and such breach is not cured within 15 days
**** IMI
***** or there shall be a change in the record or beneficial ownership of either
Related Company such that IMI ceases to hold 100% of the common stock and all
other capital stock of either Related Company, in one or more transactions,
compared to the ownership of outstanding shares of stock of such Related Company
in effect on the date hereof, without the prior written consent of GBC (other
than in connection with any initial public offering)
7.2 Remedies. Upon the occurrence and during the continuance of any Event
of Default, GBC, at its option, and without notice or demand of any kind (all of
which are hereby expressly waived by Borrower), may do any one or more of the
following: (a) Cease making Loans or otherwise extending credit to Borrower
under this Agreement or any other document or agreement; (b) Accelerate and
declare all or any part of the Obligations to be immediately due, payable, and
performable, notwithstanding any deferred or installment payments allowed by any
instrument evidencing or relating to any Obligation; (c) Take possession of any
or all of the Collateral wherever it may be found, and for that purpose Borrower
hereby authorizes GBC without judicial process to enter onto any of Borrower's
premises without interference to search for, take possession of, keep, store, or
remove any of the Collateral, and remain on the premises or cause a custodian to
remain on the premises in exclusive control thereof, without charge for so long
as GBC deems it reasonably necessary in order to complete the enforcement of its
rights under this Agreement or any other agreement; provided, however, that
should GBC seek to take possession of any of the Collateral by Court process,
Borrower hereby irrevocably waives: (i) any bond and any surety or security
relating thereto required by any statute, court rule or otherwise as an incident
to such possession; (ii) any demand for possession prior to the commencement of
any suit or action to recover possession thereof; and (iii) any requirement that
GBC retain possession of, and not dispose of, any such Collateral until after
trial or final judgment; (d) Require Borrower to assemble any or all of the
Collateral and make it available to GBC at places designated by GBC which are
reasonably convenient to GBC and Borrower, and to remove the Collateral to such
locations as GBC may deem advisable; (e) Complete the processing, manufacturing
or repair of any Collateral prior to a disposition thereof and, for such purpose
and for the purpose of removal, GBC shall have the right to use Borrower's
premises, vehicles, hoists, lifts, cranes, equipment and all other property
without charge; (f) Sell, lease or otherwise dispose of any of the Collateral,
in its condition at the time GBC obtains possession of it or after further
manufacturing, processing or repair, at one or more public and/or private sales,
in lots or in bulk, for cash, exchange or other property, or on credit, and to
adjourn any such sale from time to time without notice other than oral
announcement at the time scheduled for sale. GBC shall have the right to conduct
such disposition on Borrower's premises without charge, for such time or times
as GBC deems reasonable, or on GBC's premises, or elsewhere and the Collateral
need not be located at the place of disposition. GBC may directly or through any
affiliated company purchase or lease any
-8-
<PAGE>
Greyrock Business Credit Loan and Security Agreement
- --------------------------------------------------------------------------------
Collateral at any such public disposition, and if permissible under applicable
law, at any private disposition. Any sale or other disposition of Collateral
shall not relieve Borrower of any liability Borrower may have if any Collateral
is defective as to title or physical condition or otherwise at the time of sale;
(g) Demand payment of, and collect any Receivables and General Intangibles
comprising Collateral and, in connection therewith, Borrower irrevocably
authorizes GBC to endorse or sign Borrower's name on all collections, receipts,
instruments and other documents, to take possession of and open mail addressed
to Borrower and remove therefrom payments made with respect to any item of the
Collateral or proceeds thereof, and, in GBC's sole discretion, to grant
extensions of time to pay, compromise claims and settle Receivables, General
Intangibles and the like for less than face value; (h) Collect, receive, dispose
of and realize upon any Investment Property, including withdrawal of any and all
funds from any securities accounts; and (i) Demand and receive possession of any
of Borrower's federal and state income tax returns and the books and records
utilized in the preparation thereof or referring thereto. All reasonable
attorneys' fees, expenses, costs, liabilities and obligations incurred by GBC
with respect to the foregoing shall be added to and become part of the
Obligations, shall be due on demand, and shall bear interest at a rate equal to
the highest interest rate applicable to any of the Obligations.
7.3 Standards for Determining Commercial Reasonableness. Borrower and GBC
agree that a sale or other disposition (collectively, "sale") of any Collateral
which complies with the following standards will conclusively be deemed to be
commercially reasonable: (i) Notice of the sale is given to Borrower at least
seven days prior to the sale, and, in the case of a public sale, notice of the
sale is published at least seven days before the sale in a newspaper of general
circulation in the county where the sale is to be conducted; (ii) Notice of the
sale describes the collateral in general, non-specific terms; (iii) The sale is
conducted at a place designated by GBC, with or without the Collateral being
present; (iv) The sale commences at any time between 8:00 a.m. and 6:00 p.m; (v)
Payment of the purchase price in cash or by cashier's check or wire transfer is
required; (vi) With respect to any sale of any of the Collateral, GBC may (but
is not obligated to) direct any prospective purchaser to ascertain directly from
Borrower any and all information concerning the same. GBC shall be free to
employ other methods of noticing and selling the Collateral, in its discretion,
if they are commercially reasonable. Without limiting the generality of the
foregoing, Borrower recognizes that GBC may be unable to make a public sale of
any or all of the Investment Property, by reason of prohibitions contained in
applicable securities laws or otherwise, and expressly agrees that a private
sale to a restricted group of purchasers for investment and not with a view to
any distribution thereof shall be considered a commercially reasonable sale.
7.4 Power of Attorney. Upon the occurrence and during the continuance of
any Event of Default, without limiting GBC's other rights and remedies, Borrower
grants to GBC an irrevocable power of attorney coupled with an interest,
authorizing and permitting GBC (acting through any of its employees, attorneys
or agents) at any time, at its option, but without obligation, with or without
notice to Borrower, and at Borrower's expense, to do any or all of the
following, in Borrower's name or otherwise, but GBC agrees to exercise the
following powers in a commercially reasonable manner: (a) Execute on behalf of
Borrower any documents that GBC may, in its sole discretion, deem advisable in
order to perfect and maintain GBC's security interest in the Collateral, or in
order to exercise a right of Borrower or GBC, or in order to fully consummate
all the transactions contemplated under this Agreement, and all other present
and future agreements; (b) Execute on behalf of Borrower any document
exercising, transferring or assigning any option to purchase, sell or otherwise
dispose of or to lease (as lessor or lessee) any real or personal property which
is part of GBC's Collateral or in which GBC has an interest; (c) Execute on
behalf of Borrower, any invoices relating to any Receivable, any draft against
any Account Debtor and any notice to any Account Debtor, any proof of claim in
bankruptcy, any Notice of Lien, claim of mechanic's, materialman's or other
lien, or assignment or satisfaction of mechanic's, materialman's or other lien;
(d) Take control in any manner of any cash or non-cash items of payment or
proceeds of Collateral; endorse the name of Borrower upon any instruments, or
documents, evidence of payment or Collateral that may come into GBC's
possession; (e) Endorse all checks and other forms of remittances received by
GBC; (f) Pay, contest or settle any lien, charge, encumbrance, security interest
and adverse claim in or to any of the Collateral, or any judgment based thereon,
or otherwise take any action to terminate or discharge the same; (g) Grant
extensions of time to pay, compromise claims and settle Receivables and General
Intangibles for less than face value and execute all releases and other
documents in connection therewith; (h) Pay any sums required on account of
Borrower's taxes or to secure the release of any liens therefor, or both; (i)
Settle and adjust, and give releases of, any insurance claim that relates to any
of the Collateral and obtain payment therefor; (j) Instruct any third party
having custody or control of any books or records belonging to, or relating to,
Borrower to give GBC the same rights of access and other rights with respect
thereto as GBC has under this Agreement; (k) Execute and deliver to any
securities intermediary or other Person any entitlement order, account control
agreement or other notice, document or instrument with
-9-
<PAGE>
Greyrock Business Credit Loan and Security Agreement
- --------------------------------------------------------------------------------
respect to any Investment Property; and (l) Take any action or pay any sum
required of Borrower pursuant to this Agreement and any other present or future
agreements. Any and all reasonable sums paid and any and all reasonable costs,
expenses, liabilities, obligations and reasonable attorneys' fees incurred by
GBC with respect to the foregoing shall be added to and become part of the
Obligations, shall be payable on demand, and shall bear interest at a rate equal
to the highest interest rate applicable to any of the Obligations. In no event
shall GBC's rights under the foregoing power of attorney or any of GBC's other
rights under this Agreement be deemed to indicate that GBC is in control of the
business, management or properties of Borrower.
7.5 Application of Proceeds. All proceeds realized as the result of any
sale or other disposition of the Collateral shall be applied by GBC first to the
reasonable costs, expenses, liabilities, obligations and attorneys' fees
incurred by GBC in the exercise of its rights under this Agreement, second to
the interest due upon any of the Obligations, and third to the principal of the
Obligations, in such order as GBC shall determine in its sole discretion. Any
surplus shall be paid to Borrower or other persons legally entitled thereto;
Borrower shall remain liable to GBC for any deficiency. If, GBC, in its sole
discretion, directly or indirectly enters into a deferred payment or other
credit transaction with any purchaser at any sale of Collateral, GBC shall have
the option, exercisable at any time, in its sole discretion, of either reducing
the Obligations by the principal amount of purchase price or deferring the
reduction of the Obligations until the actual receipt by GBC of the cash
therefor.
7.6 Remedies Cumulative. In addition to the rights and remedies set forth
in this Agreement, GBC shall have all the other rights and remedies accorded a
secured party under the California Uniform Commercial Code and under all other
applicable laws, and under any other instrument or agreement now or in the
future entered into between GBC and Borrower, and all of such rights and
remedies are cumulative and none is exclusive. Exercise or partial exercise by
GBC of one or more of its rights or remedies shall not be deemed an election,
nor bar GBC from subsequent exercise or partial exercise of any other rights or
remedies. The failure or delay of GBC to exercise any rights or remedies shall
not operate as a waiver thereof, but all rights and remedies shall continue in
full force and effect until all of the Obligations have been fully paid and
performed.
8. DEFINITIONS. As used in this Agreement, the following terms have the
following meanings:
"Account Debtor" means the obligor on a Receivable.
"Additional Collateral" means all property and interests in property and
proceeds thereof described as collateral in the U.K. Related Company Security
Agreement.
"Affiliate" means, with respect to any Person, a relative, partner,
shareholder, director, officer, or employee of such Person, or any parent or
subsidiary of such Person, or any Person controlling, controlled by or under
common control with such Person.
"Agreement" and "this Agreement" means this Loan and Security Agreement and
all modifications and amendments thereto, extensions thereof, and replacements
therefor.
"Business Day" means a day on which GBC is open for business.
"Code" means the Uniform Commercial Code as adopted and in effect in the
State of California from time to time.
"Collateral" has the meaning set forth in Section 2.1 above.
"Default" means any event which with notice or passage of time or both,
would constitute an Event of Default.
"Deposit Account" has the meaning set forth in Section 9105 of the Code.
"Eligible Receivables" means unconditional Receivables arising in the
ordinary course of Borrower's* business from the completed sale of goods or
rendition of services, which GBC, in its sole judgment, shall deem eligible for
borrowing, based on such considerations as GBC may from time to time deem
appropriate.
* or U.K. Related Company's
"Equipment" means all of Borrower's present and hereafter acquired
machinery, molds, machine tools, motors, furniture, equipment, furnishings,
fixtures, trade fixtures, motor vehicles, tools, parts, dyes, jigs, goods and
other tangible personal property (other than Inventory) of every kind and
description used in Borrower's operations or owned by Borrower and any interest
in any of the foregoing, and all attachments, accessories, accessions,
replacements, substitutions, additions or improvements to any of the foregoing,
wherever located.
"Event of Default" means any of the events set forth in Section 7.1 of this
Agreement.
-10-
<PAGE>
Greyrock Business Credit Loan and Security Agreement
- --------------------------------------------------------------------------------
"General Intangibles" means all general intangibles of Borrower, whether
now owned or hereafter created or acquired by Borrower, including, without
limitation, all choses in action, causes of action, corporate or other business
records, Deposit Accounts, inventions, designs, drawings, blueprints, patents,
patent applications, trademarks and the goodwill of the business symbolized
thereby, names, trade names, trade secrets, goodwill, copyrights, registrations,
licenses, franchises, customer lists, security and other deposits, rights in all
litigation presently or hereafter pending for any cause or claim (whether in
contract, tort or otherwise), and all judgments now or hereafter arising
therefrom, all claims of Borrower against GBC, rights to purchase or sell real
or personal property, rights as a licensor or licensee of any kind, royalties,
telephone numbers, proprietary information, purchase orders, and all insurance
policies and claims (including life insurance, key man insurance, credit
insurance, liability insurance, property insurance and other insurance), tax
refunds and claims, computer programs, discs, tapes and tape files, claims under
guaranties, security interests or other security held by or granted to Borrower,
all rights to indemnification and all other intangible property of every kind
and nature (other than Receivables).
"Guarantor" means any Person who has guaranteed any of the Obligations.
"Inventory" means all of Borrower's now owned and hereafter acquired goods,
merchandise or other personal property, wherever located, to be furnished under
any contract of service or held for sale or lease (including all raw materials,
work in process, finished goods and goods in transit), and all materials and
supplies of every kind, nature and description which are or might be used or
consumed in Borrower's business or used in connection with the manufacture,
packing, shipping, advertising, selling or finishing of such goods, merchandise
or other personal property, and all warehouse receipts, documents of title and
other documents representing any of the foregoing.
"Investment Property" means any and all investment property of Borrower,
including all securities, whether certificated or uncertificated, security
entitlements, securities accounts, commodity contracts and commodity accounts,
and all financial assets held in any securities account or otherwise, wherever
located, and whether now existing or hereafter acquired or arising.
"Obligations" means all present and future Loans, advances, debts,
liabilities, obligations, guaranties, covenants, duties and indebtedness at any
time owing by Borrower to GBC, whether evidenced by this Agreement or any note
or other instrument or document, whether arising from an extension of credit,
opening of a letter of credit, banker's acceptance, loan, guaranty,
indemnification or otherwise, whether direct or indirect (including, without
limitation, those acquired by assignment and any participation by GBC in
Borrower's debts owing to others), absolute or contingent, due or to become due,
including, without limitation, all interest, charges, expenses, fees, attorney's
fees, expert witness fees, audit fees, letter of credit fees, loan fees,
termination fees, minimum interest charges and any other sums chargeable to
Borrower under this Agreement or under any other present or future instrument or
agreement between Borrower and GBC.
"Permitted Liens" means the following: (i) purchase money security
interests in specific items of Equipment; (ii) leases of specific items of
Equipment; (iii) liens for taxes not yet payable; (iv) additional security
interests and liens which are subordinate to the security interest in favor of
GBC and are consented to in writing by GBC (which consent shall not be
unreasonably withheld); (v) security interests being terminated substantially
concurrently with this Agreement; (vi) liens of materialmen, mechanics,
warehousemen, carriers, or other similar liens arising in the ordinary course of
business and securing obligations which are not delinquent; (vii) liens incurred
in connection with the extension, renewal or refinancing of the indebtedness
secured by liens of the type described above in clauses (i) or (ii) above,
provided that any extension, renewal or replacement lien is limited to the
property encumbered by the existing lien and the principal amount of the
indebtedness being extended, renewed or refinanced does not increase; (viii)
Liens in favor of customs and revenue authorities which secure payment of
customs duties in connection with the importation of goods. GBC will have the
right to require, as a condition to its consent under subparagraph (iv) above,
that the holder of the additional security interest or lien sign an
intercreditor agreement on GBC's then standard form, acknowledge that the
security interest is subordinate to the security interest in favor of GBC, and
agree not to take any action to enforce its subordinate security interest so
long as any Obligations remain outstanding, and that Borrower agree that any
uncured default in any obligation secured by the subordinate security interest
shall also constitute an Event of Default under this Agreement.
"Person" means any individual, sole proprietorship, partnership, joint
venture, trust, unincorporated organization, association, corporation,
government, or any agency or political division thereof, or any other entity.
"Prime Rate" means the actual "Reference Rate" or the substitute therefor
of Bank of America NT & SA ("B of A") whether or not that rate is the lowest
interest rate charged by B of A. If the Prime Rate, as so defined, is
-11-
<PAGE>
Greyrock Business Credit Loan and Security Agreement
- --------------------------------------------------------------------------------
unavailable on any date of determination, "Prime Rate" shall mean the highest of
the prime rates published in the Wall Street Journal, on such date of
determination, as the base rate on corporate loans at large United States money
center commercial banks, as determined in good faith by GBC, which determination
shall be conclusive absent manifest error.
"Receivables" means all of Borrower's* now owned and hereafter acquired
accounts (whether or not earned by performance), letters of credit, contract
rights, chattel paper, instruments, documents and all other forms of obligations
at any time owing to Borrower**, all guaranties and other security therefor, all
merchandise returned to or repossessed by Borrower**, and all rights of stoppage
in transit and all other rights or remedies of an unpaid vendor, lienor or
secured party.
* or U.K. Related Company's
** or U.K. Related Company
"Related Company" means, collectively, U.K. Related Company and U.S.
Related Company.
"U.K. Related Company" means Interactive Magic (UK) LTD, a corporation
organized under the laws of England, which is a subsidiary of Borrower.
"U.K. Related Company Guaranty" means a guaranty of U.K. Related Company,
in form and substance satisfactory to GBC, pursuant to which U.K. Related
Company guarantees the Obligations.
"U.K. Related Company Security Agreement" means a debenture between U.K.
Related Company and GBC, in form and substance satisfactory to GBC, pursuant to
which U.K. Related Company pledges to GBC, and grants to GBC a security interest
in, U.K. Related Company's accounts receivable and other property and interests
in property described therein as security for the Obligations.
"U.S. Related Company" means iMagic Online Corporation, a corporation
organized under the laws of North Carolina, which is a subsidiary of Borrower.
"U.S. Related Company Guaranty" means a guaranty of U.S. Related Company,
in form and substance satisfactory to GBC, pursuant to which U.S. Related
Company guarantees the Obligations.
Other Terms. All accounting terms used in this Agreement, unless otherwise
indicated, shall have the meanings given to such terms in accordance with
generally accepted accounting principles, consistently applied. All other terms
contained in this Agreement, unless otherwise indicated, shall have the meanings
provided by the Code, to the extent such terms are defined therein.
9. GENERAL PROVISIONS.*
* Each reference to Borrower in Sections 9.5 through 9.17 below shall be deemed
to include a reference to the U.K. Related Company.
9.1 Interest Computation. In computing interest on the Obligations, all
checks, wire transfers and other items of payment received by GBC (including
proceeds of Receivables and payment of the Obligations in full) shall be deemed
applied by GBC on account of the Obligations three Business Days after receipt
by GBC of immediately available funds. GBC shall not, however, be required to
credit Borrower's account for the amount of any item of payment which is
unsatisfactory to GBC in its discretion, and GBC may charge Borrower's Loan
account for the amount of any item of payment which is returned to GBC unpaid.
9.2 Application of Payments. All payments with respect to the Obligations
may be applied, and in GBC's sole discretion reversed and reapplied, to the
Obligations, in such order and manner as GBC shall determine in its sole
discretion.
9.3 Charges to Account. GBC may, in its discretion, require that Borrower
pay monetary Obligations in cash to GBC, or charge them to Borrower's Loan
account, in which event they will bear interest at the same rate applicable to
the Loans.
9.4 Monthly Accountings. GBC shall provide Borrower monthly with an account
of advances, charges, expenses and payments made pursuant to this Agreement.
Such account shall be deemed correct, accurate and binding on Borrower and an
account stated (except for reverses and reapplications of payments made and
corrections of errors discovered by GBC), unless Borrower notifies GBC in
writing to the contrary within sixty days after each account is rendered,
describing the nature of any alleged errors or admissions.
9.5 Notices. All notices to be given under this Agreement shall be in
writing and shall be given either personally or by reputable private delivery
service, or by facsimile, or by regular first-class mail, or certified mail
return receipt requested, addressed to GBC or Borrower at the addresses shown in
the heading to this Agreement, or at any other address designated in writing by
one party to the other party. All notices shall be deemed to have been given
upon delivery in the case of notices personally delivered, or at the expiration
of one business day following delivery to the private delivery service, or one
-12-
<PAGE>
Greyrock Business Credit Loan and Security Agreement
- --------------------------------------------------------------------------------
day after the date sent by facsimile, or two business days following the deposit
thereof in the United States mail, with postage prepaid*.
* (or seven days following the deposit thereof in the English mail, with postage
prepaid)
9.6 Severability. Should any provision of this Agreement be held by any
court of competent jurisdiction to be void or unenforceable, such defect shall
not affect the remainder of this Agreement, which shall continue in full force
and effect.
9.7 Integration. This Agreement and such other written agreements,
documents and instruments as may be executed in connection herewith are the
final, entire and complete agreement between Borrower and GBC and supersede all
prior and contemporaneous negotiations and oral representations and agreements,
all of which are merged and integrated in this Agreement. There are no oral
understandings, representations or agreements between the parties which are not
set forth in this Agreement or in other written agreements signed by the parties
in connection herewith.
9.8 Waivers. The failure of GBC at any time or times to require Borrower to
strictly comply with any of the provisions of this Agreement or any other
present or future agreement between Borrower and GBC shall not waive or diminish
any right of GBC later to demand and receive strict compliance therewith. Any
waiver of any default shall not waive or affect any other default, whether prior
or subsequent, and whether or not similar. None of the provisions of this
Agreement or any other agreement now or in the future executed by Borrower and
delivered to GBC shall be deemed to have been waived by any act or knowledge of
GBC or its agents or employees, but only by a specific written waiver signed by
an authorized officer of GBC and delivered to Borrower. Borrower waives demand,
protest, notice of protest and notice of default or dishonor, notice of payment
and nonpayment, release, compromise, settlement, extension or renewal of any
commercial paper, instrument, account, General Intangible, document or guaranty
at any time held by GBC on which Borrower is or may in any way be liable, and
notice of any action taken by GBC, unless expressly required by this Agreement.
9.9 Amendment. The terms and provisions of this Agreement may not be waived
or amended, except in a writing executed by Borrower and a duly authorized
officer of GBC.
9.10 Time of Essence. Time is of the essence in the performance by Borrower
of each and every obligation under this Agreement.
9.11 Attorneys' Fees and Costs. Borrower shall reimburse GBC for all
reasonable attorneys' fees and all filing, recording, search, title insurance,
appraisal, audit, and other reasonable costs incurred by GBC, pursuant to, or in
connection with, or relating to this Agreement (whether or not a lawsuit is
filed), including, but not limited to, any reasonable attorneys' fees and costs
GBC incurs in order to do the following: prepare and negotiate this Agreement
and the documents relating to this Agreement; obtain legal advice in connection
with this Agreement or Borrower; enforce, or seek to enforce, any of its rights;
prosecute actions against, or defend actions by, Account Debtors; commence,
intervene in, or defend any action or proceeding; initiate any complaint to be
relieved of the automatic stay in bankruptcy; file or prosecute any probate
claim, bankruptcy claim, third-party claim, or other claim; examine, audit,
copy, and inspect any of the Collateral or any of Borrower's books and records;
protect, obtain possession of, lease, dispose of, or otherwise enforce GBC's
security interest in, the Collateral; and otherwise represent GBC in any
litigation relating to Borrower. If either GBC or Borrower files any lawsuit
against the other predicated on a breach of this Agreement, the prevailing party
in such action shall be entitled to recover its reasonable costs and attorneys'
fees, including (but not limited to) reasonable attorneys' fees and costs
incurred in the enforcement of, execution upon or defense of any order, decree,
award or judgment. All attorneys' fees and costs to which GBC may be entitled
pursuant to this Paragraph shall immediately become part of Borrower's
Obligations, shall be due on demand, and shall bear interest at a rate equal to
the highest interest rate applicable to any of the Obligations.
9.12 Benefit of Agreement. The provisions of this Agreement shall be
binding upon and inure to the benefit of the respective successors, assigns,
heirs, beneficiaries and representatives of Borrower and GBC; provided, however,
that Borrower may not assign or transfer any of its rights under this Agreement
without the prior written consent of GBC, and any prohibited assignment shall be
void. No consent by GBC to any assignment shall release Borrower from its
liability for the Obligations.
9.13 Joint and Several Liability. If Borrower consists of more than one
Person, their liability shall be joint and several, and the compromise of any
claim with, or the release of, any Borrower shall not constitute a compromise
with, or a release of, any other Borrower.
9.14 Limitation of Actions. Any claim or cause of action by Borrower
against GBC, its directors, officers, employees, agents, accountants or
attorneys, based upon, arising from, or relating to this Agreement, or any other
present or future document or agreement, or any other
-13-
<PAGE>
Greyrock Business Credit Loan and Security Agreement
- --------------------------------------------------------------------------------
transaction contemplated hereby or thereby or relating hereto or thereto, or any
other matter, cause or thing whatsoever, occurred, done, omitted or suffered to
be done by GBC, its directors, officers, employees, agents, accountants or
attorneys, shall be barred unless asserted by Borrower by the commencement of an
action or proceeding in a court of competent jurisdiction by the filing of a
complaint within one year after the first act, occurrence or omission upon which
such claim or cause of action, or any part thereof, is based, and the service of
a summons and complaint on an officer of GBC, or on any other person authorized
to accept service on behalf of GBC, within thirty (30) days thereafter. Borrower
agrees that such one-year period is a reasonable and sufficient time for
Borrower to investigate and act upon any such claim or cause of action. The
one-year period provided herein shall not be waived, tolled, or extended except
by the written consent of GBC in its sole discretion. This provision shall
survive any termination of this Agreement or any other present or future
agreement.
9.15 Paragraph Headings; Construction. Paragraph headings are only used in
this Agreement for convenience. Borrower and GBC acknowledge that the headings
may not describe completely the subject matter of the applicable paragraph, and
the headings shall not be used in any manner to construe, limit, define or
interpret any term or provision of this Agreement. The term "including,"
whenever used in this Agreement, shall mean "including (but not limited to)."
This Agreement has been fully reviewed and negotiated between the parties and no
uncertainty or ambiguity in any term or provision of this Agreement shall be
construed strictly against GBC or Borrower under any rule of construction or
otherwise.
9.16 Governing Law; Jurisdiction; Venue. This Agreement and all acts and
transactions hereunder and all rights and obligations of GBC and Borrower shall
be governed by the laws of the State of California. As a material part of the
consideration to GBC to enter into this Agreement, Borrower (i) agrees that all
actions and proceedings relating directly or indirectly to this Agreement shall,
at GBC's option, be litigated in courts located within California, and that the
exclusive venue therefor shall be Los Angeles County; (ii) consents to the
jurisdiction and venue of any such court and consents to service of process in
any such action or proceeding by personal delivery or any other method permitted
by law; and (iii) waives any and all rights Borrower may have to object to the
jurisdiction of any such court, or to transfer or change the venue of any such
action or proceeding.
9.17 Mutual Waiver of Jury Trial. BORROWER AND GBC EACH HEREBY WAIVE THE
RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF,
OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTURE
INSTRUMENT OR AGREEMENT BETWEEN GBC AND BORROWER, OR ANY CONDUCT, ACTS OR
OMISSIONS OF GBC OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES,
AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH GBC OR BORROWER, IN ALL
OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.
Borrower:
INTERACTIVE MAGIC, INC.
By: /s/ Robert L. Pickens
---------------------------------------------
Title: President
------------------------------------------
By: /s/ William J. Kaluza
---------------------------------------------
Title: Secretary
------------------------------------------
iMAGIC ONLINE CORPORATION
By: /s/ Robert L. Pickens
---------------------------------------------
Title: Vice President
------------------------------------------
By: /s/ William J. Kaluza
---------------------------------------------
Title: Secretary
------------------------------------------
GBC:
GREYROCK BUSINESS CREDIT,
a Division of NationsCredit Commercial Corporation
By: /s/ Lisa Nagano
---------------------------------------------
Title: Vice President
------------------------------------------
-14-
<PAGE>
Greyrock Business Credit Loan and Security Agreement
- --------------------------------------------------------------------------------
RELATED COMPANY CONSENT
Interactive Magic (UK) LTD., a corporation organized under the laws of
England ("U.K. Related Company"), hereby approves of, agrees to and consents to
all of the terms and provisions of the foregoing agreement as they relate to
U.K. Related Company, and agrees to be bound thereby.
INTERACTIVE MAGIC (UK) LTD.
By: /s/ Robert L. Pickens
---------------------------------------------
Title: Director
------------------------------------------
By: /s/ Nina Jo C. Rutledge
---------------------------------------------
Title: Secretary
------------------------------------------
<PAGE>
Greyrock
Business
Credit
A NationsBank Company
Schedule to
Loan and Security Agreement
Borrower: Interactive Magic, Inc. and
iMagic Online Corporation
Address: 215 Southport Drive, Suite 1000
Morrisville, North Carolina 27560
Date: April 30, 1998
This Schedule is an integral part of the Loan and Security Agreement between
Greyrock Business Credit, a Division of NationsCredit Commercial Corporation
("GBC") and the borrower named above ("Borrower") of even date. All references
to "Borrower" herein shall mean and be each of Interactive Magic, Inc. ("Parent
Company") and iMagic Online Corporation ("U.S. Related Company"), individually
and collectively, and the successors and assigns of each.
================================================================================
1. CREDIT LIMIT An amount not to exceed the lesser of (1) or (2) below:
(Section 1.1):
(1) $5,000,000 at any one time outstanding; or
(2) an amount equal to the sum of the following
(without duplication):
(i) 65% of the amount of Borrower's Eligible
Receivables (as defined in Section 8 above), plus
(ii) 65% of the Eligible Receivables of U.K
Related Company (as defined in Section 8 above),
as calculated in U.S. Dollars, plus
(iii) an amount equal to the lesser of (A)
$1,500,000 at any one time outstanding or (B) 200%
of the Value of Borrower's Eligible Inventory (as
defined in Section 8 above). "Value," as used
herein, means the lower of cost or wholesale
market value.
The Credit Limit does not apply to Parent Company and
U.S. Related Company individually but rather applies to
all Loans to and Obligations of Parent Company and U.S.
Related Company in the aggregate. Accordingly,
notwithstanding anything in the Loan and Security
Agreement, in no event shall Parent Company and U.S.
Related Company permit the total combined balance of
all Loans to Parent Company and U.S. Related Company
and all other Obligations of Parent Company and U.S.
Related Company to GBC combined at any one time
-1-
<PAGE>
Greyrock Business Credit Schedule to Loan and Security Agreement
- --------------------------------------------------------------------------------
outstanding to exceed in the aggregate the Credit
Limit.
For purposes of requesting any Loans, receiving any
Loan proceeds and otherwise administering the Loan and
Security Agreement, U.S. Related Company hereby
irrevocably appoints, designates and authorizes Parent
Company to act on U.S. Related Company's behalf, and
the action of Parent Company in the name of U.S.
Related Company shall in each case bind U.S. Related
Company. GBC shall be fully entitled to rely upon and
act following receipt of any notice, request or
instructions by Parent Company on behalf of U.S.
Related Company.
Notwithstanding any provision to the contrary contained
herein, for so long as the Subordination Agreement
dated April 30, 1998 between GBC and Petra Capital, LLC
shall remain in effect, the total combined balance of
all Loans hereunder shall not exceed the aggregate
amount of $4,500,000.
================================================================================
2. INTEREST
Interest Rate The interest rate in effect throughout each calendar
(Section 1.2): month during the term of this Agreement shall be the
highest "Prime Rate" in effect during such month, plus
2.0% per annum, provided that the interest rate in
effect in each month shall not be less than the highest
Bank of America reference rate in effect during such
month, and provided further that the interest charged
for each month shall be a minimum of $7,500, regardless
of the amount of the Obligations outstanding. Interest
shall be calculated on the basis of a 360-day year for
the actual number of days elapsed. "Prime Rate" has the
meaning set forth in Section 8 above.
================================================================================
3. FEES (Section 1.3/Section 6.2):
Loan Fee: $50,000, payable $4,166.67 concurrently herewith and
$4,166.67 on the first day of each calendar month
thereafter until paid in full, with interest at the
rate provided in Section 1.2 above.
Termination Fee: $7,500 per month for each month (or portion thereof)
from the effective date of termination to the Maturity
Date
NSF Check Charge: $15.00 per item.
Wire Transfers: $15.00 per transfer.
================================================================================
4. MATURITY DATE April 30, 1999, subject to automatic renewal as
(Section 6.1): provided in Section 6.1 above, and early termination as
provided in Section 6.2 above.
================================================================================
5. REPORTING Parent Company shall provide GBC with the following:
(Section 5.2):
1. Annual financial statements, as soon as available,
and in any event within 90 days following the end
of Parent Company's fiscal year, certified by
independent certified public accountants
acceptable to GBC.
-2-
<PAGE>
Greyrock Business Credit Schedule to Loan and Security Agreement
- --------------------------------------------------------------------------------
2. Quarterly unaudited financial statements, as soon
as available, and in any event within 30 days
after the end of each fiscal quarter of Parent
Company.
3. Monthly unaudited financial statements as soon as
available and, in any event, no later than 30 days
after the end of each month.
4. Monthly Receivable agings, aged by invoice date,
within 10 days after the end of each month.
5. Monthly accounts payable agings, aged by invoice
date, and outstanding or held check registers
within 10 days after the end of each month.
6. Such financial statements as are prepared in the
ordinary course for each Related Company, as soon
as available.
7. Such information as GBC shall from time to time
reasonably request with respect to Receivables of
U.K. Related Company and such other information
reasonably requested by GBC relating thereto.
================================================================================
6. BORROWER INFORMATION:
Prior Names of
Borrower S.P. Enterprises, Inc.
(Section 3.2): Interactive Creations Acquisition Corp.
Prior Trade
Names of Borrower
(Section 3.2): N/A
Existing Trade
Names of Borrower
(Section 3.2): N/A
Other Locations and
Addresses (Section 3.3): See Annex attached hereto.
Material Adverse
Litigation (Section 3.10): See Annex attached hereto.
-3-
<PAGE>
Greyrock Business Credit Schedule to Loan and Security Agreement
- --------------------------------------------------------------------------------
================================================================================
7. COPYRIGHT REGISTRATION COVENANT
(Section 5.8): Borrower agrees promptly, and in any event not later
than 90 days after the date hereof (the "Registration
Completion Date"), to have any of its currently
unregistered copyrightable software and software titles
registered with the U.S. Copyright Office in
Washington, D.C. (the "Copyright Office") and to
promptly provide GBC with evidence of such
registration. Borrower will, on an ongoing basis,
promptly register any future unregistered copyrightable
software and software titles with the Copyright Office.
Until the Registration Completion Date Borrower may
request Loans notwithstanding any noncompliance with
Section 2(e) of the Security Agreement in Copyrighted
Works (the "Copyright Security Agreement") between
Borrower and GBC (which Section 2(e) requires
registration with the Copyright Office of any copyright
the sale, licensing or other disposition of which
results in any Receivable (a "Copyright Receivable")
with respect to which any Loan is requested). Effective
the Registration Completion Date, no Loan request may
be made with respect to any Copyright Receivables if
GBC has not made its filing with the Copyright Office
with respect to the copyright giving rise to such
Copyright Receivables.
================================================================================
8. ADDITIONAL PROVISIONS
(i) Additional Subsidiaries. (A) If Borrower proposes
to incorporate, create or acquire any additional
subsidiary, Borrower shall notify GBC thereof, and, if
required by the Loan and Security Agreement, obtain
GBC's consent thereto. After the incorporation,
creation or acquisition of any such subsidiary (subject
to obtaining any necessary GBC consent), within five
Business Days following receipt by Borrower from GBC of
a security agreement, in form and substance
satisfactory to GBC, and a guaranty of the Obligations
in form and substance satisfactory to GBC, Borrower
shall cause such subsidiary to execute and deliver such
guaranty and security agreement to GBC. GBC may elect
in its sole discretion to waive any such requirement in
the case of any non-U.S. subsidiary and any subsidiary
that will remain a dormant or shell subsidiary. (B)
Within five Business Days after receipt from GBC,
Borrower shall cause such subsidiary to have executed
and filed any UCC-1 financing statements furnished by
GBC in each jurisdiction in which such filing is
necessary to perfect the security interest of GBC in
the Collateral of such subsidiary and in which GBC
requests that such filing be made. (C) Additionally,
Borrower and such subsidiary shall have executed and
delivered to GBC such other items as reasonably
requested by GBC in connection with the foregoing,
including resolutions, incumbency and officers'
certificates, opinions of counsel, search reports and
other certificates and documents.
(ii) U.K. Related Company Receivables. (A) In order to
be Eligible Receivables, the U.K. Related Company's
Receivables (the "U.K. Related Company Receivables")
shall be billed from and payable to offices in England
(even though bills may be sent to, and payments may be
remitted from, other countries). Currencies in which
Receivables are denominated shall be acceptable to GBC
in its sole discretion. (B) Daily reporting of
transactions and daily schedules and assignments of
Receivables and schedules of collections, called for by
Section 4.3 of the Loan Agreement, will not be required
with respect to the Receivables of the U.K. Related
Company. Instead, Borrower will provide GBC
-4-
<PAGE>
Greyrock Business Credit Schedule to Loan and Security Agreement
- --------------------------------------------------------------------------------
with a monthly Borrowing Base Certificate, in such form
as GBC shall from time to time specify, within 10 days
after the end of each month, with respect to the U.K.
Related Company Receivables. In the event, as of the
end of any month, the total of all Loans and all other
Obligations secured by all Eligible Receivables (after
including the amount of all Eligible Receivables of the
U.K. Related Company therein) exceeds the Credit Limit
set forth above, Borrower shall immediately pay the
amount of the excess to GBC. (C) Delivery of the
proceeds of U.K. Related Company Receivables and other
Additional Collateral within one business day after
receipt, as called for by Sections 4.4 and 5.4 of the
Loan Agreement, will not be required. (D) The foregoing
provisions of this Section U.K. Related Company shall
immediately terminate if any Default or Event of
Default occurs and is continuing. Upon any such
termination, Borrower shall, then and thereafter,
provide GBC with the daily reporting of transactions
and daily schedules and assignments of U.K. Related
Company Receivables and schedules of collections, as
called for by Section 4.3 of the Loan Agreement, and
Borrower shall deliver all proceeds of U.K. Related
Company Receivables and other Additional Collateral to
GBC, within one business day after receipt, as called
for by Sections 4.4 and 5.4 of the Loan Agreement.
