U.S. Securities and Exchange Commission
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
Commission file number 0-29750
INTERACTIVE MAGIC, INC.
(Exact name of small business issuer as specified in its charter)
North Carolina 56-2092059
(State of incorporation) (I.R.S. Employer Identification Number)
215 Southport Drive, Suite 1000
Morrisville, North Carolina 27560
(Address of principal executive office)
(919) 461-0722
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes | X | No | |
As of November 12, 1999 (the most recent practicable date), there were
14,655,337 shares of the issuer's Common Stock, $.10 par value per share,
outstanding.
Transitional Small Business Disclosure Format (check one)
Yes |_| No | X |
<PAGE>
<TABLE>
<CAPTION>
INTERACTIVE MAGIC, INC.
Form 10-QSB Quarterly Report
INDEX
<S> <C> <C> <C> <C> <C> <C>
PART I FINANCIAL INFORMATION PAGE
Item 1 Financial Statements 3
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
PART II OTHER INFORMATION 28
Item 1 Legal Proceedings 28
Item 2 Changes in Securities and Use of Proceeds 28
Item 3 Defaults Upon Senior Securities 28
Item 4 Submission of Matters to a Vote of Security Holders 28
Item 5 Other Information 28
Item 6 Exhibits and Reports on Form 8-K 30
SIGNATURES 31
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Interactive Magic, Inc.
Consolidated Balance Sheets
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30 DECEMBER 31
1999 1998
(UNAUDITED) (AUDITED)
------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,570 $ 2,943
Trade receivables, net of allowances of $713
and $2,871, respectively 475 2,109
Inventories 61 892
Advance royalties, net 231 1,586
Software development costs, net - 912
Prepaid expenses and other 128 252
------------------------------
Total current assets 2,465 8,694
Property and equipment, net 1,110 1,082
Noncurrent assets:
Royalties receivable 73 726
Goodwill, net 3,750 0
Other - 18
------------------------------
Total noncurrent assets 4,933 744
------------------------------
Total assets $ 7,398 $10,520
==============================
<PAGE>
Interactive Magic, Inc.
Consolidated Balance Sheets (continued)
(IN THOUSANDS, EXCEPT SHARE DATA
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1999 1998
(UNAUDITED) (AUDITED)
------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
<S> <C> <C>
Accounts payable and accrued expenses $ 2,241 $ 1,698
Royalties and commissions payable 239 768
Lines of credit 1,023 1,348
Current portion of capital lease obligations 50 23
------------------------------------
Total current liabilities 3,553 3,837
Noncurrent liabilities:
Accrued interest payable to related parties 183 117
Long-term debt 2,156 -
Capital lease obligations, less current portion 13 15
------------------------------------
Total noncurrent liabilities 2,352 132
Stockholders' equity (deficit):
Preferred Stock, $.01 par value; 25,000,000 shares authorized; none
issued and outstanding - -
Common stock, $.10 par value; 50,000,000 shares authorized; 12,505,337
and 9,850,867 shares issued and outstanding at September 30, 1999 and
December 31, 1998, respectively 1,250 985
Additional paid-in capital 40,239 31,522
Accumulated deficit (39,861) (25,862)
Accumulated other comprehensive loss (135) (94)
-------------------------------------
Total stockholders' equity (deficit) 1,493 (6,551)
-------------------------------------
Total liabilities and stockholders' equity (deficit) $ 7,398 $ 10,520
=====================================
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
Interactive Magic, Inc.
Consolidated Statements of Operations
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1999 1998 1999 1998
-----------------------------------------------------------
NET REVENUES:
<S> <C> <C> <C> <C>
CD-ROM PRODUCT SALES $ 373 $ 1,903 $ 934 $ 8,455
ONLINE SALES 464 473 1,429 1,257
ROYALTIES AND LICENSES 12 293 19 1,692
ADVERTISING AND CONTRACT REVENUE 659 -- 1,265 --
------------------------------------------------------------------
TOTAL NET REVENUES 1,508 2,669 3,647 11,404
COST OF REVENUES:
COST OF PRODUCTS AND SERVICES 238 957 2,588 2,529
ROYALTIES AND AMORTIZED SOFTWARE COSTS -- 709 311 2,079
-----------------------------------------------------------------
TOTAL COST OF REVENUES 238 1,666 2,899 4,608
-----------------------------------------------------------------
GROSS PROFIT 1,270 1,003 748 6,796
OPERATING EXPENSES:
SALES AND MARKETING 912 2,446 4,003 6,161
PRODUCT DEVELOPMENT 1,000 1,273 4,193 3,234
GENERAL AND ADMINISTRATIVE 521 460 2,643 1,479
GOODWILL AMORTIZATION 376 -- 932 --
------------------------------------------------------------------
TOTAL OPERATING EXPENSES 2,809 4,179 11,771 10,874
-----------------------------------------------------------------
OPERATING LOSS (1,539) (3,176) (11,023) (4,078)
OTHER (INCOME) EXPENSE:
NET INTEREST EXPENSE - THIRD PARTIES 1,198 78 3,771 593
INTEREST EXPENSE - RELATED PARTIES 21 22 59 114
OTHER 16 (179) (906) (160)
-----------------------------------------------------------------
TOTAL OTHER (INCOME) EXPENSE 1,235 (79) 2,924 547
-----------------------------------------------------------------
LOSS BEFORE INCOME TAXES (2,774) (3,097) (13,947) (4,625)
INCOME TAX EXPENSE 10 28 52 156
-----------------------------------------------------------------
LOSS BEFORE EXTRAORDINARY ITEM $ (2,784) $ (3,125) $ (13,999) $ (4,781)
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT -- (387) -- (387)
=================================================================
NET LOSS $ (2,784) $ (3,512) $ (13,999) $ (5,168)
=================================================================
BASIC LOSS PER SHARE:
LOSS BEFORE EXTRAORDINARY ITEM $ (0.25) $ (0.35) $ (1.31) $ (0.88)
=================================================================
EXTRAORDINARY ITEM $ (0.00) $ (0.04) $ (0.00) $ (0.07)
=================================================================
NET LOSS PER SHARE $ (0.25) $ (0.39) $ (1.31) $ (0.95)
=================================================================
WEIGHTED AVERAGE SHARES USED IN COMPUTING BASIC
LOSS PER SHARE 11,013,733 8,992,650 10,674,069 5,420,773
=================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
Interactive Magic, Inc.
Consolidated Statements of Cash Flows
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
1999 1998
-----------------------------------
OPERATING ACTIVITIES
<S> <C> <C>
Net loss $ (13,999) $ (5,168)
Adjustments to reconcile net loss to net cash used in operating
activities:
Issuance of warrants 172 -
Depreciation and amortization 1,116 305
Extraordinary Loss - 387
Gain on the sale of advance royalties (NOTE 3) (855) -
Amortization of capitalized software development costs 329 745
Noncash interest expense 2,775 59
Write-off of capitalized software development costs 611 -
Changes in operating assets and liabilities net of effects of purchase of
MPG-Net (NOTE 4)
Trade and royalties receivables 2,402 (1,855)
Inventories 831 (96)
Advance royalties 5 (446)
Prepaid expenses and other (89) 48
Accounts payable and accrued expenses 251 (520)
Royalties and commissions payable (529) 92
Accrued interest to related party 66 (485)
-----------------------------------
Net cash used in operating activities (6,914) (6,934)
INVESTING ACTIVITIES
Acquisition of MPG-Net (NOTE 4) (15) -
Proceeds from the sale of advance royalties (NOTE 3) 2,315 -
Purchase of property and equipment (31) (208)
Increase in notes receivable (200) -
Software development costs (37) (1,423)
----------------------------------
Net cash provided by (used in) investing activities 2,032 (1,631)
FINANCING ACTIVITIES
Proceeds from issuance of common and preferred stock 245 23,760
Proceeds (Repayments) on long-term debt 3,660 (4,950)
Repayments on notes payable to related parties - (870)
<PAGE>
Interactive Magic, Inc.
Consolidated Statements of Cash Flows (continued)
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30
1999 1998
-----------------------------------
Net repayments from lines-of-credit (325) (3,342)
Payments on capital lease obligations (30) (38)
-----------------------------------
Net cash provided by financing activities 3,550 14,560
Effect of currency exchange rate changes on cash and cash equivalents (41) (25)
-----------------------------------
Net (decrease) increase in cash and cash equivalents (1,373) 5,970
Cash and cash equivalents at beginning of period 2,943 384
-----------------------------------
Cash and cash equivalents at end of period $ 1,570 $ 6,354
===================================
NONCASH INVESTING AND FINANCING ACTIVITIES
Conversion of notes payable into common and preferred stock $ 831 $ 2,600
===================================
Issuance of common stock in settlement of accrued interest payable to
related parties $ - $ 319
===================================
Conversion of preferred stock into common stock $ - $ 3,169
===================================
Issuance of common stock in connection with acquisition of MPG-Net (NOTE 4) $ 3,858 $ -
===================================
Issuance of common stock in connection with acquisition of Virtual Business
Designs, Inc. (NOTE 4) $ 288 $ -
===================================
Contingently issuable warrants provided to holder of convertible debenture
(NOTE 6) $ 1,067 $ -
===================================
Issuance of warrants to broker in connection with convertible debenture
(NOTE 6) $ 390 $ -
===================================
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
Interactive Magic, Inc.
Notes to Consolidated Financial Statements
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS
Interactive Magic, Inc. (or the "Company") is a developer and publisher of
Internet and online games and an operator of online game services. The Company
develops and publishes proprietary online multi-player games and is building the
Company Entertainment Network ("iEN"), an Internet distribution infrastructure
which will offer online gamers a variety of free, subscription and pay-per-play
games and services, including simulation, parlor, strategy, role playing and
action games.
The Company is the exclusive game site operator for AT&T WorldNet, an
Internet service provider ("ISP"), and has been contracted to provide online
games for America Online, the world's leading online Internet services company.
The Company seeks to establish itself as a major provider of online gaming
services for ISPs, Internet portals and online services in order to broaden its
audience of users. GameHub, AT&T WorldNet's co-branded online gaming service,
was launched in January 1999 and is currently being marketed by AT&T to new
WorldNet subscribers as a premium service included with their subscription. The
GameHub site offers consumers a mix of free and pay-per-play games in all
categories, including strategy, role playing, simulation, action and parlor
games. In addition to games, GameHub will offer chat rooms, forums and shopping
areas. GameHub is expected to generate revenue from subscriber premiums,
e-commerce and advertising. GameHub complements the Company's online gaming
strategy by expanding the Company's network of player communities.
2. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
Interactive Magic, Inc. (the "Company"), a North Carolina corporation, and its
wholly owned subsidiaries, iMagicOnline Corporation, Interactive Magic Ltd. And
Interactive Magic GmbH. All significant intercompany accounts and transactions
have been eliminated.
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. As shown in the consolidated
financial statements during the nine months ended September 30, 1999 the Company
incurred losses of $13,999,000 and has experienced negative cash flows from
operations. These factors, among others, indicate that the Company may be unable
to continue as a going concern for a reasonable period of time. The consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern. The Company's continuation
as a going concern is dependent upon its ability to generate sufficient cash
flow to meet its obligations on a timely basis, to obtain additional financing
or refinancing as may be required, and ultimately to attain profitability.
<PAGE>
Interactive Magic, Inc.
Notes to Consolidated Financial Statements (continued)
2. BASIS OF PRESENTATION (CONTINUED)
While the financial information furnished is unaudited, the condensed
consolidated financial statements included in this report reflect all
adjustments (consisting only of normal recurring adjustments) which the Company
considers necessary for the fair presentation of the results of operations for
the interim periods covered and of the financial condition of the Company at the
date of the interim balance sheet. The results for interim periods are not
necessarily indicative of the results for the entire year. The condensed
consolidated financial statements should be read in conjunction with the
Interactive Magic, Inc. consolidated financial statements and the notes thereto,
included in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1998.
3. DISPOSITION OF ASSETS
On May 25, 1999, the Company executed an Agreement Regarding Assignment of
Contracts (the "Agreement") to sell its rights under certain development
contracts for CD-ROM products between the Company and third party developers
(and assume certain liabilities thereto) for $2.5 million. The Agreement
provides the Company a license to use these products on the Internet. The
transaction was consummated on June 30, 1999. Cash proceeds to the Company, net
of related expenses, were $2.3 million. The carrying value of net assets sold
(primarily CD-ROM advance royalties) was $ 1.6 million. The Company recognized a
gain of $855,000 related to the sale, which is included in other (income)
expense in the consolidated statements of operations.
4. BUSINESS COMBINATION
On August 27, 1999 the Company purchased all right, title and interest in and to
all of the tangible and intangible assets of Virtual Business Designs, Inc.,
doing business as The Gamers Net ("The Gamers Net"), for 107,143 shares of its
common stock valued at approximately $288,000. The merger was accounted for as a
purchase in accordance with Accounting Principles Board Opinion No. 16 and,
accordingly, the operating results of The Gamers Net have been included in the
Company's consolidated financial statements since the date of acquisition.
The purchase price is being amortized over 2 years.
On February 12, 1999 the Company completed the acquisition of MPG-Net, Inc.
("MPG-Net") Company by exchanging 600,000 shares of its common stock valued at
approximately $3.1 million for all of the outstanding common stock of MPG-Net
and issuing 150,000 shares of its common stock valued at approximately $0.8
million in full settlement of certain debt obligations of MPG-Net. MPG-Net is
primarily in the business of developing, publishing and distributing
interactive, real time 3-D entertainment for multi-user online/Internet play, as
well as creating entertainment platforms on the Internet such as online game
channels, game hubs and websites. The merger was accounted for as a purchase in
accordance with Accounting Principles Board Opinion No. 16 and, accordingly, the
operating results of MPG-Net have been included in the Company's consolidated
financial statements since the date of acquisition. The excess of the aggregate
purchase price over the fair market value of the net assets acquired of
approximately $4.3 million is being amortized over 3 years.
<PAGE>
Interactive Magic, Inc.
Notes to Consolidated Financial Statements (continued)
4. BUSINESS COMBINATION (CONTINUED)
The following unaudited consolidated pro forma data summarizes the combined
operating results of the Company and MPG-Net as if the acquisition had occurred
at January 1, 1998:
<TABLE>
<CAPTION>
--------------------------- --------------------------
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
--------------------------- --------------------------
<S> <C> <C>
Net revenues $3,741 $ 11,588
Net loss before extraordinary item (14,459) (6,988)
Net loss (14,459) (7,375)
Loss per share $(1.34) $(1.20)
</TABLE>
5. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include amounts in demand deposit accounts and
investments with an original maturity date of three months or less when
purchased.
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.
<TABLE>
<CAPTION>
Inventories consist of the following (IN THOUSANDS):
SEPTEMBER 30, 1999 DECEMBER 31, 1998
-------------------------------------------------
<S> <C> <C>
Finished goods $ 243 $ 1,065
Components 93 117
-------------------------------------------------
336 1,182
Inventory valuation reserve (275) (290)
-------------------------------------------------
$ 61 $ 892
=================================================
</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. At September 30, 1999 and December 31, 1998, the reserve
for advance royalties was $36,000 and $1,654,000, respectively.
<PAGE>
Interactive Magic, Inc.
Notes to Consolidated Financial Statements (continued)
5. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
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.
Information related to net capitalized software development costs is as follows
(IN THOUSANDS):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
-------------------------------------------------
<S> <C> <C>
Balance at beginning of period $ 912 $ 425
Capitalized 37 1,450
Written off (620) -
Amortized (329) (963)
-------------------------------------------------
Balance at end of period $ - $ 912
=================================================
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, trade receivables, accounts
payable and other liabilities approximates fair value at September 30, 1999 and
December 31, 1998.
REVENUE RECOGNITION
In October 1997, the Accounting Standards Executive Committee (AcSEC) issued
Statement of Position (SOP) 97-2 Software Revenue Recognition as amended in
March 1998 by SOP 98-4 and October 1998 by SOP 98-9. These SOPs provide guidance
on applying generally accepted accounting principles in recognizing revenue on
software transactions. The Company adopted SOP 97-2 for software transactions
entered into beginning January 1, 1998. Based on the current requirements of the
SOPs, application of these statements did not have a material impact on the
Company's revenue recognition policies.
<PAGE>
Interactive Magic, Inc.
Notes to Consolidated Financial Statements (continued)
5. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
However, AcSEC is currently reviewing further modifications to the SOP with the
objective of providing more definitive, detailed implementation guidelines. This
guidance could lead to unanticipated changes in the Company's operations and
revenue recognition practices
Revenue from CD-ROM product sales 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. Revenue from
royalties and licenses is recognized when earned under the terms of the relevant
agreements with original equipment manufacturers ("OEMs"), international
distributors and other third parties. With respect to license agreements that
provide customers the right to multiple copies in exchange for guaranteed
amounts, net revenue is recognized upon delivery of the product master or the
first copy; provided collectibility is probable. Per copy royalties on sales
that exceed the guarantee are recognized as earned. The Company accepts product
returns and provides price protection on certain unsold merchandise. Revenue is
recorded net of an allowance for estimated future returns, markdowns, price
protection and warranty costs. Such reserves are based upon management's
evaluation of historical experience, current industry trends and estimated
costs.
Revenue from certain software development contracts with fixed price components
is recognized on the percentage of completion basis in accordance with the
American Institute of Certified Public Accountants' SOP 81-1, "Accounting for
Performance of Construction-Type and Certain Production-Type Contracts." In
accordance with SOP 81-1, the Company recognizes percentage of completion
revenue based upon the ratio of accumulated incurred costs to the total
estimated costs to complete each contract.
The accounts receivable allowance consists primarily of reserves for product
returns, markdowns, price protection and warranty costs. The allowance also
includes a reserve for doubtful accounts, which management records based on
historical experience and current evaluation of potential collectibility issues.
The Company does not require collateral for unpaid balances. Credit losses have
historically been within management's expectations.
<PAGE>
Interactive Magic, Inc.
Notes to Consolidated Financial Statements (continued)
5. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
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.
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, warranty provisions, and estimates regarding the recoverability
of prepaid royalty advances and inventory. Actual results could differ from
those estimates.
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 component
of accumulated other comprehensive loss.
INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes". Under SFAS No. 109, the liability method is used
in accounting for income taxes and deferred tax assets and liabilities are
determined based on differences between the financial reporting and tax bases of
assets and liabilities.
COMPREHENSIVE LOSS
The following chart details the Company's comprehensive loss for the periods
presented:
<TABLE>
<CAPTION>
-------------------------------------------- ---------------------------------------
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
------------------- ------------------------ --------------------- -----------------
1999 1998 1999 1998
------------------- ------------------------ --------------------- -----------------
<S> <C> <C> <C> <C>
Net Loss $ (2,784) $ (3,512) $ (13,999) $ (5,168)
Other comprehensive (loss) - (foreign
currency translation adjustment) (84) (4) (41) (25)
Comprehensive loss $ (2,868) $ (3,516) $ (14,040) $ (5,193)
</TABLE>
<PAGE>
Interactive Magic, Inc.
Notes to Consolidated Financial Statements (continued)
5. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
BASIC NET LOSS PER SHARE
Basic net loss per share has been calculated in accordance with SFAS No. 128,
"Earnings Per Share". SFAS No. 128 requires companies to compute earnings per
share under two different methods (basic and diluted). Basic net loss per share
is calculated by dividing net loss by the weighted average shares of common
stock outstanding during the period. All shares used in computing basic net loss
per share reflect the retroactive effect of the Company's July 1998 one-for-two
reverse stock split.
Had the Company been in a net income position, diluted earnings per share would
have been presented and would have included potential common shares related to
outstanding options and warrants. The diluted earnings per share computation is
not included, as all potential common shares are antidilutive. The Company
evaluated the requirements of the Securities and Exchange Commission Staff
Accounting Bulletin No. 98 ("SAB 98"), and concluded that there are no nominal
issuances of common stock or potential common stock which would be required to
be shown as outstanding for all periods as outlined in SAB 98.
6. LONG-TERM DEBT
On January 25, 1999, the Company issued a $4 million convertible debenture ("the
debenture") for net cash proceeds to the Company of approximately $3.7 million.
The Company also issued 200,000 warrants to the broker of the debenture, which
represented additional debt issuance costs, valued at $390,000. These warrants
were recorded as additional paid-in capital and the resulting debt issuance
costs will be amortized to interest expense over the term of the debenture.
These warrants have a weighted average exercise price of $4.85 and were
exercisable upon issuance. For the three and nine months ended September 30,
1999, amortization of the debt issuance costs was approximately $159,000 and
$259,000, respectively.
The debenture accrues interest at an annual interest rate of 6% and is due with
principal on January 25, 2002. The holder of the convertible debenture may
convert all or any portion of the debenture into the Company's common stock
where the number of shares to be issued will be determined by dividing the
principal plus interest due by the conversion price. The conversion price will
be equal to the lesser of a conversion price ranging from 77% to 93% of the
market price of the Company's common stock (as defined in the securities
purchase agreement) or a conversion price ranging from 104% to 120% of a fixed
conversion price (as defined in the securities purchase agreement). On the date
of conversion, if the Company's common stock trades at a price higher than the
fixed conversion price, the Company is obligated to issue to the holder of the
debenture warrants to purchase the Company's stock at a one-for-two ratio of
common stock issued as a result of the debenture conversion at an exercise price
equal to the debenture conversion price (the "contingently issuable warrants").
Subsequent to May 11, 1999 the debenture accrues additional interest at a
monthly rate of 4% of the outstanding principal balance until such time as the
Company's registration statement effecting the shares issuable under the
debenture becomes, and remains effective. For the nine months ended September
30, 1999, the Company recorded approximately $743,000 of interest expense
related to this provision.
<PAGE>
Interactive Magic, Inc.
Notes to Consolidated Financial Statements (continued)
6. LONG-TERM DEBT (CONTINUED)
The contingently issuable warrants were valued at approximately $1.1 million at
the date of issuance and were recorded as additional paid-in capital. The
beneficial conversion feature of the debenture also resulted in a portion of the
proceeds of the debenture being allocated to the conversion feature based on its
intrinsic value of $2.1 million, which was recorded as additional paid-in
capital. However, the debenture was convertible at the date of issuance and
therefore the value of the conversion feature was immediately recorded as
additional interest expense and accreted into the carrying value of the
debenture. Based on the recorded fair value of the contingently issuable
warrants, the carrying value assigned to the debenture at the date of issuance
was $2.9 million. The difference between the initial carrying value of the
debenture and the $4 million face value will be accreted into the carrying value
as additional interest expense over the term of the debenture. For the three and
nine months ended September 30, 1999, the Company recorded approximately
$232,000 and $380,000 in interest expense related to such accretion,
respectively.
For the three and nine months ended September 30, 1999, interest expense related
to this debenture totaled $1.2 million and $3.7 million, respectively.