(iii) Certain Conditions Precedent The availability of
Loans secured by Receivables of the U.K. Related
Company shall be subject to the condition precedent
that GBC shall have received each of the following, in
form and substance satisfactory to GBC and its counsel:
(i) the U.K. Related Company Security Agreement, duly
executed by GBC and U.K. Related Company;
(ii) the U.K. Related Company Guaranty, duly executed
by GBC and U.K. Related Company;
(iii)a certificate of the Secretary or other
appropriate officer of U.K. Related Company
certifying (A) copies of the articles of
incorporation and bylaws (or other applicable
organizational documents), of U.K. Related Company
and the resolutions and other actions taken or
adopted by U.K. Related Company authorizing the
execution, delivery and performance of the U.K.
Documents, and (B) the incumbency, authority and
signatures of each officer of U.K. Related Company
authorized to execute and deliver the U.K.
Documents and act with respect thereto;
(iv) a favorable legal opinion of U.K. counsel to U.K.
Related Company as to such matters as GBC may
reasonably request; and
(v) evidence that all filings, registrations and
recordings have been made in the appropriate
governmental offices, and all other action has
been taken, which shall be necessary to create, in
favor of GBC, a perfected first priority pledge of
and security interest in the Additional
Collateral.
(iv) Additional Conditions Precedent. Concurrently,
Borrower shall cause U.S. Related Company to execute
and deliver to GBC a guaranty with respect to all of
the Obligations, together with a security agreement
granting a security interest in the assets of U.S.
Related Company, each in form and substance
satisfactory to GBC. Additionally, Borrower shall cause
U.S. Related Company
-5-
<PAGE>
Greyrock Business Credit Schedule to Loan and Security Agreement
- --------------------------------------------------------------------------------
to have executed and filed any UCC-1 financing
statements furnished by GBC in each jurisdiction in
which such filing is necessary to perfect the security
interest of GBC in U.S. Related Company's assets and in
which GBC requests that such filing be made, and
Borrower and U.S. Related Company shall execute and
deliver to GBC such other items as reasonably requested
by GBC in connection with the foregoing, including
resolutions, incumbency and officers' certificates,
opinions of counsel, search reports and other
certificates and documents.
(v) Corporate Structure. Borrower represents and
warrants that its corporate structure is as follows:
Borrower owns 100% of the outstanding stock of each
Related Company. U.K. Related Company does not and will
not do business in the United States and does not and
will not own any assets in the United States. U.K.
Related Company has no subsidiaries other than
Interactive Magic GmbH. Borrower has no other
subsidiaries other than as set forth above.
(vi). Foreign Law Provisions. (A) Each of Borrower and
each Related Company (each an "Obligor") shall pay all
amounts of principal, interest, fees and other amounts
due under this Agreement and any and all related
instruments and agreements (collectively, the "Loan
Documents") free and clear of, and without reduction
for or on account of, any present and future taxes,
levies, imposts, duties, fees, assessments, charges,
deductions or withholdings and all liabilities with
respect thereto excluding, in the case of GBC, income
and franchise taxes imposed on it by the jurisdiction
under the laws of which GBC is organized or in which
its principal executive offices may be located or any
political subdivision or taxing authority thereof or
therein, and by the jurisdiction of GBC's lending
office and any political subdivision or taxing
authority thereof or therein (all such nonexcluded
taxes, levies, imposts, duties, fees, assessments,
charges, deductions, withholdings and liabilities being
hereinafter referred to as "Taxes"). If any Taxes shall
be required by law to be deducted or withheld from any
payment, Obligor shall increase the amount paid so that
GBC receives when due (and is entitled to retain),
after deduction or withholding for or on account of
such Taxes (including deductions or withholdings
applicable to additional sums payable under this
Section), the full amount of the payment provided for
in the Loan Documents. (B) If an Obligor makes any
payment hereunder in respect of which it is required by
law to make any deduction or withholding, it shall pay
the full amount to be deducted or withheld to the
relevant taxation or other authority within the time
allowed for such payment under applicable law and
promptly thereafter shall furnish to GBC an original or
certified copy of a receipt evidencing payment thereof,
together with such other information and documents as
GBC may reasonably request. If no Taxes are payable in
respect of any payment hereunder or in connection
herewith, the Obligor shall, upon request of GBC,
furnish to GBC a certificate from each appropriate
taxing authority, or an opinion of counsel acceptable
to GBC, in either case stating that such payment is
exempt from or not subject to Taxes. (C) If GBC is
required by law to make any payment on account of
Taxes, or any liability in respect of any Tax is
imposed, levied or assessed against GBC, the Obligor
shall indemnify GBC for and against such payment or
liability, together with any incremental taxes,
interest or penalties, and all costs and expenses,
payable or incurred in connection therewith, including
Taxes imposed on amounts payable under this Section 8,
whether or not such payment or liability was correctly
or legally asserted. A certificate of GBC as to the
amount of any such payment shall, in the absence of
manifest error, be conclusive and binding for all
purposes. (D) The Obligor
-6-
<PAGE>
Greyrock Business Credit Schedule to Loan and Security Agreement
- --------------------------------------------------------------------------------
agrees to indemnify GBC against and hold it harmless
from any and all present and future stamp, transfer,
documentary and other such taxes, levies, fees,
assessments and other charges made by any jurisdiction
by reason of the execution, delivery, performance and
enforcement of the Loan Documents. (E) Payment in U.S.
Dollars of all amounts due under the Loan Documents is
of the essence, and U.S. Dollars shall be the currency
of account in all events. The payment obligations of an
Obligor under the Loan Documents shall not be
discharged by an amount paid in another currency or in
another place, whether pursuant to a judgment or
otherwise, to the extent that the amount so paid on
conversion to U.S. Dollars and transfer to GBC under
normal banking procedures (after premium and costs of
exchange) does not yield the amount of U.S. Dollars due
under the Loan Documents. If, for the purposes of
obtaining judgment in any court, it is necessary to
convert a sum due hereunder or any other Loan Document
in U.S. Dollars into another currency (the "Other
Currency"), the rate of exchange used shall be that at
which in accordance with normal banking procedures GBC
could purchase U.S. Dollars with the Other Currency on
the Business Day preceding that on which final judgment
is given. The obligation of any Obligor in respect of
any such sum due from it to GBC under the Loan
Documents shall, notwithstanding any judgment in such
Other Currency, be discharged only to the extent that
on the Business Day following receipt by GBC of any sum
adjudged to be so due in the Other Currency, GBC may in
accordance with normal banking procedures purchase U.S.
Dollars with the Other Currency; if the U.S. Dollars so
purchased are less than the sum originally due to GBC
in U.S. Dollars, each Obligor agrees, as a separate and
independent obligation and notwithstanding any such
judgment, to indemnify GBC against such loss, and if
the U.S. Dollars so purchased exceed the sum originally
due to GBC in U.S. Dollars, GBC agrees to remit to
Borrower such excess.
-7-
<PAGE>
Greyrock Business Credit Schedule to Loan and Security Agreement
- --------------------------------------------------------------------------------
Borrower: GBC:
INTERACTIVE MAGIC, INC. GREYROCK BUSINESS CREDIT,
a Division of NationsCredit Commercial
Corporation
By: /s/ Robert L. Pickens By: /s/ Lisa Nagano
-------------------------------- ---------------------------------
President or Vice President Title: Vice President
------------------------------
By: /s/ William J. Kaluza
--------------------------------
Secretary
iMAGIC ONLINE CORPORATION
By: /s/ Robert L. Pickens
--------------------------------
President or Vice President
By: /s/ William J. Kaluza
--------------------------------
Secretary
U.K. RELATED COMPANY CONSENT
INTERACTIVE MAGIC (UK) LTD.
By: /s/ Robert L. Pickens
--------------------------------
Title: Director
-----------------------------
By: /s/ Nina Jo C. Rutledge
--------------------------------
Title: Secretary
-----------------------------
-8-
<PAGE>
Greyrock Business Credit Schedule to Loan and Security Agreement
- --------------------------------------------------------------------------------
Annex to
Schedule to Loan and Security Agreement
6. Borrower Information:
(a) Other Locations and Addresses (Section 3.3):
Interactive Magic, Inc.
215 Southport Drive, Suite 1000
Morrisville, NC 27560
iMagic Online Corporation
1701 W. Northwest Hwy., Suite 220
Grapevine, TX 76051
Interactive Magic (UK) Ltd.
Ginger's Court
1st Floor
36 A High Street
Bracknell Berkshire RG121HE
UK
Interactive Magic Germany GmbH
Diesselstr. 66
D-333334 Gutersloh
Germany
BB&T
200 E. Chatham Street
Cary, NC 27512
First Charter Bankcard Division
11620 Wilshire Boulevard
W. Los Angeles, CA 90025
First State Bank, Grapevine
1400 South Main
Grapevine, TX 76051
Saturn Solutions, Inc.
38 River Road
Essex Junction, VT 05452
PBM Graphics, Inc.
2520 South Tri Center Blvd.
Durham, NC 27713
(b) Material Adverse Litigation (Section 3.10) Carol Levy, on behalf of the
Public v. Interactive Magic, Inc. Suit No. 98-01228 (Contra Costa
County, March 23, 1998). False advertising Suit based on packaging of
Air Warrior III.
9
<PAGE>
NORTH CAROLINA LEASE AGREEMENT
WAKE COUNTY SINGLE STORY FLEX BUILDING
THIS LEASE AGREEMENT ("Lease"), made and entered into as of the
4th day of December, 1997
by and between
SOUTHPORT BUSINESS PARK LIMITED PARTNERSHIP
hereinafter referred to as "Landlord,"
AND:
S P Enterprises, Inc.
d/b/a Interactive Magic
-----------------------
a Maryland corporation
hereinafter referred to as "Tenant;"
STATEMENT OF PURPOSES
Landlord is the owner of Southport, an office, research and development and
distribution park located in Wake County, North Carolina ("Property"). Landlord
and Tenant have agreed that Landlord shall lease to Tenant and Tenant shall
lease from Landlord certain space at 215 Southport Drive, Suites 1000-1400 and
have agreed to enter into this Lease to evidence the terms and conditions of the
leasing of space by Landlord to Tenant.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants,
conditions and agreements herein contained and other good and valuable
consideration the receipt and sufficiency of which are mutually acknowledged,
Landlord and Tenant hereby agree as follows:
ARTICLE 1
BASIC PROVISIONS
SECTION 1.01 - THE DEMISED PREMISES
Subject in all respects to the terms, conditions, agreements and limitations of
this Lease, the Landlord hereby leases to Tenant and Tenant hereby leases from
(which is the total of (1) the area contained in the Demised Premises as
measured from the centerline of all demising and exterior walls on Exhibit A
below plus (2) the square footage set forth in Section 1.01.1 below relative to
the Interior Hallway) Landlord the following described space, hereinafter
referred to as the "Demised Premises":
Approximately Eighteen Thousand Four Hundred Fifty Two (18,452) RENTABLE SQUARE
FEET of space located in the building located at 215 Southport Drive,
Suites 1000-1400, (such building in the lot or lots in which is located
collectively, hereinafter referred to as the "Building")
in Morrisville, Wake County, North Carolina. The location of the Demised
Premises within the Building shall be as shown on EXHIBIT A attached hereto and
hereby made a part hereof.
SECTION 1.01.1 - INTERIOR HALLWAY
Tenant shall have the non-exclusive right to use the Interior Hallway in common
with all other tenants in the Building. The term Interior Hallway will mean the
hallway described on Exhibit A attached hereto and hereby made a part hereof.
Tenant's use of the Interior Hallway shall be subject to the rules and
regulations set forth in Section 9.04 of this Lease. For purposes of determining
the square footage in Section 1.01 above and Article 2 below, Four Hundred Two
(402) square feet of the Interior Hallway will be included as part of the
Demised Premises for rent calculation purposes only.
SECTION 1.02 - TERM OF THE LEASE
Subject in all respects to the terms, limitations, conditions and agreements
contained herein, the term of this Lease (herein referred to as the "Term")
shall commence on the earlier of the date that the Tenant takes possession of
any part of the Demised Premises which is expected to be
March 1, 1996
and shall terminate (unless extended as herein provided) at midnight on
February 28, 2001.
Landlord and Tenant each agrees to sign a statement confirming the actual date
on which the Term begins (herein referred to as the Commencement Date) as soon
as it is determined.
-2-
<PAGE>
If Tenant remains in possession of the Demised Premises after the end of the
Term or any renewal or extension thereof with Landlord's consent but without a
new lease reduced to writing and duly executed, Tenant shall be deemed to be
occupying the Demised Premises as a tenant from month-to-month only, but
otherwise subject to all the covenants, conditions, and agreements of this
Lease.
SECTION 1.03 - USE OF THE DEMISED PREMISES
Subject to the general limitations of Section 4.01 and to the terms,
limitations, conditions and agreements contained herein, Tenant may use the
Demised Premises for the following purposes but for none other without
Landlord's prior written consent:
General offices, administration, research and development and distribution for
a computer software company
SECTION 1.04 - MONTHLY MINIMUM RENT AND ADJUSTED MONTHLY MINIMUM RENT
Rents shall be payable as follows:
For the initial partial month (if any) and next sixty (60) full months
Thirteen Thousand Nine Hundred Sixty Two and 01/100 Dollars ($13,962.01) which
is $9.08 PSF
(hereinafter referred to as the "Monthly Minimum Rent")
Such Monthly Minimum Rent or the Adjusted Monthly Minimum Rents, together with
any Additional Rents then due as specified in Article 2 of this Lease, shall be
payable on or before the first day of each calendar month during the Term of
this Lease.
If the Term commences on any day other than of the first day of a calendar month
then, in addition to the Minimum Monthly Rent specified above, the Tenant shall
pay for the initial partial month (being the period from the Commencement Date
until the end of that month) a prorated Monthly Minimum Rent computed based upon
the Monthly Minimum Rent specified above prorated for the number of days during
such period.
-3-
<PAGE>
SECTION 1.05 - SECURITY DEPOSIT
Tenant hereby agrees to pay to Landlord with or prior to the execution of this
Lease the sum of: Thirteen Thousand Nine Hundred Sixty Two and 01/100 DOLLARS
($13,962.01)
(hereinafter referred to as the "Security Deposit"),
which sum Landlord shall retain as security for the performance by Tenant of
each of its obligations hereunder. Such Security Deposit shall be held, applied
and refunded in the manner and subject to the conditions hereinafter provided.
ARTICLE 2
ADDITIONAL RENT
SECTION 2.01 - COST OF LIVING INCREASE
Tenant agrees that at each Adjustment Date (as hereinafter defined) the Monthly
Minimum Rent shall be adjusted based upon a Cost of Living Increase as and to
the extent provided in this Section 2.01. The rents as so adjusted (referred to
herein as the "Adjusted Monthly Minimum Rents") shall become the Monthly Minimum
Rent for the month which includes the Adjustment Date and for each month
thereafter until the Minimum Monthly Rent is again adjusted pursuant to this
Section 2.01.
The amount of the Cost of Living Increase under this Section 2.01 shall be based
on changes in the Consumer Price Index for All Urban Consumers - U.S. City
Average (1982-84=100), all items published by the Bureau of Labor Statistics,
U.S. Department of Labor (the "Price Index").
The Adjustment Dates shall be the following:
(a) The first day of the thirteenth (13th) month of the Term of this
Lease, excluding the initial partial month, if any; and
(b) the first day of the same calendar month of each subsequent year
during the Term of this Lease and any renewals, extensions or hold
over (tenant at will) periods following the first Adjustment Date, the
intent being to provide for an annual evaluation of the Monthly
Minimum Rents hereunder.
At each Adjustment Date, a fraction shall be computed, the denominator of which
is the Price Index for the month which is fifteen (15) months prior to the
Adjustment Date and the numerator of which is said Price Index for the calendar
month which is three (3) months prior to the Adjustment Date. If the fraction so
computed is greater than one (1.00), the Monthly Minimum Rent (or if there has
been a prior adjustment, the Adjusted Monthly Minimum Rent then required to be
paid hereunder) shall be multiplied by such fraction to determine the new
Adjusted Monthly Minimum Rent. If the fraction so computed at any Adjustment
Date is less than one (1.00), there shall be no adjustment under this Section
2.01 and the Tenant shall continue to pay the Monthly Minimum Rents then being
paid until the next Adjustment Date at which time the Monthly Minimum Rents
shall be again evaluated under this Section 2.01 and, if appropriate, adjusted
hereunder.In the event the Price Index is discontinued or ceases to be
published, Landlord will designate a comparable index reflecting changes in the
cost of living or purchasing power of the consumer dollar published by any other
governmental agency, bank or financial institution or any other recognized
authority and in such event the designated index shall thereafter be the Price
Index.
-4-
<PAGE>
SECTION 2.02 - SHARE OF DIRECT EXPENSES
The Tenant agrees to pay to Landlord, as Additional Rent, each year, Tenant's
proportionate share of any Direct Expenses incurred by or accrued as an expense
of Landlord or its agents on account of the operation or maintenance of the
Building and all appurtenances thereto and including a portion of any charges
attributable to Common Areas, as hereinafter defined, and an allocable portion
of any and all other charges incurred by or accrued as an expense of Landlord in
connection with the operation or maintenance of the Building; provided, however
in the cases of expenses which benefit portions of Southport Business Park other
than the Building, the portion allocated to the Building shall be based upon
sound accounting principles adopted by the Landlord for the purpose of making a
reasonable allocation.
Tenant's proportionate share of the total of all Direct Expenses allocable to
the Building shall be calculated by dividing the total square feet of the
Demised Premises stated at Section 1.01 hereof by an amount which is equal to
the total net rentable square feet of the Building. It is agreed that the net
rentable square feet of the Building is Sixty Three Thousand Seven Hundred and
Forty Four (63,744) SQUARE FEET.
Notwithstanding the foregoing, in the event the usage of any utility, equipment
or other Direct Expense by Tenant shall be determined by Landlord to be
disproportionate to the amount of space leased by Tenant, the Landlord reserves
the right to make an allocation of such Direct Expense to Tenant based upon
actual usage by Tenant, as determined by Landlord in its sole discretion. Tenant
agrees to pay such specially allocated amount in the event Landlord determines
such usage is disproportionate and so advises Tenant.
The term "Direct Expense" as used herein, shall include all direct costs of
operation and maintenance as determined by Generally Accepted Accounting
Principles (GAAP) and shall include without limitation the following: building
supplies; ad valorem real property taxes and other governmental charges; utility
and service charges attributable to Common Areas or paid by Landlord; property,
casualty, liability and other insurance premiums; repairs, maintenance and
service contracts for the Building, Common Areas and all related mechanical
equipment; property management charges; grounds maintenance, security, removal
of snow and ice, parking maintenance and striping, landscaping; and all other
similar costs and expenses.
If the State of North Carolina or any political subdivision thereof or any
governmental or quasi-governmental authority having jurisdiction over the
Building, should specifically impose a tax, assessment charge or fee or
specifically increase a then existing tax assessment, charge or fee, which
Landlord shall be required to pay, either by way of substituting for said real
estate taxes or assessed against the Building, or in addition thereto, or impose
an income or franchise tax or tax on rents in substitution for a general tax
levied against the Building or in addition thereto, such taxes, assessments,
charges or fees shall be deemed to constitute a real property tax hereunder to
the extent said taxes are in substitution therefore or in addition thereto. A
copy of tax bills or assessment bills submitted by Landlord to Tenant shall at
all times be sufficient evidence of the amount of taxes and/or assessments
levied or assessed against the property to which such bill relates. Landlord's
reasonable expenditures for attorney's fees, appraiser's fees, consultant's fees
and other costs incurred during the Term of this Lease without regard to the tax
year involved, in any efforts by Landlord to minimize ad valorem personal and
real property taxes, and other governmental charges, which rights are reserved
to Landlord, shall be included in the definition of ad valorem real property
taxes and other governmental charges for the purposes
-5-
<PAGE>
of this Section. If Landlord should receive a refund of any such taxes or
charges, the Tenant will share proportionately in same, after deduction for all
of Landlord's expenses in obtaining any such refund. Landlord's and Tenant's
obligations under this Section shall survive the expiration of the Term of this
Lease.
The term "Direct Expense" shall not include any income tax of Landlord, any
depreciation on the Building or any depreciation on equipment therein, interest,
or real estate broker's commission for any sale or for securing the execution of
any Lease.
SECTION 2.03 - ADDITIONAL RENT - CERTAIN TAXES
Tenant shall further pay as Additional Rent any sales or use tax imposed on
rents due from Tenant (other than City, State or Federal Income Tax), and to the
fullest extent lawful; any tax or rents in lieu of ad valorem taxes on the
Building, even though laws imposing such taxes attempt to require Landlord to
pay the same.
SECTION 2.04 - NOTICE
Landlord shall from time to time send to Tenant, in writing, a statement of the
amount of any Additional Rent plus any applicable sales or use taxes payable by
Tenant under Sections 2.01, 2.02, or 2.03 hereof.
SECTION 2.05 - PAYMENT IN ADVANCE
Tenant shall pay to Landlord each month, one twelfth (1/12) of the amounts, if
any, reasonably computed by Landlord to be Tenant's anticipated annual charges
for Additional Rents, in anticipation of Additional Rents due for the then
current calendar year and all such monthly payments shall be applied to Tenant's
Additional Rent for the then current calendar year.
SECTION 2.06 - PAYMENT OF RENTS, LATE PAYMENT, NON-PAID CHECK
All rents shall be paid at the address from time to time specified by Landlord
by written notice to Tenant. The covenant of Tenant to pay rents is and shall be
independent of any and all other covenants of this Lease and all rents shall be
payable when due without prior notice or demand and without offset or deduction
whatsoever, in legal tender of the United States of America for the payment of
public or private debts.
In addition to such remedies as may be provided under Article 12, Default by
Tenant and Landlord's Remedies, Landlord shall be entitled to, as further
Additional Rent, a late charge of two (2%) per cent of any amount due hereunder,
if not received within five(5) days of when due, and a charge of two (2%) per
cent of any amount due hereunder, for any check given by Tenant not paid when
first presented to the financial institution on which the check is drawn. In
addition, in the event the Tenant fails to pay any amount due hereunder
including, but not limited to any Monthly Minimum Rent, Adjusted Monthly Minimum
Rent, Additional Rents, or other monetary payment as and when provided in this
Lease (which shall include a failure to pay by reason of the failure to honor
any check), the Tenant shall pay to the Landlord as Additional Rent, interest
daily at the annual rate of four (4%) per cent in excess of the prime interest
rate from time to time in effect, by CitiBank N.A., New York, New York. Any
payment by Tenant or acceptance by Landlord of a lesser amount than shall be due
from Tenant to Landlord shall be treated as a payment on account. The acceptance
by Landlord of a check for a lesser amount with an endorsement or statement
thereon, or upon any letter accompanying such check, that such lesser amount is
payment in full shall be given no effect, and Landlord may accept such check
without prejudice to any other rights or remedies which Landlord may have
against Tenant.
-6-
<PAGE>
SECTION 2.07 - OTHER CHARGES TO BE TREATED AS RENTS
All charges, costs and sums required to be paid by Tenant to Landlord hereunder
shall be considered Additional Rent and shall be collectible by and with the
same rights held by the Landlord for the collection of rents.
ARTICLE 3
LANDLORD'S WORK
SECTION 3.01 - TENANT'S ACCEPTANCE OF PREMISES
Tenant represents to the Landlord that it has examined and inspected the Demised
Premises and finds them to be as represented by the Landlord and satisfactory
for Tenant's intended use. Tenant hereby accepts the Demised Premises "as is"
except for Landlord's Work, if any, listed in EXHIBIT B.
SECTION 3.02 - SCOPE OF LANDLORD'S WORK
Landlord shall, at its own expense, perform the additional work described as
"Landlord's Work" in EXHIBIT B attached hereto and made a part hereof.
Notwithstanding the foregoing, Tenant agrees to pay Landlord $5,000 toward the
costs incurred for the private executive restroom. Such additional costs shall
be paid by Tenant within thirty (30) days of receipt of bill from Landlord. It
is expressly understood and agreed that Landlord's obligation with respect to
construction of the Demised Premises shall be limited to the scope of work
described as Landlord's Work in EXHIBIT B and shall in no event include any work
not described on EXHIBIT B and shall not include the performance, procurement
and/or installation of any other work, fixtures or equipment. All Landlord's
Work shall constitute improvements to the Demised Premises and shall remain upon
expiration of the Term of the Lease.
SECTION 3.03 - NOTICE OF COMPLETION OF LANDLORD'S WORK
Landlord shall notify Tenant upon completion of Landlord's Work. The Demised
Premises shall be deemed "ready for occupancy" under the terms of this Lease if
Landlord has substantially completed its work in accordance with EXHIBIT B
attached hereto, which can be accomplished prior to and independently of any
construction or installation required to be performed by Tenant. The occupancy
and use of the additional improvements by the Tenant shall be deemed conclusive
evidence that Landlord's Work has been substantially completed in accordance
with EXHIBIT B.
The failure by Tenant to give notice within thirty (30) days of the delivery of
possession of the Demised Premises specifying in detail those items of
Landlord's Work which are not then complete shall be deemed conclusive evidence
that Tenant has accepted the Demised Premises with all items of Landlord's Work
completed.
SECTION 3.04 - LATEST COMPLETION DATE
The Landlord shall exercise reasonable care to cause the Landlord's Work at the
Demised Premises to be substantially complete on or prior to the Latest
Completion Date. The parties confirm and agree that the completion of Landlord's
Work may be delayed for reasons beyond the Landlord's control, Force Majeure,
and hereby agree that the Latest Completion Date shall automatically be extended
if and to the extent that any delays are encountered which are not within the
control of the Landlord. Notwithstanding the foregoing, in the event Landlord's
Work is not completed within FORTY FIVE (45) days following the Latest
Completion Date, then this Lease Agreement shall automatically become null and
void and neither party hereto shall have any further rights or obligations
hereunder. Under no circumstances shall Landlord be liable to Tenant for any
damages including, but not limited to direct, indirect, and consequential or
incidental damages, which may be caused by any delay in commencing or completing
its construction of the Demised Premises or for a total failure to complete
same.
-7-
<PAGE>
ARTICLE 4
USE OF THE PROPERTY BY THE TENANT
SECTION 4.01 - USE GENERALLY
Tenant may use the Demised Premises for the purposes stated in Section 1.03
hereof but for none other without Landlord's prior written consent, provided,
however, notwithstanding the generality of the foregoing, in no event shall
Tenant make any use of the Demised Premises, the Building or the Common Areas
which is in violation of any applicable laws, ordinances, statutes, rules or
regulations affecting the Demised Premises, the Building or the Common Areas,
including without limitation general rules and regulations proscribed from time
to time by Landlord for the use of the Demised Premises, the Building or the
Common Areas and restrictions with respect to employee parking in designated
employee parking areas as may be developed from time to time by Landlord and
delivered to Tenant or posted on the Building insofar as they might relate to
Tenant's use and occupancy of the Demised Premises, nor may Tenant make any use
of the Demised Premises not permitted by any present or future lawful
restrictive covenants which apply to the Demised Premises, or which is or might
constitute a nuisance, or which increases the property, casualty or other
insurance premiums (or makes any such insurance unavailable to Landlord or other
tenants) on the Building.
Tenant shall not permit its agents, employees, or invitees to place excessive
loads on the parking lots and drives.
Tenant shall not permit its agents, employees, or invitees to place excessive
loads on the floors of the Buildings, the maximum load shall not exceed Eight
Hundred (800) pounds per square foot.
The Tenant hereby agrees that it will hold Landlord harmless from loss, cost or
expense resulting from or occasioned by Tenant's use of the Demised Premises,
the Common Areas or other portions of Southport Business Park, whether caused by
Tenant or by its agents, servants, employees, independent contractors, invitees
or licensees, including, without limitations, any and all claims against, and
any and all liabilities, loss, cost or expense, incurred by the Landlord and
arising out of or in any way connected with the application to the Demised
Premises of any current or future legislation relating to the presence of any
oil, hazardous substances, or waste materials upon the Demised Premises, the
Building, or other Common Areas. Tenant shall maintain and care for its personal
property on the Demised Premises, insure the same and shall neither have nor
make any claim against Landlord for any loss or damage to the same.
Tenant may not allow any animals in the Demised Premises or on the Property.
Tenant may not allow unusual odors, noise, vibration, or dust to emanate from
the Demised Premises. No cooking is allowed in the Demised Premises other than
by household type microwave.
SECTION 4.02 HAZARDOUS WASTE AND RELATED MATTERS
The Tenant shall not permit any violation to exist with respect to the Demised
Premises, Building, or Property under any federal, state or local laws, rules
and regulations now or hereafter in effect with respect to oil, hazardous wastes
or hazardous materials, or toxic substances, or the release or disposal thereof.
Tenant shall not use all or any portion of the Demised Premises, Building, or
Property for the generation, storage, treatment, use of disposal of any
substance for which a license or permit is required by North Carolina or Federal
Laws, without the prior written consent of the Landlord. Without limitation
express or implied upon any other requirements of this Lease, the Tenant shall
pay all such sums and take all such actions as may be required to avoid or
discharge the imposition of any lien on the Demised Premises Building, or
Property
-8-
<PAGE>
under North Carolina Laws, or applicable federal law as the same may be amended
from time to time, and the Tenant shall indemnify and save harmless the Landlord
from any and all liens, claims, liabilities and expenses, including without
limitation attorneys' fees incurred or suffered by the Landlord by virtue of the
provisions thereof as applied to the Demised Premises, Building, or Property.
(a) The Tenant shall not:
(i) generate (except with the proper written consent of the Landlord
and in compliance with all laws, ordinances, and regulations
pertaining thereto), or dispose of any hazardous material or oil
on the Demised Premises, Building or Property.
(ii) store (except with the prior written consent of Landlord and in
compliance with all laws, ordinances, and regulations pertaining
thereto), or dispose of any hazardous material or oil on the
Demised Premises, Building or Property
(iii) directly or indirectly transport or arrange for the transport of
any hazardous material or oil (except with the prior written
consent of the Landlord and in compliance with all laws,
ordinances, and regulations pertaining thereto); on the Demised
Premises, Building or Property.
(b) The Tenant shall indemnify, defend, and hold the Landlord harmless of
and from any claim brought or threatened against the Landlord by the
Tenant, any guarantor or endorser of the obligation of Tenant, or any
governmental agency or authority or any other person (as well as from
attorneys' reasonable fees and expenses in connection therewith) on
account of the presence of hazardous material or oil on the Demised
Premises, Building or Property, or the failure by the Tenant to comply
with the terms and provisions hereof. This indemnification shall
survive any termination of this Lease.
Failure of Tenant to comply with this Section 4.02 of the Lease shall be an
Event of Default under this Lease.
SECTION 4.03 - PAYMENT FOR UTILITIES FOR DEMISED PREMISES
Tenant shall pay promptly and before any delinquency for nonpayment all charges
for utilities serving the Demised Premises, including without limitation,
electricity, gas, telephone, and/or oil bills. In the event that any utilities
are not separately metered for Tenant, Tenant shall pay its proper pro-rata
portion of such utilities in common with others using such utilities off the
same meter as provided in Section 2.02. On request of Landlord or Tenant,
Tenant's use of any particular utility shall be determined by appropriate survey
of Tenant's equipment, by monitoring of submeters, or other method fairly
evaluating Tenant's use, and after such determination, Tenant's charges for
utilities uses surveyed shall be adjusted in accordance with such
determinations. In the event Tenant's use of any utilities on a common meter are
irregular or disproportionate, either Landlord or Tenant shall have the option
as to future charges to have installed at its expense separate meters for the
utilities in question.
-9-
<PAGE>
ARTICLE 5
REPAIRS AND MAINTENANCE BY THE TENANT
SECTION 5.01 - REPAIRS AND MAINTENANCE
Tenant shall maintain, repair, or replace, (and so deliver at the end of the
Lease) each and every part of the Demised Premises, including without
limitation, all glass, doorways and doors, interior walls, interior ceilings,
interior floors, plumbing, electrical, HVAC, and all equipment located within
the Demised Premises, in first class repair and condition, and shall make at
Tenant's sole cost and expense such replacements, restorations, renewals or
repairs, in quality equivalent to the original work replaced, as may be required
to so maintain the same, ordinary wear and tear only excepted. Equipment
servicing the Demised Premises that is located outside the Demised Premises,
shall be maintained by Tenant, if it was installed by the Tenant or by the
Landlord as part of Landlord's Work (e.g. HVAC equipment located on the roof).
Tenant, however, shall make no exterior or interior alterations, other than as
required pursuant to Tenant's obligations to make repairs and maintain the
Demised Premises, without Landlord's prior written consent, and in any case, all
work performed by Tenant shall be done in a good and workmanlike manner, and so
as not to disturb or inconvenience other Tenants in the Building. Tenant shall
not at any time permit any work to be performed on the Demised Premises except
by duly licensed contractors or artisans, each of whom must carry general public
liability insurance, in such amounts as are reasonably directed by Landlord and
under which Landlord is an additional insured, certificates of which shall be
furnished Landlord. At no time may Tenant do any work that results in a claim of
lien against Landlord, and if requested by Landlord on termination of the Lease
or vacation of the Demised Premises by Tenant, Tenant shall restore at Tenant's
sole expense the Demised Premises to the same condition as existed at the
completion of work described in EXHIBIT B, ordinary wear and tear only excepted.
Landlord, however, may elect to require Tenant to leave alterations performed by
Tenant.
ARTICLE 6
REPAIRS MAINTENANCE AND SERVICES BY THE LANDLORD
SECTION 6.01 - SERVICES TO THE DEMISED PREMISES
Landlord shall, subject to interruptions beyond his control and to the
scheduling of repairs by providers of such services, cause to be furnished to
the Demised Premises in common with other Tenants, the following connections:
water and sewer connections, telephone line connections providing access to the
local public telephone company, normal electrical connections, and natural gas
connections.
SECTION 6.02 - LANDLORD'S REPAIRS
Landlord will be responsible for keeping the foundations, water mains, sewer and
sprinkler lines, roof and structural portions of the exterior roof and walls of
the Demised Premises in good order and repair. Landlord shall not, however, be
responsible for any repairs occasioned by reasons of the acts of Tenant, its
employees, agents, invitees, licensees, contractors or other agents. Tenant
agrees to give Landlord written notice of the necessity for any repairs required
to be made by Landlord, and Landlord shall have a reasonable period of time
thereafter to make such repairs.
ARTICLE 7
COMMON AREAS
SECTION 7.01 - DEFINITION OF COMMON AREAS
For purpose of this Lease, the term "Common Areas" shall mean all areas,
improvements, space, equipment and special services in or adjacent to the
Building provided by Landlord for the common or joint use and benefit of
tenants, customers, and other invitees, including without limitation any
existing or future entrance ways, exits, roads, parking lots, walkways and other
-10-
<PAGE>
common spaces in the Property from time to time designated as Common Areas by
the Landlord.
SECTION 7.02 - USE OF COMMON AREAS
Provided Tenant is not in default under this Lease, Tenant shall be entitled to
use, in common with others entitled thereto, so much of the Common Areas as may
be designated from time to time by the Landlord, subject, however to the terms
and conditions of this Lease and to such rules and regulations for the use
thereof as may be proscribed from time to time by Landlord.
SECTION 7.03 - CHANGES AND ALTERATIONS OF COMMON AREAS
The Landlord reserves the rights, at any time and from time to time to increase
or decrease the size of and to alter the configuration of the Common Areas. In
the event of any such change or alteration, Landlord shall not be liable to
Tenant therefore, and Tenant shall not be entitled to any compensation or
diminution or abatement of Monthly Minimum Rent, nor shall such diminution or
alteration of the Common Areas be considered a constructive or actual eviction.
ARTICLE 8
INSURANCE AND INDEMNITY
SECTION 8.01 - INSURANCE ON THE BUILDING AND CERTAIN IMPROVEMENTS
During the Term of this Lease and any extensions or renewals thereof, the
Landlord shall maintain property and casualty insurance on the Building and on
so much of the upfit and additional real and personal property improvements and
appurtenances thereto as shall be installed by or at the expense of Landlord and
constitute the property of Landlord. Such insurance shall be maintained in an
amount, not to exceed the replacement cost thereof, and shall provide fire and
extended peril coverage and coverage against such further and additional perils,
as Landlord shall from time to time determine in its sole discretion to be
appropriate.
The amount of any insurance premiums incurred by or accrued as an expense of
Landlord in securing such coverage shall constitute a direct expense within the
meaning of Section 2.02 hereof and the Tenant shall pay its allocable portion of
such cost as a part of the Direct Expenses allocated to Tenant in the manner
provided in Section 2.02.
SECTION 8.02 - TENANT'S PUBLIC LIABILITY INSURANCE
Tenant shall, at all times during the Term hereof, at its sole cost and expense,
procure and maintain in force and effect a policy or policies of comprehensive
public liability insurance issued by a company or companies from time to time
approved by Landlord which companies must be authorized to transact business in
North Carolina. Such policy or policies shall insure, under valid and
enforceable policies against loss, damage or liability for injury to or death of
persons and loss or damage to property occurring from any cause whatsoever in,
upon or about the Demised Premises including any adjoining sidewalks,
passageways, parking areas, driveways and other Common Areas. Such policies of
liability insurance shall name Landlord and its designated property manager as
an additional insured and shall be in amounts and afford coverage against perils
all as is reasonably required from time to time by Landlord. Coverage shall
initially be in the single limit amount of ONE MILLION DOLLARS ($1,000,000.00).
SECTION 8.03 - INSURANCE RATING
Tenant will not conduct, or permit to be conducted, any activity, will not place
any equipment or materials in or about the Demised Premises, Building, or
Property, and will not take nor allow its employees, agents, or invitees to take
any action which will, in any way, violate any requirement of Landlord's
insurance policies or which will increase the rate of property, casualty,
liability or other insurance on the Demised Premises
-11-
<PAGE>
or on the Building or their operation, or which makes any property, casualty,
liability or other insurance on the Demised Premises or Building unavailable to
Landlord from companies acceptable to the Landlord. However, in the event the
Tenant shall take any such action then, in addition to and not in limitation of
any other rights pursuant to this Lease, the Landlord may require the Tenant,
upon demand, to separately pay or reimburse to Landlord the amount of any
increased insurance premiums attributable to such action which are in excess of
those charged at the Commencement Date, resulting from such activity. Landlord
shall give Tenant written notice of such proposed increase and shall give Tenant
thirty (30) days to take corrective action.
SECTION 8.04 - POLICIES OR CERTIFICATES OF INSURANCE
Tenant will furnish the Landlord prior to the delivery of the Demised Premises
to Tenant, and thereafter not fewer than thirty (30) days prior to the
expiration date of any expiring policies, certified copies of policies or
certificates of insurance bearing notations evidencing the payment of premiums
and evidencing the insurance coverage required to be carried by Tenant. Each
policy and certificate shall contain an endorsement or provision requiring not
fewer than thirty (30) days written notice to Landlord prior to the
cancellation, diminution in the perils insured against or reduction of the
amount of coverage of the particular policy in question.
SECTION 8.05 - INSURANCE OF TENANT'S PROPERTY
Tenant hereby acknowledges and agrees that it will secure and maintain insurance
upon its fixtures, trade fixture, personal property and any and all other
property of the Tenant or of any third parties which may from time to time be
stored or maintained in, on or around the Demised Premises and Building. Such
insurance shall be maintained in such amounts as shall be necessary to cover the
replacement cost thereof.
All such policies shall include a waiver of subrogation of any and all claims
against the Landlord. The Tenant hereby agrees that it will look solely to its
insurance policies for recovery of any loss for any such property and further
confirms and agrees that in no event will it make any claim against the Landlord
for any loss to any such property and that it will indemnify and hold the
Landlord harmless from and against any claim arising out of its failure to
maintain such insurance.
SECTION 8.06 - WAIVER OF SUBROGATION
Landlord hereby releases Tenant, but only to the extent of Landlord's insurance
coverage, from any liability for loss or damage caused by fire or any of the
extended coverage perils included in Landlord's insurance policies covering the
Demised Premises and Building even if the insured peril shall be brought about
by the default, negligence or other action of the Tenant, its agents, employees;
provided, this release shall be in effect only with respect to an insured loss
and only so long as Landlord's policy applicable to such loss shall contain a
clause to the effect that this release shall not affect the right of Landlord to
recover under such policy. Landlord does not waive and hereby reserves the right
to obtain compensation from Tenant occasioned by a loss for which insurance
coverage was not then available under commercially available insurance policies
at commercially reasonable rates.
Tenant hereby releases Landlord, but only to the extent of Tenant's insurance
coverage, from any liability for loss or damage caused by fire or any of the
extended coverage perils included in Tenant's insurance policies covering any
property of Tenant stored at the Demised Premises and Building even if the
insured peril shall be brought about by the default, negligence or other action
of the Landlord, its agents, employees or any of them; provided, this release
shall be in effect only with respect to an insured loss and only so long as
Tenant's policy applicable to such loss shall contain a clause to the effect
that this release shall not affect the right of Tenant to recover under such
policy.
-12-
<PAGE>
SECTION 8.07 - INDEMNIFICATION
Tenant will indemnify and hold the Landlord harmless from any and all claims,
actions, damages, liability and expense in connection with loss of life,
personal injury, or damage to property arising from or out of any occurrence in,
upon or at the Demised Premises or out of the occupancy or use by Tenant of the
Demised Premises or Building or any part thereof, and occasioned wholly or in
part by an act or omission of Tenant, its subtenants, concessionaires, agents,
contractors, employees, invitees, or licensees, or any one or more of them,
including reasonable attorney's fees, incurred by or accrued as an expense of
Landlord in defending any such claim or action. If the loss of life, personal
injury, or damage to property as aforesaid is occasioned in part by Tenant,
Tenant's liability shall be pro rata to the degree that its aforementioned
actions occasioned such loss of life, personal injury or damage to property.
SECTION 8.08 - NOTIFICATION
Tenant agrees to give Landlord prompt notice of any accidents or occurrences
subject to the provisions of this Article 8.
ARTICLE 9
LANDLORD'S RESERVED RIGHTS
SECTION 9.01 - ALTERATIONS AND ADDITIONS TO BUILDINGS AND SITE
Landlord hereby reserves the right at any time and from time to time to make
alterations or additions to, and build additions on the Building and to build
adjoining the same, and to install, maintain, use and repair and replace pipes,
ducts, conduits and wires leading through the Demised Premises in locations
serving other parts of the Building which will not materially interfere with
Tenant's use of the Demised Premises. Landlord also reserves the right to
construct other buildings or improvements from time to time and to make
alterations thereof or additions thereto and to build additional stories on any
such Building or buildings and to build adjoining same and to construct such
parking facilities as may be necessary or desirable.
It is understood and agreed that the description of the Demised Premises as set
forth in EXHIBIT A hereof and the location of the Demised Premises in the
Building hereof shall be subject to such changes as may be certified by
Landlord's architect as necessary for engineering or architectural purposes for
the construction of the improvements to be constructed thereon, so long as such
changes do not materially change the Demised Premises or adversely affect access
to the Demised Premises. Any such changes so certified shall not invalidate this
Lease and the description and location of the Demised Premises shall be deemed
to have been expressly modified and amended herein in accordance with such
changes.
SECTION 9.02 - RELOCATION OF TENANT
The Landlord shall have the right from time to time during the Term to relocate
the Demised Premises from their present location within the Building to another
location within the Property having at least the same floor area of comparable
quality as that of the Demised Premises, provided that the Landlord gives the
Tenant written notice of the Landlord's intention to do so at least ninety (90)
days before undertaking such relocation. The Landlord shall pay all reasonable
moving costs incurred by Tenant in connection with such move. Tenant agrees to
provide an estimate of such moving costs within two (2) weeks of notification by
Landlord. Upon the completion of such relocation, this Lease shall automatically
cease to cover the space constituting the Demised Premises immediately before
such relocation, and shall automatically thereafter cover the space to which the
Demised Premises have been relocated, as aforesaid, all on the same terms and
subject to the same conditions as those set forth in the provisions of this
Lease as in effect immediately before such relocation, and all without the
necessity of further action by either party hereto; provided, that each party
hereto shall, promptly upon its receipt of a written request therefore from the
other, enter into such amendment of this Lease as the requesting party considers
reasonably necessary to move Tenant.
-13-
<PAGE>
SECTION 9.03 - ACCESS TO DEMISED PREMISES
Landlord shall have the right, either itself or through its authorized agents,
to enter the Demised Premises at all reasonable times, to examine the same, to
show them to prospective tenants for other spaces in the Building or for the
Demised Premises, to allow inspection by mortgagees, and to make such repairs,
alterations or changes as Landlord deems necessary. In case of emergency,
Landlord or Landlord's authorized agent may access the Demised Premises at any
time without any liability to the Tenant. Tenant, its agents, employees,
invitees, and guests, shall have the right of ingress and egress to common and
public areas of the Building, provided Landlord by reasonable regulation may
control such access for the comfort, convenience and protection of all tenants
in the Building.
Tenant agrees to provide Landlord with one (1) key to each lock in the Demised
Premises.
SECTION 9.04 - LANDLORD'S RULES AND REGULATIONS
Landlord reserves the right to establish (and change from time to time)
regulations it deems appropriate for the common use and benefit of all tenants,
with which regulations Tenant shall comply. Landlord may sell the Building
without affecting the obligations of Tenant hereunder.
SECTION 9.05 - WINDOW TREATMENTS, SIGNS, AND EXTERIOR APPEARANCE
Tenant may not erect, install, or display any sign, advertising material, or
window treatment on any wall or window surface of the Demised Premises visible
from the exterior or on the Building, without the prior written consent of the
Landlord. Landlord will not approve any signs, advertising material or window
treatments which, in the sole discretion of the Landlord, are detrimental to a
consistent and well maintained external appearance of the Building, Property or
the Common Area. Landlord shall furnish, install, and maintain an individualized
Tenant identification sign, built to Landlord's specifications, on the facade of
the Building. Owner reserves the right, at any time, to change the name by which
the Property is designated.
SECTION 9.06 - LANDLORD'S PERFORMANCE OF TENANT'S OBLIGATIONS
In the event the Tenant shall fail to discharge any duties and obligations
hereunder imposed upon Tenant, the Landlord shall have the right, but not the
obligation, to perform such duties or obligations and, in such event, the
Landlord and its agents shall be entitled to receive as reimbursement from the
Tenant, upon demand, an amount equal to One Hundred Twenty Percent (120%) of the
total of all costs and expenses. Landlord shall provide written notice to
Tenant before performing such action and shall specify a reasonable period of
time for Tenant to take corrective action. Any such reimbursement and charge
shall constitute Additional Rents hereunder.
ARTICLE 10
FINANCING AND REFINANCING
SECTION 10.1 - SUBORDINATION - ATTORNMENT
This Lease shall be deemed subject and subordinate to any mortgage which may
heretofore or hereafter be executed by Landlord covering the Building and land
upon which the Building is located, and to all renewals, modifications or
extensions thereof. The Landlord's interest in this Lease may be assigned as
security for any financing now or hereafter required by Landlord. In the event
any proceedings are brought or notice given by any assignee for foreclosure of
any mortgage on the Building or for the exercise of any rights pursuant to any
mortgage or assignment, upon demand, Tenant will attorn to the mortgagee,
assignee or purchaser at a foreclosure sale as the case may be and will
recognize such assignee, mortgagee or purchaser as Landlord, providing such
assignee, mortgagee or purchaser agrees not to disturb Tenant's possession so
long as Tenant is not in default under the terms of this Lease. In the event
that Tenant refuses to or does not respond to Landlords written request to
execute any documents required by any
-14-
<PAGE>
mortgagee, assignee or purchaser as aforesaid within ten calendar days, then
Landlord shall, without any further action required on the part of the Tenant,
be empowered as Tenant's attorney-in-fact to deliver such documentation.
SECTION 10.2 - ESTOPPEL CERTIFICATE
Tenant will furnish to Landlord and/or to the holder of any mortgage from time
to time encumbering the Demised Premises, a statement of the status of any
matter pertaining to this Lease, including, without limitation, acknowledgment
that (or the extent to which) the Lease is in full force and effect, that
Landlord is in compliance with its respective obligations thereunder, and that
Tenant has no offsets or claims against Landlord. Tenant agrees to execute and
deliver within ten (10) days after receipt thereof, an instrument of estoppel in
the form or substantially in the form annexed hereto as Exhibit D. Tenant hereby
appoints Landlord as its true and lawful attorney to execute for and on behalf
of Tenant the foregoing instrument of estoppel in the event Tenant does not
execute and return the same within ten (10) days after its receipt of such
instrument.
SECTION 10.03 - CERTAIN CHANGES FOR FINANCING
If Landlord seeks a loan on the Demised Premises, Building or Property and the
proposed mortgagee requires as a condition of making the loan that this Lease be
modified, Tenant agrees to enter into such modification agreement providing that
the same does not increase the charges to Tenant, does not vary the areas
demised, does not change the Term of Tenant's Lease and does not materially
increase or vary Tenant's obligations, duties or covenants under this Lease.
ARTICLE 11
DESTRUCTION OR CONDEMNATION
SECTION 11.01 - DESTRUCTION OF PREMISES
If the Demised Premises are totally destroyed by fire or other casualty not
resulting from the wrongful or negligent act of Tenant, either Landlord or
Tenant may by written notice, given not later than thirty (30) days after the
date of such total destruction, terminate this Lease, in which event rent paid
for the period beyond the date of destruction shall be refunded to Tenant. If
there is not total destruction and Tenant reasonably is required to close
operation during repairs, rent shall abate while so closed, but if Tenant is
able to continue its operations during repairs, rent shall be adjusted and
prorated in the proportion which the area of unusable leased space bears to the
total Demised Premises, providing that Landlord shall not in such case have any
liability for losses claimed by Tenant. However, if: (i) the damages are such
that Landlord concludes that restoration cannot be completed within one hundred
and fifty (150) days; or (ii) less than ten percent (10%) of the Lease Term
Remains; or (iii) in Landlord's judgment, the cost of restoration will exceed
the amount of one (1) years minimum rent; or (iv) insurance carried by Landlord
is insufficient to restore the Premises, Landlord may at its option terminate
this Lease. If the Demised Premises are damaged by cause due to fault or neglect
of Tenant, its agents, employees, invitees, or licensees, there shall be no
apportionment or abatement of rent. Landlord shall not be required to restore
fixtures or improvements made or owned by Tenant that were not part of
Landlord's Work or subsequently constructed in the Demised Premises by Landlord
as part of the Lease terms.
SECTION 11.02 - CONDEMNATION
If the whole or more than twenty (20%) per cent of the Demised Premises is taken
by any governmental agency or corporation vested with the right of exercise of
eminent domain, whether such taking be effected by Court action or by settlement
with the agency exercising or threatening to exercise such power and if the
property so taken renders the remainder of the Demised Premises unfit for the
use thereof by Tenant, then Tenant shall have the option to terminate this
Lease, which option must be
-15-
<PAGE>
exercised by notice in writing, received by Landlord within sixty (60) days of
such taking. If the Tenant shall not elect to terminate, or if the taking does
not interfere with Tenant's use of the Demised Premises to the extent Tenant
does not have an option to terminate, there shall be an adjustment of all rents
reflecting on a pro-rata basis any reduction in the Demised Premises.
If the whole of the Demised Premises shall be acquired or condemned by eminent
domain for any public or quasi-public use or purpose, then the Term of the Lease
shall cease and terminate as of the date of title vesting in such public or
quasi public entity and all rents shall be paid up to that date and Tenant shall
have no claim against Landlord nor the condemning authority for the value of any
unexpired Term of this Lease. In the event of a partial taking or condemnation
which is not extensive enough to render the Demised Premises unsuitable for the
business of the Tenant, the Landlord shall promptly restore the Demised Premises
to a condition comparable to its condition at the time of such condemnation less
the portion lost in the taking, and this Lease shall continue in full force and
effect with the rents proportionally adjusted.
If the whole, or a substantial part, as determined by Landlord in its sole
discretion, of the common parking areas shall be acquired or condemned as
aforesaid, then the term of this Lease shall cease and terminate as of the date
of title vesting in such public or quasi public entity unless Landlord shall
take immediate steps to provide other suitable parking facilities. In the event
that Landlord shall provide such other parking facilities, then this Lease shall
continue in full force and effect without any reduction or abatement of rent.
In the event of any condemnation or taking as aforesaid, whether whole or
partial, the Tenant shall not be entitled to any part of the award paid for such
condemnation and Landlord is to receive the full amount of such award, the
Tenant hereby expressly waiving any right to claim to any part thereof. Although
all damages in the event of any condemnation are to belong to the Landlord,
whether such damages are awarded as compensation for diminution in value of the
leasehold or to the fee of the Premises, Tenant shall have the right to claim
and recover from the condemning authority, but not from Landlord, such
compensation as may be separately awarded or recoverable by Tenant in Tenant's
own right on account of any and all damage to Tenant's business by reason of the
condemnation and for or on account of any cost or loss to which Tenant might be
put in removing Tenant's merchandise, furniture, fixtures, leasehold
improvements and equipment.
ARTICLE 12
DEFAULT BY TENANT AND LANDLORD'S REMEDIES
SECTION 12.01 - EVENTS OF DEFAULT
For purposes of this Lease, the occurrence of any one or more of the following
shall constitute an "Event of Default" hereunder:
(a) Tenant fails to pay any Monthly Minimum Rent, Adjusted Monthly Minimum
Rent, Additional Rents or other monetary payments as and when provided
in this Lease; or
(b) Tenant breaches any other covenant, term, condition agreement or
obligation herein set forth and shall fail to cure such breach within
ten (10) days after written notice; provided if Tenant commences a
cure within such ten (10) day period and diligently and in good faith
continues to effect said cure, the Landlord shall extend the period
of time to cure same;
(c) The commencement in any court or tribunal of any proceeding, voluntary
or involuntary, to declare Tenant insolvent or unable to pay its debts
as and when due;
(d) The assignment by Tenant of all or any part of its property or assets
for the benefit of creditors;
-16-
<PAGE>
(e) The levy or execution, attachment, or taking of property, assets, or
the leasehold interest of Tenant by process of law or otherwise in
satisfaction of any judgment, debt, or claim;
(f) The filing by Tenant of any petition or action for relief under any
creditor's law (including bankruptcy, reorganization, or similar
actions), either in state or federal court;
(g) The filing against Tenant of any petition or action for relief under
any creditor's law (including bankruptcy, reorganization, or similar
actions), either in state or federal court; which is not dismissed
within sixty (60) days.
(h) Failure to comply with Section 4.02 Hazardous Waste and Related
Matters.
Upon the occurrence of any Event of Default, Landlord shall be entitled by
written notice to the Tenant to either (i) terminate the Term hereof or (ii) to
terminate Tenant's right to possession or occupancy only, without terminating
the Term of this Lease. Unless the Term is specifically terminated by notice in
writing, it shall be assumed that the Landlord has elected to terminate
possession only, without terminating the Term.
The remedies of terminating the Term or of terminating possession shall be in
addition to and not in limitation of any rights otherwise available to the
Landlord and the exercise of any rights on default shall not preclude the
exercise of any other rights available to the Landlord at law or in equity.
SECTION 12.02 - LANDLORD'S RIGHTS ON TERMINATION OF TERM OR POSSESSION
Upon any termination of the Term hereof, whether by lapse of time or otherwise,
or upon any termination of Tenant's right to possession or occupancy only,
without terminating the Term hereof, Tenant shall surrender possession and
vacate the Demised Premises and shall deliver possession thereof to the
Landlord; and Tenant hereby grants to Landlord full and free license to enter
into and upon the Demised Premises in such event and with or without process of
law to repossess the Demised Premises as of Landlord's former estate and to
expel or remove Tenant and any others who may be occupying the Demised Premises
and to remove therefrom any and all property. Except as otherwise expressly
provided in this Lease, Tenant hereby expressly waives the service and demand
for payment of rent or for possession of the Demised Premises or to re-enter
the Demised Premises, including any and every form of demand and notice
prescribed by any statute or any other law.
If Landlord elects to terminate Tenant's right to possession only as above
provided, without terminating the Term hereof, Landlord at its option may enter
into the Demised Premises, remove Tenants's property and other evidences of
tenancy and take and hold possession thereof without such entry and possession
terminating the Term hereof and without releasing Tenant from its obligation to
pay rents herein reserved for the full Term hereof. Upon and after entry into
possession without terminating such obligations, Landlord may, but shall be
obligated to the extent required by North Carolina State Law, relet the Demised
Premises, or any part for the account of Tenant to any person, firm or
corporation other than Tenant for such rent, for such time, and upon such terms
as Landlord in its sole discretion shall determine. If any rent collected by
Landlord upon any such reletting for Tenant's account is not sufficient to pay
monthly the full amount of the rent herein reserved, (including Monthly Minimum
Rents, Adjusted Monthly Minimum Rents, Additional Rents, and other charges),
and not theretofore paid by Tenant, together with the costs of any
-17-
<PAGE>
repairs, alterations, or redecoration necessary for such reletting, Tenant shall
pay to Landlord the amount of each monthly deficiency upon demand, and if the
rent so collected from such reletting is more than enough to pay the full amount
of the rents reserved hereunder and all of the aforementioned costs, Landlord
shall be entitled to retain such excess. Notwithstanding any termination of the
right to possession without termination of the Term, the Landlord expressly
reserves the right, at any time after the termination of possession, to
terminate the Term of this Lease by notice of such termination to Tenant.
Tenant, upon expiration or termination of this Lease, either by lapse of time or
otherwise, agrees peaceably to surrender to Landlord the Demised Premises in
broom-clean condition and in good repair. In the event Tenant shall fail to
leave the Demised Premises upon expiration or termination of this Lease,
Landlord, in addition to all other remedies available to it hereunder, shall
have the right to receive, as rents for all the time Tenant shall so retain
possession of the Demised Premises, or any part thereof, an amount equal to One
Hundred Fifty Percent (150%) of the Monthly Minimum Rent and Additional Rents
specified in Sections 1.04, in Article 2 or otherwise in this Lease, as applied
to such period.
ARTICLE 13
MISCELLANEOUS PROVISIONS
SECTION 13.01 - ASSIGNMENT OF LEASE - SUBLEASE
Tenant may not assign or encumber this Lease, and may not sublet any part or all
of the Demised Premises without the written consent of Landlord, which Landlord
may not unreasonably withhold or delay. Landlord's consideration or
reasonableness may include the assignee or sublessee's compatability with
existing tenants and the compatability of leasing space to new tenants. Any
assignment or sublease to which Landlord may consent (one consent not being any
basis to contend that Landlord should consent to a further change) shall not
relieve Tenant of any of its obligations hereunder. In no event shall this Lease
be assignable by operation of any law, and Tenant's rights hereunder may not
become, and shall not be listed by Tenant as an asset under any bankruptcy,
insolvency, or reorganization proceedings. Tenant is not, may not become, and
shall never represent itself to be a agent of Landlord, and Tenant expressly
recognizes that Landlord's title is paramount, and that it can do nothing to
affect or impair Landlord's title.
SECTION 13.02 - QUIET ENJOYMENT
If Tenant promptly and punctually complies with each of its obligations
hereunder, it shall peacefully have and enjoy the possession of the Demised
Premises during the Term hereof, providing that no action of Landlord in work in
other space in the Building, or in repairing or restoring the Demised Premises,
shall be deemed a breach of this covenant, or give Tenant any right to modify
this Lease either as to Term, rent payable, or other obligations to perform.
However, Landlord shall not be responsible or liable to Tenant for injury or
damage resulting from acts or omissions of persons occupying property adjacent
to the Demised Premises or any part of the Building in which the Demised
Premises are a part, or for injury or damage resulting to Tenant or its property
from bursting, stoppage or leaking of water, gas, sewer or steam pipes, except
where such loss or damage arises from the willful misconduct of Landlord.
SECTION 13.03 - SECURITY DEPOSIT
Landlord shall retain the Security Deposit as additional security for the
performance by Tenant of each of its obligations hereunder. If Tenant fails at
any time to perform its obligations, Landlord may at its option apply said
deposit or so much thereof as is required, to cure Tenant's default, but if
prior to the termination of this Lease, Landlord depletes said deposit in whole
or in part, Tenant shall immediately restore the amount so used by Landlord, the
obligation to so restore to be regarded as the obligation to pay Additional
Rent. This deposit shall not bear interest, and unless the Landlord
-18-
<PAGE>
uses the same to cure a default of Tenant, or to restore the Demised Premises to
the condition that Tenant is required to leave them at the conclusion of the
Term, Landlord shall, within thirty (30) days of the termination of the Lease,
refund to Tenant, so much of the deposit as it continues to hold. If Landlord
transfers its interest in the Premises during the Term, Landlord may assign the
Security Deposit to the transferee and thereafter shall have no further
liability for the return of such Security Deposit.
SECTION 13.04 - NOTICES
Any notices which Landlord or Tenant is required or desires to give to the other
shall be deemed sufficiently given or rendered if, in writing, delivered
personally, or sent by certified or registered mail, postage prepaid, to the
address listed after the respective signatures on the last page of this Lease.
Any notice given herein shall be deemed delivered when the return receipt
therefore is signed, or refusal to accept the mailing by the addressee is noted
thereon by the postal authorities.
SECTION 13.05 - LIABILITY OF LANDLORD
In the event Landlord shall fail to perform any covenant, term or condition of
this Lease upon Landlord's part to be performed. Tenant covenants and agrees to
look solely to Landlord's estate and interest in the Demised Premises and the
Building in which the Demised Premises are located for any recovery of money
judgment from Landlord from and after the date of this Lease Agreement. Nothing
herein shall be construed to waive or limit any right of recovery which Tenant
may have against Landlord's General Partner.
SECTION 13.06 - SALE BY LANDLORD
The Landlord may at any time assign or transfer its interest as Landlord or may
sell or transfer its interest in the property of which the Demised Premises is a
part. The term Landlord as used in this Lease so far as the covenants and
obligations on the part of the Landlord are concerned, shall be limited to mean
and include only the owner or owners of the Demised Premises at the time in
question and in the event of any transfer or conveyance of the Landlord's title
to such property, other than by an assignment for security only, the grantee
shall automatically be substituted and the grantor shall automatically be
released from any and all liability arising with respect to the performance of
any covenants or obligations after the effective date of any such sale.
SECTION 13.07 - BROKERAGE
Tenant warrants that it has had no dealings with any broker or agent in
connection with this Lease and covenants to pay, hold harmless and indemnify
Landlord from and against, any and all cost, expense or liability for any
compensation, commissions and charges claimed by any other broker or agent with
respect to this Lease or the negotiation thereof.
SECTION 13.08 - ROOF AND WALLS
Landlord shall have the exclusive right to use all or any part of the roof of
the Building for any purpose; to erect other structures over all of any part of
the Building; and to erect in connection with the construction thereof temporary
scaffolds and other aids to construction on the exterior of the Demised
Premises, provided that access to the Demised Premises shall not be denied nor
shall the Tenant's exterior glass be diminished or view be reduced.
-19-
<PAGE>
SECTION 13.09 - SPECIAL PROVISIONS - EXHIBIT C
Notwithstanding any contrary provisions hereof, the provisions, if any contained
within Exhibit C constitute special provisions and agreements of the parties
which shall supersede any provisions of this Lease which are inconsistent with
the provisions stated within Exhibit C.
SECTION 13.10 - GENERAL RULES FOR INTERPRETING THIS LEASE
Headings of paragraphs are for convenience only and shall not be considered in
construing the meaning of the contents of such paragraph.
The acceptance of rentals and other payments by Landlord for any period or
periods after an Event of Default shall not be deemed a waiver of any rights on
the part of the Landlord to terminate this Lease for any other Event of Default.
No waiver by Landlord of any of the terms or conditions of this Lease shall be
construed as a waiver by Landlord of any subsequent Event of Default.
The invalidity of any provision of this Lease shall not have any effect on the
balance hereof.
Should Landlord or Tenant institute any legal proceedings against the other for
breach of any provision herein contained, and prevail in such action, the
non-prevailing party shall in addition be liable for the reasonable costs and
expenses of the prevailing party, including its reasonable attorney's fees.
This Lease shall be binding upon the respective parties hereto, and upon their
heirs, executors, successors and assigns.
This Lease is executed with the express intent and understanding that it shall
supersede any and all prior discussions and or agreements between the parties
hereto, it being understood and agreed that the Lease contains the entire
understanding and agreement concerning the Lease of the Demised Premises
described herein.
Changes and amendments to this lease shall be in writing signed by the party
affected by such change or amendment.
This Lease may not be recorded without Landlord's prior consent, but Tenant
agrees on request of Landlord to execute a memorandum hereof for recording
purposes.
The singular shall include the plural, and the masculine or neuter includes the
other.
This Lease shall be construed under the laws of the State of North Carolina.
SECTION 13.11 - LANDLORD'S SECURITY INTEREST
Upon an Event of Default, in addition to any lien for rent available to the
Landlord, the Landlord shall have, and the Tenant hereby grants to the Landlord,
a continuing security interest for all rent and other sums of money becoming due
hereunder from the Tenant, upon all of the Tenant's accounts receivable,
inventory, equipment and all other personal property located on the Demised
Premises, none of which may be removed from the Demised Premises without the
Landlord's express, written consent so long as any Rent or other such sums from
time to time owed to the Landlord hereunder remains unpaid or another uncured
Event of Default has occurred. On the occurrence of an Event or Default, the
Landlord shall have, in addition to any other remedies provided herein or by
law, all of the rights and remedies afforded to secured parties under the
provisions of the Uniform Commercial Code, as codified in North Carolina
(hereinafter referred to as "the Code"), including by way of example rather than
of limitation (a) the right to sell the Tenant's said property at public or
private sale upon ten (10) days' notice to the Tenant, and (b) the right to take
possession
-20-
<PAGE>
of such property without resort to judicial process in accordance with the
provisions of Section 9-503 of the Code. The Tenant shall, on its receipt of a
written request therefore from the Landlord, execute such financing statements
and other instruments as are necessary or desirable, in the Landlord's judgment,
to perfect such security interest.
Landlord agrees that its security interest will be subordinate to that of any
bank, and will execute any instruments reasonably necessary to satisfy the bank
of such subordination.
SECTION 13.12 - CONSTRUCTION OF THE BUILDING BY LANDLORD
Section 1.02 of this Lease provides that the Commencement Date of this Lease
shall be the earlier of the date that the Tenant takes possession of any of the
Demised Premises or the date that the Demised Premises is substantially
complete. The parties hereto acknowledge that the Building to contain the
Demised Premises has not been constructed but is scheduled for completion of
construction on or about April 1, 1996. However, the parties hereto recognize
that the Landlord cannot guarantee to Tenant that the Building will be
constructed in time for a April 1, 1996 Commencement Date. Therefore, the
parties agree that the April 1, 1996 date set forth in Section 1.02 shall, at
the election of the Landlord, be extended for the following periods of time:
(a) A period not to exceed thirty (30) calendar days, such period or
periods to be determined by Landlord in its sole discretion plus
(b) a period of time equal to the period of time that the completion of
construction of the Building by March 1, 1996 was delayed by Force
Majeure or other reasons beyond the Landlord's control; provided that
such period of time under this Subsection (b) shall not exceed
forty-five (45) calendar days. For purposes of this Lease the term
Force Majeure shall mean acts of God, any weather that delays
construction, strike, lockouts or other industrial disturbances, acts
of the public enemy, orders of any kind of the Government of the
United States or of any state or any civil or military authority,
insurrections, riots, epidemics, landslides, lightening, earthquakes,
fires, hurricanes, storms, floods, washouts, droughts, arrest,
restraining of government and people, civil disturbances, explosions,
partial or entire failure of utilities, shortage of labor, material
supplies, transportation, or any other similar or different cause not
reasonably in the control of the Landlord.
-21-
<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease in duplicate
originals as a sealed instrument, all as of the day and year first above
written.
LANDLORD:
Southport Business Park Limited Partnership, (SEAL)
a North Carolina Limited Partnership
BY: /s/ Robert T. Karp (SEAL)
Robert T. Karp, Agent for the General Partner
ADDRESS FOR LANDLORD FOR NOTICES UNDER LEASE:
SOUTHPORT BUSINESS PARK LIMITED PARTNERSHIP
101 Southcenter Court, Suite 1100
Morrisville, NC 27560
GENERAL COUNSEL
General Investment & Development Co.
600 Atlantic Avenue, Suite 2000
Boston, MA 02210
- --------------------------------------------------------------------------------
TENANT:
- ---------------------------------
HERE INSERT CORRECT TENANT NAME
BY: /s/ Robert L. Pickens (SEAL)
President
[CORPORATE SEAL]
ATTEST:
BY: /s/ Nina Jo C. Rutledge (SEAL)
(Asst.) Secretary
ADDRESS FOR TENANT FOR NOTICES UNDER THIS LEASE:
Interactive Magic
215 Southport Drive
Suites 1000-1400
Morrisville, N.C. 27560
(IF NONE SPECIFIED, THE ADDRESS OF THE
LEASED PREMISES SHALL BE THE ADDRESS FOR
ALL NOTICES.)
- --------------------------------------------------------------------------------
-22-
<PAGE>
EXHIBIT A - DEMISED PREMISES
Exhibit A is a drawing showing the Demised Premises and its location within the
Building.
-23-
<PAGE>
EXHIBIT B - DESCRIPTION OF LANDLORD'S WORK
Landlord's Work shall consist of upfitting the space in accordance with plans
and specifications approved by Landlord and Tenant, copies of which will be
attached as a part of Exhibit B.
Tenant will pay Landlord $5,000.00 for the construction of the one (1)
private restroom adjacent to one of the front executive offices. Payment
shall be due and payable no later than thirty (30) days after Commencement Date
as denied in Section 1.02 of the Lease.
-24-
<PAGE>
EXHIBIT C - SPECIAL PROVISIONS
In the event the Landlord and Tenant agree to any special provisions, the
special provisions shall be listed on this Exhibit C.
1. Signage
Landlord shall provide Tenant a $1,000.00 allowance for a building facia
sign. Landlord shall provide the glass storefront, suite signage and one
dock sign at no expense to the Tenant. The signage shall conform to the
existing signage criteria and is subject to Landlord's approval.
2. Parking
Landlord shall provide sixty five (65) Unassigned Parking (stripped) Spaces
which surround the Building as shown on Exhibit A attached hereto.
3. Guaranty
A personal guaranty for this Agreement is attached hereto as Exhibit F.
4. Termination of other leased space
Upon the Commencement Date of this Lease and the vacancy of space located at
140 Southcenter Court, Suite 800 Morrisville, N.C., Landlord and Tenant
agree to execute an amendment to terminate space leased by Tenant from
Landlord at approximately 6314 square feet located at 140 Southcenter Court,
Suite 800, Morrisville, N.C.
-25-
<PAGE>
EXHIBIT D - TENANT ESTOPPEL CERTIFICATE
TO:
RE: Property Address: __________________________________
__________________________________
Current Lease Date _____________________________________________
Between _____________________________________________
and _____________________________________________
Suite No. ____ Square Footage _____("Demised Premises")
Ladies and Gentlemen:
The undersigned is the Tenant under the above-referenced Lease (said Lease,
together with any and all amendments thereto, hereinafter the "Lease"). The
undersigned, acknowledging that __________________ will rely on the
representations and agreements below in granting a loan to the Landlord,
repayment of which shall be secured by, inter alia, a mortgage upon the property
of which the Demised Premises are a part, hereby acknowledges, certifies and
represents to ______________________ that:
1) A true, accurate and complete copy of the Lease is attached hereto. The
Lease represents the entire understanding between Landlord and Tenant with
respect to the leasing of the Demised Premises.
2) There is no prepaid rent, except $____________, and the amount of
Security Deposit is $______________.
3) We took possession of the Demised Premises on ________ ___________ and
commenced to pay rent on _______________________ in the amount of
$_________________. Rent was last paid on ___________, and has been paid through
________________________.
4) The current Lease terminates on ______________________ and we have the
following renewal option(s) ________________________________________________
______________________________________________________________________________.
We have no right to acquire or purchase the Demised Premises, or any portion of
the above-referenced property or interest therein.
5) All work to be performed for us under the Lease has been performed as
required and has been accepted by us, except ________________________________
______________________________________________________________________________.
6) The Lease is in full force and effect, and free from default by
Landlord. We have no offsets or claims against Landlord, whether against rental
and/or other charges payable by Tenant under the Lease, or otherwise.
7) The undersigned has received no notice of a prior sale, transfer,
assignment, hypothecation or pledge of said lease or of the rent received herein
except to use, except
______________________________________________________________________________.
8) The Demised Premises are being used only for the purpose as described in
said Lease.
If we are a corporation, the undersigned is a duly appointed officer of the
corporation signing this certificate and is the incumbent in the office
indicated under his/her name. In any event, the undersigned individual is duly
authorized to execute this certificate.
Executed under seal this ____ day of _______________, 19__.
TENANT:
By:_____________________________
Title:__________________________
-26-
<PAGE>
EXHIBIT E - ATTORNMENT, SUBORDINATION AND NON-DISTURBANCE AGREEMENT
ATTORNMENT, SUBORDINATION AND NON-DISTURBANCE AGREEMENT
THIS AGREEMENT made this _______ day of ________________, 1993, by and
among:
MORTGAGEE:
LESSEE: ____________________ Inc.
___ Southport Drive, Suite ___
Morrisville, NC 27560
and
OWNER: Southport Business Park Limited Partnership
600 Atlantic Avenue, Suite 2000
Boston, Massachusetts 02210
WHEREAS:
(1) Southport Business Park Limited Partnership ("Landlord") is the owner
of the property described in Exhibit A attached hereto and incorporated herein
by reference (the "Building");
(2) _____________________________ ("Mortgagee") has made a loan to
Landlord, and such loan is secured by a mortgage on the Building (the
"Mortgage");
(3) By Lease dated _______________________, (the "Lease"), the Landlord, as
Lessor, leased to ____________, Inc. (the "Tenant") a portion of the Building or
the improvements located thereon ("Demised "Premises") for a term of __________
(__) years [with _______ (__) options to extend said lease term for an
additional period of ______ (__) years each so that the total or aggregate
number of possible lease years under said Lease is a total of _______ (__)
years], at the rental and upon the terms and conditions set forth in said Lease;
(4) Mortgagee desires to assure the Tenant possession of the Demised
Premises upon the terms and conditions set forth in the Lease for the entire
original term and any optional renewal term therein provided without regard to
any default under the terms of the Mortgage between Landlord and Mortgagee;
(5) Tenant desires to assure Mortgagee that Tenant will attorn to the
Mortgagee under the circumstances set forth in this Agreement and under the
Lease;
(6) Mortgagee desires to assure Tenant that its possession of the Demised
Premises and rights under the Lease will not be disturbed so long as Tenant is
not in default under the Lease or the terms of this Agreement;
(7) Tenant has agreed to subordinate the Lease and its interest therein to
the Mortgage.
NOW, THEREFORE, in consideration of Ten and No/100 Dollars ($10.00) in hand
paid by each of the parties herein to the other, of other good and valuable
consideration, and of the mutual promises contained herein, the receipt and
sufficiency of which is hereby acknowledged by each of the parties, the
Mortgagee, Tenant and Landlord covenant and agree as follows:
-27-
<PAGE>
1. TENANT TO ATTORN TO MORTGAGEE
(a) In the event that the Mortgagee shall succeed to the interest of
Landlord under the Lease, the Lease shall continue with the same force and
effect as if the Mortgagee, as lessor, and the Tenant had entered into a Lease
for a term equal to the then unexpired term of the Lease, containing the same
terms, conditions and covenants as those contained in the Lease, including, but
not limited to, any rights of renewal therein, and the Tenant shall be bound to
the Mortgagee under all of the provisions of the Lease for the remaining term
thereof with the same force and effect as if the Mortgagee were the lessor under
the Lease, and the Tenant hereby attorns and agrees to attorn to the Mortgagee
as its landlord, such attornment to be effective and self-operative without the
execution of any further instruments on the part of either of the parties hereto
immediately upon the succession of Mortgagee to the interest of Landlord under
the Lease. The Tenant shall be under no obligation to pay rent to the Mortgagee
until the Tenant receives written notice from the Mortgagee that an Event of
Default under the Deed of Trust, Security Agreement and Financing Statement
(hereinafter "Deed of Trust") or other Collateral Documents (as defined in the
Construction Loan Agreement) has occurred, or that it has succeeded to the
interest of the Landlord under the Lease. The Landlord agrees that, upon
receiving such notice from Mortgagee, Tenant shall pay all rents directly to
Mortgagee without any liability therefor to Landlord; provided, however, that if
Landlord in good faith disputes that such an Event of Default has occurred,
Landlord may promptly notify in writing Tenant and Mortgagee, and, upon receipt
of such notice, Tenant shall thereafter deposit all rents into an appropriate
court having jurisdiction over the Demised Premises, with notice of such deposit
to Mortgagee and Landlord (and in such event Landlord consents for the court to
remit to Mortgagee from such deposit the debt service required under the
Mortgage). Nothing contained herein shall in any manner limit or restrict the
right of Mortgagee to have a receiver appointed or to seek any other appropriate
relief or remedy under the Deed of Trust, or other related Collateral Documents.
The respective rights and obligation of the Tenant and the Mortgagee upon such
attornment and their relationship shall be as tenant and landlord respectively,
for the remaining term of the Lease, including any renewal periods set forth in
said Lease;
(b) Tenant agrees that it will not, without the express written consent of
Mortgagee, prepay any minimum rental under the Lease to Landlord in excess of
two (2) month's advance minimum rental; and
(c) In the event that the Mortgagee shall succeed to the interest of the
Landlord under the Lease, the Mortgagee agrees to be bound to the Tenant under
all of the terms, covenants and conditions of the Lease; provided, however, that
Mortgagee shall not be:
(i) liable for any act of omission of any prior landlord (including the
Landlord); or
(ii) subject to any offsets not specifically provided for in the Lease
which the Tenant might have or thereafter have against any prior
landlord (including the Landlord); or
(iii) bound by any prepayment of more than two (2) month's minimum rental
under the Lease to any prior landlord (including the Landlord); or
(iv) bound by an amendment, modification or surrender of the Lease made
without its consent.