On or about September 15, 1999 the holder of the debenture elected to convert
$830,611 of principal and the related accrued interest into 1,683,786 shares of
the Company's common stock.
7. STOCK OPTIONS, STOCK PLANS AND WARRANTS
The following table summarizes the activity under the Company's Stock Option
Plans for the nine months ended September 30, 1999:
<TABLE>
<CAPTION>
OPTIONS WEIGHTED-AVERAGE EXERCISE PRICE
OUTSTANDING PER SHARE
-------------------------------------------------------
<S> <C> <C> <C> <C>
Balances at December 31, 1998 1,981,968 2.72
Options granted 1,146,830 3.21
Options exercised (113,541) 2.26
Options canceled (772,344) 4.37
-------------------------------------------------------
Balances at September 30, 1999 2,242,913 $2.53
=======================================================
</TABLE>
At September 30, 1999 the Company had 1,380,231 options exercisable at exercise
prices ranging from $1.00 - $6.00 per share.
<PAGE>
Interactive Magic, Inc.
Notes to Consolidated Financial Statements (continued)
7. STOCK OPTIONS, STOCK PLANS AND WARRANTS (CONTINUED)
STOCK WARRANTS
The following summarizes the activity of warrants for the nine months ended
September 30, 1999:
WARRANTS
OUTSTANDING
------------
Balance at December 31, 1998 729,172
Issued 639,998
Cancelled (27,058)
Exercised -
------------
Balance at September 30, 1999 1,342,112
============
All of the Company's outstanding warrants at September 30, 1999 were exercisable
at prices ranging from $1.00 to $9.60 per share.
8. SUBSEQUENT EVENTS
Subsequent to the close of the September 30, 1999 quarter, the Company has
completed the following transactions in an effort to improve its financial
position:
A) On November 11, 1999, RGC International Investors, LDC (Rose Glen)
converted the remainder of its unconverted debenture, which as of
September 30, 1999 had an outstanding principal balance of
$3,310,844 and a recorded value of $2,156,000 into 3,310.844
shares of the Company's newly created Series D Preferred Stock
with a stated value of $1,000 per share. In addition, Rose Glen
converted $500,000 of all other accrued amounts under the
debenture into 500 shares of Series D Preferred Stock, and agreed
to waive all other accrued amounts which totaled $260,000. The
difference between the recorded value of the debt and the
outstanding principal balance along with the $260,000 waived
interest accrual were netted and charged to additional paid-in
capital. Interest expense related to these debentures was
$3,679,000 for the nine months ended September 30, 1999.
B) On November 11, 1999 Rose Glen purchased 1,100 shares of Series D
Preferred Stock for $1,100,000.
C) On November 11, 1999 Vertical Financial Holdings purchased 700,000
shares of common stock for $700,000.
D) On November 11, 1999 - Value Management & Research AG purchased
400,000 shares of common stock for $400,000.
<PAGE>
Interactive Magic, Inc.
Notes to Consolidated Financial Statements (continued)
8. SUBSEQUENT EVENTS (CONTINUED)
E) On November 9, 1999, J.W. Stealey, former CEO of the Company,
released the Company from the line of credit indebtedness to BB&T
in the amount of $1,000,000 in exchange for 1,000,000 shares of
common stock. The Company also paid $15,000 due on this line.
Interest expense on this line of credit was $78,000 and $158,000
for the nine months ended September 30, 1999 and the year ended
December 31, 1998 respectively. In addition, as part of these
transactions, Mr. Stealey's resignation agreement dated August 16,
1999 has been amended such that his consulting services are no
longer being used and the sole remaining consideration due him has
been reduced to one lump sum payment of $200,000 (less the value
of 12 months health insurance payments and car lease payments
totaling approximately $20,000) and 50,000 shares of the Company's
common stock valued at $62,500. This payment was made November 12,
1999. The Company has agreed to convey to Mr. Stealey all
trademarks and available rights to the name Interactive Magic,
pending shareholder approval of the Company name change to
iEntertainment Network. Mr. Stealey agreed to waive the interest
due him from the Company in the amount of $183,000 under the terms
of the line of credit with BB&T that he had personally guaranteed;
in consideration of which the Company incurred additional interest
expense of $59,000 for the nine months ended September 30, 1999
and $107,000 for the year ended December 31, 1998. The amount of
waived interest has been reflected as a credit to additional
paid-in capital.
The following unaudited pro forma consolidated financial data present the
unaudited pro forma consolidated balance sheet of Interactive Magic as of
September 30, 1999 and the unaudited pro forma consolidated statements of
operations of Interactive Magic for the nine months ended September 30, 1999 and
the year ended December 31, 1998. The unaudited pro forma consolidated balance
sheet data reflects the following adjustments, as described above, as if they
had occurred on September 30, 1999:
o Conversion of Rose Glen indebtedness
o All issuances of preferred and common stock
o Severance accrual for former CEO
o Release of the Company from the BB&T line of credit indebtedness
The unaudited consolidated statements of operations data reflect the release of
the BB&T line of credit indebtedness and the former CEO's personal guarantee as
if they had occurred on January 1, 1998.
The unaudited pro forma consolidated financial data are based on historical
financial statements of Interactive Magic and the aforementioned adjustments.
The unaudited pro forma financial data do not purport to represent what
Interactive Magic's financial position or result's of operations would actually
have been if the transactions had in fact occurred on the dates indicated and
are not necessarily representative of Interactive Magic's financial position or
results of operations at any future date or for any future period.
<PAGE>
Interactive Magic, Inc.
Unaudited Condensed Consolidated Pro Forma Balance Sheet
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
SEPTEMBER 30 PRO FORMA SEPTEMBER 30
1999 ADJUSTMENTS 1999
--------------------------------------------------------
ASSETS
Current assets:
<S> <C> <C> <C>
Cash and cash equivalents $ 1,570 B 1,100 $ 3,575
C 700
D 400
E (15)
E (180)
Other current assets 895 895
--------------------------------------------------------
Total current assets 2,465 2,005 4,470
Property and equipment, net 1,110 1,110
Goodwill and intangible assets 3,750 3,750
Other 73 73
========================================================
Total assets $ 7,398 $ 2,005 $ 9,403
========================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,241 A (760) $ 1,501
E 20
Lines of credit 1,023 E (1,015) 8
Royalties and other current liabilities 289 289
--------------------------------------------------------
Total current liabilities 3,553 (1,755) 1,798
Long-term debt 2,156 A (2,156) -
Other noncurrent liabilities 196 E (183) 13
Stockholders' equity:
Preferred Stock, $.10 par value; 25,000,000 shares
authorized; of Series D Preferred Stock, stated
value $1,000 per share. 4,910.844 shares
authorized, issued and outstanding - A,B 1 1
Common stock, $.10 par value; 50,000,000 shares
authorized; 12,505,337 and 14,655,337 shares issued and
outstanding at September 30, 1999 and pro forma
September 30, 1999, respectively 1,250 C 70 1,465
D 40
E 105
</TABLE>
<PAGE>
INTERACTIVE MAGIC, INC.
Unaudited Condensed Consolidated Pro Forma Balance Sheet (continued)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
SEPTEMBER 30 PRO FORMA SEPTEMBER 30
1999 ADJUSTMENTS 1999
-----------------------------------------------------------
<S> <C> <C> <C>
Additional paid-in capital 40,239 A 2,915 46,385
B 1,100
C 630
D 360
E 1,141
Accumulated deficit (39,861) E (263) (40,124)
Accumulated other comprehensive loss (135) (135)
------------------------------------------------------------
Total stockholders' equity 1,493 6,099 7,592
===========================================================
Total liabilities and stockholders' equity $ 7,398 $ 2,005 $ 9,403
===========================================================
</TABLE>
<PAGE>
Interactive Magic, Inc.
Unaudited Pro Forma Consolidated Statements of Operations
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
---------------------
PRO FORMA
ADJUSTMENTS
------------------------------------------------------------------------
NET REVENUES:
<S> <C> <C>
CD-ROM PRODUCT SALES $ 934 $ 934
ONLINE SALES 1,429 1,429
ROYALTIES AND LICENSES 19 19
ADVERTISING AND OTHER 1,265 1,265
------------------------------------------------------------------------
TOTAL NET REVENUES 3,647 3,647
COST OF REVENUES:
COST OF PRODUCTS AND SERVICES 2,620 2,620
ROYALTIES AND AMORTIZED SOFTWARE COSTS 279 279
------------------------------------------------------------------------
TOTAL COST OF REVENUES 2,899 2,899
------------------------------------------------------------------------
GROSS PROFIT 748 748
OPERATING EXPENSES:
SALES AND MARKETING 4,003 4,003
PRODUCT DEVELOPMENT 4,193 4,193
GENERAL AND ADMINISTRATIVE 2,643 2,643
GOODWILL 932 932
------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 11,771 11,771
------------------------------------------------------------------------
OPERATING LOSS (11,023) (11,023)
OTHER (INCOME) EXPENSE:
NET INTEREST EXPENSE/(INCOME) - THIRD PARTIES 3,771 A (3,679) 14
E (78)
INTEREST EXPENSE - RELATED PARTIES 59 E (59) -
OTHER (906) (906)
------------------------------------------------------------------------
TOTAL OTHER (INCOME) EXPENSE 2,924 (3,816) (892)
------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES (13,947) (3,816) (10,131)
INCOME TAX EXPENSE 52 52
------------------------ -------------------------------------
NET LOSS $ (13,999) (3,816) $ (10,183)
BASIC LOSS PER SHARE:
NET LOSS PER SHARE $ (1.31) $ (0.80)
========================================================================
WEIGHTED AVERAGE SHARES USED IN COMPUTING BASIC
LOSS PER SHARE 10,674,069 12,774,069
========================================================================
</TABLE>
<PAGE>
Interactive Magic, Inc.
Consolidated Pro Forma Statements of Operations
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA UNAUDITED
PRO FORMA
YEAR ENDED DECEMBER YEAR ENDED DECEMBER
31, 1998 31, 1998
----------------------
ADJUSTMENTS
----------------------
ITEM
--------------------------------------------------
NET REVENUES:
<S> <C> <C>
CD-ROM PRODUCT SALES $ 9,177 $ 9,177
ONLINE SALES 1,773 1,773
ROYALTIES AND LICENSES 1,616 1,616
----------------------
---------------------------------------
TOTAL NET REVENUES 12,566 12,566
COST OF REVENUES:
COST OF PRODUCTS AND SERVICES 3,157 3,157
ROYALTIES AND AMORTIZED SOFTWARE COSTS 2,942 2,942
---------------------- ---------------------------------------
TOTAL COST OF REVENUES 6,099 6,099
---------------------- ---------------------------------------
GROSS PROFIT 6,467 6,467
OPERATING EXPENSES:
SALES AND MARKETING 8,490 8,490
PRODUCT DEVELOPMENT 5,983 5,983
GENERAL AND ADMINISTRATIVE 2,684 2,684
---------------------------------------
----------------------
TOTAL OPERATING EXPENSES 17,157 17,157
---------------------- ---------------------------------------
OPERATING LOSS (10,690) (10,690)
OTHER (INCOME) EXPENSE:
NET INTEREST EXPENSE/(INCOME) - THIRD PARTIES 554 E (158) 396
INTEREST EXPENSE - RELATED PARTIES 134 E (107) 27
OTHER (161) (161)
---------------------- ---------------------------------------
TOTAL OTHER (INCOME) EXPENSE 527 (265) 262
---------------------- ---------------------------------------
LOSS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM (11,217) (265) (11,952)
INCOME TAX EXPENSE 28 28
---------------------- ---------------------------------------
LOSS BEFORE EXTRAORDINARY ITEM $ (11,245) (265) $ (10,980)
BASIC LOSS PER SHARE:
LOSS BEFORE EXTRAORDINARY ITEM $ (1.73) $ (1.27)
====================== =======================================
WEIGHTED AVERAGE SHARES USED IN COMPUTING BASIC
LOSS PER SHARE 6,515,213 8,615,213
====================== =======================================
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
On June 30,1999 the Company received $2,500,000 from Ubi Soft Entertainment
S.A.for the sale of the rights the Company had for the development of certain
CD-ROM games. The Company retained the online rights for these games. The sale
of the development rights marked the Company's exit from the CD-ROM business.
The three month and nine month financial statement comparisons are therefore
heavily impacted by the disposition of the CD-ROM business.
NET REVENUES
Net revenues decreased by 43% to $ 1.5 million for the three months ended
September 30, 1999 from $2.7 million for the three months ended September 30,
1998. Net revenue decreased from $11.4 million in the first nine months of 1998
to $3.6 million in the first nine months of 1999.
The following table summarizes the changes in revenue from 1998 to 1999:
<TABLE>
<CAPTION>
- -------------------------------------------- ------------------------------------ ------------------------------
- -------------------------------------------- ------------------------------------ ------------------------------
Three Months ended September 30 Nine months ended September 30
($000) ($000)
- -------------------------------------------- ------------------------------------ ------------------------------
<S> <C> <C> <C>
Revenue for the period in 1998 $2,669 $11,404
- -------------------------------------------- ------------------------------------ ------------------------------
Increase/ (Decrease) in CD-ROM revenue (1,530) (7,521)
- -------------------------------------------- ------------------------------------ ------------------------------
Increase/ (Decrease) in Online Revenue (9) 172
- -------------------------------------------- ------------------------------------ ------------------------------
Increase/(Decrease) in Royalty & Licensing (281) (1,673)
- -------------------------------------------- ------------------------------------ ------------------------------
Increase in Advertising & Other 659 1,265
- -------------------------------------------- ------------------------------------ ------------------------------
Revenue for the period in 1999 $1,508 $3,647
- -------------------------------------------- ------------------------------------ ------------------------------
</TABLE>
COST OF REVENUES.
Cost of revenues consist of costs of products sold (including cost of Internet
access) and royalties and amortization of software development costs. Cost of
revenues in the third quarter of 1999 decreased to $ 0.2 million from $1.7
million in the same period of 1998. The decrease was due to the Company's exit
from the CD-ROM business. For the nine month period, cost of revenue in 1999 is
$1.7 million below the comparable period for 1998. The decrease reflects the
considerably lower level of CD-ROM shipments, offset partially by the expenses
in the second quarter for the establishment of reserves and inventory
write-downs associated with the exit from the CD-ROM business.
<PAGE>
OPERATING EXPENSES
Operating expenses decreased $1.4 million or 33% from the third quarter of 1998
to the same period in 1999. On a year-to-date basis, operating expenses were
$0.9 million higher in 1999 than they were in 1998. Included in the 1999 results
was $376,000 and $932,000 for the three and nine month periods, respectively,
due to amortization of goodwill associated with the MPG-Net acquisition. The
following is a summary of major variances:
<TABLE>
<CAPTION>
- ------------------------------------------------ ------------------------------------- -------------------------------
- ------------------------------------------------ ------------------------------------- -------------------------------
Three Months ended September 30 Nine months ended September 30
($000) ($000)
- ------------------------------------------------ ------------------------------------- -------------------------------
<S> <C> <C> <C>
Operating Expenses for the period in 1998 $4,179 $10,874
- ------------------------------------------------ ------------------------------------- -------------------------------
Increase/ (Decrease) Sales and Marketing (1,534) (2,158)
- ------------------------------------------------ ------------------------------------- -------------------------------
Increase/ (Decrease) Product Development (273) 959
- ------------------------------------------------ ------------------------------------- -------------------------------
Increase/ (Decrease) General and Administrative 61 1,164
- ------------------------------------------------ ------------------------------------- -------------------------------
Increase/ (Decrease) Goodwill Amortization 376 932
- ------------------------------------------------ ------------------------------------- -------------------------------
Operating Expenses for the period in 1999 $2,809 $11,771
- ------------------------------------------------ ------------------------------------- -------------------------------
</TABLE>
SALES AND MARKETING. Sales and marketing expenses declined significantly during
the quarter due to the exit from the CD-ROM business, and declined for a similar
reason year-to-date, which was coupled with a significant decrease in market
development funds spending in 1999 compared to 1998.
PRODUCT DEVELOPMENT. Product development expenses decreased in the quarter due
to the exit from the CD-ROM business, but higher year-to-date due to increased
development for on-line games, as well as the write-off of unamortized
development costs associated with the exit from the CD-ROM business.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
slightly for the three month period, and were higher on a year-to-date basis due
to the additional expense of being a publicly-held company; relocation expenses
relating to the consolidation of our Florida and Texas operations to North
Carolina; as well as employee severance.
Goodwill Amortization. Goodwill from the MPG-Net acquisition is being amortized
to income over 36 months.
OTHER (INCOME) EXPENSE
For the first nine months of 1999 compared to 1998 there is additional expense
of $2,379,000. The higher expense level is due to the interest expense relating
to the recognition of the beneficial conversion feature of the $ 4,000,000
convertible debenture, and related warrants, which were issued in the first
quarter of 1999; as well as the interest expense on these debentures, which is
partially offset by the gain on the sale of the CD-ROM business in the second
quarter.
INCOME TAX EXPENSE
The Company recorded $53,000 in income tax expense for the first nine months of
1999 compared to $156,000 for the same period in 1998. The entire tax expense in
each period is attributable to earnings in Europe.
<PAGE>
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 private sale of equity securities, and its initial
public offering.
The following is a condensed table of cash on hand and major cash flow items
from December 31, 1998 to September 30, 1999:
<TABLE>
<CAPTION>
----------------------------------------------------------------- ------------------
$ Million
----------------------------------------------------------------- ------------------
----------------------------------------------------------------- ------------------
<S> <C> <C> <C>
Cash on hand, December 31, 1998 $2.9
----------------------------------------------------------------- ------------------
----------------------------------------------------------------- ------------------
Net loss for the first nine months (14.0)
----------------------------------------------------------------- ------------------
Add: non-cash charges and expenses 5.0
----------------------------------------------------------------- ------------------
Less: non-cash gain on sale of CD-ROM (.9)
----------------------------------------------------------------- ------------------
Changes in working capital 3.0
----------------------------------------------------------------- ------------------
Net Cash Used in Operations (6.9)
----------------------------------------------------------------- ------------------
Net proceeds from sale of CD-ROM 2.3
----------------------------------------------------------------- ------------------
Net proceeds from issuing convertible debentures 3.7
----------------------------------------------------------------- ------------------
Other investing and financing activities (.4)
----------------------------------------------------------------- ------------------
----------------------------------------------------------------- ------------------
Net change in cash for the nine months ended September 30, 1999 (1.3)
----------------------------------------------------------------- ------------------
----------------------------------------------------------------- ------------------
Cash on hand, September 30, 1999 $1.6
----------------------------------------------------------------- ------------------
</TABLE>
The Company maintains lines of credit arrangements with a bank for $1.0 million.
The principal balance is payable on July 10, 2000 with interest payable monthly
at interest rates ranging from 6.45% to the bank's current prime rate plus 0.5%
(8.75% as of September 30, 1999). The balance outstanding under this line as of
September 30, 1999 was $ 1.0 million. Advances on the line of credit are
collateralized by a personal guarantee of the Company's largest shareholder
prior to November 1999.
The Company's continuation as a going concern is dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely basis, to
obtain additional financing or refinancing as may be required, and ultimately to
attain profitability. Management expects the disposition of its CD-ROM
operations will reduce its operating losses and expects to be able to attract
additional capital, if needed, for its online operations. However, there can be
no assurance that management's plans will be executed as anticipated.
Subsequent to the close of the September 30, 1999 quarter, the Company has
completed the following transactions in an effort to improve its financial
position:
A) On November 11, 1999, RGC International Investors, LDC (Rose Glen)
converted the remainder of its unconverted debenture, which as of
September 30, 1999 had an outstanding principal balance of
$3,310,844 and a recorded value of $2,156,000 into 3,310.844
shares of the Company's newly created Series D Preferred Stock
with a stated value of $1,000 per share. In addition, Rose Glen
converted $500,000 of all other accrued amounts under the
debenture into 500 shares of Series D Preferred Stock, and agreed
to waive all other accrued amounts which totaled $260,000. The
difference between the recorded value of the debt and the
outstanding principal balance along with the $260,000 waived
interest accrual were netted and charged to additional paid-in
capital. Interest expense related to these debentures was
$3,679,000 for the nine months ended September 30, 1999.
B) On November 11, 1999 Rose Glen purchased 1,100 shares of Series D
Preferred Stock for $1,100,000.
C) On November 11, 1999 Vertical Financial Holdings purchased 700,000
shares of common stock for $700,000.
D) On November 11, 1999 - Value Management & Research AG purchased
400,000 shares of common stock for $400,000.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
F) E) On November 9, 1999, J.W. Stealey, former CEO of the Company,
released the Company from the line of credit indebtedness to BB&T
in the amount of $1,000,000 in exchange for 1,000,000 shares of
common stock. The Company also paid $15,000 due on this line.
Interest expense on this line of credit was $78,000 and $158,000
for the nine months ended September 30, 1999 and the year ended
December 31, 1998 respectively. In addition, as part of these
transactions, Mr. Stealey's resignation agreement dated August 16,
1999 has been amended such that his consulting services are no
longer being used and the sole remaining consideration due him has
been reduced to one lump sum payment of $200,000 (less the value
of 12 months health insurance payments and car lease payments
totaling approximately $20,000) and 50,000 shares of the Company's
common stock valued at $62,500. This payment was made November 12,
1999. The Company has agreed to convey to Mr. Stealey all
trademarks and available rights to the name Interactive Magic,
pending shareholder approval of the Company name change to
iEntertainment Network. Mr. Stealey agreed to waive the interest
due him from the Company in the amount of $183,000 under the terms
of the line of credit with BB&T that he had personally guaranteed;
in consideration of which the Company incurred additional interest
expense of $59,000 for the nine months ended September 30, 1999
and $107,000 for the year ended December 31, 1998. The amount of
waived interest has been reflected as a credit to additional
paid-in capital.
We do not have any current arrangements or commitments for any future financing
beyond those referenced above. We may not be able to obtain sufficient
additional financing to satisfy cash requirements. We may be required to obtain
financing on terms that are not favorable to us and our shareholders. If we are
unable to obtain additional financing when needed, we may be required to delay
or scale back product development and marketing programs in order to meet our
short-term cash requirements, which could have a material adverse effect on our
business, financial condition and results of operations.
YEAR 2000 ISSUE
The Company's products are of a nature that they are not date dependent or
subject to failure because of Year 2000 issues. The Company however, has
assigned full-time information technology professionals to the task of
identifying and resolving Year 2000 problems that may affect the Company's
business, and has adopted a Year 2000 compliance plan. Under the Company's Year
2000 compliance plan, the Company has and will continue to inventory and collect
documentation on all of its computers, computer related equipment, and equipment
with embedded processors. In addition, the Company has been and plans to
continue contacting critical vendors and suppliers to obtain assurances of their
ability to ensure smooth delivery of products and services after December 1999.
Additionally, the Company plans to prioritize and implement any necessary
repairs or replacements to equipment in order to achieve Year 2000 compliance,
which it expects to complete by the end of 1999. The Company will also implement
a testing program, scheduled for completion by the end of 1999. The Company has
not prepared estimates of costs for correction of Year 2000 problems. Based on
information available at this time, including the Year 2000 compliance status of
equipment that has been examined as well as the anticipated replacement schedule
for equipment, the Company does not believe that the cost of remedial actions
will have a material adverse effect on the Company's results of operations or
financial condition. There can be no assurance, however, that there will not be
a delay in, or increased costs associated with, the implementation of
corrections as the Year 2000 compliance plan is performed. Failure to implement
such changes could have an adverse effect on future results of operations. In
addition, unexpected costs of correcting equipment that has not yet been fully
evaluated could have an adverse effect on future results of operations.
EURO CONVERSION
On January 1, 1999, the European Community began denominating significant
financial transactions in a new monetary unit, the Euro. The Euro is intended to
replace the traditional currencies of the individual EU member countries. The
Company's operations in Europe are continuing to operate in the traditional
currencies and are not converting internal financial systems to the Euro as a
functional currency. The Company is evaluating when to convert its local
currency in Europe to the Euro with as little disruption to customer and vendors
as possible. The Company does not intend to make such a conversion in 1999.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable.
(b) Not applicable.
(c) From July 1, 1999 through September 30, 1999 the Company issued
warrants to purchase 100,000 shares to members of the Board of
Directors in recompense for services;(2) granted options to purchase
206,000 shares to 16 employees; (3) issued 107,143 shares of Common
Stock to Virtual Business Designs, Inc. d/b/a/ the Gamers Net ("Gamers
Net") in connection with the Company's acquisition of the assets of the
Gamers Net.
(d) Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Subsequent to the close of the September 30, 1999 quarter, the Company has
completed the following transactions in an effort to improve its financial
position:
A) On November 11, 1999, RGC International Investors, LDC (Rose Glen)
converted the remainder of its unconverted debenture, which as of
September 30, 1999 had an outstanding principal balance of
$3,310,844 and a recorded value of $2,156,000 into 3,310.844
shares of the Company's newly created Series D Preferred Stock
with a stated value of $1,000 per share. In addition, Rose Glen
converted $500,000 of all other accrued amounts under the
debenture into 500 shares of Series D Preferred Stock, and agreed
to waive all other accrued amounts which totaled $260,000. The
difference between the recorded value of the debt and the
outstanding principal balance along with the $260,000 waived
interest accrual were netted and charged to additional paid-in
capital. Interest expense related to these debentures was
$3,679,000 for the nine months ended September 30, 1999.
B) On November 11, 1999 Rose Glen purchased 1,100 shares of Series D
Preferred Stock for $1,100,000.
C) On November 11, 1999 Vertical Financial Holdings purchased 700,000
shares of common stock for $700,000.
D) On November 11, 1999 - Value Management & Research AG purchased
400,000 shares of common stock for $400,000.
<PAGE>
ITEM 5. OTHER INFORMATION (CONTINUED)
E) E) On November 9, 1999, J.W. Stealey, former CEO of the Company,
released the Company from the line of credit indebtedness to BB&T
in the amount of $1,000,000 in exchange for 1,000,000 shares of
common stock. The Company also paid $15,000 due on this line.
Interest expense on this line of credit was $78,000 and $158,000
for the nine months ended September 30, 1999 and the year ended
December 31, 1998 respectively. In addition, as part of these
transactions, Mr. Stealey's resignation agreement dated August 16,
1999 has been amended such that his consulting services are no
longer being used and the sole remaining consideration due him has
been reduced to one lump sum payment of $200,000 (less the value
of 12 months health insurance payments and car lease payments
totaling approximately $20,000) and 50,000 shares of the Company's
common stock valued at $62,500. This payment was made November 12,
1999. The Company has agreed to convey to Mr. Stealey all
trademarks and available rights to the name Interactive Magic,
pending shareholder approval of the Company name change to
iEntertainment Network. Mr. Stealey agreed to waive the interest
due him from the Company in the amount of $183,000 under the terms
of the line of credit with BB&T that he had personally guaranteed;
in consideration of which the Company incurred additional interest
expense of $59,000 for the nine months ended September 30, 1999
and $107,000 for the year ended December 31, 1998. The amount of
waived interest has been reflected as a credit to additional
paid-in capital.
On August 27, 1999 the Company purchased all right, title and interest in and to
all of the tangible and intangible assets of Virtual Business Designs, Inc.,
doing business as The Gamers Net, for 107,143 shares of common stock. In
addition, the Company agreed to pay David Heath, former owner of The Gamers Net,
a consulting fee for services rendered in the amount of $276,000 in eight equal
amounts on the first day of the month of each quarter commencing September 1,
1999 assuming the required services are provided. The first of eight quarterly
payments was made in cash in the amount of $34,500.00, with the balance to be
paid in Company common stock with the number of shares to be determined by the
quotient of $34,500.00 divided by the price per share as reported in the Wall
Street Journal one (1) trading day prior to the first day of each quarter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
3.02 Articles of Amendment establishing the Series D Preferred
Stock of Interactive Magic, Inc., filed with the North
Carolina Secretary of State on November 10, 1999.
10.37 Securities Purchase and Exchange Agreement dated November 8,
1999 between Interactive Magic, Inc. and RGC International
Investors, LDC
10.38 Registration Rights Agreement dated November 11, 1999 by and
among Interactive Magic, Inc., Vertical Financial Holdings,
J.W. Stealey and Value Management & Research AG.
10.39 Asset Purchase Agreement dated August 27, 1999 by and among
Interactive Magic, Inc., Virtual Business Designs, Inc., d/b/a
The Gamers Net, and David Heath.
27.01 Financial Data Schedule
(B) REPORTS ON FORM 8-K
Since the filing of the Company's 1999 Second Quarter Form 10-QSB, the Company
filed current reports on Form 8-K in conjunction with the following events:
o Resignation and the terms thereof of John W. (Bill) Stealey as CEO, and
election of Jacob Agam as Chairman of the Board, filed August 25, 1999
o Pro Forma financial information in regard to the sale of the Company's
CD-Rom business to Ubi Soft Entertainment S.A. for $2,500,000 in cash,
filed September 7, 1999 ( as amended).
o Notice that the Company's common stock will trade on the NASDAQ SmallCap
market pending satisfaction of NASDAQ requirements, filed October 15, 1999
o Termination of negotiations to acquire three entertainment-hobby product
distributors: Berkeley Topline, Inc., Zocchi Distributing, Inc., and
Alliance Games Distribution, Inc., filed October 26, 1999
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INTERACTIVE MAGIC, INC.
By: /s/ Michael C. Pearce
----------------------
Michael C. Pearce
Chief Executive Officer
By: /s/ Robert L. Hart
----------------------
Robert L. Hart
Chief Financial Officer
ARTICLES OF AMENDMENT
OF
INTERACTIVE MAGIC, INC.
Pursuant to Section 55-6-02 of the North Carolina Business Corporation
Act, the undersigned corporation hereby submits these Articles of Amendment for
the purpose of amending its Articles of Incorporation to fix the preferences,
limitations and relative rights of a new series of its shares of Preferred
Stock:
1. The name of the corporation is Interactive Magic, Inc.
2. The amendment to the Articles of Incorporation of the
corporation attached hereto as Exhibit A was duly adopted by
the Board of Directors of the corporation effective the 5th
day of November, 1999.
3. These Articles of Amendment will be effective upon filing.
This the 10th day of November, 1999.
INTERACTIVE MAGIC, INC.
By: /s/ Michael Pearce
---------------------------
Name: Michael Pearce
Title: Chief Executive Officer
<PAGE>
EXHIBIT A
1. Article IV of the Articles of Incorporation of Interactive Magic, Inc. (the
"Corporation") is hereby amended to delete the heading for Section 4.4 in its
entirety and to replace it to read as follows:
Section 4.4. Designation of Series A, Series B, Series C and Series D
Preferred Stock.
2. Article IV of the Corporation's Articles of Incorporation is hereby amended
to add a new subsection Section 4.4(d) which shall read in its entirety as
follows:
(d) Series D Convertible Preferred Stock.
(1) DESIGNATION AND AMOUNT. The designation of this series, which
consists of 4,910.844 shares of Preferred Stock, is Series D Convertible
Preferred Stock (the "SERIES D PREFERRED STOCK") and the stated value shall be
One Thousand Dollars ($1,000) per share (the "STATED VALUE").
(2) RANK. The Series D Preferred Stock shall rank (i) prior to the
Corporation's common stock, par value $.10 per share (the "COMMON STOCK"); (ii)
prior to the Corporation's Series A Convertible Preferred Stock, Series B
Convertible Preferred Stock and Series C Preferred Stock; (iii) prior to any
class or series of capital stock of the Corporation hereafter created (unless,
with the consent of the holders of Series D Preferred Stock obtained in
accordance with Section 9 hereof, such class or series of capital stock
specifically, by its terms, ranks senior to or pari passu with the Series D
Preferred Stock) (collectively, with the Common Stock, Series A Convertible
Preferred Stock, Series B Convertible Preferred Stock and the Series C Preferred
Stock, the "JUNIOR SECURITIES"); (iii) pari passu with any class or series of
capital stock of the Corporation hereafter created (with the consent of the
holders of Series D Preferred Stock obtained in accordance with Section 9
hereof) specifically ranking, by its terms, on parity with the Series D
Preferred Stock ("PARI PASSU SECURITIES"); and (iv) junior to any class or
series of capital stock of the Corporation hereafter created (with the consent
of the holders of Series D Preferred Stock obtained in accordance with Section 9
hereof) specifically ranking, by its terms, senior to the Series D Preferred
Stock ("SENIOR SECURITIES"), in each case as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary.
(3) DIVIDENDS. The Series D Preferred Stock shall not bear any
dividends. Except as provided below, in no event, so long as any Series D
Preferred Stock shall remain outstanding, shall any dividend whatsoever be
declared or paid upon, nor shall any distribution be made upon, any Junior
Securities, nor shall any shares of Junior Securities be purchased or redeemed
by the Corporation nor shall any moneys be paid to or made available for a
sinking fund for the purchase or redemption of any Junior Securities (other
than, in each case, a distribution of Junior Securities), without, in each such
case, the written consent of the holders of a majority of the outstanding shares
of Series D Preferred Stock, voting together as a class.
<PAGE>
(4) LIQUIDATION PREFERENCE
(A) LIQUIDATION EVENT. If the Corporation shall commence a
voluntary case under the federal bankruptcy laws or any other applicable federal
or state bankruptcy, insolvency or similar law, or consent to the entry of an
order for relief in an involuntary case under any law or to the appointment of a
receiver, liquidator, assignee, custodian, trustee, sequestrator (or other
similar official) of the Corporation or of any substantial part of its property,
or make an assignment for the benefit of its creditors, or admit in writing its
inability to pay its debts generally as they become due, or if a decree or order
for relief in respect of the Corporation shall be entered by a court having
jurisdiction in the premises in an involuntary case under the federal bankruptcy
laws or any other applicable federal or state bankruptcy, insolvency or similar
law resulting in the appointment of a receiver, liquidator, assignee, custodian,
trustee, sequestrator (or other similar official) of the Corporation or of any
substantial part of its property, or ordering the winding up or liquidation of
its affairs, and any such decree or order shall be unstayed and in effect for a
period of 30 consecutive days and, on account of any such event, the Corporation
shall liquidate, dissolve or wind up, or if the Corporation shall otherwise
liquidate, dissolve or wind up (each such event being considered a "LIQUIDATION
EVENT"), no distribution shall be made to the holders of any shares of capital
stock of the Corporation (other than Senior Securities) upon liquidation,
dissolution or winding up unless prior thereto, the holders of shares of Series
D Preferred Stock, subject to Section 6, shall have received the Liquidation
Preference (as defined in Section 4(c)) with respect to each share. If upon the
occurrence of a Liquidation Event, the assets and funds available for
distribution among the holders of the Series D Preferred Stock and holders of
Pari Passu Securities (including any dividends or distribution paid on any Pari
Passu Securities after the date of filing of these Articles of Amendment) shall
be insufficient to permit the payment to such holders of the preferential
amounts payable thereon, then the entire assets and funds of the Corporation
legally available for distribution to the Series D Preferred Stock and the Pari
Passu Securities shall be distributed ratably among such shares in proportion to
the ratio that the Liquidation Preference payable on each such share bears to
the aggregate liquidation preference payable on all such shares. Any prior
dividends or distribution made after the date of filing of these Articles of
Amendment shall offset, dollar for dollar, the amount payable to the class or
series to which such distribution was made.
(B) LIQUIDATION PREFERENCE. For purposes of these Articles of
Amendment, the "LIQUIDATION PREFERENCE" with respect to a share of the Series D
Preferred Stock shall mean an amount equal to the sum of (i) the Stated Value
thereof, plus (ii) an amount equal to six percent (6%) per annum of such Stated
Value for the period beginning on the date of issuance thereof (the "ISSUE
DATE") and ending on the date of final distribution to the holder thereof
(prorated for any portion of such period), plus (iii) the amount of any
outstanding Conversion Default Payments (as defined in Section 6(e) below),
Delivery Default Payments (as defined in Section 6(d) below) and payments owed
to such holder pursuant to Section 2(c) of the Registration Rights Agreement (as
defined below). The liquidation preference with respect to any Pari Passu
Securities shall be as set forth in the Articles of Amendment filed in respect
thereof.
(5) REDEMPTION.
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(A) MANDATORY REDEMPTION. If any of the following events (each, a
"MANDATORY REDEMPTION EVENT") shall occur:
(i) The Corporation fails to issue shares of Common Stock
to the holders of Series D Preferred Stock upon exercise by the holders of their
conversion rights in accordance with the terms of these Articles of Amendment
(for a period of at least 60 days if such failure is solely as a result of the
circumstances governed by the second paragraph of Section 6(e) below and the
Corporation is using its best efforts to authorize a sufficient number of shares
of Common Stock as soon as practicable), fails to transfer or to cause its
transfer agent to transfer (electronically or in certificated form) any
certificate for shares of Common Stock issued to the holders upon conversion of
the Series D Preferred Stock as and when required by these Articles of Amendment
or the Registration Rights Agreement, dated as of the Closing Date (as defined
in the Purchase and Exchange Agreement (defined below)), among the Corporation
and the other signatories thereto (the "REGISTRATION RIGHTS AGREEMENT"), fails
to remove any restrictive legend (or to withdraw any stop transfer instructions
in respect thereof) on any certificate or any shares of Common Stock issued to
the holders of Series D Preferred Stock upon conversion of the Series D
Preferred Stock as and when required by these Articles of Amendment, the
Securities Purchase and Exchange Agreement, dated as of November 8, 1999,
between the Corporation and the other signatories thereto (the "PURCHASE AND
EXCHANGE AGREEMENT") or the Registration Rights Agreement, or fails to fulfill
its obligations pursuant to Sections 4(c), 4(e), 4(g) or 5 of the Purchase and
Exchange Agreement (or makes any announcement, statement or threat that it does
not intend to honor the obligations described in this paragraph) and any such
failure shall continue uncured (or any announcement, statement or threat not to
honor its obligations shall not be rescinded in writing) for 10 days after the
Corporation shall have been notified thereof in writing by any holder of Series
D Preferred Stock;
(ii) The Corporation fails to obtain effectiveness with
the Securities and Exchange Commission (the "SEC") prior to [INSERT DATE 180
DAYS AFTER CLOSING DATE] of the Registration Statement (as defined in the
Registration Rights Agreement) required to be filed pursuant to Section 2(a) of
the Registration Rights Agreement, or fails to obtain the effectiveness of any
additional Registration Statement (required to be filed pursuant to Section 3(b)
of the Registration Rights Agreement) within 60 days after the Registration
Trigger Date (as defined in the Registration Rights Agreement), or any such
Registration Statement, after its initial effectiveness and during the
Registration Period (as defined in the Registration Rights Agreement), lapses in
effect or sales of all of the Registrable Securities (as defined in the
Registration Rights Agreement, the "REGISTRABLE SECURITIES") otherwise cannot be
made thereunder (whether by reason of the Corporation's failure to amend or
supplement the prospectus included therein in accordance with the Registration
Rights Agreement, the Corporation's failure to file and obtain effectiveness
with the SEC of an additional Registration Statement required pursuant to
Section 3(b) of the Registration Rights Agreement or otherwise) for more than 30
consecutive days or more than 60 days in any 12-month period after such
Registration Statement becomes effective;
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(iii) The Corporation or any subsidiary of the Corporation
shall voluntarily make an assignment for the benefit of creditors, or
voluntarily apply for or consent to the appointment of a receiver or trustee for
it or for all or substantially all of its property or business;
(iv) Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings for relief under any bankruptcy law or any law
for the relief of debtors shall be instituted voluntarily by the Corporation or
any subsidiary of the Corporation and, if not instituted voluntarily by the
Corporation or any such subsidiary, shall be consented to or acquiesced in by
the Corporation or such subsidiary or shall be converted to a voluntary case;
(v) The sale, conveyance or disposition of all or
substantially all of the assets of the Corporation or the effectuation by the
Corporation of a transaction or series of related transactions in which more
than 50% of the voting power of the Corporation is disposed of (other than
transactions described in subparagraph (vi) or (vii) below, which shall be
governed by such subparagraphs) (PROVIDED, HOWEVER, that no transaction
described in this subparagraph shall constitute a Mandatory Redemption Event
unless the Board of Directors of the Corporation shall have approved such
transaction (including, in the case of a tender offer to, or proxy solicitation
of, the shareholders of the Corporation which results in the consummation of any
such transaction, the approval of the commencement of such tender offer or proxy
solicitation));
(vi) The consolidation, merger or other business
combination of the Corporation with or into any other individual, corporation,
limited liability company, partnership, association, trust or other entity or
organization (each a "PERSON") or Persons when the Corporation is not the
Survivor (as defined below) and either (i) the Survivor is not subject to the
periodic filing requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended (the "SEC FILING REQUIREMENTS"), or (ii) the Survivor is
subject to the SEC Filing Requirements and the consideration to be paid to the
shareholders of the Corporation in such transactions consists of cash or a
combination of cash and securities or other property (PROVIDED, HOWEVER, that no
transaction described in this subparagraph shall constitute a Mandatory
Redemption Event unless the Board of Directors of the Corporation shall have
approved such transaction (including, in the case of a tender offer to, or proxy
solicitation of, the shareholders of the Corporation which results in the
consummation of any such transaction, the approval of the commencement of such
tender offer or proxy solicitation));
(vii) The consolidation, merger or other business
combination of the Corporation with or into any other Person or Persons when the
Corporation is not the Survivor and (A) the Survivor is subject to the SEC
Filing Requirements, (B) the consideration to be paid to the stockholders of the
Corporation in such transaction consists solely of capital stock of the Survivor
and (C) (i) the average of the Closing Bid Prices (defined below) of the Common
Stock for the 20 consecutive Trading Days (defined below) ending on the later of
(I) the third Trading Day immediately preceding the closing of such transaction,
and (II) the date such transaction is approved by the holders of the requisite
percentage of outstanding capital stock of the Corporation (such later date, the
"MEASUREMENT DATE") (such average being hereinafter referred
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to as the "AVERAGE PRICE") is less than the product of (x) two, multiplied by
(y) the Conversion Price in effect on the Measurement Date or (ii) if the
Average Price is equal to or greater than the product of (x) two, multiplied by
(y) the Conversion Price in effect on the Measurement Date, the Closing Bid
Price of the Common Stock on the Trading Day immediately preceding the
Measurement Date is less than the Average Price (PROVIDED, HOWEVER, that no
transaction described in this subparagraph shall constitute a Mandatory
Redemption Event unless the Board of Directors of the Corporation shall have
approved such transaction (including, in the case of a tender offer to, or proxy
solicitation of, the shareholders of the Corporation which results in the
consummation of any such transaction, the approval of the commencement of such
tender offer or proxy solicitation)); or
(viii) The Corporation shall fail (a) to prepare and file
with the SEC on or before November 24, 1999 a proxy statement in accordance with
Section 14 of the Securities Exchange Act of 1934, as amended, and the rules and
regulations of the SEC promulgated thereunder requesting the shareholders of the
Corporation to approve the issuance of the Series D Preferred Stock and the
shares of Common Stock issuable upon conversion of or otherwise pursuant to the
Series D Preferred Stock pursuant to Rule 4310(c)(25)(H)(i) of the Nasdaq Stock
Market or any successor rule ("SHAREHOLDER APPROVAL") or (b) to hold an annual
or special meeting of its shareholders on or before December 31, 1999 and to
obtain at such meeting the Shareholder Approval; provided that such date set
forth in this clause (b) shall be extended to February 15, 2000 if the staff of
the SEC reviews and provides to the Corporation written comments requiring
changes to such proxy statement;
then, upon the occurrence and during the continuation of any Mandatory
Redemption Event specified in subparagraphs (i), (ii), (v), (vii) or (viii), at
the option of the holders of at least 50% of the then outstanding shares of
Series D Preferred Stock exercisable by delivery of written notice (the
"MANDATORY REDEMPTION NOTICE") to the Corporation of such Mandatory Redemption
Event, or upon the occurrence of any Mandatory Redemption Event specified in
subparagraphs (iii), (iv) or (vi), the then outstanding shares of Series D
Preferred Stock shall become immediately redeemable and the Corporation shall
purchase each holder's outstanding shares of Series D Preferred Stock for an
amount per share equal to the greater of (1) the sum of (a) 120% multiplied by
the Stated Value of the shares to be redeemed plus (b) an amount equal to six
percent (6%) per annum of such Stated Value for the period beginning on the
Issue Date and ending on the date of payment of the Mandatory Redemption Amount
(the "MANDATORY REDEMPTION DATE") plus (c) all Conversion Default Payments (as
defined in Section 6(e) below), Delivery Default Payments (as defined in Section
6(d) below)) and any other amounts owed to such holder pursuant to Section 2(c)
of the Registration Rights Agreement, and (2) the "PARITY VALUE" of the shares
to be redeemed, where parity value means (except as provided below with respect
to a Mandatory Redemption Event described in subparagraph (vi) above) the
product of (a) the number of shares of Common Stock issuable upon conversion of
such shares of Series D Preferred Stock in accordance with Section 6 below
(without giving any effect to any limitations on conversions of shares contained
herein, and treating the Trading Day immediately preceding the Mandatory
Redemption Date as the "CONVERSION DATE" (as defined in Section 6(d)(iv))),
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multiplied by (b) the highest Closing Price (as defined below) for the Common
Stock during the period beginning on the date of first occurrence of the
Mandatory Redemption Event and ending one day prior to the Mandatory Redemption
Date (the greater of such amounts being referred to as the "MANDATORY REDEMPTION
AMOUNT"); PROVIDED, HOWEVER, in the case of any Mandatory Redemption Event
described in subparagraph (ii) above, the Corporation shall have the option, in
lieu of redeeming the Series D Preferred Stock as provided above, to pay to each
holder thereof, within five business days of the occurrence of such Mandatory
Redemption Event, an amount in cash equal to One Hundred Dollars ($100) per
share of Series D Preferred Stock not so redeemed (the "COVENANT DEFAULT
AMOUNT"); PROVIDED, FURTHER, that the Corporation shall only have the right to
deliver the Covenant Default Amount in respect of the Mandatory Redemption Event
specified in subparagraph (ii) above if it has used its best efforts to obtain
or maintain the effectiveness of any such Registration Statement in accordance
with its obligations under the Registration Rights Agreement. If the Corporation
fails to deliver the Covenant Default Amount within such five-business day
period, it shall forfeit its right to so deliver the Covenant Default Amount and
the Mandatory Redemption Amount shall become immediately payable. In the case of
a Mandatory Redemption Event described in subparagraph (vi) above, "parity
value" means the product of (a) the number of shares of Common Stock issuable
upon conversion of the shares of Series D Preferred Stock to be redeemed in
accordance with this Section 5 (without giving effect to any limitations on
conversions of the Series D Preferred Stock contained herein) multiplied by (b)
the highest Closing Price for the Common Stock during the period beginning on
the Announcement Date with respect to the transaction giving rise to such
Mandatory Redemption Event and ending on the Measurement Date (the "MEASUREMENT
PERIOD"). The Mandatory Redemption Amount, together with all other ancillary
amounts payable hereunder, shall immediately become due and payable, all without
demand, presentment or notice, all of which hereby are expressly waived,
together with all costs, including, without limitation, reasonable legal fees
and expenses of collection, and the holders of the Series D Preferred Stock
shall be entitled to exercise all other rights and remedies available at law or
in equity. For purposes of this Agreement, "SURVIVOR" means, with respect to any
consolidation, merger or other business combination to which the Corporation is
a party, the surviving entity of such transaction; PROVIDED, HOWEVER, if the
Corporation merges with and into another Person and more than 50% of the
outstanding voting stock of the Corporation (if the Corporation is the surviving
entity), or more than 50% of the outstanding voting stock of such Person (if
such Person is the surviving entity), is owned by another Person that is subject
to the SEC Filing Requirements, then the Person subject to such requirements
shall be deemed the Survivor. "CLOSING PRICE," as of any date, means the last
sale price of the Common Stock on Nasdaq SmallCap as reported by Bloomberg
Financial Markets or an equivalent reliable reporting service mutually
acceptable to and hereafter designated by the holders of a majority in interest
of the shares of Series D Preferred Stock and the Corporation ("BLOOMBERG") or,
if Nasdaq is not the principal trading market for such security, the last sale
price of such security on the principal securities exchange or trading market
where such security is listed or traded as reported by Bloomberg, or if the
foregoing do not apply, the last sale price of such security in the
over-the-counter market on the electronic bulletin board for such security as
reported by Bloomberg, or, if no last sale price of such security is available
in the over-the-counter market on the electronic bulletin board for such
security or in any of the foregoing manners, the average of the bid prices of
any market makers for such security
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that are listed in the "pink sheets" by the National Quotation Bureau, Inc. If
the Closing Price cannot be calculated for such security on such date in the
manner provided above, the Closing Price shall be the fair market value as
mutually determined by the Corporation and the holders of a majority in interest
of shares of Series D Preferred Stock being converted for which the calculation
of the Closing Price is required in order to determine the Conversion Price of
such Series D Preferred Stock. "CLOSING BID PRICE" means, for any security as of
any date, the closing bid price on Nasdaq as reported by Bloomberg or, if Nasdaq
is not the principal trading market for such security, the closing bid price of
such security on the principal securities exchange or trading market where such
security is listed or traded as reported by Bloomberg, or if the foregoing do
not apply, the closing bid price of such security in the over-the-counter market
on the electronic bulletin board for such security as reported by Bloomberg, or,
if no closing bid price of such security is available in the over-the-counter
market on the electronic bulletin board for such security or in any of the
foregoing manners, the average of the bid prices of any market makers for such
security that are listed in the "pink sheets" by the National Quotation Bureau,
Inc. If the Closing Bid Price cannot be calculated for such security on such
date in the manner provided above, the Closing Bid Price shall be the fair
market value as mutually determined by the Corporation and the holders of a
majority in interest of shares of Series D Preferred Stock being converted for
which the calculation of the Closing Bid Price is required in order to determine
the Conversion Price of such Series D Preferred Stock. "TRADING DAY" shall mean
any day on which the Common Stock is traded for any period on Nasdaq, or on the
principal securities exchange or other securities market on which the Common
Stock is then being traded. "ANNOUNCEMENT Date" means the date on which the
Corporation (i) makes a public announcement that it intends to consolidate or
merge with any other corporation (other than a merger in which the Corporation
is the surviving or continuing corporation and its capital stock is unchanged)
or sell or transfer all or substantially all of the assets of the Corporation or
(ii) any person, group or entity (including the Corporation) publicly announces
a tender offer to purchase 50% or more of the Corporation's Common Stock (or any
other takeover scheme).