2. MORTGAGEE'S RIGHT TO PROCEED AGAINST LESSEE.
In the event the Mortgagee succeeds to the interest of the Landlord under
the Lease, the Mortgagee shall have the same remedies by entry, action or
otherwise for the nonperformance of any agreement contained in the Lease, for
the recovery of rent, for the doing of any waste or for any
-28-
<PAGE>
other default, as Landlord had or would have had if the succession had not taken
place, and this right shall exist whether or not the Lease is formally
terminated; in any such action, Tenant waives the necessity of Landlord being
made a party to such proceeding.
3. RIGHT OF MORTGAGEE TO CURE DEFAULTS.
If any default shall occur under the Lease on the part of the Landlord,
which would give Tenant the right (or under which Tenant might claim the right)
to cancel or terminate the Lease, Tenant shall promptly give notice thereof to
Mortgagee, and Mortgagee shall have thirty (30) days from the date of such
notice to cure any such default, or if such default is not reasonably capable of
being cured in such period of time, Mortgagee shall have the right within such
time to commence remedying such default and shall proceed diligently to complete
the same. In the event any such default is so cured, or Mortgagee has promptly
and properly commenced such cure, the Lease shall not be deemed to be in
default, and Lessee's duties thereunder shall continue unabated. Nothing herein
shall be deemed to be a duty on the part of Mortgagee to cure any such default,
but only a right on its behalf to do so.
4. SUBORDINATION.
The Lease, and all rights of Tenant thereunder, are and shall be subject
and subordinate in all respects to the Mortgage, to each and every advance made
of hereafter to be made under the Mortgage, and to all renewals, modifications,
consolidations, replacements and extensions of the Mortgage.
5. NON-DISTURBANCE PROVISIONS.
In the event the Mortgage shall be foreclosed, or in the event Mortgagee
otherwise succeeds to the interest of the Landlord under the Lease, and provided
that Tenant is not then in default under the Lease, the Lease shall not
terminate on account of such foreclosure or other such succession, by operation
of law or otherwise, so long as the Tenant continues to pay the rents reserved
in the Lease and otherwise does not become in Default under the Lease.
6. MORTGAGEE'S APPROVAL OR CONSENT.
Whenever Mortgagee's consent or approval under the Lease is required,
Mortgagee agrees to not unreasonably withhold or delay such consent, and it is
understood and agreed that Mortgagee shall not be deemed to have unreasonably
withheld such consent or approval, wherein Mortgagee's reasonable discretion to
give such approval or consent would reduce the value, decrease the size or
impair the structural integrity of the Demised Premises and/or the Building, or
otherwise impair the security granted under the Mortgage.
7. SURVIVAL.
This instrument shall survive any foreclosure of the Demised Premises, or
any other succession by Mortgagee to the interest of the Landlord with respect
to the Demised Premises, and shall remain in full force and effect until the end
of the Lease term and all exercised optional extension periods, or until
satisfaction of the Mortgage and all renewals, modifications, consolidations,
replacements, and extensions of the Mortgage, whichever shall first occur.
8. APPROVALS.
The Landlord has joined in this Agreement for the purpose of expressing its
consent and agreement to be bound by the provisions hereof.
-29-
<PAGE>
9. NOTICES.
All notices or demands hereunder shall be sufficient if sent by United
States registered or certified mail, postage prepaid, addressed as follows:
If to Mortgagee: _______________________________________
_______________________________________
_______________________________________
If to Tenant: ______________, Inc.
_____ Southport Drive, Suite ______
Morrisville, NC 27560
and
If to Landlord: Southport Business Park Limited Partnership
600 Atlantic Avenue, Suite 2000
Boston, Massachusetts 02210
and
Southport Business Park Limited Partnership
101 Southcenter Court, Suite 1100
Morrisville, North Carolina 27560
or such other address as any party may hereafter designate in writing to the
other.
10. BINDING EFFECT.
This Agreement and all of the covenants, terms, conditions and obligations
herein contained shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors and assigns.
IN WITNESS WHEREOF, the parties hereto have caused this Attornment,
Subordination, and Non-Disturbance Agreement to be executed effective on the day
and year first above written.
MORTGAGEE:
WITNESS:
_______________________ By: ________________________________________
Its: ________________________________________
TENANT:
__________________, INC.
ATTEST: By: ________________________________________
XXXXXXXXXXXXXXXXXXX
_______________________ Its: President
LANDLORD:
SOUTHPORT BUSINESS PARK LIMITED PARTNERSHIP,
a limited partnership
ATTEST:
_______________________ By: ________________________________________
Its: General Partner
-30-
<PAGE>
EXHIBIT F - GUARANTY
____________________
GUARANTY OF LEASE
WHEREAS, SP Enterprises, Inc., d/b/a Interactive Magic, a Maryland
corporation with a principal place of business at 215 Southport Drive, Suites
1000 - 1400, Morrisville, N.C. 27560 ("Tenant") is desirous of entering into a
lease with Southport Business Park Limited Partnership, a North Carolina
Limited Partnership, with a principal place of business at 101 Southcenter
Court, Morrisville, North Carolina ("Landlord"), for the premises located at
Suites 1000-1400, 215 Southport Drive, Morrisville, North Carolina ("Premises");
WHEREAS, Guarantor has requested that Landlord enter into the Lease with
Tenant and has represented to Landlord that Guarantor shall derive benefit
from the Lease; and
WHEREAS, Landlord has refused to enter the said lease unless Guarantor (as
defined below) guaranty Tenant's performance under the Lease in the manner
hereinafter set forth herein.
NOW, THEREFORE, to induce Landlord to enter into the Lease, which Lease
is dated this day and is being executed simultaneously herewith, the
undersigned, J. W. Stealey residing at 8120 Perry Maxwell Circle, Sarasota,
FL 34240 ("Guaantor") hereby agrees that:
1. (a) The Guarantor unconditionally guaranties to the Landlord and the
successors and assigns of Landlord the full and punctual performance and
observance, by Tenant, of all the terms, covenants, and conditions in the
Lease contained on Tenant's part to be kept, performed or observed. This
Guaranty shall include any liability of Tenant which shall accrue under the
Lease for any period preceding as well as any period following the term of
the Lease. The Guarantor waives notice of any breach of default by Tenant.
(b) If, at any time, default shall be made by Tenant in the performance or
observance of any of the terms, covenants or conditions in the Lease contained
on Tenant's part to be kept, performed or observed, Guarantor will keep,
perform and observe the same, as the case may be, in place and stead of Tenant.
2. Any act of Landlord, or the successors or assigns of Landlord, consisting of
of a waiver of any of the terms or conditions of the Lease or the giving of any
consent to any manner or thing relating to the Lease, or the granting of any
indulgences or extensions of time to Tenant, may be done without notice to
Guarantor and without releasing the obligations of Guarantor hereunder.
3. The obligations of Guarantor hereunder shall not be released by Landlord
receipt, application or release of security given for the performance and
observance of covenants and conditions in the Lease contained on Tenant's part
to be performed or observed; nor by any modification of the Lease, but in case
of any such modification the liability of Guarantor, shall be deemed modified in
accordance with the terms of any such modification of the Lease.
4. The liability of Guarantor, hereunder shall in no way be affected by (a)
the release or discharge of Tenant in any creditors', receivership, bankruptcy
or other proceedings, (b) the impairment, limitation or modification of the
liability of the Tenant or the estate of the Tenant in bankruptcy, or of any
remedy for the enforcement of Tenant's said liability under the lease, resulting
from the operation of any present or future provision of the Bankruptcy code or
other statute or from the decision in any court; (c) the rejection or
disaffirmance of the lease in any such proceedings, (d) the assignment or
transfer of the lease by Tenant; (e) any disability or other defense of Tenant,
or (f) the cessation from any cause whatsoever of the liability of Tenant.
5. Until all the covenants and conditions in the Lease on Tenant's part to be
performed and observed are fully performed and observed, Guarantor;
-32-
<PAGE>
(a) shall have no right of subrogation against Tenant by reason of any payments
or acts of performance by the Guarantor, in compliance with the obligations of
the Guarantor hereunder, (b) waives any right to enforce any remedy which
Guarantor now or hereafter shall have against Tenant by reason of any one or
more payments or acts of performance in compliance with the obligations of
Guarantor hereunder; and (c) subordinates any liability or indebtedness of
Tenant now or hereafter held by Guarantor to the obligations of Tenant to the
Landlord under the Lease.
6. This Guaranty shall apply to the Lease, any extension or renewal thereof
and to any holdover term following the term hereby granted or any extension or
renewal thereof.
7. If on the third anniversary date of the date that Tenant occupies the
Demised Premises Tenant is not in default under the Lease, Tenant and Guarantor
may in writing request that Landlord release Guarantor from this Guaranty.
Landlord shall release Guarantor if the following minimum conditions have been
satisfied at the time of such request;
(a) The Tenant had complied with the terms, covenants and conditions
of the Lease during the term thereof and had not been delinquent in the payment
of rent or other sums due thereunder;
(b) The Guarantor had complied the terms, covenants and conditions of
this Guaranty and had not been delinquent in the payment of any sum hereunder;
(c) At the time of the request for release, Tenant has submitted to
Landlord current financial statements audited by certified public accountants
reasonably satisfactory to Landlord showing, using general accounting principles
consistently applied, that (i) the ratio of Tenant's current assets to its
current liabilities is at least 1.5 to 1 and (ii) Tenant has cash or marketable
securities on hand of at least $500,000.
8. This is a guaranty of payment and performance and not collection.
9. This instrument may not be changed, modified, discharged or terminated
orally or in any manner other than by an agreement in writing signed by
Guarantor and the Landlord.
IN WITNESS WHEREOF, Guarantor has hereunto set his hand and seal the day
of 30 November, 1995.
/s/ J.W. Stealey
-----------------------------------------
J. W. Stealey (Seal)
State of North Carolina
--------------------
County of Wake
--------------------
I, Audrey Renfrow Moss, a Notary Public of Wake
County, _______________________, do hereby certify that J.W. Stealey
personally came before me on this day and acknowledged the foregoing instrument
was signed by him.
Witness my hand and notarial seal this 30 day of November, 1995.
--- ---------
/s/ Audrey Renfrow Moss
----------------------------------------
Notary Public
(NOTARY SEAL)
My commission expires: My Commission Expires Feb. 15, 2000
-----------------------------------------------
-33-
<PAGE>
LEASE AMENDMENT #1
THIS AMENDMENT #1 TO LEASE made the 7th day of February
--- ----------
1996, by and between Southport Business Park Limited Partnership (Landlord), and
SP Enterprise, Inc. d/b/a Interactive Magic, a Maryland corporation (Tenant).
WITNESSETH:
WHEREAS, Landlord and Tenant entered into a certain lease ("Lease")
dated as of December 4, 1995, for certain premises located at 215 Southport
Drive, Suites 1000-1400, Morrisville, Wake County, North Carolina ("Demised
Premises"), the Demised Premises being more particularly described in the Lease,
and
WHEREAS, Landlord and Tenant desire to modify the terms of the Lease:
NOW, THEREFORE, in consideration of the premises contained herein, the sum
of Ten Dollars ($10.00) and other good and valuable consideration, the mutual
receipt and sufficiency of which is hereby acknowledged, the parties agree:
A. to amend the Lease by the following:
1. Page Three - Section 1.02-Term of The Lease Delete the following:
-----------------------------------------------------------------
"Subject in all respects to the terms, limitations, conditions and
agreements contained herein, the term of this Lease (herein
referred to as the "Term") shall commence on the date that Tenant
takes possession of any part of the Demised Premises which is
expected to be March 1, 1995 and shall terminate (unless extended
as herein provided) at midnight on February 28, 2001."
And insert in its place the following:
---------------------------------------
"Subject in all respects to the terms, limitations, conditions
and agreements contained herein, the term of this Lease (herein
referred to as the "Term") shall commence on the date that Tenant
takes possession of any part of the Demised Premises which is
expected to be April 1, 1995 and shall terminate (unless extended
-------------
as herein provided) at midnight on March 31, 2001."
--------------
2. This amendment shall become effective upon the above mentioned
date in the opening paragraph.
Except as herein amended, the terms and conditions of said Lease dated
December 4, 1995, shall remain in full force and effect.
1
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed the date and year first above written.
WITNESS: LANDLORD:
SOUTHPORT BUSINESS PARK
LIMITED PARTNERSHIP
By: /s/ Robert T. Karp (Seal)
______________________ _____________________________________
Robert T. Karp
Title: Agent for the General Partner
TENANT:
SP Enterprises, INC.
d/b/a Interactive Magic
(CORPORATE SEAL)
By: /s/ Robert L. Pickens (Seal)
-------------------------------------------
Robert L. Pickens
Title: President
Attest:
By: /s/ Nina Jo C. Rutledge
-------------------------------------------
Asst.
Title: Secretary
2
<PAGE>
Employment Agreement
This Employment Agreement ("Agreement") is made as of January 3, 1995,
("Effective Date") between SP Enterprises, Inc. (also doing business as
"Interactive Magic", and hereafter in this Agreement the "Corporation"), a
Maryland corporation, John W. Stealey, Sr. ("Employee"), and Robert L. Pickens
("Pickens").
WHEREAS, Employee has been employed by the Corporation as of December 31,
1994, and since that date has served as a director and as Chairman of the Board
of Directors of the Corporation;
WHEREAS, Employee, Pickens and the Corporation are entering into a Stock
Purchase Agreement ("Purchase Agreement") of even date herewith whereby the
Corporation will issue shares of its Class A Common Stock (Voting) ("Class A
Stock") to Employee, such that Employee will become the majority stockholder of
the Corporation and Pickens will become a minority shareholder of the
Corporation;
WHEREAS, as an inducement to Employee to enter into the Purchase Agreement,
Pickens desires to cause the Corporation to employ Employee, and Employee
desires to be employed by the corporation, upon the terms and conditions herein
set forth; and
WHEREAS, this Agreement is the employment agreement described in the
Purchase Agreement;
NOW, THEREFORE, in consideration of the foregoing premises, and the mutual
promises and covenants herein contained, the Corporation and Employee agree as
follows:
1. Term of Agreement. This Agreement shall commence as of the Effective
Date for an initial term of three (3) years, provided that on each annual
anniversary of the Effective Date commencing on January 3, 1997, the term shall
be extended automatically by an additional one (1) year, unless either the
Corporation or the Employee, prior to such anniversary date, shall give written
notice of intent not to extend the term for an additional year. The initial
term, as extended automatically pursuant to the foregoing sentence, is hereafter
the "Term of Agreement".
2. Period of Employment. The Corporation shall employ the Employee, and the
Employee shall serve in the employ of the Corporation, during the Term of
Agreement (the "Period of Employment"), in the position and with the duties and
responsibilities set forth in Section 3, subject to the other terms and
conditions of this Agreement.
3. Position.
(a) During the Period of Employment the Employee shall serve as Chief
Executive Officer of the Corporation with the duties and responsibilities as
provided in the Corporation's By-laws for
1
<PAGE>
the Chief Executive Officer, and such other duties as are customary for a chief
executive officer.
(b) For so long as Stealey is a stockholder of the Corporation, Pickens
shall vote all of his shares of voting stock in favor of Employee serving as a
director of the Corporation, and for so long as Pickens is a director of the
Corporation, in favor of Employee serving as Chairman of the Board.
4. Compensation. During the Period of Employment, the Corporation shall pay
to the Employee as compensation a base salary and incentive compensation, as
follows:
(a) Base Salary. A base salary at the initial annual rate of
$150,000.00, provided that: (i) the amount due for the calendar year 1995
may be deferred, at the Corporation's sole discretion, and paid to Employee
in increments of $50,000 during each of calendar years 1996, 1997, and
1998; (ii) in the event this Agreement is terminated prior to December 31,
1998, Employee shall receive all deferred but unpaid amounts in a lump sum
no later than the date of termination; and (iii) notwithstanding anything
to the contrary in subsection (ii), Employee shall have the option,
exercisable by Employee upon written notice to the corporation no later
than the earlier to occur of (A) three (3) days after termination of
employment for any reason or (B) January 3, 1999, to take all or any
portion of the unpaid or deferred compensation in the form of shares of the
Corporation's Class A Stock, at a purchase price of $0.50 per share.
(b) Incentive Compensation. Annual incentive compensation in an amount
to be determined from year to year by the Corporation's Board of Directors.
5. Benefits. During the Period of Employment, the Corporation shall pay the
Employee the following benefits:
(a) Medical and Dental benefits. Employee shall be entitled to
reimbursement of reasonable health insurance premiums for family coverage
and shall be eligible to participate in the Corporation medical and dental
plans in accordance with the company's policies as may be in effect from
time to time.
(b) Automobiles. The Corporation shall make available to Employee two
(2) automobiles, owned or leased by the Corporation, for use by Employee
throughout the Period of Employment. The Corporation shall provide all
appropriate insurance coverage, all automobile maintenance and operating
expenses, and all automobile telephone expenses for each automobile.
(c) Modification of Company Benefit Plans. Nothing herein shall be
construed as an obligation to make available benefit plans to its employees
generally, or to provide for specific terms
2
<PAGE>
and conditions relating to such benefit plans.
(d) Promotion Allowance. The Corporation shall provide Employee with a
monthly allowance of $1000 to be used in the promotion, development and
advancement of the Corporation's business. The Corporation shall reimburse
Employee for all additional reasonable and necessary business expenses
incurred by Employee on behalf of the Corporation provided Employee shall
make available all records and information in support of such request.
(e) Reimbursement For Disallowed Compensation and Expenses. In the
event that any fringe benefit, expense allowance payment, or other expense
incurred by the Corporation for the benefit of the Employee shall in whole
or in part, upon audit or other examination of income tax returns of the
Corporation, be determined not to be allowable deductions from the gross
income of the Corporation and such determination shall be acceded to by the
Corporation, or such determination shall be made final and no timely appeal
shall be taken therefrom, then the Employee shall repay to the Corporation
the amount of such disallowed compensation and expenses. This obligation is
in accordance with the provisions of Revenue Ruling 69-115 and is for the
purpose of entitling such Employee to a business expense deduction for the
taxable year in which the repayment is made to the Corporation and to
protect the Corporation from having to bear the entire burden of a
disallowed expense item.
(h) Vacation. Employee shall be entitled to all regular Corporation
employee holidays and in addition to three (3) weeks of vacation per year
for the first year of the Period of Employment, four (4) weeks in the
second year of the Period of Employment, and thereafter to five (5) weeks
of vacation per year. After the fifth year of employment, Employee shall be
entitled to a one-year sabbatical with full pay and benefits.
6. Termination Before Expiration of Period of Employment. The termination
of the employment of the Employee during the Period of Employment may occur,
under this Agreement, in any one of the following ways:
(a) By the Corporation. The Corporation may terminate the employment
of the Employee at any time.
(b) By the Employee. The Employee may terminate his employment at any
time during the Period of Employment for any reason, including retirement
pursuant to the provisions of the Corporation's retirement plan, if any.
7. Notice of Termination. Any termination of the employment of the
Employee, whether by the Corporation or by the Employee shall be communicated to
the other party by notice in writing (the "Notice of Termination"), shall state
the termination provision in
3
<PAGE>
this Agreement relied upon, and shall set forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination under the
provisions so indicated. The "Date of Termination" shall mean the date on which
the employment terminates.
8. Consequences of Termination. The termination of the employment of the
Employee during the Period of Employment will cause the following results:
8.1. If the termination is for any reason other than by Employee
voluntarily (including resignation or pursuant to notice of nonrenewal by
Employee under Section 1):
(a) The Corporation will pay the Employee within five (5) days
after the Date of Termination: (i) any unpaid base compensation for
services performed prior to the Date of Termination; (ii) the amount
of any accrued annual vacation pay to which he may be entitled under
the Corporation's vacation plan and other accrued but unpaid benefits;
and (iii) an amount as liquidated damages, and in a lump sum, equal to
twice the total of (A) Employee's annual base salary then in effect
(regardless of whether such salary has been paid or deferred); (B)
Employee's incentive compensation under Section 4(b), if any, due from
prior years but unpaid as of the Date of Termination; and (C) such
incentive compensation under Section 4(b), if any, as would have been
earned (as defined in section 8.1(b)) by Employee for the period from
January 1 of the year of the Date of Termination through the Date of
Termination, in all cases subject to applicable federal and state
withholding. (The total amount due under subsection (iii) is hereafter
the "Termination Damages.")
(b) For purposes of calculating the incentive compensation
component in foregoing clause (a) (iii) (C), Employee shall be deemed
to have earned such incentive compensation if the Corporation's
performance, either pro-rated as of the Date of Termination from the
annual performance criteria as previously determined by the Board of
Directors under Section 4(b) ("Performance Criteria") or as of the end
of the applicable year, substantially satisfies the Performance
Criteria. The amount of incentive compensation to which Employee shall
be entitled under clause (a) (iii) (C) is the portion of the total
incentive compensation for the year in which the Date of Termination
occurs, pro rated from January 1 through the Date of Termination. In
the event the amount of incentive compensation due under clause (a)
(iii) (C) cannot reasonably be determined within five days of the Date
of Termination, the amount due under clause (a) (iii) (C) shall be
paid as soon as can practicably be determined, but in no event later
than incentive compensation paid to the Corporation's other employees
for such year.
4
<PAGE>
8.2. If the termination is voluntarily by the Employee:
(a) The Corporation will pay the Employee within five (5) days
after the Date of Termination: (i) any unpaid compensation for
services performed prior to the Date of Termination; (ii) the amount
of any accrued annual vacation pay to which he may be entitled under
the Corporation's vacation plan; and (iii) incentive compensation for
the year in which the Date of termination occurs as described in
Section 8.1 (a) (iii) (C).
(b) For purposes of this section, "voluntary termination" by the
Employee shall not include termination by Employee as a result of (i)
a material change in the Employee's duties, responsibilities or
authority, without his express written consent, or any change,
including the sale or other disposition of a substantial part of the
business of the Corporation and its subsidiaries, which would cause
the Employee's position with the Corporation to become of less
dignity, responsibility, importance or scope from the position and
attributes thereof described in Section 2; (ii) failure to obtain the
assumption of the obligation to perform this Agreement by any
successor, or (iii) breach of this Agreement by the Corporation.
9. Other Benefits. Nothing in this Agreement shall prevent the Employee
from receiving any benefits to which he may be entitled under any plan or
program of the Corporation, except any severance pay benefits for which he might
otherwise be eligible under any plan, program or policy of the Corporation.
Amounts paid to the Employee pursuant to Section 8 shall not be considered as
compensation or earnings for purposes of the Corporation's pension plan or other
benefit plans, programs or policies.
10. Income Tax Withholding. The Corporation may withhold from any benefits
payable under this Agreement any federal, state, city or other taxes as may be
required pursuant to any law, regulation or ruling.
11. Noncompetition And Confidentiality.
(a) Employee shall not, without the prior written approval of the Board of
Directors of the Corporation, during the term hereof and a period of two (2)
years after termination of his employment with the Corporation, be interested,
directly or indirectly, as partner, officer, director, stockholder, advisor,
employee or in any other capacity in any other Competitive Business (as defined
herein) within 250 miles of any location at which the Corporation maintains its
principal administrative headquarters; provided, however, that nothing herein
contained shall be deemed to prevent or limit the right of Employee to invest in
the capital stock or securities of any corporation whose stock or securities are
regularly traded on any public exchange. The term "Competitive Business" shall
mean the design, manufacture or sale of games used
5
<PAGE>
on personal computers.
(b) The term of this provision shall be extended by breach of section 11(a)
such that the term shall run for two years from the date such breach is cured.
(c) The term of this provision shall be reduced automatically upon failure
of the Corporation to timely pay the full amount of all Termination Damages
provided in section 8. The amount of the reduction in the term shall bear the
same proportion to the two-year term as the amount of Termination Damages due
but not paid bears to the total Termination Damages.
12. Confidentiality.
(a) Employee shall not at any time, either directly or indirectly, divulge,
disclose, or communicate to any person, firm or corporation in any manner
whatsoever any information concerning any matters affecting or relating to the
business of the Corporation, including without limitation the names of its
customers or clients, the prices at which it sells, has sold, provides or has
provided, its products and services, or any other information concerning the
Corporation, its manner of operation, its plans, processes, or other data
without regard to whether all of the forgoing matters would be deemed
confidential, material or important, the parties hereto stipulating that, as
between them, the same are important, material, and confidential and gravely
affect the effective and successful conduct of the business of the Corporation,
and the Corporation's good will and that any breach of the terms of this
paragraph shall be a material breach of this Agreement. This confidentiality
provision shall survive the termination of Employee's employment, regardless of
cause. The existence of any claims or cause of action against the Corporation by
Employee, whether predicated on this Agreement or otherwise, shall not
constitute a defense to enforcement of this provision.
(b) Employee agrees that upon termination for any reason, and unless
specifically authorized otherwise in writing by the Corporation's Board of
Directors, he shall return to the Corporation, without making or retaining any
copies thereof, all documents pertaining to the Corporation's business in any
way obtained while Employee was an employee of the Corporation.
13. Severability. The invalidity or unenforceability of any provisions of
this Agreement shall not affect the validity or enforceability of any other
provision or this Agreement, which shall remain in full force and effect.
14. Amendment. This Agreement may not be modified or amended except by an
instrument in writing signed by all parties hereto.
6
<PAGE>
15. Governing Law. This Agreement shall be subject to, and governed by, the
laws of the state of Maryland, excluding its choice of law provisions.
16. Entire Agreement. This Agreement and the Purchase Agreement constitute
the entire agreement and understanding between the parties hereto in respect of
the matters set forth herein, and all prior negotiations, writings and
understandings, written or oral, relating to the subject matter of this
Agreement are merged herein and are superseded and canceled by this Agreement
and the Purchase Agreement.
17. Binding Agreement and Successors. This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
successors and permitted assigns; provided, however, that this Agreement and the
rights of the .parties hereunder may not be assigned, and the obligations of the
parties hereunder may not be delegated, in whole or in part, without the prior
written consent of the other party hereto.
18. Notices. Any notice, request, instruction or other document or
communication required or permitted to be given under this Agreement shall be in
writing and shall be deemed to be given as provided in the Purchase Agreement.
19. Section Headings. The Section headings contained in this Agreement are
for convenience of reference only and shall not limit or otherwise affect the
meaning or interpretation of this Agreement or any of its terms and conditions.
20. Construction. Each and every term and condition of this Agreement and
any and all agreements and instruments subject to the terms hereof, the parties
hereto understand and agree that the same have or has been mutually negotiated,
prepared and drafted, and that if at any time the parties hereto desire or are
required to interpret or construe any such term or condition or any agreement or
instrument subject hereto, no consideration shall be given to the issue of which
party hereto actually prepared, drafted or requested any term or condition of
this Agreement or any agreement or instrument subject hereto.
[End of Page]
7
<PAGE>
21. Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed an original, but all of which taken together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this agreement as of
the date first above written.
Witness or Attest: SP Enterprises, Inc.
/s/ Nina Jo C. Rutledge By: /s/ Robert L. Pickens
- ---------------------------- ------------------------------
Robert Pickens
President
Witness:
/s/ Nina Jo C. Rutledge /s/ Robert L. Pickens
- ---------------------------- ----------------------------------
Robert L. Pickens
Witness:
/s/ Nina Jo C. Rutledge /s/ John W. Stealey, Sr.
- ---------------------------- ----------------------------------
John W. Stealey, Sr.
8
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement is entered into, effective the
_____ day of May, 1998, by and between INTERACTIVE MAGIC, INC. (formerly known
as SP Enterprises, Inc. and hereinafter in this Agreement, the "Corporation")
and JOHN W. STEALEY, SR. (the "Employee") and ROBERT L. PICKENS.
WHEREAS, the Corporation and the Employee are parties to an Employment
Agreement dated January 3, 1995, a copy of which is attached hereto as Exhibit A
(the "Agreement");
WHEREAS, the Corporation and the Employee desire to amend the
Agreement.
NOW, THEREFORE, in consideration of the above and the mutual promises
set forth below, the legal sufficiency and adequacy of which are hereby
acknowledged, the parties agree to amend the Agreement as follows:
1. Section 3(b) of the Agreement is amended by deleting that Section in
its entirety.
2. Section 4(a), Base Salary, is amended by deleting that Section in
its entirety and inserting in lieu thereof a new Section 4(a) to read as
follows:
(a) Base Salary. A base salary at the initial annual
rate of $180,000, with increases in such amounts as may be
determined from time to time by the Board of Directors but in
no event to be less than five percent (5%) per year; and
1
<PAGE>
3. Section 5(b), Automobiles, is amended by deleting that Section in
its entirety and inserting in lieu thereof a new Section 5(b) to read as
follows:
(b) Automobile. The Corporation shall make available
to Employee an automobile, owned or leased by the Corporation,
for use by Employee throughout the Employment Period. The
Corporation shall provide all appropriate insurance coverage,
all automobile maintenance and operating expenses, and all
automobile telephone expenses.
4. Section 5(h), Vacation, is amended by deleting the last sentence of
that Section which reads, "After the fifth year of employment, Employee shall
be entitled to a one-year sabbatical with full pay and benefits."
5. Section 5, Benefits, is amended by adding the following:
(i) Life Insurance. The Corporation shall provide
Employee with a term life insurance benefit equal to no less
than $1,000,000. Employee shall have the sole discretion to
name the beneficiary of this insurance. The Corporation shall
have the right, at its own expense and for its own benefit, to
purchase additional insurance on Employee's life, and Employee
shall cooperate by providing the necessary information,
submitting to
2
<PAGE>
the required examinations, and otherwise complying with the
designated carrier's requirements.
(j) Disability Insurance. The Corporation
shall provide Employee with disability insurance in accordance
with the Corporation's policies as may be in effect from time
to time.
6. Section 8.1 is amended by deleting the introductory clause which
currently reads "If the termination is for any reason other than by Employee
voluntarily (including resignation or pursuant to notice of non-renewal by
Employee under Section 1)" and inserting in lieu thereof "If the termination is
for any reason other than either by the Corporation for Cause (as defined
herein) or by Employee voluntarily (including resignation or pursuant to notice
of non-renewal by Employee under Section 1)".
7. Section 8.1 is further amended by adding the following:
(c) The term "Cause" shall mean: (i)
substantially uncured breach of this Agreement 30 days
following written notice by the Corporation to Employee of
such alleged breach; (ii) material or flagrant violations of
Employer's policies and procedures; (iii) other conduct that
is substantially and materially detrimental to the best
interests of the Corporation; (iv) conviction of, or pleading
guilty or confessing to, fraud, misappropriation, embezzlement
or any felony; or (v) willful failure, without reasonable
excuse or proper authorization, to devote full business
3
<PAGE>
time to the affairs of the Corporation. Without limiting the
generality of the first sentence of Section 8.1, notice by the
Corporation that it will not extend the Period of Employment
for an additional one-year term upon any anniversary of the
Effective Date, as provided in Section 1, shall be considered
termination of Employee by the Corporation without Cause.
8. Section 15, Governing Law, is amended by deleting that Section in
its entirety and by inserting in lieu thereof a new Section 16 to read as
follows:
15. Governing Law. This Agreement shall be
subject to, and governed by, the laws of the State of North
Carolina, excluding its choice of law provisions.
9. The Agreement is amended by adding as Section 22 the following:
22. Remedy for Breach. The parties recognize that
the services to be rendered by Employee hereunder are special,
unique, of an extraordinary character, require Employee's
special skills, knowledge and talents and that his employment
with the Corporation of necessity provides Employee with
specialized knowledge, and that the Corporation will be
irreparably harmed in the event Employee were to use his
special skill, knowledge and talents and his knowledge of the
Corporation's trade secrets in competition with a competitor
of the Corporation, or otherwise in
4
<PAGE>
breach or threatened breach of this Agreement. In such event,
the Corporation, without limitation as to other remedies that
may be available to it, shall be entitled to institute and
prosecute proceedings at law or in equity to enforce the
specific performance hereof by Employee or to enjoin Employee
from breaching the provisions hereof. Employee waives any and
all defenses he may have on the ground of jurisdiction or
competence of the court to grant such an injunction, specific
performance or other equitable relief.
10. Except as set forth herein, the Agreement is not modified or
amended, and the parties hereto reaffirm and agree to all of the terms and
provisions of the Agreement, as amended, in all other respects.
IN WITNESS WHEREOF, the parties have executed this Amendment to
Employment Agreement, effective the _____day of May, 1998.
INTERACTIVE MAGIC, INC.
ATTEST:
By: __________________________________
Name:
Title:
- ------------------------------------
Secretary
(CORPORATE SEAL)
5
<PAGE>
EMPLOYEE:
----------------------------------------
John W. Stealey, Sr.
-----------------------------------------
Robert L. Pickens
Employment Agreement
This Employment Agreement ("Agreement") is made as of January 3, 1995,
("Effective Date") between SP Enterprises, Inc. (also doing business as
"Interactive Magic", and hereafter in this Agreement the "Corporation"), a
Maryland corporation, Robert L. Pickens (the "Employee"), and John W. Stealey,
Sr. ("Stealey").
WHEREAS, Employee has been the president of the Corporation through the
Effective Date, and immediately prior to the Effective Date the Employee was
sole stockholder and Employee and Stealey were the sole directors of the
Corporation;
WHEREAS, Employee, Stealey and the Corporation are entering into a Stock
Purchase Agreement ("Purchase Agreement") of even date herewith whereby the
Corporation will issue shares of its Class A, Common Stock (Voting) to Stealey,
such that Stealey will become the majority shareholder and the Employee will
become a minority shareholder of the corporation;
WHEREAS, as an inducement to Employee to enter into the Purchase Agreement,
Stealey desires to cause the Corporation to employ Employee, and Employee
desires to be employed by the Corporation, upon the terms and conditions herein
set forth; and
WHEREAS, this Agreement is the employment agreement described in the
Purchase Agreement;
NOW, THEREFORE, in consideration of the foregoing premises, and the mutual
promises and covenants herein contained, the Corporation and Employee agree as
follows:
1. Term of Agreement. This Agreement shall commence as of the Effective
Date for an initial term of three (3) years, provided that upon each annual
anniversary of the Effective Date commencing January 3, 1997, the term shall be
extended automatically by an additional one (1) year unless either the
Corporation or Employee, prior to such anniversary date, shall give notice of
intent not to extend the term for an additional year. The initial term, as
extended automatically pursuant to the foregoing sentence, is hereafter the
"Term of Agreement".
2. Period of Employment. The Corporation shall employ the Employee, and the
Employee shall serve in the employ of the Corporation, during the Term of
Agreement (the "Period of Employment"), in the position and with the duties and
responsibilities set forth in Section 3, subject to the other terms and
conditions of this Agreement.
3. Position.
(a) During the Period of Employment the Employee shall serve as President
and Chief Operating Officer of the Corporation with the duties and
responsibilities as provided in the Corporation's By-laws for the President and
such additional duties
1
<PAGE>
as are customary for a chief operating officer.
(b) For so long as Stealey is a stockholder of the Corporation, Stealey
shall vote all of his shares of voting stock in favor of Employee serving as a
director of the Corporation.
4. Compensation. During the Period of Employment, the Corporation shall pay
to the Employee as compensation a base salary and incentive compensation, as
follows:
(a) Base Salary. A base salary at the initial annual rate of
$100,000.00, with increases in such amounts as may be determined from time
to time by the Board of Directors but in no event to be less than five
percent (5%) per year; and
(b) Incentive Compensation. Annual incentive compensation in an amount
to be determined from year to year by the Corporation's Board of Directors.
5. Benefits. During the Period of Employment, the Corporation shall pay the
Employee the following benefits:
(a) Medical and Dental benefits. Employee shall be entitled to
reimbursement of reasonable health insurance premiums for family coverage
and shall be eligible to participate in the corporation medical and dental
plans in accordance with the company's policies as may be in effect from
time to time.
(b) Life insurance. The Corporation shall provide Employee with a term
life insurance benefit equal to no less than $500,000 and whole life
insurance benefit equal to no less than $200,000. Employee shall have the
sole discretion to name the beneficiary of this insurance. The Corporation
shall have the right, at its own expense and for its own benefit, to
purchase additional insurance on Employee's life, and Employee shall
cooperate by providing the necessary information, submitting to the
required examinations, and otherwise complying with the designated
carrier's requirements.
(c) Disability Insurance. The Corporation shall provide Employee with
disability insurance in accordance with the Corporation's policies as may
be in effect from time to time.
(d) Automobile. The Corporation shall make available to Employee an
automobile, owned or leased by the Corporation, for use by Employee
throughout the Employment Period. The Corporation shall provide all
appropriate insurance coverage, all automobile maintenance and operating
expenses, and all automobile telephone expenses.
(e) Modification of Company Benefit Plans. Nothing herein shall be
construed as an obligation to make available benefit plans to its employees
generally, or to provide for specific terms and conditions relating to such
benefit plans.
2
<PAGE>
(f) Promotion Allowance. The Corporation shall provide Employee with a
monthly allowance of $1000 to be used in the promotion, development and
advancement of the Corporation's business. The Corporation shall reimburse
Employee for all additional reasonable and necessary business expenses
incurred by Employee on behalf of the Corporation provided Employee shall
make available all records and information in support of such request.
(g) Reimbursement For Disallowed Compensation and Expenses. In the
event that any fringe benefit, expense allowance payment, or other expense
incurred by the Corporation for the benefit of the Employee shall in whole
or in part, upon audit or other examination of income tax returns of the
Corporation, be determined not to be allowable deductions from the gross
income of the Corporation and such determination shall be acceded to by the
Corporation, or such determination shall be made final and no timely appeal
shall be taken therefrom, then the Employee shall repay to the Corporation
the amount of such disallowed compensation and expenses. This obligation is
in accordance with the provisions of Revenue Ruling 69-115 and is for the
purpose of entitling such Employee to a business expense deduction for the
taxable year in which the repayment is made to the Corporation and to
protect the Corporation from having to bear the entire burden of a
disallowed expense item.
(h) Vacation. Employee shall be entitled to all regular Corporation
employee holidays and in addition to three (3) weeks of vacation per year
for each of the first four years of the Period of Employment, and
thereafter to four (4) weeks of vacation per year.
6. Termination Before Expiration of Period of Employment. The termination
of the employment of the Employee during the Period of Employment may occur,
under this Agreement, in any one of the following ways:
(a) By the Corporation. The Corporation may terminate the employment
of the Employee at any time.