(B) FAILURE TO PAY MANDATORY REDEMPTION AMOUNT. In the case of
a Mandatory Redemption Event, if the Corporation fails to pay the Mandatory
Redemption Amount within five business days of written notice that such amount
is due and payable, then (assuming there are sufficient authorized shares) in
addition to all other available remedies, each holder of Series D Preferred
Stock shall have the right at any time and from time to time, so long as the
Mandatory Redemption Event continues, to require the Corporation, upon written
notice, to immediately issue (in accordance with and subject to the terms of
Section 6 below), in lieu of the Mandatory Redemption Amount, the number of
shares of Common Stock of the Corporation equal to such applicable amount
divided by any Conversion Price, as chosen in the sole discretion of the holder
of Series D Preferred Stock, in effect from the date of the Mandatory Redemption
Event until the date such holder elects to exercise its rights pursuant to this
Section 5(b).
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(6) CONVERSION AT THE OPTION OF THE HOLDER
(A) CONVERSION AMOUNT. Each holder of shares of Series D
Preferred Stock may, at its option at any time and from time to time, upon
surrender of the certificates therefor, convert any or all of its shares of
Series D Preferred Stock into Common Stock as set forth below (an "OPTIONAL
CONVERSION"); provided, however, the Series D Preferred Stock shall not be
convertible into more than 436,103 shares of Common Stock until such time as the
Corporation shall have obtained Shareholder Approval or at such time as
Shareholder Approval is no longer required, whether because the Common Stock is
no longer listed on Nasdaq or otherwise. Each share of Series D Preferred Stock
shall be convertible into such number of fully paid and nonassessable shares of
Common Stock as such Common Stock exists on the Issue Date, or any other shares
of capital stock or other securities of the Corporation into which such Common
Stock is thereafter changed or reclassified, as is determined by dividing (1)
the sum of (i) the Stated Value thereof plus (ii) the Premium Amount (as defined
below) plus (iii) at the option of such holder of the Series D Preferred Stock,
any Conversion Default Payments (as defined in Section 6(e) below), Delivery
Default Payments (as defined in Section 6(d) below) and any other amounts owed
to such holder pursuant to Section 2(c) of the Registration Rights Agreement
(the sum of (i), (ii) and (iii) being collectively referred to as the
"CONVERSION AMOUNT"), by (2) the then effective Conversion Price (as defined
below); PROVIDED, HOWEVER, that in no event shall a holder of shares of Series D
Preferred Stock be entitled to convert any such shares in excess of that number
of shares upon conversion of which the sum of (x) the number of shares of Common
Stock beneficially owned by the holder and its affiliates (other than shares of
Common Stock which may be deemed beneficially owned through the ownership of the
unconverted portion of the shares of Series D Preferred Stock or the unexercised
or unconverted portion of any other securities of the Corporation), subject to a
limitation on conversion or exercise analogous to the limitations contained
herein) and (y) the number of shares of Common Stock issuable upon the
conversion of the shares of Series D Preferred Stock with respect to which the
determination of this proviso is being made, would result in beneficial
ownership by a holder and such holder's affiliates of more than 4.99% of the
outstanding shares of Common Stock. For purposes of the proviso to the
immediately preceding sentence, beneficial ownership shall be determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended, and Regulation 13D-G thereunder, except as otherwise provided in clause
(x) of such proviso. The "PREMIUM AMOUNT" means the product of the Stated Value,
multiplied by .06, multiplied by (N/365), where "N" equals the number of days
elapsed from the Issue Date to and including the Conversion Date (as defined in
Section (6)(d)).
(b) CONVERSION PRICE. The Conversion Price shall be $1.00
(subject to adjustment for stock splits, stock dividends and similar events)
(the "CONVERSION PRICE"). The Conversion Price shall be subject to adjustments
pursuant to the provisions of Section 6(c) below.
(c) ADJUSTMENTS TO CONVERSION PRICE. The Conversion Price
shall be subject to adjustment from time to time as follows:
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(i) ADJUSTMENT DUE TO STOCK SPLIT, STOCK DIVIDEND, ETC.
If, at any time when Series D Preferred Stock is issued and outstanding, the
number of outstanding shares of Common Stock is increased or decreased by a
stock split, stock dividend, combination, reclassification, or other similar
event, then the Conversion Price shall be proportionately adjusted to give
effect to the stock split, stock dividend, combination, reclassification or
other similar event. In such event, the Corporation shall notify the Transfer
Agent of such change on or before the effective date thereof.
(ii) ADJUSTMENT DUE TO MERGER, CONSOLIDATION, ETC. If, at
any time when Series D Preferred Stock is issued and outstanding, there shall be
any merger, consolidation, exchange of shares, recapitalization, reorganization,
sale of assets or other similar event (other than a transaction described in
Section 7(b)), as a result of which shares of Common Stock of the Corporation
shall be changed into the same or a different number of shares of another class
or classes of stock or securities of the Corporation or another entity, or in
case of any sale or conveyance of all or substantially all of the assets of the
Corporation other than in connection with a plan of complete liquidation of the
Corporation, then the holders of Series D Preferred Stock shall thereafter have
the right to receive upon conversion of the Series D Preferred Stock, upon the
basis and upon the terms and conditions specified herein and in lieu of the
shares of Common Stock immediately theretofore issuable upon conversion, such
stock, securities or assets which the holders of Series D Preferred Stock would
have been entitled to receive in such transaction had the Series D Preferred
Stock been converted in full immediately prior to such transaction (without
regard to any limitations on conversion contained herein), and in any such case
appropriate provisions shall be made with respect to the rights and interests of
the holders of Series D Preferred Stock to the end that the provisions hereof
(including, without limitation, provisions for adjustment of the Conversion
Price and of the number of shares of Common Stock issuable upon conversion of
the Series D Preferred Stock) shall thereafter be applicable, as nearly as may
be practicable in relation to any securities or assets thereafter deliverable
upon the conversion of Series D Preferred Stock. The Corporation shall not
effect any transaction described in this subsection (ii) unless (A) it first
gives, to the extent practical, prior written notice of the record date of the
special meeting of stockholders to approve, or if there is no such record date,
the consummation of, such merger, consolidation, exchange of shares,
recapitalization, reorganization, sale of assets or other similar event to the
extent required by law (during which time the holders of Series D Preferred
Stock shall be entitled to convert the Series D Preferred Stock), which notice
shall be given concurrently with the first public announcement of such
transaction and (B) the resulting successor or acquiring entity (if not the
Corporation) and, if an entity different from the successor or acquiring entity,
the entity whose capital stock or assets the holders of Common Stock of the
Corporation are entitled to receive as a result of such merger, consolidation,
exchange of shares, recapitalization, reorganization, sale of assets or other
similar event, assumes by written instrument all of the obligations of these
Articles of Amendment, including this subsection (ii). The above provisions
shall similarly apply to successive consolidations, mergers, sales, transfers or
share exchanges.
(iii) ADJUSTMENT DUE TO DISTRIBUTION. Subject to Section
3, if the Corporation shall declare or make any distribution of its assets (or
rights to acquire its assets) to holders of Common Stock as a dividend, stock
repurchase, by way of return of capital or
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otherwise (including any dividend or distribution to the Corporation's
shareholders in cash or shares (or rights to acquire shares) of capital stock of
a subsidiary (i.e., a spin-off)) (a "DISTRIBUTION"), then the holders of Series
D Preferred Stock shall be entitled, upon any conversion of shares of Series D
Preferred Stock after the date of record for determining shareholders entitled
to such Distribution, to receive the amount of such assets which would have been
payable to the holder with respect to the shares of Common Stock issuable upon
such conversion had such holder been the holder of such shares of Common Stock
on the record date for the determination of shareholders entitled to such
Distribution.
(iv) ADJUSTMENTS TO CONVERSION PRICE UPON ISSUANCE OF
PURCHASE RIGHTS. Subject to Section 3, if at any time when any Series D
Preferred Stock is issued and outstanding, the Corporation issues any
convertible securities or rights to purchase stock, warrants, securities or
other property (the "PURCHASE Rights") pro rata to the record holders of any
class of Common Stock, then the holders of Series D Preferred Stock will be
entitled to acquire, upon the terms applicable to such Purchase Rights, the
aggregate Purchase Rights which such holder could have acquired if such holder
had held the number of shares of Common Stock acquirable upon complete
conversion of the Series D Preferred Stock (without regard to any limitations on
conversion contained herein) immediately before the date on which a record is
taken for the grant, issuance or sale of such Purchase Rights, or, if no such
record is taken, the date as of which the record holders of Common Stock are to
be determined for the grant, issue or sale of such Purchase Rights.
(d) MECHANICS OF CONVERSION. In order to convert Series D
Preferred Stock into full shares of Common Stock, a holder of Series D Preferred
Stock shall: (i) submit a copy of the fully executed notice of conversion in the
form attached hereto as Exhibit B ("NOTICE OF CONVERSION") to the Corporation by
facsimile dispatched prior to Midnight, New York City time (the "CONVERSION
NOTICE DEADLINE"), on the date specified therein as the Conversion Date (or by
other means resulting in, or reasonably expected to result in, notice to the
Corporation on the Conversion Date) to the office of the Corporation or its
designated Transfer Agent for the Series D Preferred Stock, which notice shall
specify the number of shares of Series D Preferred Stock to be converted, the
applicable Conversion Price and a calculation of the number of shares of Common
Stock issuable upon such conversion (together with a copy of the first page of
each certificate to be converted); and (ii) surrender the original certificates
representing the Series D Preferred Stock being converted (the "PREFERRED STOCK
CERTIFICATES"), duly endorsed, along with a copy of the Notice of Conversion to
the office of the Corporation or the Transfer Agent for the Series D Preferred
Stock as soon as practicable thereafter. The Corporation shall not be obligated
to issue certificates evidencing the shares of Common Stock issuable upon such
conversion, unless either the Preferred Stock Certificates are delivered to the
Corporation or its Transfer Agent as provided above, or the holder notifies the
Corporation or its Transfer Agent that such certificates have been lost, stolen
or destroyed (subject to the requirements of subparagraph (i) below). In the
case of a dispute as to the calculation of the Conversion Price, the Corporation
shall promptly issue such number of shares of Common Stock that are not disputed
in accordance with subparagraph (ii) below. The Corporation shall submit the
disputed calculations to its outside accountant via facsimile within two
business days of receipt of the
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Notice of Conversion. The accountant shall audit the calculations and notify the
Corporation and the holder of the results no later than 48 hours from the time
it receives the disputed calculations. The accountant's calculation shall be
deemed conclusive absent manifest error.
(i) LOST OR STOLEN CERTIFICATES. Upon receipt by the
Corporation of evidence of the loss, theft, destruction or mutilation of any
Preferred Stock Certificates representing shares of Series D Preferred Stock,
and (in the case of loss, theft or destruction) of indemnity reasonably
satisfactory to the Corporation, and upon surrender and cancellation of the
Preferred Stock Certificate(s), if mutilated, the Corporation shall execute and
deliver new Preferred Stock Certificate(s) of like tenor and date.
(ii) DELIVERY OF COMMON STOCK UPON CONVERSION. Upon the
surrender of certificates as described above together with a Notice of
Conversion, the Corporation shall issue and, within three business days after
such surrender (or, in the case of lost, stolen or destroyed certificates, after
provision of agreement and indemnification pursuant to subparagraph (i) above)
(the "DELIVERY PERIOD"), deliver (or cause its Transfer Agent to so issue and
deliver) in accordance with the terms hereof and the Purchase and Exchange
Agreement (including, without limitation, in accordance with the requirements of
Section 2(g) of the Purchase and Exchange Agreement) to or upon the order of the
holder (A) that number of shares of Common Stock for the shares of Series D
Preferred Stock converted as shall be determined in accordance herewith and (B)
a certificate representing the balance of the shares of Series D Preferred Stock
not converted, if any. In addition to any other remedies available to the
holder, including actual damages and/or equitable relief, the Corporation shall
pay to a holder $2,000 per day in cash for each day beyond a three-day grace
period following the Delivery Period that the Corporation fails to deliver
Common Stock (a "DELIVERY DEFAULT") issuable upon surrender of shares of Series
D Preferred Stock with a Notice of Conversion until such time as the Corporation
has delivered all such Common Stock (the "DELIVERY DEFAULT PAYMENTS"); PROVIDED,
HOWEVER, in the event of a failure by the Corporation to deliver shares upon
conversion as a result of a Conversion Default (as defined below), the holder
shall not be entitled to receive Delivery Default Payments but shall be entitled
to receive Conversion Default Payments in accordance with Section 6(e). Such
Delivery Default Payments shall be paid to such holder by the fifth day of the
month following the month in which it has accrued or, at the option of the
holder (by written notice to the Corporation by the first day of the month
following the month in which it has accrued), shall be convertible into Common
Stock in accordance with the terms of this Section 6.
In lieu of delivering physical certificates representing
the Common Stock issuable upon conversion, provided the Corporation's Transfer
Agent is participating in the Depository Trust Company ("DTC") Fast Automated
Securities Transfer ("FAST") program, upon request of the holder and its
compliance with the provisions contained in Section 6(a) and in this Section
6(d), the Corporation shall use its best efforts to cause its Transfer Agent to
electronically transmit the Common Stock issuable upon conversion to the holder
by crediting the account of holder's Prime Broker with DTC through its Deposit
Withdrawal Agent Commission ("DWAC") system. The time periods for delivery and
penalties described in the immediately preceding paragraph shall apply to the
electronic transmittals described herein.
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(iii) NO FRACTIONAL SHARES. If any conversion of Series D
Preferred Stock would result in a fractional share of Common Stock or the right
to acquire a fractional share of Common Stock, such fractional share shall be
disregarded and the number of shares of Common Stock issuable upon conversion of
the Series D Preferred Stock shall be the next higher number of shares.
(iv) CONVERSION DATE. The "CONVERSION DATE" shall be the
date specified in the Notice of Conversion, provided that the Notice of
Conversion is submitted by facsimile (or by other means resulting in, or
reasonably expected to result in, notice) to the Corporation or its Transfer
Agent before Midnight, New York City time, on the date so specified, otherwise
the Conversion Date shall be the first business day after the date so specified
on which the Notice of Conversion is actually received by the Corporation or its
Transfer Agent. The person or persons entitled to receive the shares of Common
Stock issuable upon conversion shall be treated for all purposes as the record
holder or holders of such securities as of the Conversion Date and all rights
with respect to the shares of Series D Preferred Stock surrendered shall
forthwith terminate except the right to receive the shares of Common Stock or
other securities or property issuable on such conversion and except that the
holders' preferential rights as holders of Series D Preferred Stock shall
survive to the extent the Corporation fails to deliver such securities.
(e) RESERVATION OF SHARES. A number of shares of the authorized but
unissued Common Stock sufficient to provide for the conversion of the Series D
Preferred Stock outstanding shall at all times be reserved by the Corporation,
free from preemptive rights, for such conversion or exercise. As of the date of
issuance of the Series D Preferred Stock, 5,794,796 authorized and unissued
shares of Common Stock have been duly reserved for issuance upon conversion of
the Series D Preferred Stock (the "RESERVED AMOUNT"). The Reserved Amount shall
be increased from time to time in accordance with the Corporation's obligations
pursuant to Section 4(e) of the Purchase and Exchange Agreement. In addition, if
the Corporation shall issue any securities or make any change in its capital
structure which would change the number of shares of Common Stock into which
each share of the Series D Preferred Stock shall be convertible, the Corporation
shall at the same time also make proper provision so that thereafter there shall
be a sufficient number of shares of Common Stock authorized and reserved, free
from preemptive rights, for conversion of the outstanding Series D Preferred
Stock.
If at any time a holder of shares of Series D Preferred Stock submits a
Notice of Conversion, and the Corporation does not have sufficient authorized
but unissued shares of Common Stock available to effect such conversion in
accordance with the provisions of this Section 6 (a "CONVERSION DEFAULT"),
subject to Section 10, the Corporation shall issue to the holder all of the
shares of Common Stock which are available to effect such conversion. The number
of shares of Series D Preferred Stock included in the Notice of Conversion which
exceeds the amount which is then convertible into available shares of Common
Stock (the "EXCESS AMOUNT") shall, notwithstanding anything to the contrary
contained herein, not be convertible into Common Stock in accordance with the
terms hereof until (and at the holder's option at any
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time after) the date additional shares of Common Stock are authorized by the
Corporation to permit such conversion, at which time the Conversion Price in
respect thereof shall be the lesser of (A) the Conversion Price on the
Conversion Default Date (as defined below) and (B) the Conversion Price on the
Conversion Date elected by the holder in respect thereof. The Corporation shall
use its best efforts to effect an increase in the authorized number of shares of
Common Stock as soon as possible following the earlier of (x) such time that a
holder of Series D Preferred Stock notifies the Corporation or that the
Corporation otherwise becomes aware that there are or likely will be
insufficient authorized and unissued shares to allow full conversion thereof and
(y) a Conversion Default. In addition, the Corporation shall pay to the holder
payments ("CONVERSION DEFAULT PAYMENTS") for a Conversion Default in the amount
of (a) .24, multiplied by (b) the sum of the Stated Value plus the Premium
Amount per share of Series D Preferred Stock held by such holder through the
Authorization Date (as defined below), multiplied by (c) (N/365), where N = the
number of days from the day the holder submits a Notice of Conversion giving
rise to a Conversion Default (the "CONVERSION DEFAULT DATE") to the date (the
"AUTHORIZATION DATE") that the Corporation authorizes a sufficient number of
shares of Common Stock to effect conversion of the full number of shares of
Series D Preferred Stock. The Corporation shall send notice to the holder of the
authorization of additional shares of Common Stock, the Authorization Date and
the amount of holder's accrued Conversion Default Payments. The accrued
Conversion Default Payment for each calendar month shall be paid in cash or
shall be convertible into Common Stock at the applicable Conversion Price, at
the holder's option, as follows:
(i) In the event the holder elects to take such payment in
cash, cash payment shall be made to the holder by the fifth day of the month
following the month in which it has accrued; and
(ii) In the event the holder elects to take such payment
in Common Stock, the holder may convert such payment amount into Common Stock at
the Conversion Price (as in effect at the time of Conversion) at any time after
the fifth day of the month following the month in which it has accrued in
accordance with the terms of this Section 6 (so long as there is then a
sufficient number of authorized shares of Common Stock).
The holder's election shall be made in writing to the
Corporation at any time prior to 9:00 p.m., New York City Time, on the third day
of the month following the month in which Conversion Default payments have
accrued. If no election is made, the holder shall be deemed to have elected to
receive cash. Nothing herein shall limit the holder's right to pursue actual
damages (to the extent in excess of the Conversion Default Payments) for the
Corporation's failure to maintain a sufficient number of authorized shares of
Common Stock, and each holder shall have the right to pursue all remedies
available at law or in equity (including a decree of specific performance and/or
injunctive relief).
(f) NOTICE OF CONVERSION PRICE ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of the Conversion Price pursuant to this Section 6,
the Corporation, at its expense, shall promptly compute such adjustment or
readjustment in accordance with the terms
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hereof and prepare and furnish to each holder of Series D Preferred Stock a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based. The Corporation
shall, upon the written request at any time of any holder of Series D Preferred
Stock, furnish or cause to be furnished to such holder a like certificate
setting forth (i) such adjustment or readjustment, (ii) the Conversion Price at
the time in effect and (iii) the number of shares of Common Stock and the
amount, if any, of other securities or property which at the time would be
received upon conversion of a share of Series D Preferred Stock.
(g) STATUS AS STOCKHOLDERS. Upon submission of a Notice of
Conversion by a holder of Series D Preferred Stock, (i) the shares covered
thereby (other than the shares, if any, which cannot be issued because their
issuance would exceed such holder's allocated portion of the Reserved Amount)
shall be deemed converted into shares of Common Stock and (ii) the holder's
rights as a holder of such converted shares of Series D Preferred Stock shall
cease and terminate, excepting only the right to receive certificates for such
shares of Common Stock and to any remedies provided herein or otherwise
available at law or in equity to such holder because of a failure by the
Corporation to comply with the terms of these Articles of Amendment.
Notwithstanding the foregoing, if a holder has not received certificates for all
shares of Common Stock prior to the 10th business day after the expiration of
the Delivery Period with respect to a conversion of shares of Series D Preferred
Stock for any reason, then (unless the holder otherwise elects to retain its
status as a holder of Common Stock by so notifying the Corporation) the holder
shall regain the rights of a holder of such shares of Series D Preferred Stock
with respect to such unconverted shares of Series D Preferred Stock and the
Corporation shall, as soon as practicable, return such unconverted shares of
Series D Preferred Stock to the holder or, if such shares of Series D Preferred
Stock have not been surrendered, adjust its records to reflect that such shares
of Series D Preferred Stock have not been converted. In all cases, the holder
shall retain all of its rights and remedies (including, without limitation, (i)
the right to receive Delivery Default Payments pursuant to Section 6(d) to the
extent required thereby for such Delivery Default and any subsequent Delivery
Default and (ii) the right to have the Conversion Price with respect to
subsequent conversions determined in accordance with Section 6(e) for the
Corporation's failure to convert the Series D Preferred Stock .
(7) AUTOMATIC CONVERSION
(a) So long as (i) all of the shares of Common Stock issuable
upon conversion of all outstanding shares of Series D Preferred Stock are then
(x) authorized and reserved for issuance, (y) registered for re-sale under the
Securities Act of 1933, as amended, by the holders of the Series D Preferred
Stock (or may otherwise be resold publicly without registration or restriction
as to volume) and (z) eligible to be traded on Nasdaq, the NYSE, the AMEX or
Nasdaq SmallCap, and (ii) there is not then a continuing Mandatory Redemption
Event, each share of Series D Preferred Stock issued and outstanding on [INSERT
DATE THAT IS THIRD ANNIVERSARY OF ISSUE DATE] (the "AUTOMATIC CONVERSION DATE")
(together with the Premium Amount and any Conversion Default Payments, Delivery
Default Payments and other amounts
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due and payable by the Corporation pursuant to Section 2(c) of the Registration
Rights Agreement) automatically shall be converted into shares of Common Stock
on such date at the then effective Conversion Price in accordance with, and
subject to, the provisions of Section 6 hereof (the "AUTOMATIC CONVERSION"). The
Automatic Conversion Date shall be delayed by one Trading Day for each Trading
Day occurring prior thereto and prior to the full conversion of the Series D
Preferred Stock that (i) any Registration Statement required to be filed and to
be effective pursuant to the Registration Rights Agreement is not effective or
sales of all of the Registrable Securities (as defined in the Registration
Rights Agreement) otherwise cannot be made thereunder during the Registration
Period (whether by reason of the Corporation's failure to properly supplement or
amend the Prospectus in accordance with the terms of the Registration Rights
Agreement or otherwise), (ii) any Mandatory Redemption Event exists, without
regard to whether any cure periods shall have run, or (iii) the Corporation is
in breach of any of its obligations pursuant to Section 4(e) of the Purchase and
Exchange Agreement. The Automatic Conversion Date shall be the Conversion Date
for purposes of determining the Conversion Price and the time within which
certificates representing the Common Stock must be delivered to the holders.
(b) In the event that the Corporation enters into a
consolidation, merger or other business combination with any Person or Persons
when the Corporation is not the Survivor and (i) the Survivor is subject to the
SEC Filing Requirements, (ii) the consideration to be paid to the stockholders
of the Corporation in such transaction consists solely of capital stock of the
Survivor ("SURVIVOR CAPITAL STOCK"), (iii) the Average Price is equal to or
greater than the product of (x) two, multiplied by (y) the Conversion Price in
effect on the Measurement Date, and (iv) the Closing Bid Price of the Common
Stock on the Trading Day immediately preceding the Measurement Date is equal to
or greater than the Average Price, then, so long as the Survivor Capital Stock
is then listed on Nasdaq, the NYSE or the AMEX and the resale thereof by Holder
has been registered under the Securities Act or such stock may be resold by
Holder without registration or restriction (including volume limitations) under
the Securities Act, all shares of Series D Preferred Stock then outstanding
(together with the Premium Amount and any Conversion Default Payments, Delivery
Default Payments and other amounts due and payable by the Corporation pursuant
to Section 2(c) of the Registration Rights Agreement) automatically shall be
converted on the closing date for such transaction into the number of shares of
Survivor Capital Stock that the holders thereof would have received in such
transaction if they had converted such shares in full into Common Stock in
accordance with, and subject to, the provisions of Section 6, at the Conversion
Price then in effect. The Corporation shall not effect any transaction described
in this Section 7(b) unless (x) it first gives, to the extent practical, prior
written notice of the record date of the special meeting of stockholders to
approve, or if there is no such record date, the consummation of, such
transaction, to the extent required by law, which notice shall be given
concurrently with the first public announcement of such transaction and (y) the
Survivor assumes by written instrument the obligations of the Corporation under
this Section 7. Holders of Series D Preferred Stock shall be permitted to
convert such stock in accordance with the terms of Section 6 at any time
following receipt of the notice described in clause (x) of the preceding
sentence.
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<PAGE>
(8) VOTING RIGHTS. The holders of the Series D Preferred Stock have no
voting power whatsoever, except as otherwise provided by the North Carolina
Business Corporation Act ("NCBCA"), in this Section 8, and in Section 9 below.
Notwithstanding the above, the Corporation shall provide each holder of
Series D Preferred Stock with prior notification of any meeting of the
shareholders (and copies of proxy materials and other information sent to
shareholders). In the event of any taking by the Corporation of a record of its
shareholders for the purpose of determining shareholders who are entitled to
receive payment of any dividend or other distribution, any right to subscribe
for, purchase or otherwise acquire (including by way of merger, consolidation or
recapitalization) any share of any class or any other securities or property, or
to receive any other right, or for the purpose of determining shareholders who
are entitled to vote in connection with any proposed sale, lease or conveyance
of all or substantially all of the assets of the Corporation, or any proposed
liquidation, dissolution or winding up of the Corporation, the Corporation shall
mail a notice to each holder, at least 10 days prior to the record date
specified therein (or 30 days prior to the consummation of the transaction or
event, whichever is earlier), of the date on which any such record is to be
taken for the purpose of such dividend, distribution, right or other event, and
a brief statement regarding the amount and character of such dividend,
distribution, right or other event to the extent known at such time.
To the extent that under the NCBCA the vote of the holders of the
Series D Preferred Stock, voting separately as a class, is required to authorize
a given action of the Corporation, the affirmative vote or consent of the
holders of at least a majority of the shares of the Series D Preferred Stock
represented at a duly held meeting at which a quorum is present or by unanimous
consent of holders of the shares of Series D Preferred Stock (except as
otherwise may be required under the NCBCA) shall constitute the approval of such
action by the class. To the extent that under the NCBCA holders of the Series D
Preferred Stock are entitled to vote on a matter with holders of Common Stock,
voting together as one class, each share of Series D Preferred Stock shall be
entitled to a number of votes equal to the number of shares of Common Stock into
which it is then convertible using the record date for the taking of such vote
of shareholders as the date as of which the Conversion Price is calculated.
Holders of the Series D Preferred Stock shall be entitled to notice of all
shareholder meetings or written consents (and copies of proxy materials and
other information sent to shareholders) with respect to which they would be
entitled to vote, which notice would be provided pursuant to the Corporation's
bylaws and the NCBCA.
(9) PROTECTIVE PROVISIONS. So long as shares of Series D Preferred
Stock are outstanding, the Corporation shall not, without first obtaining the
approval (by vote or written consent, as provided by the NCBCA) of the holders
of at least a majority of the then outstanding shares of Series D Preferred
Stock:
(a) alter, amend or repeal (whether by merger, consolidation
or otherwise) any of the rights, preferences or privileges of the Series D
Preferred Stock or any capital stock of the Corporation so as to affect
adversely the Series D Preferred Stock;
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(b) create any Senior Securities;
(c) create any Pari Passu Securities;
(d) increase the authorized number of shares of Series D
Preferred Stock;
(e) issue any Senior Securities or Pari Passu Securities;
(f) increase the par value of the Common Stock, or
(g) do any act or thing not authorized or contemplated by
these Articles of Amendment which would result in taxation of the holders of
shares of the Series D Preferred Stock under Section 305 of the Internal Revenue
Code of 1986, as amended (or any comparable provision of the Internal Revenue
Code as hereafter from time to time amended).
In the event holders of at least a majority of the then
outstanding shares of Series D Preferred Stock agree to allow the Corporation to
alter or change the rights, preferences or privileges of the shares of Series D
Preferred Stock, pursuant to subsection (a) above, so as to affect the Series D
Preferred Stock, then the Corporation will deliver notice of such approved
change to the holders of the Series D Preferred Stock that did not agree to such
alteration or change (the "DISSENTING HOLDERS") and Dissenting Holders shall
have the right for a period of 30 days to convert pursuant to the terms of these
Articles of Amendment as they exist prior to such alteration or change or
continue to hold their shares of Series D Preferred Stock.
(10) PRO RATA ALLOCATIONS. The Reserved Amount (including any increases
thereto) shall be allocated by the Corporation pro rata among the holders of
Series D Preferred Stock based on the number of shares of Series D Preferred
Stock issued to each holder. Each increase to the Reserved Amount shall be
allocated pro rata among the holders of Series D Preferred Stock based on the
number of shares of Series D Preferred Stock held by each holder at the time of
the increase in the Reserved Amount. In the event a holder shall sell or
otherwise transfer any of such holder's shares of Series D Preferred Stock, each
transferee shall be allocated a pro rata portion of such transferor's Reserved
Amount. Any portion of the Reserved Amount which remains allocated to any person
or entity which does not hold any Series D Preferred Stock shall be allocated to
the remaining holders of shares of Series D Preferred Stock, pro rata based on
the number of shares of Series D Preferred Stock then held by such holders.
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EXHIBIT B
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Series D Preferred Stock)
The undersigned hereby irrevocably elects to convert ______ shares of
Series D Preferred Stock, represented by stock certificate No(s). __________
(the "PREFERRED STOCK CERTIFICATES") into shares of common stock ("COMMON
STOCK") of Interactive Magic, Inc., a North Carolina corporation (the
"CORPORATION") according to the conditions of the Articles of Amendment with
respect to the Series D Preferred Stock, as of the date written below. If
securities are to be issued in the name of a person other than the undersigned,
the undersigned will pay all transfer taxes payable with respect thereto and is
delivering herewith such certificates. No fee will be charged to the Holder for
any conversion, except for transfer taxes, if any. A copy of each Preferred
Stock Certificate is attached hereto (or evidence of loss, theft or destruction
thereof).
The Corporation shall electronically transmit the Common Stock issuable
pursuant to this Notice of Conversion to the account of the undersigned or its
nominee with DTC through its Deposit Withdrawal Agent Commission system ("DWAC
Transfer").
Name of DTC Prime Broker:__________________________________________
Account Number:____________________________________________________
[ ] In lieu of receiving shares of Common Stock issuable pursuant to this
Notice of Conversion by way of a DWAC Transfer, the undersigned hereby
requests that the Corporation issue a certificate or certificates for
the number of shares of Common Stock set forth above (which numbers are
based on the Holder's calculation attached hereto) in the name(s)
specified immediately below or, if additional space is necessary, on an
attachment hereto:
Name:_______________________________________________________________
Address:____________________________________________________________
____________________________________________________________
The undersigned represents and warrants that all offers and sales by
the undersigned of the securities issuable to the undersigned upon conversion of
the Series D Preferred Stock shall be made pursuant to registration of the
securities under the Securities Act of 1933, as amended (the "ACT"), or pursuant
to an exemption from registration under the Act.
Date of Conversion:____________________________
Conversion Price:______________________________
Number of Shares of
Common Stock to be Issued:_____________________
Signature:_____________________________________
Name:__________________________________________
Address:_______________________________________
_______________________________________________
_______________________________________________
_______________________________________________
*The Corporation is not required to issue shares of Common Stock until the
original Series D Preferred Stock Certificate(s) (or evidence of loss, theft or
destruction thereof) to be converted are received by the Corporation or its
Transfer Agent. The Corporation shall issue and deliver shares of Common Stock
to an overnight courier not later than two (2) business days following receipt
of the
<PAGE>
original Preferred Stock Certificate(s) to be converted, and shall make
payments pursuant to the Articles of Amendment for the number of business days
such issuance and delivery is late.
SECURITIES PURCHASE AND EXCHANGE AGREEMENT
SECURITIES PURCHASE AND EXCHANGE AGREEMENT (this "AGREEMENT"), dated as
of November 8, 1999, between Interactive Magic, Inc., a corporation organized
under the laws of the State of North Carolina (the "COMPANY"), with headquarters
located at 215 Southport Drive, Suite 1000, Morrisville, NC 27560, and the
purchaser (the "PURCHASER") set forth on the execution page hereof (the
"EXECUTION PAGE").
WHEREAS:
A. The Company and the Purchaser are executing and delivering this
Agreement in reliance upon the exemptions from securities registration afforded
by Rule 506 of Regulation D ("Regulation D"), as promulgated by the United
States Securities Exchange Commission (the "SEC") under the Securities Act of
1933, as amended (the "SECURITIES ACT"), and by Section 3(a)(9) under the
Securities Act;
B. Pursuant to a Securities Purchase Agreement, dated as of January
25, 1999, between the Company and the Purchaser (the "SECURITIES PURCHASE
AGREEMENT"), the Company issued and sold to the Purchaser a convertible note in
the original principal amount of $4,000,000 (the "NOTE"), (i) convertible into
shares of the Company's common stock, par value $.10 per share (the "COMMON
STOCK") and (ii) in certain circumstances, entitling the holder to warrants to
acquire a number of shares of Common Stock determined at the time of such
conversion. As of the date hereof, the principal amount of the Note outstanding
(after giving effect to the prior conversion of a portion of the Note) is
$3,310,844, and there is accrued interest thereon and other amounts payable with
respect thereto in an aggregate amount in excess of $500,000 and no such
warrants have been issued. All references in this Agreement to the Note shall be
deemed to include all such accrued interest and such other amounts.
C. Subject to the terms and conditions set forth herein, (i) the
Company and the Purchaser desire to exchange the Note for newly issued shares of
the Company's Series D Convertible Preferred Stock, par value $.10 per share
(the "PREFERRED SHARES"), the rights and preferences of which, including the
terms on which the Preferred Shares are convertible into shares of Common Stock,
are set forth in the Articles of Amendment, attached hereto as Exhibit A (the
"ARTICLES OF AMENDMENT") and (ii) the Purchaser desires to purchase additional
Preferred Shares. The shares of Common Stock issuable upon conversion of or
otherwise pursuant to the Preferred Shares are referred to herein as the
"CONVERSION SHARES" and the Preferred Shares and the Conversion Shares are
collectively referred to herein as the "SECURITIES."
D. Contemporaneous with the execution and delivery of this Agreement,
the parties hereto are executing and delivering a Registration Rights Agreement,
in the form attached hereto as Exhibit B (the "REGISTRATION RIGHTS AGREEMENT"),
pursuant to which the Company has agreed to
<PAGE>
provide certain registration rights under the Securities Act and the rules and
regulations promulgated thereunder, and applicable state securities laws;
NOW, THEREFORE, the Company and the Purchaser hereby agree as follows:
1. PURCHASE AND EXCHANGE OF SECURITIES
a. Purchase of, and Exchange of Note for, Preferred Shares. On the
Closing Date (as defined below), subject to the satisfaction (or waiver) of the
conditions set forth in Section 6 and Section 7 below, (i) the Company shall
issue and deliver to the Purchaser duly executed certificates representing a
number of Preferred Shares (the "EXCHANGE SHARES") having an aggregate Stated
Value (as such term is defined in the Articles of Amendment) equal to the sum of
(x) the principal amount of the Note outstanding as of the Closing Date, plus
(y) $500,000, and the Purchaser shall deliver to the Company the Note for
cancellation and (ii) the Company shall issue and sell to the Purchaser, and the
Purchaser agrees to purchase from the Company, additional Preferred Shares (the
"PURCHASE SHARES") having an aggregate Stated Value equal to $1,100,000 for an
aggregate purchase price (the "PURCHASE PRICE") equal to $1,100,000. The
Purchaser shall pay the Purchase Price by wire transfer to the Company in
accordance with the Company's written wiring instructions. The term "Preferred
Shares" shall mean both the Exchange Shares and the Purchase Shares.
b. Closing Date. The date and time of the issuance and delivery of the
Exchange Shares in exchange for the Note and the issuance and sale of the
Purchase Shares pursuant to this Agreement (the "CLOSING") shall be as soon as
practicable (but in any event within three business days following the
satisfaction (or waiver) of the conditions thereto set forth in Section 6 and
Section 7 below and in no event later than November 15, 1999) (the "CLOSING
DATE"). The Closing shall occur at the offices of Klehr, Harrison, Harvey,
Branzburg & Ellers LLP, 260 South Broad Street, Philadelphia, Pennsylvania
19102.
2. PURCHASER'S REPRESENTATIONS AND WARRANTIES
The Purchaser represents and warrants to the Company as follows:
a. Investment Purpose. The Purchaser is purchasing the Securities for
the Purchaser's own account and not with a present view towards the public sale
or distribution thereof; provided, however, by making the representations
herein, the Purchaser does not agree to hold any of the Securities for any
minimum or other specific term and reserves the right to dispose of the
Securities at any time in accordance with or pursuant to a registration
statement or an exemption under the Securities Act.
b. Accredited Investor Status. The Purchaser is an "ACCREDITED
INVESTOR" as that term is defined in Rule 501(a) of Regulation D.
c. Reliance on Exemptions. The Purchaser understands that the
Securities are being offered and exchanged or sold, as the case may be, to the
Purchaser in reliance upon specific
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<PAGE>
exemptions from the registration requirements of United States federal and state
securities laws and that the Company is relying upon the truth and accuracy of,
and the Purchaser's compliance with, the representations, warranties,
agreements, acknowledgments and understandings of the Purchaser set forth herein
in order to determine the availability of such exemptions and the eligibility of
the Purchaser to acquire the Securities.
d. Information. The Purchaser and its counsel have been furnished all
materials relating to the business, finances and operations of the Company and
materials relating to the offer and sale of the Securities which have been
specifically requested by the Purchaser or its counsel. The Purchaser and its
counsel have been afforded the opportunity to ask questions of the Company and
have received what the Purchaser believes to be satisfactory answers to any such
inquiries. Neither such inquiries nor any other due diligence investigation
conducted by the Purchaser or its counsel or any of its representatives shall
modify, amend or affect the Purchaser's right to rely on the Company's
representations and warranties contained in Section 3 below. The Purchaser
understands that the Purchaser's investment in the Securities involves a
significant degree of risk.
e. Governmental Review. The Purchaser understands that no United States
federal or state agency or any other government or governmental agency has
passed upon or made any recommendation or endorsement of the Securities.
f. Transfer or Resale. The Purchaser understands that (i) except as
provided in the Registration Rights Agreement, the sale or resale of the
Securities has not been and is not being registered under the Securities Act or
any applicable state securities laws, and the Securities may not be transferred
unless (a) the Securities are sold pursuant to an effective registration
statement under the Securities Act, (b) the Purchaser shall have delivered to
the Company an opinion of counsel (which opinion shall be in form, substance and
scope customary for opinions of counsel in comparable transactions and shall be
given by counsel reasonably acceptable to the Company) to the effect that the
Securities to be sold or transferred may be sold or transferred pursuant to an
exemption from such registration, (c) the Securities are sold or transferred to
an "affiliate" (as defined in Rule 144 promulgated under the Securities Act (or
a successor rule) ("RULE 144")) of the Purchaser who agrees to sell or otherwise
transfer the Securities only in accordance with this Section 2(f) and who is an
Accredited Investor or (d) the Securities are sold pursuant to Rule 144; (ii)
any sale of such Securities made in reliance on Rule 144 may be made only in
accordance with the terms of such Rule and further, if such Rule is not
applicable, any resale of such Securities under circumstances in which the
seller (or the person through whom the sale is made) may be deemed to be an
underwriter (as that term is defined in the Securities Act) may require
compliance with some other exemption under the Securities Act or the rules and
regulations of the SEC thereunder; and (iii) neither the Company nor any other
person is under any obligation to register such Securities under the Securities
Act or any state securities laws or to comply with the terms and conditions of
any exemption thereunder (in each case, other than pursuant to the Registration
Rights Agreement). Notwithstanding the foregoing or anything else contained
herein to the contrary, the Securities may be pledged as collateral in
connection with a bona fide margin account or other lending arrangement;
provided that any transfer by the pledgee of such Securities must be in
accordance with Rule 144.