(b) By the Employee. The Employee may terminate his employment at any
time during the Period of Employment for any reason, including retirement
pursuant to the provisions of the Corporation's retirement plan, if any.
(c) Death or Disability. Upon the death or disability of the Employee,
and in either such event, the provisions of Section 9 will apply.
7. Notice of Termination. Any termination of the employment of the
Employee, whether by the Corporation or by the Employee shall be communicated to
the other party by notice in writing (the "Notice of Termination"), and (other
than nonrenewal of the Term as provided in Section 1) shall state the
termination provision in this Agreement relied upon and shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
3
<PAGE>
termination under the provisions so indicated. The "Date of Termination" shall
mean the date on which the employment terminates.
8. Consequences of Termination. The termination of the employment of the
Employee during the Period of Employment will cause the following results:
8.1. If the termination is for any reason other than either by the
Corporation for Cause (as defined herein) or by Employee voluntarily
(including resignation or pursuant to notice of nonrenewal by Employee
under Section 1):
(a) The Corporation will pay the Employee within five (5) days
after the Date of Termination: (i) any unpaid base compensation for
services performed prior to the Date of Termination; (ii) the amount
of any accrued annual vacation pay to which he may be entitled under
the Corporation's vacation plan and other accrued but unpaid benefits;
and (iii) an amount as liquidated damages, and in a lump sum, equal to
twice the total of (A) Employee's annual base salary then in effect
(regardless of whether such salary has been paid or deferred); (B)
Employee's incentive compensation under Section 4(b), if any, due from
prior years but unpaid as of the Date of Termination; and (C) such
incentive compensation under Section 4(b), if any, as would have been
earned (as defined in section 8.1(b)) by Employee for the period from
January 1 of the year of the Date of Termination through the Date of
Termination, in all cases subject to applicable federal and state
withholding. (The total amount due under subsection (iii) is hereafter
the "Termination Damages.")
(b) For purposes of calculating the incentive compensation
component in foregoing clause (a) (iii) (C), Employee shall be deemed
to have earned such incentive compensation if the Corporation's
performance, either pro-rated as of the Date of Termination from the
annual performance criteria as previously determined by the Board of
Directors under Section 4 (b) ("Performance Criteria") or as of the
end of the applicable year, substantially satisfies the Performance
Criteria. The amount of incentive compensation to which Employee shall
be entitled under clause (a) (iii) (C) is the portion of the total
incentive compensation for the year in which the Date of Termination
occurs, pro-rated from January 1 through the Date of Termination. In
the event the amount of incentive compensation due under clause (a)
(iii) (C) cannot reasonably be determined within five days of the Date
of Termination, the amount due under clause (a) (iii) (C) shall be
paid as soon as can practicably be determined, but in no event later
than incentive compensation paid to the Corporation's other employees
for such year.
(c) The term "Cause" shall mean: (i) substantially uncured breach
of this Agreement 30 days following written notice by the Corporation
to Employee of such alleged breach; (ii) material or flagrant
violations of Employer's policies and
4
<PAGE>
procedures; (iii) other conduct that is substantially and materially
detrimental to the best interests of the Corporation; (iv) conviction
of, or pleading guilty or confessing to, fraud, misappropriation,
embezzlement or any felony; or (v) willful failure, without reasonable
excuse or proper authorization, to devote full business time to the
affairs of the Corporation. Without limiting the generality of the
first sentence of Section 8.1, notice by the Corporation that it will
not extend the Period of Employment for an additional one-year term
upon any anniversary of the Effective Date, as provided in Section 1,
or the failure of the Corporation's shareholders to elect, reelect,
appoint or reappoint the Employee as a director, shall be considered
termination of Employee by the Corporation without Cause.
8.2. If the termination is voluntarily by the Employee or is by the
Corporation for Cause:
(a) The Corporation will pay the Employee within five (5) days
after the Date of Termination: (i) any unpaid compensation for
services performed prior to the Date of Termination; (ii) the amount
of any accrued annual vacation pay to which he may be entitled under
the Corporation's vacation plan; and (iii) incentive compensation for
the year in which the Date of termination occurs as described in
Section 8.1 (a) (iii) (C).
(b) For purposes of this section, "voluntary termination" by the
Employee shall not include termination by Employee as a result of (i)
a material change in the Employee's duties, responsibilities or
authority, without his express written consent, or any change,
including. the sale or other disposition of a substantial part of the
business of the Corporation and its subsidiaries, which would cause
the Employee's position with the Corporation to become of less
dignity, responsibility, importance or scope from the position and
attributes thereof described in Section 2; (ii) relocation or transfer
of the Employee's office to a location more than fifty miles from the
Employee's principal residence or the Corporation's principal offices
as of the date of this Agreement, without his express written consent;
(iii) failure to obtain the assumption of the obligation to perform
this Agreement by any successor, or (iv) breach of this Agreement by
the corporation.
9. Death or Disability. In the event of the Employee's death or disability,
the following provisions will apply:
(a) Death. The Employee's employment shall be terminated upon his
death, and the beneficiaries of the Employee will be entitled to receive
the amounts set forth in section 8.2(a), the life insurance benefits set
forth in section 5.2, and the benefits set forth in any plans of the
Corporation then in effect and applicable under the circumstances.
(b) Disability. If, during the Period of Employment, the Employee
becomes physically or mentally disabled so as to be unable
5
<PAGE>
to carry out the normal and usual duties of his employment for six (6)
continuous months, his employment hereunder may be terminated at the
election of the Corporation. During such period of the Employee's
disability prior to termination, the Employee shall continue to earn all
compensation and other benefits as if he were not disabled, and following
termination he shall continue to participate in all benefit plans of the
Corporation applicable to employees terminated for disability or
retirement, as the case may be.
10. Other Benefits. Nothing in this Agreement shall prevent the Employee
from receiving any benefits to which he may be entitled under any plan or
program of the Corporation, except any severance pay benefits for which he might
otherwise be eligible under any plan, program or policy of the Corporation.
Amounts paid to the Employee pursuant to Section 8 shall not be considered as
compensation or earnings for purposes of the Corporation's pension plan or other
benefit plans, programs or policies.
11. Income Tax Withholding. The Corporation may withhold from any benefits
payable under this Agreement any federal, state, city or other taxes as may be
required pursuant to any law, regulation or ruling.
12. Noncompetition And Confidentiality.
(a) Employee shall not, without the prior written approval of the Board of
Directors of the corporation, during the term hereof and a period of one (1)
year after termination of his employment with the Corporation, be interested,
directly or indirectly, as partner, officer, director, stockholder, advisor,
employee or in any other capacity in any other Competitive Business (as defined
herein) within 250 miles of any location at which the Corporation maintains its
principal administrative headquarters; provided, however, that nothing herein
contained shall be deemed to prevent or limit the right of Employee to invest in
the capital stock or securities of any corporation whose stock or securities are
regularly traded on any public exchange. The term "Competitive Business" shall
mean the design, manufacture, or sale of games used on personal computers.
(b) The term of this provision shall be extended by breach of section 11(a)
such that the term shall run for one year from the date such breach is cured.
(c) The term of this provision shall be reduced automatically upon failure
of the Corporation to timely pay the full amount of all Termination Damages
provided in section 8. The amount of the reduction in the term shall bear the
same proportion to the one-year term as the amount of Termination Damages due
but not paid bears to the total Termination Damages.
6
<PAGE>
13. Confidentiality.
(a) Employee shall not at any time, either directly or indirectly, divulge,
disclose, or communicate to any person, firm or corporation in any manner
whatsoever any information concerning any matters affecting or relating to the
business of the Corporation, including without limitation the names of its
customers or clients, the prices at which it sells, has sold, provides or has
provided, its products and services, or any other information concerning the
Corporation, its manner of operation, its plans, processes, or other data
without regard to whether all of the forgoing matters would be deemed
confidential, material or important, the parties hereto stipulating that, as
between them the same are important, material, and confidential and gravely
affect the effective and successful conduct of the business of the Corporation,
and the Corporation's good will and that any breach of the terms of this
paragraph shall be a material breach of this Agreement. This confidentiality
provision shall survive the termination of Employee's employment, regardless of
cause. The existence of any claims or cause of action against the Corporation by
Employee, whether predicated on this Agreement or otherwise, shall not
constitute a defense to enforcement of this provision.
(b) Employee agrees that upon termination for any reason, and unless
specifically authorized otherwise in writing by the Corporation's Board of
Directors, he shall return to the Corporation, without making or retaining any
copies thereof, all documents pertaining to the Corporation's business in any
way obtained while Employee was an employee of the Corporation.
14. Severability. The invalidity or unenforceability of any provisions of
this Agreement shall not affect the validity or enforceability of any other
provision or this Agreement, which shall remain in full force and effect.
15. Amendment. This Agreement may not be modified or amended except by an
instrument in writing signed by all parties hereto.
16. Governing Law. This Agreement shall be subject to, and governed by, the
laws of the state of Maryland, excluding its choice of law provisions.
17. Entire Agreement. This Agreement and the Purchase Agreement constitute
the entire agreement and understanding between the parties hereto in respect of
the matters set forth herein, and all prior negotiations, writings and
understandings, written or oral, relating to the subject matter of this
Agreement are merged herein and are superseded and canceled by this Agreement
and the Purchase Agreement.
18. Binding Agreement and Successors. This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
successors and permitted assigns; provided, however, that this Agreement and the
rights of the
7
<PAGE>
parties hereunder may not be assigned, and the obligations of the parties
hereunder may not be delegated, in whole or in part, without the prior written
consent of the other party hereto.
19. Notices. Any notice, request, instruction or other document or
communication required or permitted to be given under this Agreement shall be in
writing and shall be deemed to be given as provided in the Purchase Agreement.
20. Section Headings. The Section headings contained in this Agreement are
for convenience of reference only and shall not limit or otherwise affect the
meaning or interpretation of this Agreement or any of its terms and conditions.
21. Construction. Each and every term and condition of this Agreement and
any and all agreements and instruments subject to the terms hereof, the parties
hereto understand and agree that the same have or has been mutually negotiated,
prepared and drafted, and that if at any time the parties hereto desire or are
required to interpret or construe any such term or condition or any agreement or
instrument subject hereto, no consideration shall be given to the issue of which
party hereto actually prepared, drafted or requested any term or condition of
this Agreement or any agreement or instrument subject hereto.
22. Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which taken together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this agreement as of
the date first above written.
Witness or Attest: SP Enterprises, Inc.
/s/ Nina Rutledge By: /s/ Robert L. Pickens
- ------------------------- --------------------------
Title: President
Witness:
/s/ Nina Rutledge /s/ Robert L. Pickens
- ------------------------- -----------------------------
Robert L. Pickens
Witness:
/s/ Nina Rutledge /s/ John W. Stealey, Sr.
- ------------------------- -----------------------------
John W. Stealey, Sr.
8
<PAGE>
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement is entered into, effective the
_____ day of May, 1998, by and between INTERACTIVE MAGIC, INC., (formerly known
as SP Enterprises, Inc. and hereinafter in this Agreement, the "Corporation")
and ROBERT L. PICKENS (the "Employee") and JOHN W. STEALEY, SR.
WHEREAS, the Corporation and the Employee are parties to an Employment
Agreement dated January 3, 1995, a copy of which is attached hereto as Exhibit A
(the "Agreement");
WHEREAS, the Corporation and the Employee desire to amend the
Agreement.
NOW, THEREFORE, in consideration of the above and the mutual promises
set forth below, the legal sufficiency and adequacy of which are hereby
acknowledged, the parties agree to amend the Agreement as follows:
1. Section 3(b) of the Agreement is amended by deleting that Section in
its entirety.
2. Section 4(a), Base Salary, is amended by deleting that Section in
its entirety and inserting in lieu thereof a new Section 4(a) to read as
follows:
(a) Base Salary. A base salary at the initial annual
rate of $144,000, with increases in such amounts as may be
determined from time to time by the Board of Directors but in
no event to be less than five percent (5%) per year; and
1
<PAGE>
3. Section 8.1(c) is amended by deleting in the last sentence of that
Section the phrase which reads "or the failure of the Corporation's shareholders
to elect, re-elect, appoint or re-appoint the Employee as a director."
4. Section 16, Governing Law, is amended by deleting that Section that
in its entirety and by inserting in lieu thereof a new Section 16 to read as
follows:
16. Governing Law. This Agreement shall be subject
to, and governed by, the laws of the State of North Carolina,
excluding its choice of law provisions.
5. The Agreement is amended by adding as Section 23 the following:
23. Remedy for Breach. The parties recognize that
the services to be rendered by Employee hereunder are special,
unique, of an extraordinary character, require Employee's
special skills, knowledge and talents and that his employment
with the Corporation of necessity provides Employee with
specialized knowledge, and that the Corporation will be
irreparably harmed in the event Employee were to use his
special skill, knowledge and talents and his knowledge of the
Corporation's trade secrets in competition with a competitor
of the Corporation, or otherwise in breach or threatened
breach of this Agreement. In such event, the Corporation,
without limitation as to other remedies that may
2
<PAGE>
be available to it, shall be entitled to institute and
prosecute proceedings at law or in equity to enforce the
specific performance hereof by Employee or to enjoin Employee
from breaching the provisions hereof. Employee waives any and
all defenses he may have on the ground of jurisdiction or
competence of the court to grant such an injunction, specific
performance or other equitable relief.
6. Except as set forth herein, the Agreement is not modified or
amended, and the parties hereto reaffirm and agree to all of the terms and
provisions of the Agreement, as amended, in all other respects.
IN WITNESS WHEREOF, the parties have executed this Amendment to
Employment Agreement, effective the _____day of May, 1998.
INTERACTIVE MAGIC, INC.
ATTEST:
By: _____________________________
Name:
Title:
- ------------------------------------
Secretary
(CORPORATE SEAL)
EMPLOYEE:
-----------------------------------------
Robert L. Pickens
-----------------------------------------
John W. Stealey, Sr.
3
Employment Agreement
This Employment Agreement ("Agreement") is made as of March 25, 1996,
("Effective Date") between SP Enterprises, Inc. (also doing business as
"Interactive Magic", and hereafter in this Agreement the "Corporation"), a
Maryland corporation, and William J. Kaluza ("Employee").
WHEREAS, the Corporation desires to employ Employee, and Employee desires
to be employed by the Corporation, upon the terms and conditions herein set
forth;
NOW, THEREFORE, in consideration of the foregoing premises, and the mutual
promises and covenants herein contained, the Corporation and Employee agree as
follows:
1. Term of Agreement. This Agreement shall commence as of the Effective
Date for an initial term of two (2) years, provided that upon each annual
anniversary of the Effective Date commencing March 25, 1998 the term shall be
extended automatically by an additional one (1) year unless either the
Corporation or Employee, prior to such anniversary date shall give notice of
intent not to extend the term for an additional year. The initial term, as
extended automatically pursuant to the foregoing sentence, is hereafter the
"Term of Agreement".
2. Period of Employment. The Corporation shall employ the Employee, and the
Employee shall serve in the employ of the Corporation, during the Term of
Agreement (the "Period of Employment"), in the position and with the duties and
responsibilities set forth in Exhibit A, subject to the other terms and
conditions of this Agreement.
3. Compensation. During the Period of Employment, the Corporation shall pay
to the Employee as compensation a base salary and incentive compensation as set
forth on Exhibit A.
4. Benefits. During the Period of Employment, the Corporation shall pay the
Employee the following benefits:
(a) Medical and Dental benefits. Employee shall be entitled to
reimbursement of reasonable health insurance premiums for family coverage
and shall be eligible to participate in the Corporation medical and dental
plans in accordance with the company's policies as may be in effect from
time to time.
(b) Disability Insurance. The Corporation shall provide Employee with
disability insurance in accordance with the Corporation's policies as may
be in effect from time to time.
1
<PAGE>
(c) Modification of Company Benefit Plans. Nothing herein shall be
construed as an obligation to make available benefit plans to its employees
generally, or to provide for specific terms and conditions relating to such
benefit plans.
(d) Vacation. Employee shall be entitled to all regular Corporation
employee holidays in addition to such vacation as provided in Exhibit A.
5. Termination Before Expiration of Period of Employee. The termination of
the employment of the Employee during the Period of Employment may occur, under
this Agreement, in any one of the following ways:
(a) By the Corporation. The Corporation may terminate the employment
of the Employee at any time.
(b) By the Employee. The Employee may terminate his employment at any
time during the Period of Employment for any reason, including retirement
pursuant to the provisions of the Corporation's retirement plan, if any.
(c) Death or Disability. Upon the death or disability of the employee,
and in either such event, the provisions of Section 8 will apply.
6. Notice of Termination. Any termination of the employment of the
Employee, whether by the Corporation or by the Employee shall be communicated to
the other party by notice in writing (the "Notice of Termination"), and shall
state the termination provision in this agreement relied upon and (other than
for nonrenewal of the Term provided in Section 1) shall set forth in reasonable
detail the facts/circumstances claimed to provide a basis for termination under
the provisions so indicated. The "Date of Termination" shall mean the date on
which the employment terminates.
7. Consequences of Termination. The Termination of the employment of the
Employee during the Period of Employment will cause the following results:
7.1. If the termination is for any reason other than either by the
Corporation for Cause (as defined herein) or by Employee voluntarily
(including resignation or pursuant to notice of nonrenewal by Employee
under Section 1):
(a) The Corporation will pay the Employee within five (5) days
after the Date of Termination: (i) any unpaid base compensation for
services performed prior to the Date of Termination; (ii) the amount
of any accrued annual vacation pay to which he may be entitled under
the Corporation's vacation plan and other accrued but unpaid benefits;
and (iii) an amount as liquidated damages, and in a lump sum, equal to
the total of (A) Employee's annual base salary then in effect
(regardless of whether such salary has been paid or deferred); (B)
Employee's incentive compensation under Section 4 (b), if any, due
from prior years but unpaid as of the Date of Termination; and
2
<PAGE>
(C) such incentive compensation under Section 4 (b), if any, as would
have been earned (as defined in Section 7.1 (b)) by Employee for the
period from January 1 of the year of the Date of Termination through
the Date of Termination, in all cases subject to applicable federal
and state withholding. (The total amount due under subsection (iii) is
hereafter the "Termination Damages.")
(b) For purposes of calculating the incentive compensation
component in foregoing clause (a) (iii) (C), Employee shall be deemed
to have earned such incentive compensation if the Corporation's
performance, either pro-rated as of the Date of Termination from the
annual performance criteria as previously determined by the Board of
Directors under Section 3 ("Performance Criteria") or as of the end of
the applicable year, substantially satisfies the Performance Criteria.
The amount of incentive compensation to which the Employee shall be
entitled under clause (a) (iii) (C) is the portion of the total
incentive compensation for the year in which the Date of Termination
occurs, pro rated from January 1 through the Date of Termination. In
the event the amount of incentive compensation due under clause (a)
(iii) (C) cannot reasonably be determined within five days of the Date
of Termination, the amount due under clause (a) (iii) (C) shall be
paid as soon as can practicably be determined, but in no event later
than incentive compensation paid to the Corporation's other employees
for such year.
(c) The term "Cause" shall mean: (i) breach of this Agreement
that (except as to breach sections 11 and 12, which shall not be
curable other than with the Corporation's consent which may be
withheld in its sole discretion) remains uncured 30 days following
written notice by the Corporation to Employee of such breach; (ii)
material or flagrant violations of Employer's policies and procedures;
(iii) other conduct that is substantially and materially detrimental
to the best interests of the Corporation; (iv) conviction of, or
pleading guilty or Confessing to, fraud, misappropriation,
embezzlement or any felony; or (v) willful failure, without reasonable
excuse or proper authorization, to devote full business time to the
affairs of the Corporation.
(d) Notwithstanding anything to the contrary, in the event of
notice by the Corporation pursuant to Section 1 that it will not
extend the Period of Employment for an additional one-year term upon
any anniversary of the Effective Date, amounts due the Employee under
Section (a) shall be reduced by amounts paid by the Corporation to
Employee as base and incentive compensation for the period commencing
January 3 of the final year of the Term of the Agreement through the
Date of Termination.
7.2 If the termination is voluntarily by the Employee or is by the
Corporation for Cause:
(a) The Corporation will pay the Employee within five (5) days
after the Date of Termination: (i) any unpaid compensation for
services performed prior to the Date of Termination; (ii) the amount
of any accrued annual vacation pay to
3
<PAGE>
which he may be entitled under the Corporation's vacation plan; and
(iii) incentive compensation for the year in which the Date of
Termination occurs as described in Section 7.1 (a) (iii) (C).
(b) For purposes of this section, "voluntary termination" by
Employee shall not include termination by Employee as a result of (i)
a material change in the Employee's duties, responsibilities or
authority, without his express written consent, or any change,
including the sale or other disposition of a substantial part of the
business of the Corporation and its subsidiaries, which would cause
the Employee's position with the Corporation to become of less
dignity, responsibility, importance or scope from the position and
attributes thereof described in Section 2; (ii) relocation or transfer
of the Employee's office to a location more than fifty miles from the
Employee's principal residence or the Corporation's principal offices
in North Carolina as of the date of this Agreement, without his
express written consent; (iii) failure to obtain the assumption of the
obligation to perform this Agreement by any successor, or (iv) breach
of this Agreement by the Corporation.
8. Death and Disability. In the event of the Employee's death or
disability, the following provisions will apply:
(a) Death. The Employee's employment shall be terminated upon his
death, and the beneficiaries of the Employee will be entitled to receive
the amounts set forth in section 7.2 (a) and the benefits set forth in any
plans of the Corporation then in effect and applicable under the
circumstances.
(b) Disability. If, during the Period of Employment, the Employee
becomes physically or mentally disabled so as to be unable to carry out the
normal and usual duties of his employment for six (6) continuous months,
his employment hereunder may be terminated at the election of the
Corporation. During such period of the Employee's disability prior to
termination, the Employee shall continue to earn all compensation and other
benefits as if he were not disabled, and following termination he shall
continue to participate in all benefit plans of the Corporation applicable
to employees terminated for disability or retirement, as the case may be.
9. Other Benefits. Nothing in this Agreement shall prevent the Employee
from receiving any benefits to which he may be entitled under any plan or
program of the Corporation, except any severance pay benefits for which he might
otherwise be eligible under any plan, program or policy of the Corporation.
Amounts paid to the Employee pursuant to Section 7 shall be considered as
compensation or earnings for purposes of the Corporation's pension plan or other
benefit plans, programs or policies.
10. Income Tax Withholding. The Corporation may withhold from and benefits
payable under this Agreement any federal, state, city or other taxes as may be
required pursuant to any law, regulation or ruling.
4
<PAGE>
11. Noncompetition.
(a) Employee shall not, without the prior written approval of the Board of
Directors of the Corporation, during the term hereof and a period of one (1)
year after termination of his employment with the Corporation, be interested,
directly or indirectly, as partner, officer, director, stockholder, advisor,
employee or in any other capacity in any other Competitive Business (as defined
herein) within 250 miles of any location at which the Corporation maintains its
principal administrative headquarters; provided, however, that nothing herein
contained shall be deemed to prevent or limit the right of Employee to invest in
the capital stock or securities of any corporation whose stock or securities are
regularly traded on any public exchange. The term "Competitive Business" shall
mean the design, manufacture, or sale of games used on personal computers.
(b) The Term of this provision shall be extended by breach of subsection
(a) such that the term shall run for one year from the date such breach is
cured.
(c) The term of this provision shall be reduced automatically upon failure
of the Corporation to timely pay the full amount of all Termination Damages
provided in Section 7. The amount of reduction in the term shall bear the same
proportion to the one-year term as the amount of Termination Damages due but not
paid bears to the total Termination Damages. Reduction of the term shall not
release the Corporation from its full obligation for Termination Damages without
the express written consent of the Employee.
12. Confidentiality; Ownership and Assignment of Rights.
(a) Other than in the furtherance of his duties to the Corporation the
Employee shall not at any time, either directly or indirectly, divulge,
disclose, or communicate to any person, firm or corporation in any manner
whatsoever any information concerning any matters affecting or relating to the
business of the Corporation, including without limitation the names of its
customers or clients, the prices at which it sells, has sold, provides or has
provided, its products and services, or any other information concerning the
Corporation, its manner of operation, its plans, processes, or other data
without regard to whether all of the forgoing matters would be deemed
confidential, material or important, the parties hereto stipulating that, as
between them, the same are important, material, and confidential and gravely
affect the effective and successful conduct of the business of the Corporation,
and the Corporation's good will and that any breach of the terms of this
paragraph shall be a material breach of this Agreement. This confidentiality
provision shall survive the termination of Employee's employment, regardless of
cause. The existence of any claims or cause of action against the Corporation by
Employee, whether predicated on this Agreement or otherwise, shall not be
constitute a defense to enforcement of this provision.
5
<PAGE>
(b) Employee agrees that upon termination for any reason and unless
specifically authorized otherwise in writing by the Corporation's Board of
Directors, he shall return to the Corporation, without making or retaining any
copies thereof, all documents pertaining to the Corporation's business in any
way obtained while Employee was an Employee of the Corporation.
(c) Employee shall not, whether during the Period of Employment or
thereafter, have or claim any right, title or interest in any trade name,
patent, trademark, copyright or other similar rights, domestic or foreign
(collectively, "Intangible Assets") belonging to or used by the Corporation, and
shall not assert any right, title or interest in any material prepared for or
used in connection with the Corporation, whether produced in whole or in part by
the Employee. Employee shall cooperate fully with the Corporation during his
employment and thereafter in securing for the benefit of the Corporation to
Intangible Assets.
(d) Employee shall communicate to the Corporation promptly and fully all
inventions made or conceived by Employee relating to the business of the
Corporation, whether on the time of the Corporation or Employee's own time, and
such inventions shall remain the sole and exclusive property of the Corporation.
The term "inventions" as used in this section shall include without limitation
all concepts, ideas, notes, reports, and other material regardless of whether
patentable or copyrightable. All inventions made of conceived by Employee within
one year after termination of Employee's employment shall be presumed to relate
to the business of the Corporation unless Employee can demonstrate the complete
non-applicability of such invention to the Corporation's business as conducted
or planned at the date of such termination.
13. Remedy or Breach. The parties recognize that the services to be
rendered by Employee hereunder are special, unique, of an extraordinary
character, require Employee's special skills knowledge and talents and that his
employment with the company of necessity provide Employee with the specialized
knowledge, and that the Corporation will be irreparably harmed in the event
Employee were to use his special skill, knowledge and talents and his knowledge
of the Corporation's trade secrets in competition with the competitor of the
Corporation, or otherwise in breach or threatened breach of the Agreement. In
such event the Corporation, without limitation as to other remedies that may be
available to it, shall be entitled to institute and prosecute proceedings in law
or in equity to enforce the specific performance hereof by Employee or to enjoin
Employee from breaching the provisions hereof. Employee waives any and all
defenses he may have on the ground of jurisdiction or competence of the court to
grant such an injunction, specific performance or other equitable relief.
14. Severability. The invalidity or unenforceability of any provisions of
this Agreement shall not affect the validity or enforceability of any other
provision or this Agreement, which shall remain in full force and effect.
6
<PAGE>
15. Amendment. This Agreement may not be modified or amended except by an
instrument in writing signed by all parties hereto.
16. Entire Agreement. This Agreement constitutes the entire agreement and
understanding between the parties hereto in respect of the matters set forth
herein, and all prior negotiations, writings and understandings, written or
oral, relating to the subject matter of the Agreement are merged herein and are
superseded and canceled by this Agreement.
17. Binding Agreement and Successors. The Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
successors and permitted assigns; provided, however, that this Agreement and the
rights of the parties hereunder may not be assigned, and the obligations of the
parties hereunder may not be delegated, in whole or in part, without the prior
written consent of the other party hereto.
18. Notices. Any notice, request, instruction or other document or
communication required or permitted to be given under this Agreement shall be in
writing and shall be deemed to be given upon (i) delivery in person, (ii) three
(3) days after being deposited in he mail, first class postage prepaid, for
mailing by certified or registered mail, (iii) one day after being deposited
with an overnight courier, charges prepaid for next day delivery, or (iv) when
transmitted by facsimile, upon receipt of a facsimile confirmation by the
intended recipient, with a copy simultaneously sent as provided in clauses (ii)
or (iii), in every case addressed as follows (or at such other address or
addresses as be specified from time to time pursuant to a notice sent in
accordance with this section):
If to the Corporation, delivered or mailed to:
SP Enterprises, Inc. (dba Interactive Magic)
140 Southcenter Court
Suite #800
Morrisville, North Carolina 27560
Attention: President
If to Employee, delivered or mailed to the Employee at his last-known
address on the Corporation's records.
19. Section Headings. The Section headings contained in this Agreement are
for convenience of reference only and shall not limit or otherwise affect the
meaning or interpretation of this Agreement or any of its terms and conditions.
20. Construction. Each and every term and condition of this Agreement and
any and all agreements and instruments subject to the terms hereof, the parties
hereto understand and agree that the same have or has been mutually negotiated,
prepared
7
<PAGE>
and drafted, and that if at any time the parties hereto desire or are required
to interpret or construe any such term or condition or any agreement or
instrument subject hereto, no consideration shall be given to the issue of which
party hereto actually prepared, drafted or requested any term or condition of
this Agreement or any agreement or instrument subject hereto.
21. Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which taken together shall
constitute one and the same instrument.
22. Previous Agreements. Employee represents and warrants that he has
undertaken a review of all applicable agreements and understandings with his
former and current employers and that he is not subject to any duties or
obligations that conflict with or are inconsistent with the full and complete
performance of his duties and obligations under this Agreement.
23. Governing Laws. This Agreement shall be subject to, and governed by,
the laws of the state of Maryland, excluding its choice of law provisions.
IN WITNESS WHEREOF, the parties hereto have executed this agreement as of
the date first above written.
Witness or Attest: SP Enterprises, Inc.
/s/ Nina Rutledge /s/ Robert L. Pickens
- ---------------------- --------------------------
Robert L. Pickens
President
Witness:
/s/ Nina Rutledge /s/ William J. Kaluza
- ---------------------- --------------------------
William J. Kaluza
CFO
8
<PAGE>
William J. Kaluza
Employment Agreement
Exhibit A
1. Description of Position:
a. Title: Chief Financial Officer (CFO)
b. Duties: Those duties normally accorded to CFO's including but not
limited to business planning, cash flow management, corporate records
maintenance, investor relations, accounting and financial transactions, and any
other duties that may be assigned to the position from time to time from the
company's management or Board of Directors.
2. Compensation:
a. Annual base compensation of One Hundred Twenty Thousand Dollars
($120,000) with increases in such amounts as may be determined from time to time
by the Board of Directors.
b. Annual incentive compensation in an amount to be determined from year to
year by the Corporation's Board of Directors.
3. Vacation:
a. Three (3) weeks per year.
<PAGE>
3
Employment Agreement
This Employment Agreement ("Agreement") is made as of January 3, 1995,
("Effective Date") between SP Enterprises, Inc. (also doing business as
"Interactive Magic", and hereafter in this Agreement the "Corporation"), a
Maryland corporation, and Joseph F. Rutledge ("Employee").
WHEREAS, the Corporation desires to employ Employee, and Employee desires
to be employed by the Corporation, upon the terms and conditions herein set
forth;
NOW, THEREFORE, in consideration of the foregoing premises, and the mutual
promises and covenants herein contained, the Corporation and Employee agree as
follows:
1. Term of Agreement. This Agreement shall commence as of the Effective
Date for an initial term of three (3) years, provided that upon each annual
anniversary of the Effective Date commencing January 3, 1997, the term shall be
extended automatically by an additional one (1) year unless either the
Corporation or Employee, prior to such anniversary date shall give notice of
intent not to extend the term for an additional year. The initial term, as
extended automatically pursuant to the foregoing sentence, is hereafter the
"Term of Agreement".
2. Period of Employment. The Corporation shall employ the Employee, and the
Employee shall serve in the employ of the Corporation, during the Term of
Agreement (the "Period of Employment"), in the position and with the duties and
responsibilities set forth in Exhibit A, subject to the other terms and
conditions of this Agreement.
3. Compensation. During the Period of Employment, the Corporation shall pay
to the Employee as compensation a base salary and incentive compensation as set
forth on Exhibit A.
4. Benefits. During the Period of Employment, the Corporation shall pay the
Employee the following benefits:
(a) Medical and Dental benefits. Employee shall be entitled to
reimbursement of reasonable health insurance premiums for family coverage
and shall be eligible to participate in the Corporation medical and dental
plans in accordance with the company's policies as may be in effect from
time to time.
(b) Disability Insurance. The Corporation shall provide Employee with
disability insurance in accordance with the Corporation's policies as may
be in effect from time to time.
1
<PAGE>
(c) Modification Of Company Benefit Plans. Nothing herein shall be
construed as an obligation to make available benefit plans to its employees
generally, or to provide for specific terms and conditions relating to such
benefit plans.
(d) Vacation. Employee shall be entitled to all regular Corporation
employee holidays in addition to such vacation as provided in Exhibit A.
5. Termination Before Expiration of Period of Employee. The termination of
the employment of the Employee during the Period of Employment may occur, under
this Agreement, in any one of the following ways:
(a) By the Corporation. The Corporation may terminate the employment
of the Employee at any time.
(b) By the Employee. The Employee may terminate his employment at any
time during the Period of Employment for any reason, including retirement
pursuant to the provisions of the Corporation's retirement plan, if any.
(c) Death or Disability. Upon the death or disability of the employee,
and in either such event, the provisions of Section 8 will apply.
6. Notice of Termination. Any termination of the employment of the
Employee, whether by the Corporation or by the Employee shall be communicated to
the other party by notice in writing (the "Notice of Termination"), and shall
state the termination provision in this agreement relied upon and (other than
for nonrenewal of the Term provided in Section 1) shall set forth in reasonable
detail the facts circumstances claimed to provide a basis for termination under
the provisions so indicated. The "Date of Termination" shall mean the date on
which the employment terminates.
7. Consequences of Termination. The Termination of the employment of the
Employee during the Period of Employment will cause the following results:
7.1. If the termination is for any reason other than either by the
Corporation for Cause (as defined herein) or by Employee voluntarily
(including resignation or pursuant to notice of nonrenewal by Employee
under Section 1):
(a) The Corporation will pay the Employee within five (5) days
after the Date of Termination: (i) any unpaid base compensation for
services performed prior to the Date of Termination; (ii) the amount
of any accrued annual vacation pay to which he may be entitled under
the Corporation's vacation plan and other accrued but unpaid benefits;
and (iii) an amount as liquidated damages, and in a lump sum, equal to
the total of (A) Employee's annual base salary then in effect
(regardless of whether such salary has been paid or deferred); (B)
Employee's incentive compensation under Section 4 (b), if any, due
from prior years but unpaid as of the Date of Termination; and
2
<PAGE>
(C) such incentive compensation under Section 4 (b), if any, as would
have been earned (as defined in Section 7.1 (b)) by Employee for the
period from January 1 of the year of the Date of Termination through
the Date of Termination, in all cases subject to applicable federal
and state withholding. (The total amount due under subsection (iii) is
hereafter the "Termination Damages.")
(b) For purposes of calculating the incentive compensation
component in foregoing clause (a) (iii) (C), Employee shall be deemed
to have earned such incentive compensation if the Corporation's
performance, either pro-rated as of the Date of Termination from the
annual performance criteria as previously determined by the Board of
Directors under Section 3 ("Performance Criteria") or as of the end of
the applicable year, substantially satisfies the Performance Criteria.
The amount of incentive compensation to which the Employee shall be
entitled under clause (a) (iii) (C) is the portion of the total
incentive compensation for the year in which the Date of Termination
occurs, pro rated from January 1 through the Date of Termination. In
the event the amount of incentive compensation due under clause (a)
(iii) (C) cannot reasonably be determined within five days of the Date
of Termination, the amount due under clause (a) (iii) (C) shall be
paid as soon as can practicably be determined, but in no event later
than incentive compensation paid to the Corporation's other employees
for such year.
(c) The term "Cause" shall mean: (i) breach of this Agreement
that (except as to breach sections 11 and 12, which shall not be
curable other than with the Corporation's consent which may be
withheld in its sole discretion) remains uncured 30 days following
written notice by the Corporation to Employee of such breach; (ii)
material or flagrant violations of Employer's policies and procedures;
(iii) other conduct that is substantially and materially detrimental
to the best interests of the Corporation; (iv) conviction of, or
pleading guilty or Confessing to, fraud, misappropriation,
embezzlement or any felony; or (v) willful failure, without reasonable
excuse or proper authorization, to devote full business time to the
affairs of the Corporation.
(d) Notwithstanding anything to the contrary, in the event of
notice by the Corporation pursuant to Section 1 that it will not
extend the Period of Employment for an additional one-year term upon
any anniversary of the Effective Date, amounts due the Employee under
Section (a) shall be reduced by amounts paid by the Corporation to
Employee as base and incentive compensation for the period commencing
January 3 of the final year of the Term of the Agreement through the
Date of Termination.
7.2 If the termination is voluntarily by the Employee or is by the
Corporation for Cause:
(a) The Corporation will pay the Employee within five (5) days after
the Date of Termination: (i) any unpaid compensation for services performed
prior to the Date of Termination; (ii) the amount of any accrued annual
vacation pay to
3
<PAGE>
which he may be entitled under the Corporation's vacation plan; and (iii)
incentive compensation for the year in which the Date of Termination occurs
as described in Section 7.1 (a) (iii) (C).
(b) For purposes of this section, "voluntary termination" by Employee
shall not include termination by Employee as a result of (i) a material
change in the Employee's duties, responsibilities or authority, without his
express written consent, or any change, including the sale or other
disposition of a substantial part of the business of the Corporation and
its subsidiaries, which would cause the Employee's position with the
Corporation to become of less dignity, responsibility, importance or scope
from the position and attributes thereof described in Section 2; (ii)
relocation or transfer of the Employee's office to a location more than
fifty miles from the Employee's principal residence or the Corporation's
principal offices in North Carolina as of the date of this Agreement,
without his express written consent; (iii) failure to obtain the assumption
of the obligation to perform this Agreement by any successor, or (iv)
breach of this Agreement by the Corporation.
8. Death and Disability. In the event of the Employee's death or
disability, the following provisions will apply:
(a) Death. The Employee's employment shall be terminated upon his
death, and the beneficiaries of the Employee will be entitled to receive
the amounts set forth in section 7.2 (a) and the benefits set forth in any
plans of the Corporation then in effect and applicable under the
circumstances.
(b) Disability. If, during the Period of Employment, the Employee
becomes physically or mentally disabled so as to be unable to carry out the
normal and usual duties of his employment for six (6) continuous months,
his employment hereunder may be terminated at the election of the
Corporation. During such period of the Employee's disability prior to
termination, the Employee shall continue to earn all compensation and other
benefits as if he were not disabled, and following termination he shall
continue to participate in all benefit plans of the Corporation applicable
to employees terminated for disability or retirement, as the case may be.