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<PAGE>
g. Legends. The Purchaser understands that the Preferred Shares and,
until such time as the Conversion Shares have been registered under the
Securities Act as contemplated by the Registration Rights Agreement or otherwise
may be sold pursuant to Rule 144(k) (or a successor rule), the Conversion Shares
shall bear a restrictive legend in substantially the following form (and a
stop-transfer order may be placed against transfer of the certificates for such
Securities):
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended. The
securities may not be sold, transferred or assigned in the
absence of an effective registration statement for the
securities under such Act, or an opinion of counsel, in form,
substance and scope customary for opinions of counsel in
comparable transactions, that registration is not required
under such Act or unless sold pursuant to Rule 144 under such
Act."
The legend set forth above shall be removed and the Company
shall issue a certificate without such legend to the holder of any Security upon
which it is stamped, if, unless otherwise required by applicable state
securities laws, (a) such Security is registered for sale under an effective
registration statement filed under the Securities Act or otherwise may be sold
pursuant to Rule 144(k) (or a successor rule), or (b) such holder provides the
Company with an opinion of counsel, in form, substance and scope customary for
opinions of counsel in comparable transactions and given by counsel reasonably
acceptable to the Company, to the effect that a public sale or transfer of such
Security may be made without registration under the Securities Act and such sale
or transfer is effected or (c) such holder provides the Company with reasonable
assurances that such Security can be sold pursuant to Rule 144 and such sale is
effected. The Purchaser agrees to sell all Securities, including those
represented by a certificate(s) from which the legend has been removed, in
compliance with applicable prospectus delivery requirements, if any.
h. Authorization; Enforcement. This Agreement has been duly authorized,
executed and delivered on behalf of the Purchaser and is a valid and binding
agreement of the Purchaser, enforceable against the Purchaser in accordance with
its terms. The Registration Rights Agreement has been duly authorized and, when
executed and delivered on behalf of the Purchaser, will be a valid and binding
agreement of the Purchaser, enforceable against the Purchaser in accordance with
its terms.
i. Residency. The Purchaser is a resident of the jurisdiction set forth
under the Purchaser's name on the Execution Page hereto executed by the
Purchaser.
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<PAGE>
3.REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to the Purchaser as follows:
a. Organization and Qualification. The Company and each of its
Subsidiaries (as defined below) is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction in which it is
incorporated, and has the requisite corporate power to own, lease and operate
its properties and to carry on its business as and where now owned, leased,
used, operated and conducted. Section 3(a) of the Disclosure Letter, dated of
even date herewith, delivered by the Company to the Purchaser (the "DISCLOSURE
LETTER") sets forth a list of all of the Subsidiaries of the Company and the
jurisdiction in which each is incorporated. The Company and each of its
Subsidiaries is duly qualified as a foreign corporation to do business and is in
good standing in every jurisdiction in which its ownership or use of property or
the nature of the business conducted by it makes such qualification necessary
and where the failure so to qualify would have a Material Adverse Effect.
"MATERIAL ADVERSE EFFECT" means any material adverse effect on (i) the
Securities, (ii) the ability of the Company to perform its obligations hereunder
or under the Articles of Amendment or the Registration Rights Agreement or (iii)
the business, operations, properties, prospects or financial condition of the
Company and its Subsidiaries, taken as a whole. "SUBSIDIARY" shall have the
meaning set forth in Regulation S-X promulgated by the SEC.
b. Authorization; Enforcement. (i) The Company has the requisite
corporate power and authority to enter into and perform its obligations under
this Agreement and the Registration Rights Agreement, to issue and exchange or
sell, as the case may be, the Preferred Shares in accordance with the terms
hereof and to issue the Conversion Shares upon conversion of the Preferred
Shares or otherwise pursuant to the Articles of Amendment in accordance with the
terms thereof; (ii) the execution, delivery and performance of this Agreement
and the Registration Rights Agreement by the Company and the consummation by it
of the transactions contemplated hereby and thereby (including, without
limitation, the issuance of the Preferred Shares and the issuance and
reservation for issuance of the Conversion Shares), have been duly authorized by
the Company's Board of Directors and, except as set forth in Section 3(b) of the
Disclosure Letter, no further consent or authorization of the Company, its Board
of Directors or its stockholders is required; (iii) this Agreement has been duly
executed and delivered by the Company; and (iv) this Agreement constitutes, and
upon execution and delivery by the Company of the Registration Rights Agreement
and upon execution by the Company and filing of the Articles of Amendment, such
agreements and instruments will constitute, valid and binding obligations of the
Company, enforceable against the Company in accordance with their terms, subject
to applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
relating to creditors' rights generally and the application of equitable
principles in any action, legal or equitable, and except as rights to indemnity
or contribution may be limited by applicable law.
c. Capitalization. The capitalization of the Company as of the date
hereof, including the authorized capital stock, the number of shares issued and
outstanding, the number of shares issuable and reserved for issuance pursuant to
the Company's stock option plans, the number of shares issuable and reserved for
issuance pursuant to securities (other than the Preferred Shares) exercisable
for, or convertible into or exchangeable for any shares of capital stock and the
number of shares to
-5-
<PAGE>
be reserved for issuance upon conversion of or otherwise pursuant to the
Preferred Shares is set forth in Section 3(c) of the Disclosure Letter. All of
such outstanding shares of capital stock have been, or upon issuance will be,
validly issued, fully paid and nonassessable. No shares of the authorized and
unissued capital stock of the Company (including the Conversion Shares) are
subject to preemptive rights or any other similar rights of the stockholders of
the Company or any liens or encumbrances. Except for the Securities and the Note
and as set forth in Section 3(c) of the Disclosure Letter, as of the date of
this Agreement, (i) there are no outstanding options, warrants, scrip, rights to
subscribe for, puts, calls, rights of first refusal, agreements, understandings,
claims or other commitments or rights of any character whatsoever relating to,
or securities or rights convertible into or exercisable or exchangeable for, any
shares of capital stock of the Company or any of its Subsidiaries, or
arrangements by which the Company or any of its Subsidiaries is or may become
bound to issue additional shares of capital stock of the Company or any of its
Subsidiaries, (ii) there are no agreements or arrangements under which the
Company or any of its Subsidiaries is obligated to register the sale of any of
its or their securities under the Securities Act (except the Registration Rights
Agreement and the Registration Rights Agreement, dated as of January 25, 1999,
between the Company and the Purchaser (the "JANUARY REGISTRATION RIGHTS
AGREEMENT")) and (iii) there are no anti-dilution or price adjustment provisions
contained in any security issued by the Company (or in any agreement providing
rights to security holders). There are no securities or instruments containing
antidilution or similar provisions that will be triggered by the issuance of the
Securities in accordance with the terms of this Agreement or the Articles of
Amendment. The Company has furnished to the Purchaser true and correct copies of
the Company's Articles of Incorporation as in effect on the date hereof
("ARTICLES OF INCORPORATION"), the Company's By-laws as in effect on the date
hereof (the "BY-LAWS"), and all other instruments and agreements to which the
Company is a party governing securities convertible into or exercisable or
exchangeable for capital stock of the Company other than agreements under the
Company's option and stock plans for its directors, officers and employees in
accordance with such plans.
d. Issuance of Shares. The Conversion Shares are duly authorized and
reserved for issuance and, upon conversion of the Preferred Shares in accordance
with the terms thereof, will be validly issued, fully paid and non-assessable,
and free from all taxes (other than taxes payable by the Company), liens, claims
and encumbrances (other than such as may arise from obligations or agreements of
the Purchaser) and will not be subject to preemptive rights or other similar
rights of stockholders of the Company and will not impose personal liability
upon the holder thereof.
e. No Conflicts. The execution, delivery and performance of this
Agreement and the Registration Rights Agreement by the Company, the execution
and filing by the Company of the Articles of Amendment and the consummation by
the Company of the transactions contemplated hereby and thereby (including,
without limitation, the issuance and reservation for issuance, as applicable, of
the Preferred Shares and the Conversion Shares) will not (i) conflict with or
result in a violation of any provision of the Articles of Incorporation or
By-laws or (ii) conflict with, or result in a breach of any provision of, or
constitute a default (or an event which with notice or lapse of time or both
could become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture, patent,
patent license or instrument to which the Company or any of its Subsidiaries is
a party, or (iii) result in a violation of any law, rule,
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<PAGE>
regulation, order, judgment or decree (including U.S. federal and state
securities laws and regulations and regulations of any self-regulatory
organizations to which the Company or its securities are subject) applicable to
the Company or any of its Subsidiaries or by which any property or asset of the
Company or any of its Subsidiaries is bound or affected (except, with respect to
clauses (ii) and (iii), for such conflicts, defaults, terminations, amendments,
accelerations, cancellations and violations as would not, individually or in the
aggregate, have a Material Adverse Effect). Neither the Company nor any of its
Subsidiaries is in violation of its Articles of Incorporation, By-laws or other
organizational documents and neither the Company nor any of its Subsidiaries is
in default (and no event has occurred which, with notice or lapse of time or
both, could put the Company or any of its Subsidiaries in default) under, nor
has there occurred any event giving others (with notice or lapse of time or
both) any rights of termination, amendment, acceleration or cancellation of, any
agreement, indenture or instrument to which the Company or any of its
Subsidiaries is a party or by which any property or assets of the Company or any
of its Subsidiaries is bound or affected, except for actual or possible
violations, defaults or rights as would not, individually or in the aggregate,
have a Material Adverse Effect and except for defaults existing under the Note
and the January Registration Rights Agreement. The businesses of the Company and
its Subsidiaries are not being conducted, and shall not be conducted so long as
the Purchaser owns any of the Securities, in violation of any law, ordinance or
regulation of any governmental entity, except for actual or possible violations,
if any, the sanctions for which either singly or in the aggregate would not have
a Material Adverse Effect. Subject to the accuracy of the representations and
warranties of the Purchaser set forth herein, except as specifically
contemplated by this Agreement and as required under the Securities Act and any
applicable state securities laws, the Company is not required to obtain any
consent, approval, authorization or order of, or make any filing or registration
with, any court or governmental agency or any regulatory or self-regulatory
agency, the NASDAQ SmallCap Market ("NASDAQ") or any third party in order for it
to execute, deliver or perform any of its obligations under this Agreement or
the Registration Rights Agreement, or to perform any of its obligations under
the Articles of Amendment, in each case in accordance with the terms hereof or
thereof, other than such as will have been made or obtained by the Closing. All
consents, authorizations, orders, filings and registrations which the Company is
required to obtain pursuant to the preceding sentence have been obtained or
effected on or prior to the date hereof. The Company and its Subsidiaries are
unaware of any facts or circumstances which might give rise to any of the
foregoing.
f. SEC Documents, Financial Statements. Except as set forth in Section
3(f) of the Disclosure Letter, since July 27, 1998, the date on which the
Company completed its initial public offering (the "IPO DATE"), the Company has
timely filed all reports, schedules, forms, statements and other documents
required to be filed by it with the SEC pursuant to the reporting requirements
of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT") (all of
the foregoing filed prior to the date hereof and on or after the IPO Date and
all exhibits included therein and financial statements and schedules thereto and
documents incorporated by reference therein, being hereinafter referred to
herein as the "SEC DOCUMENTS"). The Company has delivered to the Purchaser true
and complete copies of the SEC Documents, except for the exhibits and schedules
thereto and the documents incorporated therein. As of their respective dates,
the SEC Documents complied in all material respects with the applicable
requirements of the Exchange Act or the Securities Act, as the case may be, and
the rules and regulations of the SEC promulgated thereunder applicable to the
SEC
-7-
<PAGE>
Documents, and none of the SEC Documents, at the time they were filed with
the SEC, contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. As of their respective dates, the financial statements of the
Company included in the SEC Documents complied as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC applicable with respect thereto. Such financial
statements have been prepared in accordance with U.S. generally accepted
accounting principles, consistently applied, during the periods involved (except
(i) as may be otherwise indicated in such financial statements or the notes
thereto, or (ii) in the case of unaudited interim statements, to the extent they
may not include footnotes or may be condensed or summary statements) and fairly
present in all material respects the consolidated financial position of the
Company and its consolidated Subsidiaries as of the dates thereof and the
consolidated results of their operations and cash flows for the periods then
ended (subject, in the case of unaudited statements, to immaterial year-end
audit adjustments). Except as set forth in the financial statements of the
Company included in the SEC Documents and as disclosed in Section 3(f) of the
Disclosure Letter, the Company has no liabilities, contingent or otherwise,
other than (i) liabilities incurred in the ordinary course of business
subsequent to the date of such financial statements, (ii) obligations under
contracts and commitments incurred in the ordinary course of business and not
required under generally accepted accounting principles to be reflected in such
financial statements and (iii) liabilities related to borrowings under lines of
credit in existence on the date of such financial statements (which liabilities
and obligations referred to in clauses (i), (ii) and (iii), individually or in
the aggregate, are not material to the financial condition or operating results
of the Company).
g. Absence of Certain Changes. Since December 31, 1998, there has been
no material adverse change and no material adverse development in the assets,
liabilities, business, properties, operations, financial condition, results of
operations or prospects of the Company and its Subsidiaries, except as disclosed
in or as contemplated by the SEC Documents.
h. Absence of Litigation. Except as disclosed in the SEC Documents,
there is no action, suit, claim, proceeding, inquiry or investigation before or
by any court, public board, government agency, self-regulatory organization or
body pending or, to the knowledge of the Company or any of its Subsidiaries,
threatened against or affecting the Company, any of its Subsidiaries, or any of
their respective directors or officers in their capacities as such that could
have a Material Adverse Effect. There are no facts which, if known by a
potential claimant or governmental authority, could give rise to a claim or
proceeding which, if asserted or conducted with results unfavorable to the
Company or any of its Subsidiaries, could have a Material Adverse Effect.
i. Intellectual Property. Each of the Company and its Subsidiaries owns
or is licensed to use all patents, patent applications, trademarks, trademark
applications, trade names, service marks, copyrights, copyright applications,
licenses, permits, know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or procedures) and
other similar rights and proprietary knowledge (collectively, "INTELLECTUAL
PROPERTY") necessary for the conduct of its business as now being conducted and
as described in the Company's Prospectus dated September 9, 1999 included in the
Company's Registration Statement on Form SB-2, SEC File
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<PAGE>
No. 333-84691 (the "SEPTEMBER SB-2"). Except as disclosed in Section 3(i) of the
Disclosure Letter, to the knowledge of the Company, neither the Company nor any
of its Subsidiaries infringes or is in conflict with any right of any other
person with respect to any Intellectual Property which, individually or in the
aggregate, if the subject of an unfavorable decision, ruling or finding, would
have a Material Adverse Effect. Except as disclosed in Section 3(i) of the
Disclosure Letter, neither the Company nor any of its Subsidiaries has received
written notice of any pending conflict with or infringement upon such third
party Intellectual Property. Neither the Company nor any of its Subsidiaries has
entered into any consent, indemnification, forbearance to sue or settlement
agreements with respect to the validity of the Company's or its Subsidiaries'
ownership or right to use its Intellectual Property and, to the knowledge of the
Company, there is no reasonable basis for any such claim to be successful. The
Intellectual Property is valid and enforceable and no registration relating
thereto has lapsed, expired or been abandoned or canceled or is the subject of
cancellation or other adversarial proceedings, and all applications therefor are
pending and in good standing. The Company and its Subsidiaries have complied, in
all material respects, with their respective contractual obligations relating to
the protection of the Intellectual Property used pursuant to licenses. Except as
disclosed in Section 3(i) of the Disclosure Letter, to the best knowledge of the
Company, no person is infringing on or violating the Intellectual Property owned
or used by the Company of its Subsidiaries. The Company and each or its
Subsidiaries have taken reasonable security measures to protect the secrecy,
confidentiality and value of their Intellectual Property.
j. No Materially Adverse Contracts, Etc. Except as disclosed in the SEC
Documents, neither the Company nor any of its Subsidiaries is subject to any
charter, corporate or other legal restriction, or any judgment, decree, order,
rule or regulation which, to the knowledge of the Company, has or could
reasonably be expected in the future to have a Material Adverse Effect. Neither
the Company nor any of its Subsidiaries is a party to any contract or agreement
which, to the knowledge of the Company, has or is expected to have a Material
Adverse Effect.
k. Year 2000 Compliance. All of the Company's computer software and
computer hardware, and other similar or related items of automated, computerized
or software systems that are used or relied on by the Company in the conduct of
its business or that were, or currently are being, sold or licensed by the
Company to customers (collectively, "INFORMATION TECHNOLOGY"), are Year 2000
Compliant, except to the extent any noncompliance would not have a Material
Adverse Effect. For purposes of this Agreement, the term "YEAR 2000 COMPLIANT"
means, with respect to the Company's Information Technology, that the
Information Technology is designed to be used prior to, during and after the
calendar Year 2000 A.D., and the Information Technology used during each such
time period will accurately receive, provide and process date and time data
(including, but not limited to, calculating, comparing and sequencing) from,
into and between the 20th and 21st centuries, including the years 1999 and 2000,
and leap-year calculations and will not malfunction, cease to function, or
provide invalid or incorrect results as a result of date or time data, to the
extent that other information technology, used in combination with the
Information Technology, properly exchanges date and time data with it.
l. Foreign Corrupt Practices. Neither the Company, nor any of its
Subsidiaries, nor any director, officer, agent, employee or other person acting
on behalf of the Company or any Subsidiary
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<PAGE>
has, in the course of his actions for, or on behalf of, the Company, used any
corporate funds for any unlawful contribution, gift, entertainment or other
unlawful expenses relating to political activity; made any direct or indirect
unlawful payment to any foreign or domestic government official or employee from
corporate funds; violated or is in violation of any provision of the U.S.
Foreign Corrupt Practices Act of 1977; or made any bribe, rebate, payoff,
influence payment, kickback or other unlawful payment to any foreign or domestic
government official or employee.
m. Disclosure. All information relating to or concerning the Company or
its Subsidiaries set forth in this Agreement or in the Disclosure Letter or
provided to the Purchaser pursuant to Section 2(d) hereof or in the SEC
Documents and otherwise in connection with the transactions contemplated hereby
is true and correct in all material respects and the Company has not omitted to
state any material fact necessary in order to make the statements made herein or
therein, in light of the circumstances under which they were made, not
misleading. No event or circumstance has occurred or exists with respect to the
Company or its Subsidiaries or their respective businesses, properties,
prospects, operations or financial conditions, which has not been publicly
disclosed but, under applicable law, rule or regulation, would be required to be
disclosed by the Company in a registration statement filed on the date hereof by
the Company under the Securities Act with respect to a primary issuance of the
Company's securities other than (i) events or circumstances contemplated by the
SEC Documents and (ii) such events or circumstances that have occurred or exist
in the ordinary course of the Company's business.
n. Acknowledgment Regarding the Purchaser's Acquisition of the
Securities. The Company acknowledges and agrees that the Purchaser is acting
solely in the capacity of an arm's-length purchaser with respect to this
Agreement and the transactions contemplated hereby. The Company further
acknowledges that the Purchaser is not acting as a financial advisor or
fiduciary of the Company (or in any similar capacity) with respect to this
Agreement or the transactions contemplated hereby and that any statement made by
the Purchaser or any of its representatives or agents in connection with this
Agreement and the transactions contemplated hereby is not advice or a
recommendation and is merely incidental to the Purchaser's acquisition of the
Securities and, except for the representations and warranties of the Purchaser
set forth in Section 2 hereof, has not been relied upon by the Company, its
officers or directors in any way. The Company further represents to the
Purchaser that the Company's decision to enter into this Agreement has been
based solely on an independent evaluation by the Company and its
representatives.
o. Form S-3 Eligibility. The Company is currently eligible to register
the resale of its Common Stock on a registration statement on Form S-3 under the
Securities Act. There exist no facts or circumstances known to the Company that
would prohibit the preparation and filing of a registration statement on Form
S-3 with respect to the Registrable Securities (as defined in the Registration
Rights Agreement) within the time periods referred to therein.
p. No General Solicitation. Neither the Company nor any distributor
participating on the Company's behalf in the transactions contemplated hereby
(if any) nor any person acting for the Company, or any such distributor, has
conducted any "general solicitation," as such term is defined in Regulation D,
with respect to any of the Securities being offered hereby.
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q. No Integrated Offering. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales of any security or solicited any offers to
buy any security under circumstances that would require registration of the
Securities being offered hereby under the Securities Act or cause this offering
of Securities to be integrated with any other offering of securities of the
Company (past, current or future) for purposes of any stockholder approval
provisions applicable to the Company or its securities.
r. Brokers. The Company has taken no action which would give rise to
any claim by any person for brokerage commissions, finder's fees or similar
payments by the Purchaser relating to this Agreement or the transactions
contemplated hereby.
s. Acknowledgment of Dilution. The Company understands and acknowledges
the potentially dilutive effect to the Common Stock upon the issuance of the
Conversion Shares upon conversion of or otherwise pursuant to the Preferred
Shares. The Company has studied and fully understands the nature of the
Securities being sold hereunder. The Company acknowledges that its obligation to
issue Conversion Shares in accordance with the terms of the Articles of
Amendment is absolute and unconditional, regardless of the dilution that such
issuance may have on the ownership interests of other stockholders. Taking the
foregoing into account, the Company's Board of Directors has determined in its
good faith business judgment that the issuance of the Preferred Shares hereunder
and the consummation of the other transactions contemplated hereby and thereby
are in the best interests of the Company and its stockholders.
t. Tax Status. Except as set forth in the SEC Documents, the Company
and each of its Subsidiaries has made or filed all federal, state, foreign and
local income and all other tax returns, reports and declarations required by any
jurisdiction to which it is subject (unless and only to the extent that the
Company and each of its Subsidiaries has set aside on its books provisions
reasonably adequate for the payment of all unpaid and unreported taxes) and has
paid all taxes and other governmental assessments and charges that are material
in amount, shown or determined to be due on such returns, reports and
declarations, except those being contested in good faith and has set aside on
its books provisions reasonably adequate for the payment of all taxes for
periods subsequent to the periods to which such returns, reports or declarations
apply. There are no unpaid taxes in any material amount claimed to be due by the
taxing authority of any jurisdiction, and the officers of the Company know of no
basis for any such claim. The Company has not executed a waiver with respect to
any statute of limitations relating to the assessment or collection of any
federal, state or local tax. None of the Company's tax returns has been or is
being audited by any taxing authority.
u. Certain Transactions. Except as set forth in the SEC Documents, and
except for arm's length transactions pursuant to which the Company or any of its
Subsidiaries makes payments in the ordinary course of business upon terms no
less favorable than the Company or any of its Subsidiaries could obtain from
third parties and other than the grant of stock options disclosed in Section
3(c) of the Disclosure Letter, none of the officers, directors, or employees of
the Company is presently a party to any transaction with the Company or any of
its Subsidiaries (other than for services as employees, officers and directors),
including any contract, agreement or other arrangement providing
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for the furnishing of services to or by, providing for rental of real or
personal property to or from, or otherwise requiring payments to or from any
officer, director or such employee or, to the knowledge of the Company, any
corporation, partnership, trust or other entity in which any officer, director
or any such employee has a substantial interest or is an officer, director,
trustee or partner.
v. Title. The Company and its Subsidiaries own no real property and
have good and marketable title to all personal property owned by them which is
material to the business of the Company and its Subsidiaries, free and clear of
all liens, encumbrances and defects except such as are described in Section 3(v)
of the Disclosure Letter or such as do not materially affect the value of such
property and do not materially interfere with the use made and proposed to be
made of such property by the Company and its Subsidiaries. Any real property and
facilities held under lease by the Company and its Subsidiaries are held by them
under valid, subsisting and enforceable leases with such exceptions as are not
material and do not materially interfere with the use made and proposed to be
made of such property and buildings by the Company and its Subsidiaries.
w. Permits; Compliance. The Company and each of its Subsidiaries is in
possession of all franchises, grants, authorizations, licenses, permits,
easements, variances, exemptions, consents, certificates, approvals and orders
necessary to own, lease and operate its properties and to carry on its business
as it is now being conducted (collectively, the "COMPANY PERMITS"), and there is
no action pending or, to the knowledge of the Company, threatened regarding
suspension or cancellation of any of the Company Permits, except for such
Company Permits the absence of which would not have a Material Adverse Effect.