9. Other Benefits. Nothing in this Agreement shall prevent the Employee
from receiving any benefits to which he may be entitled under any plan or
program of the Corporation, except any severance pay benefits for which he might
otherwise be eligible under any plan, program or policy of the Corporation.
Amounts paid to the Employee pursuant to Section 7 shall be considered as
compensation or earnings for purposes of the Corporation's pension plan or other
benefit plans, programs or policies.
10. Income Tax Withholding. The Corporation may withhold from and benefits
payable under this Agreement any federal, state, city or other taxes as may be
required pursuant to any law, regulation or ruling.
11. Noncompetition.
4
<PAGE>
(a) Employee shall not, without the prior written approval of the
Board of Directors of the Corporation, during the term hereof and a period
of one (1) year after termination of his employment with the Corporation,
be interested, directly or indirectly, as partner, officer, director,
stockholder, advisor, employee or in any other capacity in any other
Competitive Business (as defined herein) within 250 miles of any location
at which the Corporation maintains its principal administrative
headquarters; provided, however, that nothing herein contained shall be
deemed to prevent or limit the right of Employee to invest in the capital
stock or securities of any corporation whose stock or securities are
regularly traded on any public exchange. The term "Competitive Business"
shall mean the design, manufacture, or sale of games used on personal
computers.
(b) The Term of this provision shall be extended by breach of
subsection (a) such that the term shall run for one year from the date such
breach is cured.
(c) The term of this provision shall be reduced automatically upon
failure of the Corporation to timely pay the full amount of all Termination
Damages provided in Section 7. The amount of reduction in the term shall
bear the same proportion to the one-year term as the amount of Termination
Damages due but not paid bears to the total Termination Damages. Reduction
of the term shall not release the Corporation from its full obligation for
Termination Damages without the express written consent of the Employee.
12. Confidentiality; Ownership and Assignment of Rights.
(a) Other than in the furtherance of his duties to the Corporation the
Employee shall not at any time, either directly or indirectly, divulge,
disclose, or communicate to any person, firm or corporation in any manner
whatsoever any information concerning any matters affecting or relating to the
business of the Corporation, including without limitation the names of its
customers or clients, the prices at which it sells, has sold, provides or has
provided, its products and services, or any other information concerning the
Corporation, its manner of operation, its plans, processes, or other data
without regard to whether all of the forgoing matters would be deemed
confidential, material or important, the parties hereto stipulating that, as
between them, the same are important, material, and confidential and gravely
affect the effective and successful conduct of the business of the Corporation,
and the Corporation's good will and that any breach of the terms of this
paragraph shall be a material breach of this Agreement. This confidentiality
provision shall survive the termination of Employee's employment, regardless of
cause. The existence of any claims or cause of action against the Corporation by
Employee, whether predicated on this Agreement or otherwise, shall not be
constitute a defense to enforcement of this provision.
5
<PAGE>
(b) Employee agrees that upon termination for any reason and unless
specifically authorized otherwise in writing by the Corporation's Board of
Directors, he shall return to the Corporation, without making or retaining any
copies thereof, all documents pertaining to the Corporation's business in any
way obtained while Employee was an Employee of the Corporation.
(c) Employee shall not, whether during the Period of Employment or
thereafter, have or claim any right, title or interest in any trade name,
patent, trademark, copyright or other similar rights, domestic or foreign
(collectively, "Intangible Assets") belonging to or used by the Corporation, and
shall not assert any right, title or interest in any material prepared for or
used in connection with the Corporation, whether produced in whole or in part by
the Employee. Employee shall cooperate fully with the Corporation during his
employment and thereafter in securing for the benefit of the Corporation to
Intangible Assets.
(d) Employee shall communicate to the Corporation promptly and fully all
inventions made or conceived by Employee relating to the business of the
Corporation, whether on the time of the Corporation or Employee's own time, and
such inventions shall remain the sole and exclusive property of the Corporation.
The term "inventions" as used in this section shall include without limitation
all concepts, ideas, notes, reports, and other material regardless of whether
patentable or copyrightable. All inventions made of conceived by Employee within
one year after termination of Employee's employment shall be presumed to relate
to the business of the Corporation unless Employee can demonstrate the complete
non-applicability of such invention to the Corporation's business as conducted
or planned at the date of such termination.
13. Remedy for Breach. The parties recognize that the services to be
rendered by Employee hereunder are special, unique, of an extraordinary
character, require Employee's special skills knowledge and talents and that his
employment with the company of necessity provide Employee with the specialized
knowledge, and that the Corporation will be irreparably harmed in the event
Employee were to use his special skill, knowledge and talents and his knowledge
of the Corporation's trade secrets in competition with the competitor of the
Corporation, or otherwise in breach or threatened breach of the Agreement. In
such event the Corporation, without limitation as to other remedies that may be
available to it, shall be entitled to institute and prosecute proceedings in law
or in equity to enforce the specific performance hereof by Employee or to enjoin
Employee from breaching the provisions hereof. Employee waives any and all
defenses he may have on the ground of jurisdiction or competence of the court to
grant such an injunction, specific performance or other equitable relief.
14. Severability. The invalidity or unenforceability of any provisions of
this Agreement shall not affect the validity or enforceability of any other
provision or this Agreement, which shall remain in full force and effect.
6
<PAGE>
15. Amendment. This Agreement may not be modified or amended except by an
instrument in writing signed by all parties hereto.
16. Entire Agreement. This Agreement constitutes the entire agreement and
understanding between the parties hereto in respect of the matters set forth
herein, and all prior negotiations, writings and understandings, written or
oral, relating to the subject matter of the Agreement are merged herein and are
superseded and canceled by this Agreement.
17. Binding Agreement and Successors. The Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
successors and permitted assigns; provided, however, that this Agreement and the
rights of the parties hereunder may not be assigned, and the obligations of the
parties hereunder may not be delegated, in whole or in part, without the prior
written consent of the other party hereto.
18. Notices. Any notice, request, instruction or other document or
communication required or permitted to be given under this Agreement shall be in
writing and shall be deemed to be given upon (i) delivery in person, (ii) three
(3) days after being deposited in he mail, first class postage prepaid, for
mailing by certified or registered mail, (iii) one day after being deposited
with an overnight courier, charges prepaid for next day delivery, or (iv) when
transmitted by facsimile, upon receipt of a facsimile confirmation by the
intended recipient, with a copy simultaneously sent as provided in clauses (ii)
or (iii), in every case addressed as follows (or at such other address or
addresses as be specified from time to time pursuant to a notice sent in
accordance with this section):
If to the Corporation, delivered or mailed to:
SP Enterprises, Inc. (dba Interactive Magic)
140 Southcenter Court
Suite #800
Morrisville, North Carolina 27560
Attention: President
If to Employee, delivered or mailed to the Employee at his last-known address on
the Corporation's records.
19. Section Headings. The Section headings contained in this Agreement are
for convenience of reference only and shall not limit or otherwise affect the
meaning or interpretation of this Agreement or any of its terms and conditions.
20. Construction. Each and every term and condition of this Agreement and
any and all agreements and instruments subject to the terms hereof, the parties
hereto understand and agree that the same have or has been mutually negotiated,
prepared
7
<PAGE>
and drafted, and that if at any time the parties hereto desire or are required
to interpret or construe any such term or condition or any agreement or
instrument subject hereto, no consideration shall be given to the issue of which
party hereto actually prepared, drafted or requested any term or condition of
this Agreement or any agreement or instrument subject hereto.
21. Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which taken together shall
constitute one and the same instrument.
22. Previous Agreements. Employee represents and warrants that he has
undertaken a review of all applicable agreements and understandings with his
former and current employers and that he is not subject to any duties or
obligations that conflict with or are inconsistent with the full and complete
performance of his duties and obligations under this Agreement.
23. Governing Laws. This Agreement shall be subject to, and governed by,
the laws of the state of Maryland, excluding its choice of law provisions.
IN WITNESS WHEREOF, the parties hereto have executed this agreement as of
the date first above written.
Witness or Attest: SP Enterprises, Inc.
/s/ Suzanne McKenzie /s/ Robert L. Pickens
- ------------------------- --------------------------
Robert L. Pickens
President
Witness:
/s/ Douglas B. Kubel /s/ Joseph F. Rutledge
- ------------------------- --------------------------
Joseph F. Rutledge
8
<PAGE>
Joseph F. Rutledge
Employment Agreement
Exhibit A
1. Description of Position:
a. Title: Vice President of Internal Development
b. Duties:
o Manage all internal development activities
o Procuring all hardware and software
o Staff with appropriate human resources
o Set up development offices
2. Compensation:
a. Annual base compensation of Eighty Thousand Dollars ($80,000) with
increases in such amounts as may be determined from time to time by the Board of
Directors.
b. Annual incentive compensation in an amount to be determined from year to
year by the Corporation's Board of Directors.
3. Vacation:
a. Two (2) weeks per year.
9
<PAGE>
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement is entered into, effective the
_____ day of May, 1998, by and between INTERACTIVE MAGIC, INC. (formerly known
as SP Enterprises, Inc. and hereinafter in this Agreement, the "Corporation")
and JOSEPH F. RUTLEDGE (the "Employee").
WHEREAS, the Corporation and the Employee are parties to an Employment
Agreement dated January 3, 1995, a copy of which is attached hereto as Exhibit A
(the "Agreement");
WHEREAS, the Corporation and the Employee desire to amend the
Agreement.
NOW, THEREFORE, in consideration of the above and the mutual promises
set forth below, the legal sufficiency and adequacy of which are hereby
acknowledged, the parties agree to amend the Agreement as follows:
1. Section 23, Governing Laws, is amended by deleting that Section
that in its entirety and by inserting in lieu thereof a new Section 23 to read
as follows:
23. Governing Law. This Agreement shall be subject
to, and governed by, the laws of the State of North Carolina,
excluding its choice of law provisions.
2. Exhibit A to the Agreement is amended by deleting Subparagraph a. of
Section 2, Compensation, in its entirety and inserting in lieu thereof the
following:
1
<PAGE>
a. Annual base compensation of One Hundred
Twenty-Five Thousand Dollars ($125,000) with increases in such
amounts as may be determined from time to time by the Board of
Directors.
3. Except as set forth herein, the Agreement is not modified or
amended, and the parties hereto reaffirm and agree to all of the terms and
provisions of the Agreement, as amended, in all other respects.
IN WITNESS WHEREOF, the parties have executed this Amendment to
Employment Agreement, effective the _____day of May, 1998.
INTERACTIVE MAGIC, INC.
ATTEST:
By: _______________________________
Name:
Title:
- ------------------------------------
Secretary
(CORPORATE SEAL)
EMPLOYEE:
--------------------------
Joseph F. Rutledge
2
Employment Agreement
This Employment Agreement ("Agreement") is made as of February 1, 1995,
("Effective Date") between SP Enterprises, Inc. (also doing business as
"Interactive Magic", and hereafter in this Agreement the "Corporation"), a
Maryland corporation, and Raymond E. Rutledge ("Employee").
WHEREAS, the Corporation desires to employ Employee, and Employee desires
to be employed by the Corporation, upon the terms and conditions herein set
forth;
NOW, THEREFORE, in consideration of the foregoing premises, and the mutual
promises and covenants herein contained, the Corporation and Employee agree as
follows:
1. Term of Agreement. This Agreement shall commence as of the Effective
Date for an initial term of three (3) years, provided that upon each annual
anniversary of the Effective Date commencing February 1, 1997, the term shall be
extended automatically by an additional one (1) year unless either the
Corporation or Employee, prior to such anniversary date shall give notice of
intent not to extend the term for an additional year. The initial term, as
extended automatically pursuant to the foregoing sentence, is hereafter the
"Term of Agreement".
2. Period of Employment. The Corporation shall employ the Employee, and the
Employee shall serve in the employ of the Corporation, during the Term of
Agreement (the "Period of Employment"), in the position and with the duties and
responsibilities set forth in Exhibit A, subject to the other terms and
conditions of this Agreement.
3. Compensation. During the Period of Employment, the Corporation shall pay
to the Employee as compensation a base salary and incentive compensation as set
forth on Exhibit A.
4. Benefits. During the Period of Employment, the Corporation shall pay the
Employee the following benefits:
(a) Medical and Dental benefits. Employee shall be entitled to
reimbursement of reasonable health insurance premiums for family coverage
and shall be eligible to participate in the Corporation medical and dental
plans in accordance with the company's policies as may be in effect from
time to time.
(b) Disability Insurance. The Corporation shall provide Employee with
disability insurance in accordance with the Corporation's policies as may
be in effect from time to time.
1
<PAGE>
(c) Modification of Company Benefit Plans. Nothing herein shall be
construed as an obligation to make available benefit plans to its employees
generally, or to provide for specific terms and conditions relating to such
benefit plans.
(d) Vacation. Employee shall be entitled to all regular Corporation
employee holidays in addition to such vacation as provided in Exhibit A.
5. Termination Before Expiration of Period of Employee. The termination of
the employment of the Employee during the Period of Employment may occur, under
this Agreement, in any one of the following ways:
(a) By the Corporation. The Corporation may terminate the employment
of the Employee at any time.
(b) By the Employee. The Employee may terminate his employment at any
time during the Period of Employment for any reason, including retirement
pursuant to the provisions of the Corporation's retirement plan, if any.
(c) Death or Disability. Upon the death or disability of the employee,
and in either such event, the provisions of Section 8 will apply.
6. Notice of Termination. Any termination of the employment of the
Employee, whether by the Corporation or by the Employee shall be communicated to
the other party by notice in writing (the "Notice of Termination"), and shall
state the termination provision in this agreement relied upon and (other than
for nonrenewal of the Term provided in Section 1) shall set forth in reasonable
detail the facts circumstances claimed to provide a basis for termination under
the provisions so indicated. The "Date of Termination" shall mean the date on
which the employment terminates.
7. Consequences of Termination. The Termination of the employment of the
Employee during the Period of Employment will cause the following results:
7.1. If the termination is for any reason other than either by the
Corporation for Cause (as defined herein) or by Employee voluntarily
(including resignation or pursuant to notice of nonrenewal by Employee
under Section 1):
(a) The Corporation will pay the Employee within five (5) days
after the Date of Termination: (i) any unpaid base compensation for
services performed prior to the Date of Termination; (ii) the amount
of any accrued annual vacation pay to which he may be entitled under
the Corporation's vacation plan and other accrued but unpaid benefits;
and (iii) an amount as liquidated damages, and in a lump sum, equal to
the total of (A) Employee's annual base salary then in effect
(regardless of whether such salary has been paid or deferred); (B)
Employee's incentive compensation under Section 4 (b), if any, due
from prior years but unpaid as of the Date of Termination; and
2
<PAGE>
(C) such incentive compensation under Section 4 (b), if any, as would
have been earned (as defined in Section 7.1 (b)) by Employee for the
period from January 1 of the year of the Date of Termination through
the Date of Termination, in all cases subject to applicable federal
and state withholding. (The total amount due under subsection (iii) is
hereafter the "Termination Damages.")
(b) For purposes of calculating the incentive compensation
component in foregoing clause (a) (iii) (C), Employee shall be deemed
to have earned such incentive compensation if the Corporation's
performance, either pro-rated as of the Date of Termination from the
annual performance criteria as previously determined by the Board of
Directors under Section 3 ("Performance Criteria") or as of the end of
the applicable year, substantially satisfies the Performance Criteria.
The amount of incentive compensation to which the Employee shall be
entitled under clause (a) (iii) (C) is the portion of the total
incentive compensation for the year in which the Date of Termination
occurs, pro rated from January 1 through the Date of Termination. In
the event the amount of incentive compensation due under clause (a)
(iii) (C) cannot reasonably be determined within five days of the Date
of Termination, the amount due under clause (a) (iii) (C) shall be
paid as soon as can practicably be determined, but in no event later
than incentive compensation paid to the Corporation's other employees
for such year.
(c) The term "Cause" shall mean: (i) breach of this Agreement
that (except as to breach sections 11 and 12, which shall not be
curable other than with the Corporation's consent which may be
withheld in its sole discretion) remains uncured 30 days following
written notice by the Corporation to Employee of such breach; (ii)
material or flagrant violations of Employer's policies and procedures;
(iii) other conduct that is substantially and materially detrimental
to the best interests of the Corporation; (iv) conviction of, or
pleading guilty or Confessing to, fraud, misappropriation,
embezzlement or any felony; or (v) willful failure, without reasonable
excuse or proper authorization, to devote full business time to the
affairs of the Corporation.
(d) Notwithstanding anything to the contrary, in the event of
notice by the Corporation pursuant to Section 1 that it will not
extend the Period of Employment for an additional one-year term upon
any anniversary of the Effective Date, amounts due the Employee under
Section (a) shall be reduced by amounts paid by the Corporation to
Employee as base and incentive compensation for the period commencing
January 3 of the final year of the Term of the Agreement through the
Date of Termination.
7.2 If the termination is voluntarily by the Employee or is by the
Corporation for Cause:
(a) The Corporation will pay the Employee within five (5) days after
the Date of Termination: (i) any unpaid compensation for services performed
prior to the Date of Termination; (ii) the amount of any accrued annual
vacation pay to which
3
<PAGE>
he may be entitled under the Corporation's vacation plan; and (iii)
incentive compensation for the year in which the Date of Termination occurs
as described in Section 7.1 (a) (iii) (C).
(b) For purposes of this section, "voluntary termination" by Employee
shall not include termination by Employee as a result of (i) a material
change in the Employee's duties, responsibilities or authority, without his
express written consent, or any change, including the sale or other
disposition of a substantial part of the business of the Corporation and
its subsidiaries, which would cause the Employee's position with the
Corporation to become of less dignity, responsibility, importance or scope
from the position and attributes thereof described in Section 2; (ii)
relocation or transfer of the Employee's office to a location more than
fifty miles from the Employee's principal residence or the Corporation's
principal offices in North Carolina as of the date of this Agreement,
without his express written consent; (iii) failure to obtain the assumption
of the obligation to perform this Agreement by any successor, or (iv)
breach of this Agreement by the Corporation.
8. Death and Disability. In the event of the Employee's death or
disability, the following provisions will apply:
(a) Death. The Employee's employment shall be terminated upon his
death, and the beneficiaries of the Employee will be entitled to receive
the amounts set forth in section 7.2 (a) and the benefits set forth in any
plans of the Corporation then in effect and applicable under the
circumstances.
(b) Disability. If, during the Period of Employment, the Employee
becomes physically or mentally disabled so as to be unable to carry out the
normal and usual duties of his employment for six (6) continuous months,
his employment hereunder may be terminated at the election of the
Corporation. During such period of the Employee's disability prior to
termination, the Employee shall continue to earn all compensation and other
benefits as if he were not disabled, and following termination he shall
continue to participate in all benefit plans of the Corporation applicable
to employees terminated for disability or retirement, as the case may be.
9. Other Benefits. Nothing in this Agreement shall prevent the Employee
from receiving any benefits to which he may be entitled under any plan or
program of the Corporation, except any severance pay benefits for which he might
otherwise be eligible under any plan, program or policy of the Corporation.
Amounts paid to the Employee pursuant to Section 7 shall be considered as
compensation or earnings for purposes of the Corporation's pension plan or other
benefit plans, programs or policies.
10. Income Tax Withholding. The Corporation may withhold from and benefits
payable under this Agreement any federal, state, city or other taxes as may be
required pursuant to any law, regulation or ruling.
4
<PAGE>
11. Noncompetition.
(a) Employee shall not, without the prior written approval of the Board of
Directors of the Corporation, during the term hereof and a period of one (1)
year after termination of his employment with the Corporation, be interested,
directly or indirectly, as partner, officer, director, stockholder, advisor,
employee or in any other capacity in any other Competitive Business (as defined
herein) within 250 miles of any location at which the Corporation maintains its
principal administrative headquarters; provided, however, that nothing herein
contained shall be deemed to prevent or limit the right of Employee to invest in
the capital stock or securities of any corporation whose stock or securities are
regularly traded on any public exchange. The term "Competitive Business" shall
mean the design, manufacture, or sale of games used on personal computers.
(b) The Term of this provision shall be extended by breach of subsection
(a) such that the term shall run for one year from the date such breach is
cured.
(c) The term of this provision shall be reduced automatically upon failure
of the Corporation to timely pay the full amount of all Termination Damages
provided in Section 7. The amount of reduction in the term shall bear the same
proportion to the one-year term as the amount of Termination Damages due but not
paid bears to the total Termination Damages. Reduction of the term shall not
release the Corporation from its full obligation for Termination Damages without
the express written consent of the Employee.
12. Confidentially; Ownership and Assignment of Rights.
(a) Other than in the furtherance of his duties to the Corporation the
Employee shall not at any time, either directly or indirectly, divulge,
disclose, or communicate to any person, firm or corporation in any manner
whatsoever any information concerning any matters affecting or relating to the
business of the Corporation, including without limitation the names of its
customers or clients, the prices at which it sells, has sold, provides or has
provided, its products and services, or any other information concerning the
Corporation, its manner of operation, its plans, processes, or other data
without regard to whether all of the forgoing matters would be deemed
confidential, material or important, the parties hereto stipulating that, as
between them, the same are important, material, and confidential and gravely
affect the effective and successful conduct of the business of the Corporation,
and the Corporation's good will and that any breach of the terms of this
paragraph shall be a material breach of this Agreement. This confidentiality
provision shall survive the termination of Employee's employment, regardless of
cause. The existence of any claims or cause of action against the Corporation by
Employee, whether predicated on this Agreement or otherwise, shall not be
constitute a defense to enforcement of this provision.
5
<PAGE>
(b) Employee agrees that upon termination for any reason and unless
specifically authorized otherwise in writing by the Corporation's Board of
Directors, he shall return to the Corporation, without making or retaining any
copies thereof, all documents pertaining to the Corporation's business in any
way obtained while Employee was an Employee of the Corporation.
(c) Employee shall not, whether during the Period of Employment or
thereafter, have or claim any right, title or interest in any trade name,
patent, trademark, copyright or other similar rights, domestic or foreign
(collectively, "Intangible Assets") belonging to or used by the Corporation, and
shall not assert any right, title or interest in any material prepared for or
used in connection with the Corporation, whether produced in whole or in part by
the Employee. Employee shall cooperate fully with the Corporation during his
employment and thereafter in securing for the benefit of the Corporation to
Intangible Assets.
(d) Employee shall communicate to the Corporation promptly and fully all
inventions made or conceived by Employee relating to the business of the
Corporation, whether on the time of the Corporation or Employee's own time, and
such inventions shall remain the sole and exclusive property of the Corporation.
The term 'inventions" as used in this section shall include without limitation
all concepts, ideas, notes, reports, and other material regardless of whether
patentable or copyrightable. All inventions made of conceived by Employee within
one year after termination of Employee's employment shall be presumed to relate
to the business of the Corporation unless Employee can demonstrate the complete
non-applicability of such invention to the Corporation's business as conducted
or planned at the date of such termination.
13. Remedy for Breach. The parties recognize that the services to be
rendered by Employee hereunder are special, unique, of an extraordinary
character, require Employee's special skills knowledge and talents and that his
employment with the company of necessity provide Employee with the specialized
knowledge, and that the Corporation will be irreparably harmed in the event
Employee were to use his special skill, knowledge and talents and his knowledge
of the Corporation's trade secrets in competition with the competitor of the
Corporation, or otherwise in breach or threatened breach of the Agreement. In
such event the Corporation, without limitation as to other remedies that may be
available to it, shall be entitled to institute and prosecute proceedings in law
or in equity to enforce the specific performance hereof by Employee or to enjoin
Employee from breaching the provisions hereof. Employee waives any and all
defenses he may have on the ground of jurisdiction or competence of the court to
grant such an injunction, specific performance or other equitable relief.
14. Severability. The invalidity or unenforceability of any provisions of
this Agreement shall not affect the validity or enforceability of any other
provision or this Agreement, which shall remain in full force and effect.
6
<PAGE>
15. Amendment. This Agreement may not be modified or amended except by an
instrument in writing signed by all parties hereto.
16. Entire Agreement. This Agreement constitutes the entire agreement and
understanding between the parties hereto in respect of the matters set forth
herein, and all prior negotiations, writings and understandings, written or
oral, relating to the subject matter of the Agreement are merged herein and are
superseded and canceled by this Agreement.
17. Binding Agreement and Successors. The Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
successors and permitted assigns; provided, however, that this Agreement and the
rights of the parties hereunder may not be assigned, and the obligations of the
parties hereunder may not be delegated, in whole or in part, without the prior
written consent of the other party hereto.
18. Notices. Any notice, request, instruction or other document or
communication required or permitted to be given under this Agreement shall be in
writing and shall be deemed to be given upon (i) delivery in person, (ii) three
(3) days after being deposited in he mail, first class postage prepaid, for
mailing by certified or registered mail, (iii) one day after being deposited
with an overnight courier, charges prepaid for next day delivery, or (iv) when
transmitted by facsimile, upon receipt of a facsimile confirmation by the
intended recipient, with a copy simultaneously sent as provided in clauses (ii)
or (iii), in every case addressed as follows (or at such other address or
addresses as be specified from time to time pursuant to a notice sent in
accordance with this section):
If to the Corporation, delivered or mailed to:
SP Enterprises, Inc. (dba Interactive Magic)
140 Southcenter Court
Suite #800
Morrisville, North Carolina 27560
Attention: President
If to Employee, delivered or mailed to the Employee at his last-known
address on the Corporation's records.
19. Section Headings. The Section headings contained in this Agreement are
for convenience of reference only and shall not limit or otherwise affect the
meaning or interpretation of this Agreement or any of its terms and conditions.
20. Construction. Each and every term and condition of this Agreement and
any and all agreements and instruments subject to the terms hereof, the parties
hereto understand and agree that the same have or has been mutually negotiated,
prepared
7
<PAGE>
and drafted, and that if at any time the parties hereto desire or are required
to interpret or construe any such term or condition or any agreement or
instrument subject hereto, no consideration shall be given to the issue of which
party hereto actually prepared, drafted or requested any term or condition of
this Agreement or any agreement or instrument subject hereto.
21. Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which taken together shall
constitute one and the same instrument.
22. Previous Agreements. Employee represents and warrants that he has
undertaken a review of all applicable agreements and understandings with his
former and current employers and that he is not subject to any duties or
obligations that conflict with or are inconsistent with the full and complete
performance of his duties and obligations under this Agreement.
23. Governing Laws. This Agreement shall be subject to, and governed by,
the laws of the state of Maryland, excluding its choice of law provisions.
IN WITNESS WHEREOF, the parties hereto have executed this agreement as of
the date first above written.
Witness or Attest: SP Enterprises, Inc.
/s/ Nina Jo C. Rutledge /s/ Robert L. Pickens
- ------------------------------ ---------------------------
Robert L. Pickens
President
Witness:
/s/ Douglas B. Kubel /s/ Raymond E. Rutledge
- ------------------------------ ---------------------------
Raymond E. Rutledge
8
<PAGE>
Raymond E. Rutledge
Employment Agreement
Exhibit A
1. Description of Position:
a. Title: Vice President of External Development
b. Duties: Responsible for all externally developed products. Duties
include, but not limited to, identification of new product opportunities,
negotiations and implementation of contract, management of total project, and
building relationships for future expansion.
2. Compensation:
a. Annual base compensation of Eighty Thousand Dollars ($80,000) with
increases in such amounts as may be determined from time to time by the Board of
Directors.
b. Annual incentive compensation in an amount to be determined from year to
year by the Corporation's Board of Directors.
3. Vacation:
a. Two (2) weeks per year.
9
<PAGE>
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement is entered into, effective the
_____ day of May, 1998, by and between INTERACTIVE MAGIC, INC. (formerly known
as SP Enterprises, Inc. and hereinafter in this Agreement, the "Corporation")
and RAYMOND E. RUTLEDGE (the "Employee").
WHEREAS, the Corporation and the Employee are parties to an Employment
Agreement dated February 1, 1995, a copy of which is attached hereto as Exhibit
A (the "Agreement");
WHEREAS, the Corporation and the Employee desire to amend the
Agreement.
NOW, THEREFORE, in consideration of the above and the mutual promises
set forth below, the legal sufficiency and adequacy of which are hereby
acknowledged, the parties agree to amend the Agreement as follows:
1. Section 23, Governing Laws, is amended by deleting that Section
that in its entirety and by inserting in lieu thereof a new Section 23 to read
as follows:
23. Governing Law. This Agreement shall be subject
to, and governed by, the laws of the State of North Carolina,
excluding its choice of law provisions.
1
<PAGE>
2. Exhibit A to the Agreement is amended by deleting Subparagraph
1.a., Title, in its entirety and inserting in lieu thereof the following:
a. Title: Vice President of Licensing
3. Exhibit A to the Agreement is further amended by deleting
Subparagraph a. of Section 2, Compensation, in its entirety and inserting in
lieu thereof the following:
a. Annual base compensation of One Hundred Twenty
Thousand Dollars ($120,000) with increases in such amounts as
may be determined from time to time by the Board of Directors.
4. Except as set forth herein, the Agreement is not modified or
amended, and the parties hereto reaffirm and agree to all of the terms and
provisions of the Agreement, as amended, in all other respects.
IN WITNESS WHEREOF, the parties have executed this Amendment to
Employment Agreement, effective the _____day of May, 1998.
INTERACTIVE MAGIC, INC.
ATTEST:
By: _______________________________
Name:
Title:
- ------------------------------------
Secretary
(CORPORATE SEAL)
2
<PAGE>
EMPLOYEE:
------------------------
Raymond E. Rutledge
3
SP Enterprises, Inc.
(Interactive Magic)
1995 Employees' Incentive Stock option Plan
Class A Common Stock (voting)
1. Purpose. The purpose of the SP Enterprises, Inc., (the "Corporation") 1995
Employees' Incentive Stock option Plan (Class A Common Stock) (the "Plan") is
intended as an incentive to induce key employees of the Corporation to remain in
the employ of the Corporation, or of any subsidiary of the Corporation, and to
encourage such employees to secure or increase on reasonable terms their stock
ownership in the Corporation. The board of directors of the Corporation (the
"Board") believes the Plan will promote continuity of management and increased
incentive and personal interest in the Corporation's welfare by those who are
primarily responsible for shaping and carrying out the long-range plans of the
corporation and securing its continued growth and financial success. it is
intended that the options issued pursuant to this Plan will constitute incentive
stock options within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended.
2. Effective Date of the Plan. The Plan shall become effective on January 2,
1995, the date adopted by the Board.
3. Stock Subject to Plan. The stock subject to options under the Plan shall be
shares of the Corporation's Class A Common Stock (Voting) of the par value of
$0.10 per share ("Stock"), either authorized and unissued or treasury shares.
One Million Five Hundred Thousand (1,500,000) shares of the authorized but
unissued Stock of the Corporation shall be reserved for issue upon the
exercise of options granted under the Plan, subject to the adjustments
provided under Section 14 below; provided, however, that the number of
shares of such authorized but unissued stock so reserved may front time to
time be reduced to the extent that a corresponding amount of issued and
outstanding stock has been purchased by the Corporation and set aside for
issuance upon the exercise of the options granted under the Plan. If any options
shall expire or terminate for any reason without having been exercised in full,
the unpurchased shares subject thereto shall again be available for further
grants under the Plan. All options granted under the Plan shall be authorized
by the Board and shall be evidenced by written incentive stock option agreements
("Option Agreements") in such form and containing such terms and conditions as
the Board shall determine from time to time.
4. Administration. The Plan shall be administered by the Board " which shall
have complete authority, in its discretion, to determine those key employees
(the "Participants") to whom, and the price at which, options shall be granted;
the option periods; the time or times at which the options may he exercised;
limitations upon the exercise of the options (including without limitation
restrictions effective upon the death or other termination of employment of the
Participant); the restrictions, if any, to be imposed upon the transferability
of shares acquired upon exercise of options; and to make all other
determinations necessary or advisable for the administration of the Plan. In
making such determinations the Board may take into account the nature of
services to be rendered by the prospective employees, and the present and
potential
1
<PAGE>
contributions of employees and prospective employees to the success of the
Corporation and its subsidiaries, as hereinafter defined, and such other factors
as the Board shall in its sole discretion deem relevant. Subject to the express
provisions of the Plan, the Board shall also have complete authority to
interpret the Plan and its determinations shall be conclusive.
5. Eligibility. An option may be granted under the Plan only to a key employee,
as determined by the Board, of the Corporation or of its present and future
subsidiaries.
6. Option Price. The option price per share shall be not less than 100 percent
of the fair market value, as reasonably determined by the Board, of a share of
Stock on the data of the grant of such option.
7. Payment. Within five (5) business days following the date of the exercise,
the Participant shall make full payment of the option price (i) in cash; (ii) in
such other form as is acceptable to the Board, including without limitation
tendering previously acquired shares of-Stock valued at their fair market value,
as determined by the Board, as of the date of exercise.
8 Date of Option Grant. An option shall be considered granted on the date the
Participant enters into an Option Agreement, after the Board has acted to grant
the option, or such date thereafter as the Board shall specify.
9. Term of Plan. The Board of Directors, without further approval of the
stockholders may terminate the Plan at any time, but no termination shall,
without the Participant's consent, alter or impair any of the rights under any
option theretofore ore granted to a Participant under the Plan.
10. Term Of Options. The term of each option shall be for such period as the
Board shall determine, which in no event shall exceed ten (10) years from the
date such option is granted. Each option shall be subject to earlier termination
as described in Section 11.
11. Exercise of Options. Each option granted under the Plan shall be exercisable
on such date or dates and during such period and for such number of shares as
shall be determined by the Board and prescribed in the option Agreement
evidencing such option. An option may be exercised by providing notice and
making payment as prescribed in the Option Agreement.
12. Maximum Per Participant. The aggregate fair market value, as reasonably
determined by the Board, of the Stock for which a Participant may exercise
incentive options under the plan and any other plans of the Corporation or its
subsidiaries during any calendar year shall not exceed $100,000 plus any "unused
limit carryover" within the meaning of Section 422 of the Internal Revenue Code,
as amended, or the Regulations thereunder (or such other amount as may be
provided under such sections from time to time) .
13. Nontransferability. Options granted under the Plan may be exercised only
during the lifetime of a participant only by the participant and are not
transferable other than by will or laws of descent or distribution.
2
<PAGE>
14. Adjustment of Number of Shares. In the event that a dividend shall be
declared upon the Stock payable in stock of the Corporation, the number of
shares of Stock subject to any option and the number of shares reserved for
issuance under the Plan but not yet subject to an option, shall be adjusted by
adding to each such share the number of shares that would be distributable
thereon if such share had been outstanding on the date fixed for determining the
stockholders entitled to receive such stock dividend. In the event that the
outstanding shares of the Stock shall be changed into or exchanged for a
different number or kind of shares of stock or other securities of the
Corporation or of another corporation, whether through reorganization,
recapitalization, stock split-up, combination of shares, merger or
consolidation, then there shall be substituted for each such share of common
stock reserved for issuance pursuant to the Plan, but not yet subject to an
option, the number and kind of shares of stock or other securities into which
each outstanding share of Stock shall be so changed or into which each such
share shall be exchanged. In the event there shall be any change, other than as
specified above in this section in the number or kind of outstanding shares of
Stock or of any stock or other securities into which such Stock shall have been
changed or for which it shall have been exchanged, then if the Board shall in
its sole discretion determine that such change equitably requires an adjustment
in the number or kind of shares theretofore reserved for issuance pursuant to
the Plan, but not yet covered by an option and of the shares then subject to an
option or options, such adjustment shall be made by the Board and shall be
effective and binding for all purposes of the Plan and of each Option Agreement.
The option price in each Option Agreement for each share of stock or other
securities substituted or adjusted as provided for in this Section shall be
determined by dividing the option price in such agreement for each share prior
to such substitution or adjustment by the number of shares or fraction of a
share substituted for such share or into which such share shall have been
adjusted. No adjustment or substitution provided for in this Section shall
require the corporation in any option Agreement to sell a fractional share, and
the total substitution or adjustment with respect to such Option Agreement shall
be limited accordingly.
15. Amendments. The Board, without further approval of the stockholders, may
from time to time amend the Plan in such respects as the Board may deem
advisable, provided that no amendment shall become effective without prior
approval of the stockholders that would increase the maximum number of shares of
Stock for which options may be granted under the Plan. No amendment shall,
without the Participant's consent, alter or impair any of the rights or
obligations under any option theretofore granted to a Participant under the
Plan.
3
Interactive Magic, Inc.
1995 Employees' Incentive Stock Option Plan
Class B Common Stock (Nonvoting)
1. Purpose. The purpose of the Interactive Magic, Inc., (the "Corporation") 1995
Employees' Incentive Stock Option Plan (Class B Common Stock, Nonvoting) (the
"Plan") is intended as an incentive to induce key employees of the Corporation
to remain in the employ of the Corporation, or of any subsidiary of the
Corporation, and to encourage such employees to secure or increase on reasonable
terms their stock ownership in the Corporation. The board of directors of the
Corporation (the "Board") believes the Plan will promote continuity of
management and increased incentive and personal interest in the Corporation's
welfare by those who are primarily responsible for shaping and carrying out the
long-range plans of the Corporation and securing its continued growth and
financial success. It is intended that the options issued pursuant to this Plan
will constitute incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended.
2. Effective Date of the Plan. The Plan shall become effective on January 2,
1995, the date adopted by the Board.
3. Stock Subject to Plan. The stock subject to options under the Plan shall be
shares of the Corporation's Class B Common Stock (Nonvoting) of the par value of
$0.10 per share ("Stock"), either authorized and unissued or treasury shares.
Four Million Two Hundred Fifty Thousand (4,250,000) shares of the
authorized but unissued Stock of the Corporation shall be reserved for issue
upon the exercise of options granted under the Plan, subject to the
adjustments provided under Section 14 below; provided, however, that the
number of shares of such authorized but unissued stock so reserved may from
time to time be reduced to the extent that a corresponding amount of issued
and outstanding stock has been purchased by the Corporation and set aside for
issuance upon the exercise of the options granted under the Plan. If any options
shall expire or terminate for any reason without having been exercised in full,
the unpurchased shares subject thereto shall again be available for further
grants under the Plan. All options granted under the Plan shall be authorized
by the Board and shall be evidenced by written incentive stock option
agreements ("Option Agreements") in such form and containing such terms
and conditions as the Board shall determine from time to time.
4. Administration. The Plan shall be administered by the Board, which shall have
complete authority, in its discretion, to determine those key employees (the
"Participants") to whom , and the price at which, options shall be granted; the
option periods; the time or times at which the options may be exercised;
limitations upon the exercise of the options (including without limitation
restrictions effective upon the death or other termination of employment of the
Participant); the restrictions, if any to be imposed upon the transferability of
shares acquired upon exercise of options and to make all other determinations
necessary or advisable for the administration of the Plan. In making such
determinations, the Board may take into account the nature of services to be
rendered by the prospective employees, and the present and potential
1
<PAGE>
contributions of employees and prospective employees to the success of the
Corporation and its subsidiaries, as hereinafter defined, and such other factors
as the Board shall in its sole discretion deem relevant. Subject to the express
provisions of the Plan, the Board shall also have complete authority to
interpret the Plan and its determinations shall be conclusive.
5. Eligibility. An option may be granted under the Plan only to a key employee,
as determined by the board, of the Corporation or of its present and future
subsidiaries.
6. Option Price. The option price per share shall be not less than 100 percent
of the fair market value, as reasonably determined by the Board, of a share of
Stock on the date of the grant of such option.
7. Payment. Within five (5) business days following the date of the exercise,
the Participant shall make full payment of the option price (i) in cash; (ii) in
such other form as is acceptable to the Board, including without limitation
tendering previously acquired shares of Stock valued at their fair market value,
as determined by the Board, as of the date of exercise.
8. Date of Option Grant. An option shall be considered granted on the date the
Participant enters into an Option Agreement, after the Board has acted to grant
the option, or such date thereafter as the Board shall specify.
9. Term of Plan. The Board of Directors, without further approval of the
stockholders may terminate the Plan at any time, but no termination shall,
without the Participant's consent, alter or impair any of the rights under any
option theretofore granted to a Participant under the Plan.
10. Term of Options. The term of each option shall be for such period as the
Board shall determine, which in no event shall exceed ten (10) years from the
date such option is granted. Each option shall be subject to earlier termination
as described in Section 11.
11. Exercise of Options. Each option granted under the Plan shall be exercisable
on such date or dates and during such period and for such number of shares as
shall be determined by the Board and prescribed in the Option Agreement
evidencing such option. An option may be exercised by providing notice and
making payment as prescribed in the Option Agreement.
12. Maximum Per Participant. The aggregate fair market value, as reasonably
determined by the Board, of the Stock for which a Participant may exercise
incentive options under the Plan and any other plans of the Corporation or its
subsidiaries during any calendar year shall not exceed $100,000 plus any "unused
limit carryover" within the meaning of Section 422 of the Internal Revenue Code,
as amended, or the Regulations thereunder (or such other amount as may be
provided under such sections from time to time).
13. Nontransferability. Options granted under the Plan may be exercised only
during the lifetime of a participant only by the participant and are not
transferable other than by will or laws of decent or distribution.
2
<PAGE>
14. Adjustment of Number of Shares. In the event that a dividend shall be
declared upon the Stock payable in stock of the Corporation, the number of
shares of Stock subject to any option and the number of shares reserved for
issuance under the Plan but not yet subject to an option, shall be adjusted by
adding to each such share the number of shares that would be distributable
thereon if such share had been outstanding on the date fixed for determining the
stockholders entitled to receive such stock dividend. In the event that the
outstanding shares of the Stock shall be changed into or exchanged for a
different number or kind of shares of stock or other securities of the
Corporation or of another corporation, whether through reorganization,
recapitalization, stock split-up, combination of shares, merger or
consolidation, then there shall be substituted for each such share of common
stock reserved for issuance pursuant to the Plan, but not yet subject to an
option, the number and kind of shares of stock or other securities into which
each outstanding share of Stock shall be so changed or into which each such
share shall be exchanged. In the event there shall be any change, other than as
specified above in this Section in the number or kind of outstanding shares of
Stock or of any stock or other securities into which such Stock shall have been
changed or for which it shall have been exchanged, then if the Board shall in
its sole discretion determine that such change equitable requires an adjustment
in the number or kind of shares theretofore reserved for issuance pursuant to
the Plan, but not yet covered by an option and of the shares then subject to an
option or options, such adjustment shall be made by the Board and shall be
effective and binding for all purposes of the Plan and of each Option Agreement.
The option price in each Option Agreement for each share of Stock or other
securities substituted or adjusted as provided for in this Section shall be
determined by dividing the option price in such agreement for each share prior
to such substitution or adjustment by the number of shares or fraction of a
share substituted for such share or into which such share shall have been
adjusted. No adjustment or substitution provided for in this Section shall
require the Corporation in any Option Agreement to sell a fractional share, and
the total substitution or adjustment with respect to such Option Agreement shall
be limited accordingly.
15. Amendments. The Board, without further approval of the stockholders, may
from time to time amend the Plan in such respects as the Board may deem
advisable, provided that no amendment shall become effective without prior
approval of the stockholders that would increase the maximum number of shares of
Stock for which options may be granted under the Plan. No amendment shall,
without the Participant's consent, alter or impair any of the rights or
obligations under any option theretofore granted to a Participant under the
Plan.
3
INCENTIVE STOCK OPTION PLAN
Section 1. Purpose
This Incentive Stock Option Plan ("Plan") is intended to promote the best
interests of the Corporation and its stockholders by providing an incentive and
reward for those employees who contribute to the operation progress and earning
power of the Corporation.
Section 2. Definitions
The following definitions shall apply to this Plan:
a. "Code" means the Internal Revenue Code of 1954, as amended.
b. "Controlling Participant" means any Eligible Employee who, immediately
before any Option is granted to him, possesses directly or indirectly
more than ten per cent (10%) of the total combined voting power or
value of all classes of stock of the Corporation [or any parent or
subsidiary corporation, as defined in section 424(e) and (f) of the
Code].
c. "Corporation" means Interactive Creations Incorporated, a Texas
corporation.
d. "Eligible Employee" means any employee of the Corporation who is
determined (in accordance with the provisions of Section 5 of this
Plan) to be eligible to be granted an Option.
e. "Exercise Price" means the price at which a share of Incentive Stock
may be purchased by a particular Participant pursuant to the exercise
of an Option, as determined in accordance with Section 7 of this Plan.
f. "Incentive Stock" means Common Stock without par value of the
Corporation issued pursuant to this Plan.
g. "Incentive Stock Option Agreement" means an agreement between a
participant and the Corporation setting forth the specific terms and
conditions of an Option, as well as the specific terms and conditions
under which Incentive Stock may be purchased by that Participant
pursuant to the exercise of that Option. The Incentive Stock Option
Agreement shall be subject to the provisions of this Plan (which shall
be incorporated by reference in the Incentive Stock Option Agreement)
and shall contain such other provisions as the Board of Directors of
the Corporation, in its sole discretion, may determine.
1
<PAGE>
h. "Option" means the right of a Participant to purchase shares of
Incentive Stock in accordance with the terms of this Plan and the
Incentive Stock Option Agreement between that Participant and the
Corporation.
i. "Participant" means any Eligible Employee who is a party to an
Incentive Stock Option Agreement.
Section 3. Adoption and Administration of Plan.
This Plan shall become effective upon its adoption by the Board of
Directors of the Corporation and approval by the holders of a majority of the
outstanding voting capital stock of the Corporation within twelve (12) months
before or after the adoption of this Plan by the Board of Directors of the
Corporation. Upon becoming effective, except as set forth in Sections 4, 5(d),
6(c), 7, and 18 of this Plan, any action taken by the Board of Directors of the
Corporation with respect to the implementation, interpretation, or
administration of this Plan shall be final, conclusive, and binding; provided,
however, that to the extent not prohibited by the Texas Business Act, the
Certificate of Incorporation of the Corporation, the By-Laws of the Corporation,
or the Code, the Board of Directors of the Corporation may delegate any or all
of its responsibilities under this Plan to a committee of the Board of Directors
of the Corporation as the Board of Directors of the Corporation shall designate
and, in the event of that designation, all references in this Plan to the Board
of Directors of the Corporation shall, to the extent applicable, be deemed to
refer to and include that committee.
Section 4. Total Number of Shares of Incentive Stock.
The number of shares of Incentive Stock that may be issued in the aggregate
by the Corporation under this Plan pursuant to the exercise of Options granted
under this Plan shall not be more than 600,000, which number may be increased
only by a resolution adopted by the Board of Directors of the Corporation and
approved within one (1) year after that adoption by the holders of a majority of
the outstanding voting capital stock of the Corporation. Those shares of
Incentive Stock may be issued out of the authorized and unissued or reacquired
Common Stock of the Corporation. Any shares subject to an Option that expires or
is terminated unexercised as to those shares may again be subject to an Option
under this Plan. To the extent of any adjustment pursuant to the provisions of
Section 17 of this Plan, the number of shares mentioned above shall be adjusted
appropriately.
Section 5. Eligibility and Awards.
The Board of Directors of the Corporation shall determine, as soon as
practicable after the effective date of this Plan and at any time and from time
to time after that date: (a) which of the employees of the Corporation shall be
Eligible Employees; (b) the number of shares of Incentive Stock that each
Eligible Employee may purchase pursuant to the exercise of his Option; (c) the
Exercise Price for each Eligible Employee; (d) the other terms of each Eligible
Employee's Option, including, without limitation, the term during which that
Option shall be in effect, which term shall not be greater than seven (7) years
for any Option; (e) the terms on which each share
2
<PAGE>
of Incentive Stock may be purchased by each particular Eligible Employee
pursuant to the exercise of his Option; and (f) the form of Incentive Stock
Option Agreement for any Option granted to an Eligible Employee.
Section 6. Grant, Exercise Rights, and Termination of Options.
a. As soon as practicable after a determination is made by the Board of
Directors of the Corporation, as set forth in Section 5 of this Plan, the
appropriate officer or officers of the Corporation shall give notice (written or
oral) to that effect to each employee Of the Corporation so determined to be an
Eligible Employee, which notice shall be accompanied by a copy or copies of the
Incentive Stock Option Agreement to be executed by that Eligible Employee.
b. Upon receipt of the notice specified in Section 6(a) of this Plan, an
Eligible Employee shall have an Option, and shall thereby become and be a
Participant, only upon the due execution by that Eligible Employee and the
Corporation of an Incentive Stock Option Agreement (in such number as the Board
of Directors shall determine) within ten (10) days from the giving of that
notice.
c. Any Option granted pursuant to this Plan must be granted within five (5)
years from the date that this Plan is adopted by the Board of Directors of the
Corporation and approved by the stockholders of the Corporation. The aggregate
fair market value (determined at the time an Option is granted) of Incentive
Stock for which any Eligible Employee may be granted an Option in any calendar
year [under all incentive stock option plans of the Corporation or its parent or
subsidiaries, if any, as defined in section 424(e) and (f) of the Code] shall
not exceed One Hundred Thousand ($100,00.00), as defined in section 422(d) of
the Code.
d. A Participant shall have no equity interest in the Corporation or any
voting, dividend, liquidation, or dissolution rights with respect to any capital
stock of the Corporation solely by reason of having an Option or having executed
an Incentive Stock Option Agreement. Furthermore, prior to the exercise of a
Participant's Option, as set forth in Section 6(e) of this Plan, that
Participant shall have no interest in, or any voting, dividend, liquidation, or
dissolution rights with respect to, the shares of Incentive Stock relating to
that Option.
e. An Option of a Participant may be exercised during the period that the
Option is in effect and as set forth in this Plan and in the Incentive Stock
Option Agreement. The Option of a Participant may be exercised only during the
period the Option shall be in effect and only if compliance with all applicable
federal and state securities laws can be effected, and may be exercised only by
(i) that Participant's completion, execution, and delivery to the Corporation of
a notice of exercise and an "investment letter" in the forms supplied by the
Corporation; and (ii) the payment to the Corporation of the aggregate Exercise
Price, as provided under Section 8 of this Plan, for the shares of Incentive
Stock to be purchased pursuant to that exercise (as shall be specified by that
Participant in that notice). Except in the event of the death of a Participant,
in which event that Participant's estate, executors or administrators, or
personal or legal representatives may exercise the Option in accordance with the
terms of Section 6(f) of this Plan, an Option or any of the rights under that
Option may be exercised by that Participant only and
3
<PAGE>
may not be transferred or assigned, voluntarily, involuntarily, or by operation
of law (including, without limitation, the laws of bankruptcy, intestacy,
descent and distribution, and succession).
f. If a Participant dies when he possesses an Option, the Participant's
estate, executors or administrators, or personal or legal representatives shall
be entitled for a period of six (6) months following the date of the
Participant's death to exercise the Option, but only to the extent that the
Participant was entitled to exercise the Option pursuant to the terms of his
Incentive Stock Option Agreement on the date of his death. Any person who
desires to exercise a deceased Participant's Option shall be required, as a
condition to the exercise of any Option, to furnish to the Corporation
documentation that the Corporation shall deem satisfactory to evidence the
authority of that person to exercise that Option on behalf of that deceased
Participant. Any shares of Incentive Stock purchased pursuant to this Section
6(f) shall be subject to the Corporation's options specified in Sections 11 and
12 of this Plan and shall be subject to the terms of Section 20 of this Plan. If
a Participant's estate, executors or administrators, or personal or legal
representatives exercise this Option, all references in this Plan to a
Participant shall, to the extent applicable, be deemed to refer to and include
the Participant's estate, executors or administrators, or personal or legal
representatives, as the case may be.
g. The Board of Directors of the Corporation may, upon terms and conditions
it deems appropriate, accept the surrender by a Participant of a right to
exercise an Option, in whole or in part, and if the Board elects, authorize a
payment in consideration of that Option of an amount equal to the difference
obtained by subtracting the Exercise Price of the shares of Incentive Stock that
are the subject of that surrendered Option from the fair market value of the
shares of Incentive Stock that are the subject of that surrendered Option on the
date of that surrender (that amount not to be less than zero). Payment shall be
in cash unless otherwise agreed by the Board and the Participant.
h. An Option of a Participant shall terminate on the earliest of the date
that (i) all shares of Incentive Stock relating to the Option are purchased
pursuant to the terms of the Incentive Stock Option Agreement, (ii) the
Corporation becomes aware of a violation by the Participant of Section 16 or 13
of the Incentive Stock Option Agreement, or (iii) the Option expires, as
determined pursuant to Section 5(d) of this Plan. Notwithstanding any other
provision of this Plan, in the event of a merger or consolidation to which the
Corporation is a party (other than as the surviving entity), any other
acquisition of a majority of the outstanding Common Stock of the Corporation,
any transfer of all or substantially all of the assets of the Corporation, or of
the Corporation's liquidation or dissolution, the Corporation shall give each
Participant at least ten (10) days' prior written notice of any event of this
nature, and any Option granted pursuant to the Plan, to the extent that the
Option is still in force and has not been exercised, shall be accelerated, and
any Participant may, upon compliance with all terms of this Plan, purchase any
or all shares of Incentive Stock subject to that Option before the occurrence of
any event of this nature, and, to the extent any Option shall not be exercised,
it shall expire upon any event of this nature becoming effective. Once
terminated, that Option shall have no further force or effect, and that
Participant shall have no further rights in or under that Option or to the
4
<PAGE>
shares of Incentive Stock relating to that Option that shall not have been
purchased at that time pursuant to the Option.
Section 7. Purchase Price of Incentive Stock.
The determination of the Exercise Price shall be made by the Board of
Directors of the Corporation, in its sole discretion, it being understood that
the Exercise Price may not be less than one hundred percent (100%) of the fair
market value of the shares of Common Stock of the Corporation on the date that
the Option shall be granted; provided, however, that if an Option shall be
granted to a Controlling Participant, the Exercise Price may not be less than
one hundred ten per cent (110%) of the fair market value of the shares of Common
Stock of the Corporation on the date that the Option shall be granted. Before
the occurrence of the event referred to in Section 19(a) of this Plan, the fair
market value of the shares of Common Stock of the Corporation shall be
determined pursuant to a bona fide appraisal conducted by the Corporation's
independent or certified public accountant or by an appraiser engaged by the
Corporation to conduct an appraisal. Following the occurrence of the event
referred to in Section 19(a) of this Plan, the fair market value of the shares
of Common Stock of the Corporation as of any particular date shall be deemed to
be the mean between the lowest bid and highest asked prices of that Common Stock
as of the close of business on such date as reported by NASDAQ (if that Common
Stock is traded in the over-the counter market) or, if the Common Stock is
traded on an exchange, the mean of the highest asked and lowest bid prices (as
of the close of business on that date) at which that Common Stock is quoted on
that date on the exchange on which it generally has the greatest trading volume.
If on any day no sales of Common Stock of the Corporation shall have been
reported by NASDAQ or made on that exchange, as the case may be, or if, in the
opinion of the Board of Directors of the Corporation, insufficient sales have
been made on that day to constitute a representative market, then the fair
market value of that Common Stock as of that valuation date shall be determined
by taking a weighted average of the means between the asked and bid prices, or
the highest and lowest sales prices, as the case may be, on the nearest
representative trading date before, and the nearest representative date after,
the valuation date.
Section 8. Payment for Shares of Incentive Stock.
Payment by each Participant for the shares of Incentive Stock purchased
under this Plan shall be made by cashiers check, certified funds or in any other
method approved by the Board of Directors.
Section 9. Delivery of Shares of Incentive Stock.
Upon the exercise of an Option by a Participant, in accordance with Section
6(e) of this Plan, or as soon thereafter as is practicable, the Corporation
shall issue and deliver to that Participant a certificate or certificates
evidencing that number of shares of Incentive Stock as that Participant has
elected to purchase. The certificate or certificates shall be registered in the
name of that Participant and shall bear an appropriate investment warranty
legend, any legend required by any federal or state securities law, rule, or
regulation, and (if applicable) a legend referring to the restrictions provided
under this Plan and under the Incentive Stock Option Agreement. Upon
5
<PAGE>
the exercise of an Option and the issuance of the certificate or certificates, a
Participant shall have all the rights of a stockholder with respect to those
shares of Incentive Stock purchased, including the right to vote those shares
and to receive all dividends or other distributions paid or made with respect to
those shares; provided, however, that those shares shall be subject to the
restrictions set forth below in this Plan and in the Incentive Stock Option
Agreement executed by that Participant. In the event of a merger or
consolidation to which the Corporation is a party (other than as the surviving
entity), any other acquisition of a majority of the outstanding shares of Common
Stock of the Corporation, or any transfer of all or substantially all of the
assets of the Corporation, the acquiring corporation alone shall determine
whether the stock of the acquiring corporation so received (if any) shall be
subject to the restrictions set forth in this Plan.
Section 10. Restrictions on Transfer of Shares of Incentive Stock.
a. Each Participant who purchases shares of Incentive Stock pursuant to the
exercise of an Option under this Plan shall acquire those shares for investment,
not for resale or other distribution, and shall warrant the same in writing.
b. Except as otherwise provided in this Plan or in the Incentive Stock
Option Agreement executed by a Participant, Options or any shares of Incentive
Stock may not be sold, exchanged, delivered, assigned, bequeathed or given,
pledged, mortgaged, hypothecated or otherwise encumbered, transferred or
permitted to be transferred, or otherwise disposed of, whether voluntarily,
involuntarily, or by operation of law (including, without limitation, the laws
of bankruptcy, intestacy, descent and distribution, and succession).
Section 11. Option of the Corporation To Purchase Shares of Incentive Stock.
a. In the event a Participant, who shall have been issued shares of
Incentive Stock by the Corporation pursuant to this Plan, violates the Covenant
not to Compete contained in Section 16 of the Incentive Stock Option Agreement
or the Confidentiality Clause contained in Section 13 of the Incentive Stock
Option Agreement, the Corporation shall have the option, but shall not be
obligated, to purchase any or all of the shares of Incentive Stock owned by that
Participant, the Participant's estate, executors or administrators, personal or
legal representatives, and transferees (direct or indirect). For purposes of
Sections 11(b), 11(c), 12, and 13 of this Plan, any reference to a Participant
shall (when applicable) be deemed to be and include references to that
Participant's estate, executors or administrators, personal or legal
representatives, and transferees (direct or indirect).
b. The option specified in Section 11(a) of this Plan, to the extent
applicable, may be exercised by the Corporation at any time after the
Corporation becomes aware of a violation by the Participant of Section 16 or 13
of the Incentive Stock Option Agreement, by sending Registered Notice (as
defined in Section 24 of this Plan) of the exercise to the Participant,
specifying the time and date on which payment to the Participant of the purchase
price for the Participant's shares of Incentive Stock to be purchased by the
Corporation is to be made, and the number of shares to be purchased by the
Corporation. The date specified shall be not later than sixty (60) days after
the date that the Registered Notice is sent. Settlement shall be held on the
6
<PAGE>
purchase of a Participant's shares of Incentive Stock under this Section 11 at
the principal executive office of the Corporation or at another place upon which
the Corporation and the Participant shall agree. At the settlement, the
Participant shall deliver to the Corporation the certificate or certificates,
duly endorsed, evidencing the shares of Incentive Stock to be purchased pursuant
to this Section 11 and, simultaneously with that delivery, the Corporation shall
deliver to the Participant the purchase price for those shares in the manner
determined pursuant to the Incentive Stock Option Agreement between the
Corporation and that Participant.
c. If a Participant is unable to, or for any reason does not deliver to the
Corporation the certificate or certificates in accordance with the provisions of
Sections 11(b) or 12 of this Plan, the Corporation may deposit a check, or a
check and promissory note (as the case may be), in the total amount of the
purchase price, as determined pursuant to the Incentive Stock Option Agreement
between the Corporation and that Participant, with any bank doing business
within sixty (60) miles of the Corporation's principal executive office, with
the accountant or accountants then servicing the Corporation, as agent or
trustee, or in escrow for the Participant, to be held by that bank, accountant,
or accountants until withdrawn by that Participant. Upon that deposit by the
Corporation, the shares of Incentive Stock of that Participant to be purchased
pursuant to this Section 11 or pursuant to Section 12 of this Plan shall then be
deemed to have been sold, assigned, transferred, and conveyed to the
Corporation, and that Participant shall have no further rights with respect to
the Incentive Stock.
Section 12. Right of First Refusal.
a. The Incentive Stock the subject of the Option shall be further subject
to the stock transfer restrictions set forth in Article VIII Section 3 of the
By-Laws of the Corporation.
b. Notwithstanding any other provision of this Plan, to the extent that
there shall be a conflict between the provisions of Sections 11 and 12 of this
Plan, the provisions of Section II of this Plan shall take precedence over the
provisions of this Section 12, and this Section 12 shall not be of any force or
effect. Any option of the Corporation specified in this Section 12 or in Section
11 of this Plan may be assigned by the Corporation to any person or entity and,
in that event, any reference in this Plan to that option of the Corporation
shall, unless the context otherwise requires, be deemed to be a reference to
that other person or entity.
c. Strict compliance by the Participant shall be required with every
provision of this Plan and particularly with the procedures set forth in
Sections 11 and 12 of this Plan. As set forth in Section 10(b) of this Plan, a
Participant shall not have the right or power to sell, exchange, deliver,
assign, bequeath, or give, pledge, mortgage, hypothecate, or otherwise encumber,
transfer or permit the transfer or disposition of any of the Participant's
shares of Incentive Stock, except in Strict compliance with the procedures set
forth in Sections 11 and 12 of this Plan.
Section 13. Delivery of Stock and Documents.
7
<PAGE>
Upon the closing of any purchase by the Corporation of any shares of
Incentive Stock pursuant to Sections 11 or 12 of this Plan, a participant shall
deliver to the Corporation the following: the certificate or certificates
representing the shares of Incentive Stock being sold, duly endorsed for
transfer and bearing any necessary documentary stamps, and assignments,
certificates of authority, tax releases, consents to transfer, instruments and
evidences of title of that Participant and of that Participant's compliance with
this Plan as may reasonably required by the Corporation or its counsel.
Section 14. Plan Binding upon Transferees.
If at any time or from time to time, any shares of Incentive Stock are
transferred to any party (other than the Corporation) pursuant to the provisions
of Section 12 of this Plan, the transferee shall take those shares of Incentive
Stock pursuant to all the provisions, conditions, and obligations of this Plan
(including, without limitation, the obligations to sell and transfer, and to
offer to sell and transfer, those shares pursuant to the provisions of Section
11 and 12 of this Plan) and, as a condition precedent to the transfer of those
shares of Incentive Stock, the transferee shall agree (for, and on behalf of,
himself or itself, his or its legal representatives, and his or its transferees
and assigns) in writing to be bound by all provisions of this Plan. For purposes
of this Section 14, the obligation of any such transferee pursuant to Section 11
of this Plan to sell the shares of Incentive Stock transferred to him by a
Participant shall arise upon the Corporation's exercise of its option pursuant
to Section 11 of this Plan at any time after the Participant's not the
transferee's, violation of Section 16 or 13 of the Incentive stock Option
Agreement.
Section 15. Costs and Expenses.
All costs and expenses with respect to the adoption, implementation,
interpretation, and administration of this Plan shall be borne by the
Corporation; provided, however, that, except as otherwise specifically provided
in this Plan or the applicable Incentive Stock Option Agreement between the
Corporation and a Participant, the Corporation shall not be obligated to pay any
costs or expenses (including legal fees) incurred by any Participant in
connection with any Option or Incentive Stock held by any Participant.
Section 16. No Prior Right of Award.
Nothing in this Plan shall be deemed to give any officer or employee of the
Corporation, his legal representatives or assigns, or any other person or entity
claiming under or through him any contract or other right to participate in the
benefits of this Plan. Nothing in this Plan shall be construed as constituting a
commitment, guaranty, agreement, or understanding of any kind or nature that the
Corporation shall continue to employ any individual (whether or not a
Participant). This Plan shall not affect in any way the right of the Corporation
to terminate the employment of any individual (whether or not a Participant) at
any time and for any reason. Any change of a Participant's duties as an employee
of the Corporation shall not result in a modification of the terms of the
Participant's rights under this Plan or under any Incentive Stock Option
Agreement executed by that Participant.
8
<PAGE>
Section 17. Changes in Capital Structure.
Unless the Corporation has agreed in writing or is otherwise required by
law to do so, the number of shares of Incentive Stock held by a Participant
shall not be adjusted in any manner for (i) a division or combination of any of
the shares of capital stock of the Corporation, (ii) a dividend payable in
shares of capital stock of the Corporation, (iii) a reclassification of any
shares of capital stock of the Corporation, or (iv) any other change in the
capital structure of the Corporation.
Section 18. Amendment or Termination of Plan.
Except as otherwise provided in this Plan, this Plan may be amended or
terminated in whole or in party by the Board of Directors of the Corporation, in
its sole discretion, but any action of this type shall not adversely affect or
alter any right or obligation with respect to any Option or Incentive Stock
Option Agreement then in effect, except to the extent that any action of this
type shall be required or desirable, in the opinion of the Corporation or its
counsel, to comply with any rule or regulation promulgated or proposed under the
Code by the Internal Revenue Service.
Section 19. Termination of Restrictions.
The provisions of Sections 10, 12, and 20 of this Plan shall terminate: (a)
upon the first sale of Common Stock of the Corporation to the public pursuant to
a registration statement filed with, and declared effective by, the Securities
and Exchange Commission under the Securities Act of 1933; or (b) upon action of
the Board of Directors of the Corporation, by a majority of the total number of
directors then serving; provided, however, that a termination of this type shall
not be deemed to affect any restrictions imposed by any applicable federal or
state securities law, rule, regulation, or order with respect to the ownership,
sale, or disposition of shares of Incentive Stock.
Section 20. Sale or Other Disposition by A Majority Interest.
Each Participant shall irrevocably appoint the Corporation and its Chief
Executive Officer, or either of them, as that Participant's agents and
attorneys-in-fact, with full power of substitution for and in that Participant's
name, to sell, exchange, transfer, or otherwise dispose of all or a portion of
that Participant's shares of Incentive Stock and to do any and all things and to
execute any and all documents and instruments (including, without limitation,
any stock transfer powers) in connection with that sale, exchange, transfer, or
other disposal, that power of attorney to become operable only after the holder
or holders of a majority of the issued and outstanding shares of Common Stock of
the Corporation sell, exchange, transfer, or otherwise dispose of, or contract
to sell, exchange, transfer, or otherwise dispose of all or a portion of their
shares of Common Stock of the Corporation. Any sale, exchange, transfer, or
other disposition of all or a portion of a Participant's shares of Incentive
Stock pursuant to the foregoing powers of attorney shall be made upon
substantially the same terms and conditions (including sale price per share)
applicable to a sale, exchange, transfer, or other disposition of all or a
portion of shares of
9
<PAGE>
Common Stock of the Corporation owned by the holder or holders of a majority of
the issued and outstanding shares of Common Stock of the corporation. For
purposes of determining the sale price per share of Incentive Stock under this
Section 20, there shall be excluded the consideration (if any) paid or payable
to the holder or holders of a majority of the issued and outstanding shares of
Common Stock of the Corporation in connection with any employment, consulting,
non-competition, or similar agreements that the holder or holders may enter into
in connection with or after that sale, transfer, exchange, or other disposition.
The foregoing powers of attorney shall be irrevocable and coupled with an
interest and shall not terminate by operation of law, whether by the death,
bankruptcy, or adjudication of incompetency or insanity of a Participant or the
occurrence of any other event.
Section 21. Burden and Benefit.
The terms and provisions of this Plan shall be binding upon, and shall
inure to the benefit of, each Participant and his executors and administrators,
estate, heirs, and personal and legal representatives.
Section 22. Genders.
The use of any gender in this Plan shall be deemed to be or include the
other genders, and the use of the singular in this Plan shall be deemed to be or
include the plural, and vice versa, wherever appropriate.
Section 23. Headings.
The headings and other captions contained in this Plan are for convenience
and reference only and shall not be used in interpreting, construing, or
enforcing any of the provisions of this Plan.
Section 24. Registered Notice
Any notice provided for herein, shall be given by written instrument sent
by certified mail, return receipt requested, through the United States Postal
Service. All notices will be sent to the Participant's address as listed in such
Participant's Incentive Stock Option Agreement.
10
<PAGE>
CORPORATION:
Interactive Creations Incorporated,
A Texas Corporation
- ----------------------------------------
Robert McCarthy, Chief Executive Officer
PARTICIPANT:
- ----------------------------------------
Address:
-------------------------------
- ----------------------------------------
WITNESS:
11
INTERACTIVE MAGIC, INC.
1998 STOCK PLAN
1. Purposes of the Plan. The purposes of this Stock Plan are to help enable
the Company to:
o to attract and retain the best available personnel for positions
of substantial responsibility,
o to provide additional incentive to Employees, Directors and
Consultants, and
o to promote the success of the Company's business.
Options granted under the Plan may be Incentive Stock Options or
Nonqualified Stock Options, as determined by the Administrator at the time of
grant. Stock Purchase Rights may also be granted under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or any of its Committees.
(b) "Applicable Laws" means the requirements relating to the
administration of stock option plans under U. S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or
quotation system on which the Common Stock is listed or quoted and the
applicable laws of any foreign country or jurisdiction where Options or
Stock Purchase Rights are, or will be, granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Committee" means a committee of Directors appointed by the Board
in accordance with Section 4 of the Plan. The Committee shall be
constituted to comply with Applicable Laws.
(f) "Common Stock" means the common stock of the Company.
(g) "Company" means Interactive Magic, Inc., a North Carolina
corporation.
<PAGE>
(h) "Consultant" means any person, including an advisor, engaged by
the Company or a Parent or Subsidiary to render services to such entity.
(i) "Director" means a member of the Board.
(j) "Disability" means total and permanent disability as defined in
Section 22(e)(3) of the Code.
(k) "Employee" means any person, including Officers and Directors,
employed by the Company or any Parent or Subsidiary of the Company. An
Employee shall not cease to be an Employee solely by virtue of (i) any
leave of absence approved by the Company or (ii) transfers between
locations of the Company or between the Company, its Parent, any
Subsidiary, or any successor. For purposes of Incentive Stock Options, no
such leave may exceed ninety days, unless reemployment upon expiration of
such leave is guaranteed by statute or contract. If reemployment upon
expiration of a leave of absence approved by the Company is not so
guaranteed, on the 181st day of such leave any Incentive Stock Option held
by the Optionee shall cease to be treated as an Incentive Stock Option and
shall be treated for tax purposes as a Nonqualified Stock Option. Neither
service as a Director nor payment of a director's fee by the Company shall
be sufficient to constitute "employment" by the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(m) "Fair Market Value" means, as of any date, the value of Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the
Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq
Stock Market, its Fair Market Value shall be the closing sales price
for such stock (or the closing bid, if no sales were reported) as
quoted on such exchange or system for the last market trading day
prior to the time of determination, as reported in The Wall Street
Journal or such other source as the Administrator deems reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market
Value of a Share of Common Stock shall be the mean between the high
bid and low asked prices for the Common Stock on the last market
trading day prior to the day of determination, as reported in The Wall
Street Journal or such other source as the Administrator deems
reliable; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value shall be determined in good faith by the
Administrator.
(n) "Incentive Stock Option" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and
the regulations promulgated thereunder.
-2-
<PAGE>
(n) "Incentive Stock Option" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and
the regulations promulgated thereunder.
(o) "Nonqualified Stock Option" means an Option not intended to
qualify as an Incentive Stock Option.
(p) "Notice of Grant" means a written or electronic notice evidencing
certain terms and conditions of an individual Option or Stock Purchase
Right grant. The Notice of Grant is part of the Option Agreement.
(q) "Officer" means a person who is an officer of the Company within
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(r) "Option" means a stock option granted pursuant to the Plan.
(s) "Option Agreement" means an agreement between the Company and an
Optionee evidencing the terms and conditions of an individual Option grant.
Each Option Agreement is subject to the terms and conditions of the Plan.
(t) "Option Exchange Program" means a program whereby outstanding
Options are surrendered in exchange for Options with a lower exercise
price.
(u) "Optioned Stock" means the Common Stock subject to an Option or
Stock Purchase Right.
(v) "Optionee" means the holder of an outstanding Option or Stock
Purchase Right granted under the Plan.
(w) "Parent" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(x) "Plan" means this 1998 Stock Plan.
(y) "Restricted Stock" means shares of Common Stock acquired pursuant
to a grant of Stock Purchase Rights under Section 11 of the Plan.
(z) "Restricted Stock Purchase Agreement" means a written agreement
between the Company and the Optionee evidencing the terms and restrictions
applying to stock purchased under a Stock Purchase Right. The Restricted
Stock Purchase Agreement is subject to the terms and conditions of the Plan
and the Notice of Grant.
(aa) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any
successor to Rule 16b-3, as in effect when discretion is being exercised
with respect to the Plan.
(bb) "Section 16(b)" means Section 16(b) of the Exchange Act.
(cc) "Service Provider" means an Employee, Director or Consultant.
-3-
<PAGE>
(dd) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 13 of the Plan.
(ee) "Stock Purchase Right" means the right to purchase Common Stock
pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant.
(ff) "Subsidiary" means a "subsidiary corporation", whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 13 of
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is Eight Hundred Thousand (800,000) Shares. The Shares may be
authorized, but unissued, or reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to an Option
Exchange Program or otherwise, the unpurchased Shares which were subject thereto
shall become available for future grant or sale under the Plan (unless the Plan
has terminated); provided, however, that Shares that have actually been issued
under the Plan, whether upon exercise of an Option or Right, shall not be
returned to the Plan and shall not become available for future distribution
under the Plan, except that if Shares of Restricted Stock are repurchased by the
Company at their original purchase price, such Shares shall become available for
future grant under the Plan.
4. Administration of the Plan.
(a) Procedure.
(i) Multiple Administrative Bodies. The Plan may be administered by
different Committees with respect to different groups of Service Providers.
(ii) Section 162(m). To the extent that the Administrator determines
it to be desirable to qualify Options granted hereunder as
"performance-based compensation" within the meaning of Section 162(m) of
the Code, the Plan shall be administered by a Committee of two or more
"outside directors" within the meaning of Section 162(m) of the Code.
(iii) Rule 16b-3. To the extent desirable to qualify transactions
hereunder as exempt under Rule 16b-3, the transactions contemplated
hereunder shall be structured to satisfy the requirements for exemption
under Rule 16b-3.
(iv) Other Administration. Other than as provided above, the Plan
shall be administered by the Board or a Committee.
-4-
<PAGE>
(b) Powers of the Administrator. Subject to the provisions of the Plan, and
in the case of a Committee, subject to the specific duties delegated by the
Board to such Committee, the Administrator shall have the authority, in its
discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and Stock
Purchase Rights may be granted hereunder;
(iii) to determine the number of shares of Common Stock to be covered
by each Option and Stock Purchase Right granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, not inconsistent with the
terms of the Plan, of any Option or Stock Purchase Right granted hereunder.
Such terms and conditions include, but are not limited to, the exercise
price, the time or times when Options or Stock Purchase Rights may be
exercised (which may be based on performance criteria), any vesting
acceleration or waiver of forfeiture restrictions, and any restriction or
limitation regarding any Option or Stock Purchase Right or the shares of
Common Stock relating thereto, based in each case on such factors as the
Administrator, in its sole discretion, shall determine;
(vi) to reduce the exercise price of any Option or Stock Purchase
Right to the then current Fair Market Value if the Fair Market Value of the
Common Stock covered by such Option or Stock Purchase Right shall have
declined since the date the Option or Stock Purchase Right was granted;
(vii) to institute an Option Exchange Program;
(viii) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan;
(ix) to prescribe, amend and rescind rules and regulations relating to
the Plan, including rules and regulations relating to sub-plans established
for the purpose of qualifying for preferred tax treatment under foreign tax
laws;
(x) to modify or amend each Option or Stock Purchase Right (subject to
Section 15(c) of the Plan), including the discretionary authority to extend
the post-termination exercisability period of Options longer than is
otherwise provided for in the Plan;
(xi) to allow Optionees to satisfy withholding tax obligations by
electing to have the Company withhold from the Shares to be issued upon
exercise of an Option or Stock Purchase Right that number of Shares having
a Fair Market Value equal to the amount required to be withheld. The Fair
Market Value of the Shares to be withheld shall be determined on the date
that the amount of tax to be withheld is to be determined. All elections by
an Optionee to
-5-
<PAGE>
have Shares withheld for this purpose shall be made in such form and under
such conditions as the Administrator may deem necessary or advisable;
(xii) to authorize any person to execute on behalf of the Company any
instrument required to effect the grant of an Option or Stock Purchase
Right previously granted by the Administrator;
(xiii) to make all other determinations deemed necessary or advisable
for administering the Plan.
(c) Effect of Administrator's Decision. The Administrator's decisions,
determinations and interpretations shall be final and binding on all Optionees
and any other holders of Options or Stock Purchase Rights.
5. Eligibility. Nonqualified Stock Options and Stock Purchase Rights may be
granted to Service Providers. Incentive Stock Options may be granted only to
Employees.
6. Limitations.
(a) Each Option shall be designated in the Option Agreement as either an
Incentive Stock Option or a Nonqualified Stock Option. However, notwithstanding
such designation, to the extent that the aggregate Fair Market Value of the
Shares with respect to which Incentive Stock Options are exercisable for the
first time by the Optionee during any calendar year (under all plans of the
Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be
treated as Nonqualified Stock Options. For purposes of this Section 6(a),
Incentive Stock Options shall be taken into account in the order in which they
were granted. The Fair Market Value of the Shares shall be determined as of the
time the Option with respect to such Shares is granted.