Neither the Company nor any of its Subsidiaries is in conflict with, or in
default or violation of, any of the Company Permits, except for any such
conflicts, defaults or violations which, individually or in the aggregate, would
not reasonably be expected to have a Material Adverse Effect. Since the IPO
Date, neither the Company nor any of its Subsidiaries has received any
notification with respect to possible conflicts, defaults or violations of
applicable laws, except for notices relating to possible conflicts, defaults or
violations, which conflicts, defaults or violations would not have a Material
Adverse Effect.
x. Internal Accounting Controls. The Company and each of its
Subsidiaries maintain a system of internal accounting controls sufficient, in
the judgment of the Company's board of directors, to provide reasonable
assurance that (i) transactions are executed in accordance with management's
general or specific authorizations, (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability, (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 the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
y. No Commissions. The Company is issuing the Exchange Shares solely in
exchange for the Note and is issuing the Purchase Shares solely for the Purchase
Price, and no commission or other remuneration has been or will be paid or
given, directly or indirectly, by or on behalf of the Company for soliciting
such exchange or such Purchase Price.
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4. COVENANTS.
a. Best Efforts. The parties shall use their best efforts to satisfy
timely each of the conditions described in Section 6 and Section 7 of this
Agreement.
b. Form D; Blue Sky Laws. The Company agrees, if required, to file a
Form D with respect to the Securities as required under Regulation D of the SEC
and to provide a copy thereof to the Purchaser promptly after such filing. The
Company shall, on or before the Closing Date, take such action as the Company
shall reasonably determine is necessary to qualify the Securities for issuance
to the Purchaser pursuant to this Agreement under applicable securities or "blue
sky" laws of the states of the United States or obtain exemption therefrom, and
shall provide evidence of any such action so taken to the Purchaser on or prior
to the Closing Date.
c. Reporting Status; Eligibility to Use Form S-3. The Company's Common
Stock is registered under Section 12(g) of the Exchange Act. So long as the
Purchaser beneficially owns any of the Securities, the Company shall timely file
all reports required to be filed with the SEC pursuant to the Exchange Act, and
the Company shall not terminate its status as an issuer required to file reports
under the Exchange Act even if the Exchange Act or the rules and regulations
thereunder would permit such termination. The Company meets the "registrant
eligibility" requirements set forth in the general instructions to Form S-3 and
will take all action necessary to continue to meet such requirements.
d. Financial Information. The Company agrees to send the following
reports to the Purchaser until the Purchaser transfers, assigns or sells all of
its Securities: (i) within ten days after the filing with the SEC, a copy of its
Annual Report on Form 10-KSB, its Quarterly Reports on Form 10-QSB, its proxy
statements and any Current Reports on Form 8-K; (ii) within one day after
release, copies of all press releases issued by the Company or any of its
Subsidiaries; and (iii) contemporaneously with the making available or giving to
the stockholders of the Company, copies of any notices or other information the
Company makes available or gives to such stockholders.
e. Reservation of Shares. The Company shall at all times have
authorized and reserved for the purpose of issuance a sufficient number of
shares of Common Stock to provide for the full conversion of the Preferred
Shares and issuance of the Conversion Shares in connection therewith (based on
the Conversion Price (as defined in the Articles of Amendment) in effect from
time to time thereunder) and as otherwise required by, and subject to the terms
and conditions of, the Articles of Amendment. The Company shall not reduce the
number of shares reserved for issuance upon conversion of or otherwise pursuant
to the Preferred Shares (except as a result of any such conversion thereof)
without the consent of the Purchaser. The Company shall use its best efforts at
all times to maintain the number of shares of Common Stock so reserved for
issuance at no less than the number that is then actually issuable upon full
conversion of the Preferred Shares (based on the Conversion Price in effect from
time to time). If at any time the number of shares of Common Stock authorized
and reserved for issuance is below the aggregate number of Conversion Shares
issued and issuable upon conversion of or otherwise pursuant to the Preferred
Shares (based on the Conversion Price in effect from time to time), the Company
will promptly take all corporate action necessary to
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authorize and reserve a sufficient number of shares, including, without
limitation, calling a special meeting of stockholders to authorize additional
shares to meet the Company's obligations under this Section 4(e), in the case of
an insufficient number of authorized shares, and using its best efforts to
obtain shareholder approval of an increase in such authorized number of shares.
f. Listing. The Company shall promptly secure the listing of the
Conversion Shares upon each national securities exchange or automated quotation
system, if any, upon which shares of Common Stock are then listed (subject to
official notice of issuance) and shall maintain, so long as any other shares of
Common Stock shall be so listed, such listing of all Conversion Shares from time
to time issuable upon conversion of or otherwise pursuant to the Preferred
Shares. The Company will use its best efforts to continue the listing and
trading of its Common Stock on the NASDAQ, the NASDAQ National Market ("NNM"),
the New York Stock Exchange ("NYSE") or the American Stock Exchange ("AMEX") and
will comply in all respects with the Company's reporting, filing and other
obligations under the bylaws or rules of the National Association of Securities
Dealers, Inc. ("NASD") and such exchanges, as applicable. In the event the
Common Stock is not eligible to be traded on any of the NASDAQ, the NNM, the
NYSE or the AMEX and the Common Stock is not eligible for listing on any such
exchange or system, the Company shall use its best efforts to cause the Common
Stock to be eligible for trading on the over-the-counter bulletin board at the
earliest practicable date and remain eligible for trading while any Conversion
Shares are outstanding. The Company shall provide to the Purchaser and any
holder of the Preferred Shares copies of any notices it receives from NASDAQ and
any other exchanges or quotation system on which the Common Stock is then listed
regarding the continued eligibility of the Common Stock for listing on such
exchanges and quotation systems simultaneously with or promptly after such
notices are publicly available.
g. No Integrated Offerings. The Company shall not make any offers or
sales of any security (other than the Securities) under circumstances that would
require registration of the Securities being offered hereunder under the
Securities Act or cause this offering of Securities to be integrated with any
other offering of securities by the Company for purposes of any stockholder
approval provision applicable to the Company or its securities.
h. Waivers. The Company shall cause each of James W. Stealey, the
trustee of certain trusts for Mr. Stealey's children, and Vertical Financial
Holdings, and shall use its best efforts to cause each of Bluestone Capital
Partners, L.P., Royce Investment Group, Inc., Virtual Business Designs, Inc.,
Andrew G. Burch, IFM Venture Group, James Bailey and the former shareholders of
MPG-Net, Inc., to execute and deliver to the Purchaser, prior to or
simultaneously with the Closing hereunder, waivers (the "WAIVERS") by such
persons and entities of their right to require the Company to include any shares
of the capital stock of the Company which they beneficially own or have voting
power with respect to (excluding, in the case of Mr. Stealey and Vertical
Financial Holdings, the shares of Common Stock to be issued to them prior to or
simultaneously with the Closing hereunder as described in Sections 7(m) and 7(l)
hereof, respectively) in any Registration Statement (as defined in the
Registration Rights Agreement) required to be filed by the Company pursuant to
the Registration Rights Agreement.
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i. Use of Proceeds. The Company shall use the proceeds from the sale of
the Purchase Shares in the manner set forth in Section 4(i) of the Disclosure
Letter and shall not, except as set forth in such Section 4(i) of the Disclosure
Letter, directly or indirectly, use such proceeds for any loan to or investment
in any other corporation, partnership, enterprise or other person (except in
connection with its currently existing direct or indirect Subsidiaries).
j. Waiver of Certain Agreements. Upon and subject to the occurrence of
the Closing, the Purchaser waives all rights to any payments owed to the
Purchaser by the Company pursuant to the Note and Section 2(c) of the January
Registration Rights Agreement that have accrued and remain unpaid on and as of
the Closing Date (other than payments that are being exchanged for Exchange
Shares hereunder), provided that such waiver shall not apply to any payments
owed pursuant to such Section 2(c) that accrue after the Closing Date.
k. The Company shall use its best efforts (i) to prepare and file with
the SEC as promptly as practicable and in no event later than November 24, 1999
a proxy statement in accordance with Section 14 of the Securities Exchange Act
of 1934, as amended, and the rules and regulations of the SEC promulgated
thereunder requesting the shareholders of the Company to approve the issuance of
the Series D Preferred Stock and the shares of Common Stock issuable upon
conversion of or otherwise pursuant to the Series D Preferred Stock pursuant to
Rule 4310(c)(25)(H)(i) of the Nasdaq Stock Market or any successor rule
("SHAREHOLDER APPROVAL") and (ii) to hold an annual or special meeting (the
"SHAREHOLDER MEETING") of its shareholders as promptly as practicable and in no
event later than December 31, 1999, and to obtain at such meeting the
Shareholder Approval provided that such date set forth in this clause (ii) shall
be extended to February 15, 2000 if the staff of the SEC reviews and provides to
the Company written comments requiring changes to such proxy statement. The
Company shall, through its Board of Directors, recommend to its shareholders
that they approve the matters described in clause (i) above and the Company
shall use its best efforts to solicit proxies from its shareholders in favor of
such matters sufficient to satisfy all legal requirements relevant to obtaining
the Shareholder Approval.
5. TRANSFER AGENT INSTRUCTIONS.
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The Company shall issue irrevocable instructions to its transfer agent
to issue certificates, registered in the name of the Purchaser or its nominee,
for the Conversion Shares in such amounts as specified from time to time by the
Purchaser to the Company upon conversion of the Preferred Shares in accordance
with the terms thereof (the "IRREVOCABLE TRANSFER AGENT INSTRUCTIONS"). Prior to
registration of the Conversion Shares under the Securities Act or the date on
which such shares may be sold pursuant to Rule 144(k) (or any successor rule),
all such certificates shall bear the restrictive legend specified in Section
2(g) of this Agreement. The Company warrants that no instruction other than the
Irrevocable Transfer Agent Instructions referred to in this Section 5, and stop
transfer instructions to give effect to Sections 2(f) and 2(g) hereof (in the
case of the Conversion Shares, prior to registration of the Conversion Shares
under the Securities Act or the date on which the Conversion Shares may be sold
pursuant to Rule 144(k) (or any successor rule)), will be given by the Company
to its transfer agent and that the Securities shall otherwise be freely
transferable on the books and records of the Company to the extent provided, and
subject to the terms and conditions of, this Agreement and the Registration
Rights Agreement. Nothing in this Section shall affect in any way the
Purchaser's obligations and agreement set forth in Section 2(g) hereof to comply
with all applicable prospectus delivery requirements, if any, upon resale of the
Securities. If the Purchaser provides the Company with (i) an opinion of
counsel, in form, substance and scope customary for opinions in comparable
transactions and given by counsel reasonably acceptable to the Company, to the
effect that a public sale or transfer of such Securities may be made without
registration under the Securities Act and such sale or transfer is effected or
(ii) the Purchaser provides reasonable assurances that the Securities can be
sold pursuant to Rule 144 and such sale is effected, the Company shall permit
the transfer, and, in the case of the Conversion Shares, promptly instruct its
transfer agent to issue one or more certificates, free from any restrictive
legend, in such name and in such denominations as specified by the Purchaser.
6. CONDITIONS TO THE COMPANY'S OBLIGATIONS.
The obligation of the Company hereunder to issue and deliver the
Exchange Shares and to issue and sell the Purchase Shares to the Purchaser
hereunder is subject to the satisfaction, at or before the Closing Date, of each
of the following conditions thereto, provided that these conditions are for the
Company's sole benefit and may be waived by the Company at any time in its sole
discretion.
a. The Purchaser shall have executed the signature page to this
Agreement and the Registration Rights Agreement, and delivered such pages to the
Company.
b. The Purchaser shall have delivered the Note and the Purchase Price
in accordance with Section 1(a).
c. The representations and warranties of the Purchaser shall be true
and correct as of the date when made and as of the Closing Date as though made
at that time (except for representations and warranties that speak as of a
specific date, which representations and warranties shall be true and correct as
of such date), and the Purchaser shall have performed, satisfied and complied in
all material
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respects with the covenants, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by the Purchaser at or
prior to the Closing Date.
d. No statute, rule, regulation, executive order, decree, ruling,
injunction, action or proceeding shall have been enacted, entered, promulgated
or endorsed by any court or governmental authority of competent jurisdiction or
any self-regulatory organization having authority over the matters contemplated
hereby which questions the validity of, or challenges or prohibits the
consummation of any of the transactions contemplated by this Agreement.
e. The Articles of Amendment shall have been accepted for filing with
the Secretary of State of the State of North Carolina.
f. The Purchaser shall have executed and delivered a proxy, in form and
substance to be agreed upon by the parties hereto (the "PURCHASER PROXY"),
wherein the purchaser shall authorize the Company to vote all the shares of
Common Stock held of record by the Purchaser on the record date for the
Shareholder Meeting solely to approve the issuance of the Series D Preferred
Stock and the shares of Common Stock issuable upon conversion of or otherwise
pursuant to the Series D Preferred Stock pursuant to Rule 4310(c)(25)(H)(i) of
the Nasdaq Stock Market or any successor rule and the Purchaser Proxy shall not
authorize the Company to vote such shares with respect to any other matters.
7. CONDITIONS TO THE PURCHASER'S OBLIGATIONS.
The obligation of the Purchaser hereunder to exchange the Note for the
Exchange Shares and to purchase the Purchase Shares hereunder is subject to the
satisfaction, at or before the Closing Date, of each of the following
conditions, provided that these conditions are for the Purchaser's sole benefit
and may be waived by the Purchaser at any time in the Purchaser's sole
discretion:
a. The Company shall have executed the signature page to this Agreement
and the Registration Rights Agreement, and delivered such pages to the
Purchaser.
b. The Company shall have delivered to the Purchaser (i) the duly
executed certificates representing the Exchange Shares and (ii) the duly
executed certificates representing the Purchase Shares, all in accordance with
Section 1(a).
c. The Articles of Amendment shall have been accepted for filing with
the Secretary of State of the State of North Carolina and a copy thereof
certified by such official shall have been delivered to the Purchaser.
d. The Common Stock shall be authorized for quotation on NASDAQ and
trading in the Common Stock (or NASDAQ generally) shall not have been suspended
by the SEC or NASDAQ.
e. The representations and warranties of the Company shall be true and
correct as of the date when made and as of the Closing Date as though made at
that time (except for representations and warranties that speak as of a specific
date, which representations and warranties shall be true and
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correct as of such date) and the Company shall have performed, satisfied and
complied in all material respects with the covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with by the
Company at or prior to the Closing Date. The Purchaser shall have received a
certificate, executed by the Chief Executive Officer of the Company, dated as of
the Closing Date, to the foregoing effect, and as to such other matters as may
be reasonably requested by the Purchaser.
f. No statute, rule, regulation, executive order, decree, ruling,
injunction, action or proceeding shall have been enacted, entered, promulgated
or endorsed by any court or governmental authority of competent jurisdiction or
any self-regulatory organization having authority over the matters contemplated
hereby which questions the validity of, or challenges or prohibits the
consummation of, any of the transactions contemplated by this Agreement.
g. The Purchaser shall have received an opinion of the Company's
counsel, dated as of the Closing Date, in form, scope and substance reasonably
satisfactory to the Purchaser and in substantially the form of Exhibit C
attached hereto (which opinion shall state that the holding period of the
Exchange Shares and related Conversion Shares will "tack" with the holding
period of the Note for purposes of Rule 144(d) under the Securities Act).
h. The Irrevocable Transfer Agent Instructions, in the form attached
hereto as Exhibit D, shall have been delivered to and acknowledged in writing by
the Company's transfer agent and a copy of such instructions and acknowledgment
shall have been delivered to the Purchaser.
i. No material adverse change or development in the business,
operations, properties, prospects, financial condition, or results of operations
of the Company shall have occurred since the date hereof.
j. The Company shall have delivered to the Purchaser the Waiver(s) in
form and substance satisfactory to the Purchaser, duly executed by James W.
Stealey, the trustee of certain trusts for Mr. Stealey's children, and Vertical
Financial Holdings.
k. The Company shall have satisfied all conditions to the continued
listing of the Common Stock on NASDAQ as set forth in the letter, dated October
11, 1999, from NASDAQ to the Company and shall not have received notice from
NASDAQ that the Company must satisfy any additional requirements (other than
normal maintenance requirements applicable to all listed companies) to maintain
such listing.
l. Prior to or simultaneously with the Closing, Vertical Financial
Holdings (together with any designee of Vertical Financial Holdings) shall
collectively have purchased from the Company 1,100,000 shares of Common Stock
and paid to the Company an aggregate purchase price of at least $1,100,000 for
such shares of Common Stock.
m. Prior to or simultaneously with the closing, John W. Stealey shall
have arranged to the satisfaction of the Purchaser for (x) all debt and other
obligations (including any refinancing
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thereof) in the amount of $1,000,000 (the "OBLIGATIONS") owed by the Company to
any bank, including, without limitation to Branch Banking &Trust Company,
described in the September SB-2 as of the date the September SB-2 was declared
effective to have been fully satisfied (other than by the Company) and/or (y)
the Company to have been unconditionally released from the Obligations, and in
return for such arrangement the Company shall have issued to John W. Stealey no
more than 1,000,000 shares of Common Stock and the Company shall have paid no
other consideration in connection with such arrangement.
n. The Company shall have taken all actions necessary or desirable, in
the opinion of the Purchaser, to amend or supplement the September SB-2 so that
sales of all the remaining Registrable Securities (as defined in the January
Registration Rights Agreement) are permitted to be made by the Purchaser
pursuant to the September SB-2 in such amounts and at such times as the
Purchaser may determine.
8. GOVERNING LAW; MISCELLANEOUS.
a. Governing Law; Jurisdiction. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York applicable to
contracts made and to be performed in the State of New York (without regard to
principles of conflict of laws). The Company irrevocably consents to the
jurisdiction of the United States federal courts and the state courts located in
New York County, New York in any suit or proceeding based on or arising under
this Agreement, the agreements entered into in connection herewith or the
transactions contemplated hereby or thereby and irrevocably agrees that all
claims in respect of such suit or proceeding may be determined in such courts.
The Company irrevocably waives the defense of an inconvenient forum to the
maintenance of such suit or proceeding. The Company further agrees that service
of process upon the Company mailed by first class mail shall be deemed in every
respect effective service of process upon the Company in any such suit or
proceeding. Nothing herein shall affect the right of the Purchaser to serve
process in any other manner permitted by law. The Company agrees that a final
non-appealable judgment in any such suit or proceeding shall be conclusive and
may be enforced in other jurisdictions by suit on such judgment or in any other
lawful manner.
b. Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when counterparts have been signed by each party and
delivered to the other party. This Agreement, once executed by a party, may be
delivered to the other parties hereto by facsimile transmission of a copy of
this Agreement bearing the signature of the party so delivering this Agreement.
In the event any signature is delivered by facsimile transmission, the party
using such means of delivery shall cause the manually executed Execution Page(s)
hereof to be physically delivered to the other party within five days of the
execution hereof.
c. Headings. The headings of this Agreement are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Agreement.
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d. Severability. If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement or the
validity or enforceability of this Agreement in any other jurisdiction.
e. Entire Agreement; Amendments. This Agreement and the instruments
referenced herein contain the entire understanding of the parties with respect
to the matters covered herein and therein and, except as specifically set forth
herein or therein, neither the Company nor the Purchaser makes any
representation, warranty, covenant or undertaking with respect to such matters.
Notwithstanding anything contained herein to the contrary, as of the Closing
Date, none of the covenants contained in the Securities Purchase Agreement shall
remain in effect, except the covenant contained in Section 4(e) of the
Securities Purchase Agreement which shall remain in full force and effect in
accordance with its terms. Except as provided herein to the contrary, the
entirety of the January Registration Rights Agreement shall remain in full force
and effect in accordance with its terms. No provision of this Agreement may be
waived or amended other than by an instrument in writing signed by the party to
be charged with enforcement and no provision of this Agreement may be amended
other than by an instrument in writing signed by the Company and the Purchaser.
f. Notices. Any notices required or permitted to be given under the
terms of this Agreement shall be sent by certified or registered mail (return
receipt requested) or delivered personally or by courier (including a recognized
overnight delivery service) or by facsimile, and shall be effective five days
after being placed in the mail, if mailed, or upon receipt or refusal of
receipt, if delivered personally or by courier or by facsimile, in each case
addressed to a party. The addresses for such communications shall be:
If to the Company:
Interactive Magic, Inc.