(b) Neither the Plan nor any Option or Stock Purchase Right shall confer
upon an Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall either interfere
in any way with the Optionee's right or the Company's right to terminate such
relationship at any time, with or without cause.
(c) The following limitations shall apply to grants of Options:
(i) No Service Provider shall be granted, in any fiscal year of the
Company, Options to purchase more than 250,000 Shares.
(ii) In connection with his or her initial service, a Service Provider
may be granted Options to purchase up to an additional 250,000 Shares which
shall not count against the limit set forth in subsection (i) above.
(iii) The foregoing limitations shall be adjusted proportionately in
connection with any change in the Company's capitalization as described in
Section 13.
-6-
<PAGE>
(iv) If an Option is cancelled in the same fiscal year of the Company
in which it was granted (other than in connection with a transaction
described in Section 13), the cancelled Option will be counted against the
limits set forth in subsections (i) and (ii) above. For this purpose, if
the exercise price of an Option is reduced, the transaction will be treated
as a cancellation of the Option and the grant of a new Option.
7. Term of Plan. Subject to Section 19 of the Plan, the Plan shall become
effective upon its adoption by the Board. It shall continue in effect for a term
of ten (10) years unless terminated earlier under Section 15 of the Plan.
8. Term of Option. The term of each Option shall be stated in the Option
Agreement. In the case of an Incentive Stock Option, the term shall be ten (10)
years from the date of grant or such shorter term as may be provided in the
Option Agreement. Moreover, in the case of an Incentive Stock Option granted to
an Optionee who, at the time the Incentive Stock Option is granted, owns stock
representing more than ten percent (10%) of the total combined voting power of
all classes of stock of the Company or any Parent or Subsidiary, the term of the
Incentive Stock Option shall be five (5) years from the date of grant or such
shorter term as may be provided in the Option Agreement.
9. Option Exercise Price and Consideration.
(a) Exercise Price. The per share exercise price for the Shares to be
issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time the Incentive Stock
Option is granted, owns stock representing more than ten percent (10%)
of the voting power of all classes of stock of the Company or any
Parent or Subsidiary, the per Share exercise price shall be no less
than 110% of the Fair Market Value per Share on the date of grant.
(B) granted to any Employee other than an Employee described in
paragraph (A) immediately above, the per Share exercise price shall be
no less than 100% of the Fair Market Value per Share on the date of
grant.
(ii) In the case of a Nonqualified Stock Option, the per Share
exercise price shall be determined by the Administrator at the time of
grant. In the case of a Nonqualified Stock Option intended to qualify as
"performance-based compensation" within the meaning of Section 162(m) of
the Code, the per Share exercise price shall be no less than 100% of the
Fair Market Value per Share on the date of grant.
-7-
<PAGE>
(iii) Notwithstanding the foregoing, Options may be granted with a per
Share exercise price of less than 100% of the Fair Market Value per Share
on the date of grant pursuant to a merger or other corporate transaction.
(b) Waiting Period and Exercise Dates. At the time an Option is granted,
the Administrator shall fix the period within which the Option may be exercised
and shall determine any conditions which must be satisfied before the Option may
be exercised.
(c) Form of Consideration. The Administrator shall determine the acceptable
form of consideration for exercising an Option, including the method of payment.
In the case of an Incentive Stock Option, the Administrator shall determine the
acceptable form of consideration at the time of grant. Such consideration may
consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares acquired upon
exercise of an option, have been owned by the Optionee for more than six
months on the date of surrender, and (B) have a Fair Market Value on the
date of surrender equal to the aggregate exercise price of the Shares as to
which said Option shall be exercised;
(v) consideration received by the Company under a cashless exercise
program implemented by the Company in connection with the Plan;
(vi) a reduction in the amount of any Company liability to the
Optionee, including any liability attributable to the Optionee's
participation in any Company-sponsored deferred compensation program or
arrangement;
(vii) any combination of the foregoing methods of payment; or
(viii) such other consideration and method of payment for the issuance
of Shares to the extent permitted by Applicable Laws.
10. Exercise of Option.
(a) Procedure for Exercise; Rights as a Shareholder. Any Option granted
hereunder shall be exercisable according to the terms of the Plan and at such
times and under such conditions as determined by the Administrator and set forth
in the Option Agreement. Unless the Administrator provides otherwise, vesting of
Options granted hereunder shall be tolled during any unpaid leave of absence. An
Option may not be exercised for a fraction of a Share.
-8-
<PAGE>
An Option shall be deemed exercised when the Company receives: (i) written
or electronic notice of exercise (in accordance with the Option Agreement) from
the person entitled to exercise the Option, and (ii) full payment for the Shares
with respect to which the Option is exercised. Full payment may consist of any
consideration and method of payment authorized by the Administrator and
permitted by the Option Agreement and the Plan. Shares issued upon exercise of
an Option shall be issued in the name of the Optionee or, if requested by the
Optionee, in the name of the Optionee and his or her spouse. Notwithstanding the
exercise of an Option, until the Shares are issued (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company), no right to vote or receive dividends or any other rights
as a shareholder shall exist with respect to the Optioned Stock. The Company
shall issue (or cause to be issued) such Shares promptly after the Option is
exercised. No adjustment will be made for a dividend or other right for which
the record date is prior to the date the Shares are issued, except as provided
in Section 13 of the Plan.
Exercising an Option in any manner shall decrease the number of Shares
thereafter available, both for purposes of the Plan and for purchase under the
Option, by the number of Shares as to which the Option is exercised.
(b) Termination of Relationship as a Service Provider. If an Optionee
ceases to be a Service Provider, other than upon the Optionee's death or
Disability, the Optionee may exercise his or her Option within such period of
time as is specified in the Option Agreement to the extent that the Option is
vested on the date of termination (but in no event later than the expiration of
the term of such Option as set forth in the Option Agreement). In the absence of
a specified time in the Option Agreement, the Option shall remain exercisable
for three (3) months following the Optionee's termination. If, on the date of
termination, the Optionee is not vested as to his or her entire Option, the
Shares covered by the unvested portion of the Option shall revert to the Plan.
If, after termination, the Optionee does not exercise his or her Option within
the time specified by the Administrator, the Option shall terminate, and the
Shares covered by such Option shall revert to the Plan.
(c) Disability of Optionee. If an Optionee ceases to be a Service Provider
as a result of the Optionee's Disability, the Optionee may exercise his or her
Option within such period of time as is specified in the Option Agreement to the
extent the Option is vested on the date of termination (but in no event later
than the expiration of the term of such Option as set forth in the Option
Agreement). In the absence of a specified time in the Option Agreement, the
Option shall remain exercisable for twelve (12) months following the Optionee's
termination. If, on the date of termination, the Optionee is not vested as to
his or her entire Option, the Shares covered by the unvested portion of the
Option shall revert to the Plan. If, after termination, the Optionee does not
exercise his or her Option within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(d) Death of Optionee. If an Optionee dies while a Service Provider, the
Option may be exercised within such period of time as is specified in the Option
Agreement (but in no event later than the expiration of the term of such Option
as set forth in the Notice of Grant), by the Optionee's estate or by a person
who acquires the right to exercise the Option by bequest or
-9-
<PAGE>
inheritance, but only to the extent that the Option is vested on the date of
death. In the absence of a specified time in the Option Agreement, the Option
shall remain exercisable for twelve (12) months following the Optionee's
termination. If, at the time of death, the Optionee is not vested as to his or
her entire Option, the Shares covered by the unvested portion of the Option
shall immediately revert to the Plan. The Option may be exercised by the
executor or administrator of the Optionee's estate or, if none, by the person(s)
entitled to exercise the Option under the Optionee's will or the laws of descent
or distribution. If the Option is not so exercised within the time specified
herein, the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.
(e) Buyout Provisions. The Administrator may at any time offer to buy out
for a payment in cash or Shares any Option previously granted based on such
terms and conditions as the Administrator shall establish and communicate to the
Optionee at the time that such offer is made.
11. Stock Purchase Rights.
(a) Rights to Purchase. Stock Purchase Rights may be issued either alone,
in addition to, or in tandem with other awards granted under the Plan and/or
cash awards made outside of the Plan. After the Administrator determines that it
will offer Stock Purchase Rights under the Plan, it shall advise the offeree in
writing or electronically, by means of a Notice of Grant, of the terms,
conditions and restrictions related to the offer, including the number of Shares
that the offeree shall be entitled to purchase, the price to be paid, and the
time within which the offeree must accept such offer. The offer shall be
accepted by execution of a Restricted Stock Purchase Agreement in the form
determined by the Administrator.
(b) Repurchase Option. Unless the Administrator determines otherwise, the
Restricted Stock Purchase Agreement shall grant the Company a repurchase option
exercisable upon the voluntary or involuntary termination of the purchaser's
service with the Company for any reason (including death or Disability). The
purchase price for Shares repurchased pursuant to the Restricted Stock Purchase
Agreement shall be the original price paid by the purchaser and may be paid by
cancellation of any indebtedness of the purchaser to the Company. The repurchase
option shall lapse at a rate determined by the Administrator.
(c) Other Provisions. The Restricted Stock Purchase Agreement shall contain
such other terms, provisions and conditions not inconsistent with the Plan as
may be determined by the Administrator in its sole discretion.
(d) Rights as a Shareholder. Once the Stock Purchase Right is exercised,
the purchaser shall have the rights equivalent to those of a shareholder, and
shall be a shareholder when his or her purchase is entered upon the records of
the duly authorized transfer agent of the Company. No adjustment will be made
for a dividend or other right for which the record date is prior to the date the
Stock Purchase Right is exercised, except as provided in Section 13 of the Plan.
-10-
<PAGE>
12. Non-Transferability of Options and Stock Purchase Rights. Unless
determined otherwise by the Administrator, an Option or Stock Purchase Right may
not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any
manner other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Optionee, only by the Optionee. If the
Administrator makes an Option or Stock Purchase Right transferable, such Option
or Stock Purchase Right shall contain such additional terms and conditions as
the Administrator deems appropriate.
13. Adjustments Upon Changes in Capitalization, Dissolution, Merger or
Asset Sale.
(a) Changes in Capitalization. Subject to any required action by the
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option and Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option or Stock
Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed dissolution or
liquidation of the Company, the Administrator shall notify each Optionee as soon
as practicable prior to the effective date of such proposed transaction. The
Administrator in its discretion may provide for an Optionee to have the right to
exercise his or her Option until ten (10) days prior to such transaction as to
all of the Optioned Stock covered thereby, including Shares as to which the
Option would not otherwise be exercisable. In addition, the Administrator may
provide that any Company repurchase option applicable to any Shares purchased
upon exercise of an Option or Stock Purchase Right shall lapse as to all such
Shares, provided the proposed dissolution or liquidation takes place at the time
and in the manner contemplated. To the extent it has not been previously
exercised, an Option or Stock Purchase Right will terminate immediately prior to
the consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company with or
into another corporation, or the sale of substantially all of the assets of the
Company, each outstanding Option and Stock
-11-
<PAGE>
Purchase Right shall be assumed or an equivalent option or right substituted by
the successor corporation or a Parent or Subsidiary of the successor
corporation. In the event that the successor corporation refuses to assume or
substitute for the Option or Stock Purchase Right, the Optionee shall vest fully
in and have the right to exercise the Option or Stock Purchase Right as to all
of the Optioned Stock, including Shares as to which it would not otherwise be
vested or exercisable. If an Option or Stock Purchase Right becomes fully vested
and exercisable in lieu of assumption or substitution in the event of a merger
or sale of assets, the Administrator shall notify the Optionee in writing or
electronically that the Option or Stock Purchase Right shall be fully vested and
exercisable for a period of fifteen (15) days from the date of such notice, and
the Option or Stock Purchase Right shall terminate upon the expiration of such
period. For the purposes of this paragraph, the Option or Stock Purchase Right
shall be considered assumed if, following the merger or sale of assets, the
option or right confers the right to purchase or receive, for each Share of
Optioned Stock subject to the Option or Stock Purchase Right immediately prior
to the merger or sale of assets, the consideration (whether stock, cash, or
other securities or property) received in the merger or sale of assets by
holders of Common Stock for each Share held on the effective date of the
transaction (and if holders were offered a choice of consideration, the type of
consideration chosen by the holders of a majority of the outstanding Shares);
provided, however, that if such consideration received in the merger or sale of
assets is not solely common stock of the successor corporation or its Parent,
the Administrator may, with the consent of the successor corporation, provide
for the consideration to be received upon the exercise of the Option or Stock
Purchase Right, for each Share of Optioned Stock subject to the Option or Stock
Purchase Right, to be solely common stock of the successor corporation or its
Parent equal in fair market value to the per share consideration received by
holders of Common Stock in the merger or sale of assets.
14. Date of Grant. The date of grant of an Option or Stock Purchase Right
shall be, for all purposes, the date on which the Administrator makes the
determination granting such Option or Stock Purchase Right, or such other later
date as is determined by the Administrator. Notice of the determination shall be
provided to each Optionee within a reasonable time after the date of such grant.
15. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time amend, alter,
suspend or terminate the Plan.
(b) Shareholder Approval. The Company shall obtain shareholder approval of
any Plan amendment to the extent necessary and desirable to comply with
Applicable Laws.
(c) Effect of Amendment or Termination. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to Options granted under the
Plan prior to the date of such termination.
-12-
<PAGE>
16. Conditions Upon Issuance of Shares.
(a) Legal Compliance. Shares shall not be issued pursuant to the exercise
of an Option or Stock Purchase Right unless the exercise of such Option or Stock
Purchase Right and the issuance and delivery of such Shares shall comply with
Applicable Laws and shall be further subject to the approval of counsel for the
Company with respect to such compliance.
(b) Investment Representations. In the event the Shares have not been
registered under the Securities Act of 1933, as amended, as a condition to the
exercise of an Option or Stock Purchase Right, the Company may require the
person exercising such Option or Stock Purchase Right to represent and warrant
at the time of any such exercise that the Shares are being purchased only for
investment and without any present intention to sell or distribute such Shares
if, in the opinion of counsel for the Company, such a representation is
required.
17. Inability to Obtain Authority. The inability of the Company to obtain
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
18. Reservation of Shares. The Company, during the term of this Plan, will
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
19. Shareholder Approval. The Plan shall be subject to approval by the
shareholders of the Company within twelve (12) months after the date the Plan is
adopted. Such shareholder approval shall be obtained in the manner and to the
degree required under Applicable Laws.
-13-
INTERACTIVE MAGIC, INC.
1998 EMPLOYEE STOCK PURCHASE PLAN
1. Purpose. The purpose of the Plan is to provide employees of the Company
and its Designated Subsidiaries with an opportunity to purchase Common Stock of
the Company through accumulated payroll deductions. It is the intention of the
Company to have the Plan qualify as an "Employee Stock Purchase Plan" under
Section 423 of the Internal Revenue Code of 1986, as amended. The provisions of
the Plan, accordingly, shall be construed so as to extend and limit
participation in a manner consistent with the requirements of that section of
the Code.
2. Definitions.
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(c) "Common Stock" shall mean the Common Stock of the Company.
(d) "Company" shall mean Interactive Magic, Inc., a North Carolina
corporation, and any Designated Subsidiary of the Company.
(e) "Compensation" shall mean all base straight time gross earnings
and commissions, exclusive of payments for overtime, shift premium,
incentive compensation, incentive payments, bonuses and other compensation.
(f) "Designated Subsidiary" shall mean any Subsidiary which has been
designated by the Board from time to time in its sole discretion as
eligible to participate in the Plan.
(g) "Employee" shall mean any individual who is an Employee of the
Company for tax purposes whose customary employment with the Company is at
least twenty (20) hours per week and more than five (5) months in any
calendar year. For purposes of the Plan, the employment relationship shall
be treated as continuing intact while the individual is on sick leave or
other leave of absence approved by the Company. Where the period of leave
exceeds 90 days and the individual's right to reemployment is not
guaranteed either by statute or by contract, the employment relationship
shall be deemed to have terminated on the 91st day of such leave.
(h) "Enrollment Date" shall mean the first day of each Offering
Period.
(i) "Exercise Date" shall mean the last day of each Offering Period.
-1-
<PAGE>
(j) "Fair Market Value" shall mean, as of any date, the value of
Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the
Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq
Stock Market, its Fair Market Value shall be the closing sales price
for such stock (or the closing bid, if no sales were reported) as
quoted on such exchange or system for the last market trading day on
the date of such determination, as reported in The Wall Street Journal
or such other source as the Board deems reliable, or;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market
Value shall be the mean of the closing bid and asked prices for the
Common Stock on the date of such determination, as reported in The
Wall Street Journal or such other source as the Board deems reliable,
or;
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith
by the Board.
(iv) For purposes of the Enrollment Date of the first Offering
Period, the Fair Market Value shall be the price to the public as set
forth in the final prospectus included within the registration
statement on Form S-1 filed with the Securities and Exchange
Commission for the initial public offering of the Common Stock.
(k) "Offering Period" shall mean a period of approximately six (6)
months during which an option granted pursuant to the Plan may be
exercised, commencing on the first Trading Day on or after November 1 and
terminating on the last Trading Day in the period ending the following
April 30, or commencing on the first Trading Day on or after May 1 and
terminating on the last Trading Day in the period ending the following
October 31; provided, however, that the first Offering Period under the
Plan shall commence with the first Trading Day on or after the date on
which the Securities and Exchange Commission declares the Company's
Registration Statement effective and ending on the last Trading Day on or
before October 31. The duration of Offering Periods may be changed pursuant
to Section 4 of this Plan.
(l) "Plan" shall mean this Employee Stock Purchase Plan.
(m) "Purchase Price" shall mean an amount equal to 85% of the Fair
Market Value of a share of Common Stock on the Exercise Date.
(n) Reserves" shall mean the number of shares of Common Stock covered
by each option under the Plan which have not yet been exercised and the
number of shares of Common Stock which have been authorized for issuance
under the Plan but not yet placed under option.
-2-
<PAGE>
(o) "Subsidiary" shall mean a corporation, domestic or foreign, of
which not less than 50% of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter
organized or acquired by the Company or a Subsidiary.
(p) "Trading Day" shall mean a day on which national stock exchanges
and the Nasdaq System are open for trading.
3. Eligibility.
(a) Any Employee who shall be employed by the Company on a given
Enrollment Date shall be eligible to participate in the Plan.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) to the extent that,
immediately after the grant, such Employee (or any other person whose stock
would be attributed to such Employee pursuant to Section 424(d) of the
Code) would own capital stock of the Company and/or hold outstanding
options to purchase such stock possessing five percent (5%) or more of the
total combined voting power or value of all classes of the capital stock of
the Company or of any Subsidiary, or (ii) to the extent that his or her
rights to purchase stock under all employee stock purchase plans of the
Company and its subsidiaries accrues at a rate which exceeds Twenty-Five
Thousand Dollars ($25,000) worth of stock (determined at the fair market
value of the shares at the time such option is granted) for each calendar
year in which such option is outstanding at any time.
4. Offering Periods. The Plan shall be implemented by consecutive Offering
Periods with a new Offering Period commencing on the first Trading Day on or
after May 1 and November 1 each year, or on such other date as the Board shall
determine, and continuing thereafter until terminated in accordance with Section
20 hereof; provided, however, that the first Offering Period under the Plan
shall commence with the first Trading Day on or after the date on which the
Securities and Exchange Commission declares the Company's Registration Statement
effective and ending on the last Trading Day on or before October 31, 1998. The
Board shall have the power to change the duration of Offering Periods (including
the commencement dates thereof) with respect to future offerings without
stockholder approval if such change is announced at least five (5) days prior to
the scheduled beginning of the first Offering Period to be affected thereafter.
5. Participation.
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement authorizing payroll deductions in the
form of Exhibit A to this Plan and filing it with the Company's payroll
office prior to the applicable Enrollment Date.
(b) Payroll deductions for a participant shall commence on the first
payroll following the Enrollment Date and shall end on the last payroll in
the Offering Period to which such authorization is applicable, unless
sooner terminated by the participant as provided in Section 10 hereof.
-3-
<PAGE>
6. Payroll Deductions.
(a) At the time a participant files his or her subscription agreement,
he or she shall elect to have payroll deductions made on each pay day
during the Offering Period in an amount not exceeding ten percent (10%) of
the Compensation which he or she receives on each pay day during the
Offering Period.
(b) All payroll deductions made for a participant shall be credited to
his or her account under the Plan and shall be withheld in whole
percentages only. A participant may not make any additional payments into
such account.
(c) A participant may discontinue his or her participation in the Plan
as provided in Section 10 hereof, or may increase or decrease the rate of
his or her payroll deductions during the Offering Period by completing or
filing with the Company a new subscription agreement authorizing a change
in payroll deduction rate. The Board may, in its discretion, limit the
number of participation rate changes during any Offering Period. The change
in rate shall be effective with the first full payroll period following
five (5) business days after the Company's receipt of the new subscription
agreement unless the Company elects to process a given change in
participation more quickly. A participant's subscription agreement shall
remain in effect for successive Offering Periods unless terminated as
provided in Section 10 hereof.
(d) Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b) hereof, a participant's
payroll deductions may be decreased to zero percent (0%) at any time during
an Offering Period. Payroll deductions shall recommence at the rate
provided in such participant's subscription agreement at the beginning of
the first Offering Period which is scheduled to end in the following
calendar year, unless terminated by the participant as provided in Section
10 hereof.
(e) At the time the option is exercised, in whole or in part, or at
the time some or all of the Company's Common Stock issued under the Plan is
disposed of, the participant must make adequate provision for the Company's
federal, state, or other tax withholding obligations, if any, which arise
upon the exercise of the option or the disposition of the Common Stock. At
any time, the Company may, but shall not be obligated to, withhold from the
participant's compensation the amount necessary for the Company to meet
applicable withholding obligations, including any withholding required to
make available to the Company any tax deductions or benefits attributable
to sale or early disposition of Common Stock by the Employee.
7. Grant of Option. On the Enrollment Date of each Offering Period, each
eligible Employee participating in such Offering Period shall be granted an
option to purchase on the Exercise Date of such Offering Period (at the
applicable Purchase Price) up to a number of shares of the Company's Common
Stock determined by dividing such Employee's payroll deductions accumulated
prior to such Exercise Date and retained in the Participant's account as of the
Exercise Date by the applicable Purchase Price; provided that in no event shall
an Employee be
-4-
<PAGE>
permitted to purchase during each Offering Period more than 2,500 shares
(subject to any adjustment pursuant to Section 19), and provided further that
such purchase shall be subject to the limitations set forth in Sections 3(b) and
12 hereof. Exercise of the option shall occur as provided in Section 8 hereof,
unless the participant has withdrawn pursuant to Section 10 hereof. The Option
shall expire on the last day of the Offering Period.
8. Exercise of Option. Unless a participant withdraws from the Plan as
provided in Section 10 hereof, his or her option for the purchase of shares
shall be exercised automatically on the Exercise Date, and the maximum number of
full shares subject to option shall be purchased for such participant at the
applicable Purchase Price with the accumulated payroll deductions in his or her
account. No fractional shares shall be purchased; any payroll deductions
accumulated in a participant's account which are not sufficient to purchase a
full share shall be retained in the participant's account for the subsequent
Offering Period, subject to earlier withdrawal by the participant as provided in
Section 10 hereof. Any other monies left over in a participant's account after
the Exercise Date shall be returned to the participant. During a participant's
lifetime, a participant's option to purchase shares hereunder is exercisable
only by him or her.
9. Delivery. As promptly as practicable after each Exercise Date on which a
purchase of shares occurs, the Company shall arrange the delivery to each
participant, as appropriate, of a certificate representing the shares purchased
upon exercise of his or her option.
10. Withdrawal.
(a) A participant may withdraw all but not less than all the payroll
deductions credited to his or her account and not yet used to exercise his
or her option under the Plan at any time by giving written notice to the
Company in the form of Exhibit B to this Plan. All of the participant's
payroll deductions credited to his or her account shall be paid to such
participant promptly after receipt of notice of withdrawal and such
participant's option for the Offering Period shall be automatically
terminated, and no further payroll deductions for the purchase of shares
shall be made for such Offering Period. If a participant withdraws from an
Offering Period, payroll deductions shall not resume at the beginning of
the succeeding Offering Period unless the participant delivers to the
Company a new subscription agreement.
(b) A participant's withdrawal from an Offering Period shall not have
any effect upon his or her eligibility to participate in any similar plan
which may hereafter be adopted by the Company or in succeeding Offering
Periods which commence after the termination of the Offering Period from
which the participant withdraws.
11. Termination of Employment. Upon a participant's ceasing to be an
Employee for any reason, he or she shall be deemed to have elected to withdraw
from the Plan and the payroll deductions credited to such participant's account
during the Offering Period but not yet used to exercise the option shall be
returned to such participant or, in the case of his or her death, to the person
or persons entitled thereto under Section 15 hereof, and such participant's
option shall be automatically terminated. The preceding sentence
notwithstanding, a participant who receives payment in lieu of notice of
termination of employment shall be treated as continuing to be an
-5-
<PAGE>
Employee for the participant's customary number of hours per week of employment
during the period in which the participant is subject to such payment in lieu of
notice.
12. Interest. No interest shall accrue on the payroll deductions of a
participant in the Plan.
13. Stock.
(a) The maximum number of shares of the Company's Common Stock which
shall be made available for sale under the Plan shall be Five Hundred
Thousand (500,000) shares, subject to adjustment upon changes in
capitalization of the Company as provided in Section 19 hereof. If, on a
given Exercise Date, the number of shares with respect to which options are
to be exercised exceeds the number of shares then available under the Plan,
the Company shall make a pro rata allocation of the shares remaining
available for purchase in as uniform a manner as shall be practicable and
as it shall determine to be equitable.
(b) The participant shall have no interest or voting right in shares
covered by his option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan shall be
registered in the name of the participant or in the name of the participant
and his or her spouse.
14. Administration. The Plan shall be administered by the Board or a
committee of members of the Board appointed by the Board. The Board or its
committee shall have full and exclusive discretionary authority to construe,
interpret and apply the terms of the Plan, to determine eligibility and to
adjudicate all disputed claims filed under the Plan. Every finding, decision and
determination made by the Board or its committee shall, to the full extent
permitted by law, be final and binding upon all parties.
15. Designation of Beneficiary.
(a) A participant may file a written designation of a beneficiary who
is to receive any shares and cash, if any, from the participant's account
under the Plan in the event of such participant's death subsequent to an
Exercise Date on which the option is exercised but prior to delivery to
such participant of such shares and cash. In addition, a participant may
file a written designation of a beneficiary who is to receive any cash from
the participant's account under the Plan in the event of such participant's
death prior to exercise of the option. If a participant is married and the
designated beneficiary is not the spouse, spousal consent shall be required
for such designation to be effective.
(b) Such designation of beneficiary may be changed by the participant
at any time by written notice. In the event of the death of a participant
and in the absence of a beneficiary validly designated under the Plan who
is living at the time of such participant's death, the Company shall
deliver such shares and/or cash to the executor or administrator of the
estate of the participant, or if no such executor or administrator has been
appointed (to the knowledge
-6-
<PAGE>
of the Company), the Company, in its discretion, may deliver such shares
and/or cash to the spouse or to any one or more dependents or relatives of
the participant, or if no spouse, dependent or relative is known to the
Company, then to such other person as the Company may designate.
16. Transferability. Neither payroll deductions credited to a participant's
account nor any rights with regard to the exercise of an option or to receive
shares under the Plan may be assigned, transferred, pledged or otherwise
disposed of in any way (other than by will, the laws of descent and distribution
or as provided in Section 15 hereof) by the participant. Any such attempt at
assignment, transfer, pledge or other disposition shall be without effect,
except that the Company may treat such act as an election to withdraw funds from
an Offering Period in accordance with Section 10 hereof.
17. Use of Funds. All payroll deductions received or held by the Company
under the Plan may be used by the Company for any corporate purpose, and the
Company shall not be obligated to segregate such payroll deductions.
18. Reports. Individual accounts shall be maintained for each participant
in the Plan. Statements of account shall be given to participating Employees at
least annually, which statements shall set forth the amounts of payroll
deductions, the Purchase Price, the number of shares purchased and the remaining
cash balance, if any.
19. Adjustments Upon Changes in Capitalization, Dissolution, Liquidation,
Merger or Asset Sale.
(a) Changes in Capitalization. Subject to any required action by the
stockholders of the Company, the Reserves, the maximum number of shares
each participant may purchase per Offering Period (pursuant to Section 7),
as well as the price per share and the number of shares of Common Stock
covered by each option under the Plan which has not yet been exercised
shall be proportionately adjusted for any increase or decrease in the
number of issued shares of Common Stock resulting from a stock split,
reverse stock split, stock dividend, combination or reclassification of the
Common Stock, or any other increase or decrease in the number of shares of
Common Stock effected without receipt of consideration by the Company;
provided, however, that conversion of any convertible securities of the
Company shall not be deemed to have been "effected without receipt of
consideration". Such adjustment shall be made by the Board, whose
determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares
of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made
with respect to, the number or price of shares of Common Stock subject to
an option.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Offering Period then in
progress shall be shortened by setting a new Exercise Date (the "New
Exercise Date"), and shall terminate immediately prior to the consummation
of such proposed dissolution or liquidation, unless provided otherwise by
the
-7-
<PAGE>
Board. The New Exercise Date shall be before the date of the Company's
proposed dissolution or liquidation. The Board shall notify each
participant in writing, at least ten (10) business days prior to the New
Exercise Date, that the Exercise Date for the participant's option has been
changed to the New Exercise Date and that the participant's option shall be
exercised automatically on the New Exercise Date, unless prior to such date
the participant has withdrawn from the Offering Period as provided in
Section 10 hereof.
(c) Merger or Asset Sale. In the event of a proposed sale of all or
substantially all of the assets of the Company, or the merger of the
Company with or into another corporation, each outstanding option shall be
assumed or an equivalent option substituted by the successor corporation or
a Parent or Subsidiary of the successor corporation. In the event that the
successor corporation refuses to assume or substitute for the option, the
Offering Period then in progress shall be shortened by setting a new
Exercise Date (the "New Exercise Date"). The New Exercise Date shall be
before the date of the Company's proposed sale or merger. The Board shall
notify each participant in writing, at least ten (10) business days prior
to the New Exercise Date, that the Exercise Date for the participant's
option has been changed to the New Exercise Date and that the participant's
option shall be exercised automatically on the New Exercise Date, unless
prior to such date the participant has withdrawn from the Offering Period
as provided in Section 10 hereof.
20. Amendment or Termination.
(a) The Board of Directors of the Company may at any time and for any
reason terminate or amend the Plan. Except as provided in Section 19
hereof, no such termination can affect options previously granted, provided
that an Offering Period may be terminated by the Board of Directors on any
Exercise Date if the Board determines that the termination of the Plan is
in the best interests of the Company and its stockholders. Except as
provided in Section 19 hereof, no amendment may make any change in any
option theretofore granted which adversely affects the rights of any
participant. To the extent necessary to comply with Section 423 of the Code
(or any other applicable law, regulation or stock exchange rule), the
Company shall obtain shareholder approval in such a manner and to such a
degree as required.
(b) Without stockholder consent and without regard to whether any
participant rights may be considered to have been "adversely affected," the
Board (or its committee) shall be entitled to change the Offering Periods,
limit the frequency and/or number of changes in the amount withheld during
an Offering Period, establish the exchange ratio applicable to amounts
withheld in a currency other than U.S. dollars, permit payroll withholding
in excess of the amount designated by a participant in order to adjust for
delays or mistakes in the Company's processing of properly completed
withholding elections, establish reasonable waiting and adjustment periods
and/or accounting and crediting procedures to ensure that amounts applied
toward the purchase of Common Stock for each participant properly
correspond with amounts withheld from the participant's Compensation, and
establish such other limitations or procedures as the Board (or its
committee) determines in its sole discretion advisable which are consistent
with the Plan.
-8-
<PAGE>
21. Notices. All notices or other communications by a participant to the
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
22. Conditions Upon Issuance of Shares. Shares shall not be issued with
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange upon which the shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may require the
person exercising such option to represent and warrant at the time of any such
exercise that the shares are being purchased only for investment and without any
present intention to sell or distribute such shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned applicable provisions of law.
23. Term of Plan. The Plan shall become effective upon the earlier to occur
of its adoption by the Board of Directors or its approval by the stockholders of
the Company. It shall continue in effect for a term of ten (10) years unless
sooner terminated under Section 20 hereof.
-9-
<PAGE>
EXHIBIT A
INTERACTIVE MAGIC, INC.
1998 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
_____ Original Application Enrollment Date: __________
_____ Change in Payroll Deduction Rate
_____ Change of Beneficiary(ies)
1. _____________________________________ hereby elects to participate in the
1998 Employee Stock Purchase Plan (the "Employee Stock Purchase Plan") and
subscribes to purchase shares of the Company's Common Stock in accordance
with this Subscription Agreement and the Employee Stock Purchase Plan.
2. I hereby authorize payroll deductions from each paycheck in the amount of
____% of my Compensation on each payday (from 1 to 10%) during the Offering
Period in accordance with the Employee Stock Purchase Plan. (Please note
that no fractional percentages are permitted.)
3. I understand that said payroll deductions shall be accumulated for the
purchase of shares of Common Stock at the applicable Purchase Price
determined in accordance with the Employee Stock Purchase Plan. I
understand that if I do not withdraw from an Offering Period, any
accumulated payroll deductions will be used to automatically exercise my
option.
4. I have received a copy of the complete Employee Stock Purchase Plan. I
understand that my participation in the Employee Stock Purchase Plan is in
all respects subject to the terms of the Plan. I understand that my ability
to exercise the option under this Subscription Agreement is subject to
stockholder approval of the Employee Stock Purchase Plan.
5. Shares purchased for me under the Employee Stock Purchase Plan should be
issued in the name(s) of (Employee or Employee and Spouse only): .
6. I understand that if I dispose of any shares received by me pursuant to the
Plan within 2 years after the Enrollment Date (the first day of the
Offering Period during which I purchased such shares), I will be treated
for federal income tax purposes as having received ordinary income at the
time of such disposition in an amount equal to the excess of the fair
market value of the shares at the time such shares were purchased by me
over
<PAGE>
the price which I paid for the shares. I hereby agree to notify the Company
in writing within 30 days after the date of any disposition of shares and I
will make adequate provision for Federal, state or other tax withholding
obligations, if any, which arise upon the disposition of the Common Stock.
The Company may, but will not be obligated to, withhold from my
compensation the amount necessary to meet any applicable withholding
obligation including any withholding necessary to make available to the
Company any tax deductions or benefits attributable to sale or early
disposition of Common Stock by me. If I dispose of such shares at any time
after the expiration of the 2-year holding period, I understand that I will
be treated for federal income tax purposes as having received income only
at the time of such disposition, and that such income will be taxed as
ordinary income only to the extent of an amount equal to the lesser of (1)
the excess of the fair market value of the shares at the time of such
disposition over the purchase price which I paid for the shares, or (2) 15%
of the fair market value of the shares on the first day of the Offering
Period. The remainder of the gain, if any, recognized on such disposition
will be taxed as capital gain.
7. I hereby agree to be bound by the terms of the Employee Stock Purchase
Plan. The effectiveness of this Subscription Agreement is dependent upon my
eligibility to participate in the Employee Stock Purchase Plan.
8. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the
Employee Stock Purchase Plan:
NAME: (Please print) _________________________________________________
(First) (Middle) (Last)
_________________________ ________________________________________
Relationship
________________________________________
(Address)
Employee's Social
Security Number: ________________________________________
Employee's Address: ________________________________________
________________________________________
________________________________________
-2-
<PAGE>
I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT
SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.
Dated: ___________________ ________________________________________
Signature of Employee
________________________________________
Spouse's Signature (If beneficiary other
than spouse)
-3-
<PAGE>
EXHIBIT B
INTERACTIVE MAGIC, INC.
1998 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
The undersigned participant in the Offering Period of the 1998 Employee
Stock Purchase Plan which began on ___________ 19____ (the "Enrollment Date")
hereby notifies the Company that he or she hereby withdraws from the Offering
Period. He or she hereby directs the Company to pay to the undersigned as
promptly as practicable all the payroll deductions credited to his or her
account with respect to such Offering Period. The undersigned understands and
agrees that his or her option for such Offering Period will be automatically
terminated. The undersigned understands further that no further payroll
deductions will be made for the purchase of shares in the current Offering
Period and the undersigned shall be eligible to participate in succeeding
Offering Periods only by delivering to the Company a new Subscription Agreement.
Name and Address of Participant:
________________________________________
________________________________________
________________________________________
Signature:
________________________________________
Date: __________________________________
-4-
Schedule 21.01
List of Subsidiaries Of Interactive Magic, Inc.
Name of Subsidiary Jurisdiction of Organization
iMagicOnline Corporation North Carolina
Interactive Magic Ltd. United Kingdom
Interactive Magic GmbH Germany
<PAGE>
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated May 6, 1998, in the Registration Statement (Form SB-2
No. 333-__________) and related Prospectus of Interactive Magic, Inc. for the
registration of 2,800,000 shares of its common stock.
/s/ Ernst & Young LLP
Raleigh, North Carolina
May 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS OF INTERACTIVE MAGIC, INC. AS OF DECEMBER 31, 1997
AND MARCH 31, 1998 AND THE RELATED CONSOLIDATED STATEMENTS OF OPERATIONS,
STOCKHOLDERS' DEFICIT, AND CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1997 AND
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<NAME> INTERACTIVE MAGIC
<CIK> 0001061915
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-END> DEC-31-1997 MAR-31-1998
<CASH> 324 116
<SECURITIES> 0 0
<RECEIVABLES> 2,920 4,618
<ALLOWANCES> 0 0
<INVENTORY> 637 765
<CURRENT-ASSETS> 6,464 7,993
<PP&E> 1,196 1,158
<DEPRECIATION> 415 89
<TOTAL-ASSETS> 7,747 9,211
<CURRENT-LIABILITIES> 8,397 7,194
<BONDS> 0 0
0 600
8 86
<COMMON> 315 360
<OTHER-SE> (9,222) (4,805)
<TOTAL-LIABILITY-AND-EQUITY> 7,747 9,211
<SALES> 16,502 4,913
<TOTAL-REVENUES> 16,502 4,913
<CGS> 3,715 968
<TOTAL-COSTS> 18,928 5,096
<OTHER-EXPENSES> 230 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,675 307
<INCOME-PRETAX> (4,331) (490)
<INCOME-TAX> (33) 128
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,298) (618)
<EPS-PRIMARY> (1.36) (0.19)
<EPS-DILUTED> 0 0
</TABLE>