215 Southport Drive, Suite 1000
Morrisville, NC 27560
Facsimile: (919) 461-0723
Attention: Chief Executive Officer
If to the Purchaser, to the address set forth under the Purchaser's
name on the signature page hereto executed by the Purchaser. Each party shall
provide notice to the other party of any change in address or facsimile number.
g. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and assigns. Except as
provided herein, neither the Company nor the Purchaser shall assign this
Agreement or any rights or obligations hereunder. Notwithstanding the foregoing,
the Purchaser may assign its rights hereunder to any person that purchases
Securities in a private transaction from the Purchaser in accordance with the
securities laws or to any of the Purchaser's "affiliates," as that term is
defined under the Exchange Act, without the consent of the Company or to any
other person or entity with the consent of the Company. This
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provision shall not limit the Purchaser's right to transfer the Securities
pursuant to the terms of this Agreement or the Registration Rights Agreement or
to assign the Purchaser's rights hereunder or thereunder to any such transferee.
h. Third Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective permitted successors and
assigns, and is not for the benefit of, nor may any provision hereof be enforced
by, any other person.
i. Survival. The representations and warranties of the Company and the
agreements and covenants set forth in Sections 3, 4, 5 and 8 hereof and in the
Disclosure Letter shall survive the Closing hereunder until the Purchaser no
longer beneficially owns any Securities notwithstanding any due diligence
investigation conducted by or on behalf of the Purchaser. Moreover, none of the
representations and warranties made by the Company herein or in the Disclosure
Letter shall act as a waiver of any rights or remedies the Purchaser may have
under applicable federal or state securities laws. The Company agrees to
indemnify and hold harmless the Purchaser and each of the Purchaser's officers,
directors, employees, partners, members, agents and affiliates for loss or
damage arising as a result of or related to any breach or alleged breach by the
Company of any of its representations, warranties or covenants set forth herein,
in the Disclosure Letter or in the Registration Rights Agreement, including
advancement of expenses as they are incurred.
j. Publicity. The Company and the Purchaser shall have the right to
review a reasonable period of time before issuance any press releases, SEC,
NASDAQ or NASD filings, or any other public statements with respect to the
transactions contemplated hereby; PROVIDED, HOWEVER, that the Company shall be
entitled, without the prior approval of the Purchaser, to make any press release
or SEC, NASDAQ or NASD filings with respect to such transactions as is required
by applicable law and regulations (although the Purchaser shall be consulted by
the Company in connection with any such press release prior to its release and
shall be provided with a copy thereof and be given an opportunity to comment
thereon).
k. Further Assurances. Each party shall do and perform, or cause to be
done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
l. Joint Participation in Drafting. Each party to this Agreement has
participated in the negotiation and drafting of this Agreement, the Articles of
Amendment and the Registration Rights Agreement. As such, the language used
herein and therein shall be deemed to be the language chosen by the parties
hereto to express their mutual intent, and no rule of strict construction will
be applied against any party to this Agreement.
m. Equitable Relief. The Company acknowledges that a breach by it of
its obligations hereunder will cause irreparable harm to the Purchaser by
vitiating the intent and purpose of the transactions contemplated hereby.
Accordingly, the Company acknowledges that the remedy at law
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<PAGE>
for a breach of its obligations hereunder (including, but not limited to, its
obligations pursuant to Section 5 hereof) will be inadequate and agrees, in the
event of a breach or threatened breach by the Company of the provisions of this
Agreement (including, but not limited to, its obligations pursuant to Section 5
hereof), that the Purchaser shall be entitled, in addition to all other
available remedies, to an injunction restraining any breach and requiring
immediate issuance and transfer, without the necessity of showing economic loss
and without any bond or other security being required.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, the undersigned Purchaser and the Company have
caused this Agreement to be duly executed as of the date first above written.
INTERACTIVE MAGIC, INC.
By:__________________________________
Name:________________________________
Title:_______________________________
PURCHASER:
RGC INTERNATIONAL INVESTORS, LDC
By: Rose Glen Capital Management, L.P.,
Investment Manager
By: RGC General Partner Corp.,
as General Partner
By:___________________________
Name:____________________
Managing Director
RESIDENCE: Cayman Islands
ADDRESS: c/o Rose Glen Capital Management, L.P.
Three Bala Plaza East
Suite 200
251 St. Asaphs Road
Bala Cynwyd, PA 19004
Facsimile: 610-617-0570
Telephone: 610-617-5900
with copies of all notices to:
Klehr, Harrison, Harvey, Branzburg & Ellers
1401 Walnut Street
Philadelphia, PA 19102
Telecopy: (215) 568-6603
Attention: Robert W. Cleveland, Esquire
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT"), dated as of November
11, 1999, by and among INTERACTIVE MAGIC, INC., a corporation organized under
the laws of the State of North Carolina (the "COMPANY"), and RGC International
Investors, LDC ("RGC"), James W. Stealey ("STEALEY"), Value Management &
Research AG ("Value") and Vertical Financial Holdings ("VERTICAL" and, together
with RGC, Value and Stealey and their respective affiliates and any assignee or
transferee of all of their respective rights hereunder, the "INITIAL
INVESTORS").
WHEREAS:
A. In connection with the Securities Purchase and Exchange Agreement,
dated as of November 8, 1999, between the Company and RGC (the "SECURITIES
PURCHASE AND EXCHANGE AGREEMENT"), the Company has agreed, upon the terms and
subject to the conditions contained therein, (i) to issue to RGC in exchange for
the Note (as defined in the Securities Purchase and Exchange Agreement) shares
of its Series D Convertible Preferred Stock (the "PREFERRED STOCK") that are
convertible into shares of the Company's common stock, par value $.10 per share
(the "COMMON STOCK"), upon the terms and subject to the limitations and
conditions set forth in the Articles of Amendment to the Company's Articles of
Incorporation with respect to the Preferred Stock (the "ARTICLES OF AMENDMENT")
and (ii) to issue and sell to RGC additional shares of Preferred Stock for cash.
B. In connection with the Subscription Agreements (the "SUBSCRIPTION
AGREEMENTS"), dated as of November 3, 4 and 9, 1999, the Company has agreed,
upon the terms and subject to the conditions contained therein, to issue and
sell to Stealey, Value and Vertical 1,000,000 shares, 400,000 shares and 700,000
shares, respectively, of the Company's Common Stock (the "COMMON SHARES").
C. To induce the Initial Investors to execute and deliver the
Securities Purchase and Exchange Agreement and the Subscription Agreements, as
applicable, the Company has agreed to provide certain registration rights under
the Securities Act of 1933, as amended, and the rules and regulations
thereunder, or any similar successor statute (collectively, the "SECURITIES
ACT"), and applicable state securities laws;
<PAGE>
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and each
of the Initial Investors hereby agree as follows:
1. DEFINITIONS.
a. As used in this Agreement, the following terms shall have
the following meanings:
(i) "INVESTORS" means the Initial Investors and any
transferee or assignee who agrees to become bound by the provisions of this
Agreement in accordance with Section 9 hereof.
(ii) "REGISTER," "REGISTERED," and "REGISTRATION"
refer to a registration effected by preparing and filing a Registration
Statement or Statements in compliance with the Securities Act and, pursuant to
Rule 415 under the Securities Act or any successor rule providing for offering
securities on a continuous basis ("RULE 415"), and the declaration or ordering
of effectiveness of such Registration Statement by the United States Securities
and Exchange Commission (the "SEC").
(iii) "REGISTRABLE SECURITIES" means (A) the
Conversion Shares issued and issuable upon conversion of or otherwise pursuant
to the terms of the Preferred Stock (notwithstanding any limitations on
conversion applicable to the Preferred Stock), (B) the Common Shares and (C) any
shares of capital stock issued or issuable, from time to time (with any
adjustments), as a distribution on or in exchange for or otherwise with respect
to any of the foregoing (including, without limitation, any shares issued or
issuable pursuant to Section 2(c) hereof).
(iv) "REGISTRATION STATEMENTS" means any registration
statements of the Company under the Securities Act.
b. Capitalized terms used herein and not otherwise defined
herein shall have the respective meanings set forth in the Securities Purchase
and Exchange Agreement.
2. REGISTRATION.
a. Mandatory Registration. The Company shall prepare and file
with the SEC on or prior to the date which is 60 days after the Closing Date a
Registration Statement on Form S-3 (or, if Form S-3 is not then available, on
such form of Registration Statement as is then available to effect a
registration of the Registrable Securities, subject to the consent of the
Initial Investors, which consent will not be unreasonably withheld) covering the
resale of the Registrable Securities, which Registration Statement, to the
extent allowable under the Securities Act and the rules and regulations
promulgated thereunder (including Rule 416), shall state that such Registration
Statement also covers such indeterminate number of additional shares of Common
Stock as may become issuable upon conversion of or otherwise pursuant to the
Preferred Stock to prevent dilution resulting from stock
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<PAGE>
splits, stock dividends or similar transactions. The number of shares of Common
Stock initially included in such Registration Statement shall be no less than
the aggregate number of (i) Common Shares, plus (ii) Conversion Shares that
would be issuable upon conversion of the Preferred Stock (based on the
Conversion Price (as defined in the Articles of Amendment)) without regard to
any limitation on the Investors' ability to convert the Preferred Stock. The
Company acknowledges that the number of shares initially included in the
Registration Statement represents a good faith estimate of the maximum number of
shares issuable upon the conversion of or otherwise pursuant to the Preferred
Stock. The Registrable Securities included in the Registration Statement shall
be allocated to the Investors as set forth in Section 11(k) hereof. The
Registration Statement (and each amendment or supplement thereto, and each
request for acceleration of effectiveness thereof) shall be provided to (and
subject to the approval of) the Initial Investors and their respective counsel
prior to its filing or other submission, which approval shall not be
unreasonably withheld, provided that all information included in the
Registration Statement regarding the Initial Investors, their ownership of
securities of the Company and the plan of distribution of the Common Shares and
the Conversion Shares shall conform to the information supplied by the Initial
Investors for inclusion therein.
b. Underwritten Offering. If any offering pursuant to a
Registration Statement pursuant to Section 2(a) hereof involves an underwritten
offering, the Investors who hold a majority in interest of the Registrable
Securities subject to such underwritten offering (treating the Preferred Stock
as fully converted for purposes of such calculation (notwithstanding any
limitations on conversion applicable to the Preferred Stock)) shall have the
right to select one legal counsel to represent the Investors and an investment
banker or bankers and manager or managers to administer the offering, which
investment banker or bankers or manager or managers shall be reasonably
satisfactory to the Company. In the event that any Investors elect not to
participate in such underwritten offering, the Registration Statement covering
all of the Registrable Securities shall contain appropriate plans of
distribution reasonably satisfactory to the Investors participating in such
underwritten offering and the Investors electing not to participate in such
underwritten offering (including, without limitation, the ability of
nonparticipating Investors to sell from time to time and at any time during the
effectiveness of such Registration Statement).
c. Payments by the Company. The Company shall use its best
efforts to cause the Registration Statement required to be filed pursuant to
Section 2(a) hereof to become effective as soon as practicable, but in no event
later than the 120th day after the Closing Date (the "REGISTRATION DEADLINE").
If (i) the Registration Statement(s) covering the Registrable Securities
required to be filed by the Company pursuant to Section 2(a) hereof is not
declared effective by the SEC on or before the Registration Deadline, (ii) after
the Registration Statement has been declared effective by the SEC and prior to
the expiration of the Registration Period, sales of all the Registrable
Securities cannot be made pursuant to the Registration Statement or (iii) the
Common Stock is not listed or included for quotation on the Nasdaq National
Market (the "NNM"), the Nasdaq SmallCap Market ("NASDAQ SMALLCAP"), the New York
Stock Exchange (the "NYSE"), the American Stock Exchange (the "AMEX"), the OTC
Bulletin Board, or such other exchange or market as the Company may designate
and qualify under as its principal exchange at any time during the Registration
Period, then the Company will make payments to the Investors in such amounts and
at
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<PAGE>
such times as shall be determined pursuant to this Section 2(c) as partial
relief for the damages to the Investors by reason of any such delay in or
reduction of their ability to sell the Registrable Securities (which remedy
shall not be exclusive of any other remedies available at law or in equity). The
Company shall pay to each holder of the Preferred Stock or Registrable
Securities an amount equal to the stated value of the Preferred Stock then held
by such holder (and, in the case of holders of Conversion Shares, the stated
value of Preferred Stock from which such Conversion Shares were converted) or,
in the case of Common Shares then held by such holder, the purchase price paid
for such Common Shares pursuant to the applicable Subscription Agreement (in
each case, the "AGGREGATE SHARE PRICE"), multiplied by (ii) one percent,
multiplied by (iii) the sum of (x) the number of months (pro rated for partial
months) after the Registration Deadline and prior to the date the Registration
Statement filed pursuant to Section 2(a) is declared effective by the SEC, plus
(y) the number of months (prorated for partial months) prior to the expiration
of the Registration Period that sales of all of the Registrable Securities
cannot be made pursuant to the Registration Statement after the Registration
Statement has been declared effective (including, without limitation, when sales
cannot be made by reason of the Company's failure to properly supplement or
amend the prospectus included therein in accordance with the terms of this
Agreement (including Section 3(b) hereof) or otherwise), plus (z) the number of
months (prorated for partial months) prior to the expiration of the Registration
Period that the Common Stock is not listed or included for quotation on the NNM,
the Nasdaq SmallCap, the NYSE, the AMEX, the OTC Bulletin Board, or such other
exchange or market as the Company may designate and qualify under as its
principal exchange or that trading thereon is halted; PROVIDED, HOWEVER, that
there shall be excluded from each such period any delays which are solely
attributable to (i) the Investors' failure to review any Registration Statement
(or any amendment or supplement thereto, or any request for acceleration of
effectiveness thereof) and provide comments to the Company within three business
days of receipt thereof pursuant to Section 2(a) hereof, (ii) the Investors'
failure to timely provide information to the Company in accordance with Section
4(a) hereof, or (iii) changes (other than corrections of Company mistakes with
respect to information previously provided by the Investors) required by the
Investors in the Registration Statement with respect to information relating to
the Investors, including, without limitation, changes to the plan of
distribution. For example, if the Registration Statement is not effective by the
Registration Deadline, the Company would pay $10,000 for each $1,000,000 of
Aggregate Share Price for each month after the Registration Deadline until the
Registration Statement becomes effective (prorated for partial months). Such
amounts shall be paid in cash. Payments of cash pursuant hereto shall be made
within five days after the end of each period that gives rise to such
obligation, provided that, if any such period extends for more than 30 days,
interim payments shall be made for each such 30-day period. If any such payments
of cash are not timely made, each Investor holding Preferred Stock can elect to
add the amount of such payments to the stated value of the Preferred Stock then
held by such Investor and such amounts shall thereafter be convertible into
Common Stock at the "CONVERSION PRICE" (as defined in the Articles of
Amendment). Any shares of Common Stock issued upon conversion of such amounts
shall be Registrable Securities. If any Investor holding Preferred Stock desires
to convert the amounts due hereunder into Registrable Securities, it shall so
notify the Company in writing at any time after the date on which such amounts
become payable in cash and such amounts shall be so convertible (pursuant to the
mechanics set forth under Section 6 of the Articles of Amendment), beginning on
the last day upon which the cash amount would otherwise be due.
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<PAGE>
d. Piggy-Back Registrations. Subject to the last sentence of
this Section 2(d), if at any time prior to the expiration of the Registration
Period (as hereinafter defined) the Company shall file with the SEC a
Registration Statement relating to an offering for its own account or the
account of others under the Securities Act of any of its equity securities
(other than on Form S-4 or Form S-8 or their then equivalents relating to equity
securities to be issued solely in connection with any acquisition of any entity
or business or equity securities issuable in connection with stock option or
other employee benefit plans), the Company shall send to each Investor who is
entitled to registration rights under this Section 2(d) written notice of such
determination and, if within 15 days after the effective date of such notice,
such Investor shall so request in writing, the Company shall include in such
Registration Statement all or any part of the Registrable Securities such
Investor requests to be registered, except that if, in connection with any
underwritten public offering for the account of the Company the managing
underwriter(s) thereof shall impose a limitation on the number of shares of
Common Stock which may be included in the Registration Statement because, in
such underwriter(s)' judgment, marketing or other factors dictate such
limitation is necessary to facilitate public distribution, then the Company
shall be obligated to include in such Registration Statement only such limited
portion of the Registrable Securities with respect to which such Investor has
requested inclusion hereunder as the underwriter shall permit. Any exclusion of
Registrable Securities shall be made pro rata among the Investors seeking to
include Registrable Securities, in proportion to the number of Registrable
Securities sought to be included by such Investors; PROVIDED, HOWEVER, that the
Company shall not exclude any Registrable Securities unless the Company has
first excluded all outstanding securities, the holders of which are not entitled
to inclusion of such securities in such Registration Statement or are not
entitled to pro rata inclusion with the Registrable Securities; and PROVIDED
FURTHER that, after giving effect to the immediately preceding proviso, any
exclusion of Registrable Securities shall be made pro rata with holders of other
securities having the right to include such securities in the Registration
Statement other than holders of securities entitled to inclusion of their
securities in such Registration Statement by reason of demand registration
rights. No right to registration of Registrable Securities under this Section
2(d) shall be construed to limit any registration required under Section 2(a)
hereof. If an offering in connection with which an Investor is entitled to
registration under this Section 2(d) is an underwritten offering, then each
Investor whose Registrable Securities are included in such Registration
Statement shall, unless otherwise agreed by the Company, offer and sell such
Registrable Securities in an underwritten offering using the same underwriter or
underwriters and, subject to the provisions of this Agreement, on the same terms
and conditions as other shares of Common Stock included in such underwritten
offering. Notwithstanding anything to the contrary set forth herein, the
registration rights of the Investors pursuant to this Section 2(d) shall only be
available in the event the Company fails to obtain effectiveness or maintain
effectiveness of any Registration Statement to be filed pursuant to Section 2(a)
in accordance with the terms of this Agreement.
e. Eligibility for Form S-3. The Company represents and
warrants that it meets the registrant eligibility and transaction requirements
for the use of Form S-3 for registration of the offer and sale by the Initial
Investors and any other Investors of the Registrable Securities and the Company
shall file all reports required to be filed by the Company with the SEC in a
timely manner so as to maintain such eligibility for the use of Form S-3.
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<PAGE>
3. OBLIGATIONS OF THE COMPANY.
In connection with the registration of the Registrable Securities, the
Company shall have the following obligations:
a. The Company shall prepare promptly and use its best efforts
to file with the SEC the Registration Statement required by Section 2(a) as soon
as practicable after the Closing Date, and use its best efforts to (i) cause
such Registration Statement relating to Registrable Securities to become
effective as soon as practicable after such filing (but in no event later than
the Registration Deadline), and (ii) keep the Registration Statement effective
pursuant to Rule 415 at all times until such date as is the earlier of (A) the
date on which all of the Registrable Securities have been sold and (B) the date
on which all of the Registrable Securities (in the opinion of counsel to the
Initial Investors) may be immediately sold to the public without registration or
restriction (including, without limitation, as to volume by each holder thereof)
under the Securities Act (the "REGISTRATION PERIOD"), which Registration
Statement (including any amendments or supplements thereto and prospectuses
contained therein and all documents incorporated by reference therein) shall not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein, or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.
b. The Company shall prepare and file with the SEC such
amendments (including post-effective amendments) and supplements to the
Registration Statements and the prospectus used in connection with the
Registration Statements as may be necessary to keep the Registration Statement
effective at all times during the Registration Period, and, during such period,
comply with the provisions of the Securities Act with respect to the disposition
of all Registrable Securities of the Company covered by the Registration
Statements. In the event the number of shares available under a Registration
Statement filed pursuant to this Agreement is, on any trading day (such trading
day being the "REGISTRATION TRIGGER DATE"), insufficient to cover 100% of the
Registrable Securities issued or issuable upon conversion of or otherwise
pursuant to the Preferred Stock (without giving effect to any limitations on
conversion contained in the Articles of Amendment) and 100% of the Common
Shares, the Company shall amend the Registration Statement, or file a new
Registration Statement (on the short form available therefor, if applicable), or
both, so as to cover 125% of the Registrable Securities so issued or issuable
(without giving effect to any limitations on conversion contained in the
Articles of Amendment) as of the Registration Trigger Date, in each case, as
soon as practicable, but in any event within 15 days after the Registration
Trigger Date. The Company shall use its best efforts to cause such amendment
and/or new Registration Statement to become effective as soon as practicable
following the filing thereof, but in any event within 90 days after the
Registration Trigger Date. The provisions of Section 2(c) above shall be
applicable with respect to the Company's obligations under this Section 3(b).
c. The Company shall furnish to each Investor whose
Registrable Securities are included in a Registration Statement (and its legal
counsel) (i) promptly after the same is prepared and publicly distributed, filed
with the SEC, or received by the Company, one copy of each Registration
Statement and any amendment thereto, each preliminary prospectus and prospectus
and
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<PAGE>
each amendment or supplement thereto, and, in the case of the Registration
Statement referred to in Section 2(a), each letter written by or on behalf of
the Company to the SEC or the staff of the SEC and each item of correspondence
from the SEC or the staff of the SEC, in each case relating to such Registration
Statement (other than the portion, if any, thereof which contains information
for which the Company has sought confidential treatment), and (ii) such number
of copies of a prospectus, including a preliminary prospectus, and all
amendments and supplements thereto and such other documents as such Investor may
reasonably request in order to facilitate the disposition of the Registrable
Securities owned by such Investor. The Company will immediately notify each
Investor by facsimile of the effectiveness of each Registration Statement or any
post-effective amendment. The Company will promptly respond to any and all
comments received from the SEC, with a view towards causing each Registration
Statement or any amendment thereto to be declared effective by the SEC as soon
as practicable and shall file an acceleration request as soon as practicable
following the resolution or clearance of all SEC comments or, if applicable,
following notification by the SEC that any such Registration Statement or any
amendment thereto will not be subject to review.
d. The Company shall use its best efforts to (i) register and
qualify the Registrable Securities covered by the Registration Statements under
such other securities or "blue sky" laws of such jurisdictions in the United
States as each Investor who holds Registrable Securities being offered
reasonably requests in writing, (ii) prepare and file in those jurisdictions
such amendments (including post-effective amendments) and supplements to such
registrations and qualifications as may be necessary to maintain the
effectiveness thereof during the Registration Period, (iii) take such other
actions as may be necessary to maintain such registrations and qualifications in
effect at all times during the Registration Period, and (iv) take all other
actions reasonably necessary or advisable to qualify the Registrable Securities
for sale in such jurisdictions; PROVIDED, HOWEVER, that the Company shall not be
required in connection therewith or as a condition thereto to (a) qualify to do
business in any jurisdiction where it would not otherwise be required to qualify
but for this Section 3(d), (b) subject itself to general taxation in any such
jurisdiction, (c) file a general consent to service of process in any such
jurisdiction, (d) provide any undertakings that cause the Company undue expense
or burden, or (e) make any change in its charter or bylaws, which in each case
the Board of Directors of the Company determines to be contrary to the best
interests of the Company and its stockholders.
e. In the event the Investors who hold a majority in interest
of the Registrable Securities being offered in the offering (with the approval
of the Initial Investors holding a majority in interest of the Registrable
Securities then held by all Initial Investors) (treating the Preferred Stock as
fully converted for purposes of each such calculation (notwithstanding any
limitations on conversion applicable to the Preferred Stock)) select
underwriters for the offering, the Company shall enter into and perform its
obligations under an underwriting agreement, in usual and customary form,
including, without limitation, customary indemnification and contribution
obligations, with the underwriters of such offering.
f. As promptly as practicable after becoming aware of such
event, the Company shall notify each Investor of the happening of any event, of
which the Company has knowledge, as a result of which the prospectus included in
any Registration Statement, as then in effect, includes an
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<PAGE>
untrue statement of a material fact or omission to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, and use
its best efforts promptly to prepare a supplement or amendment to any
Registration Statement to correct such untrue statement or omission, and deliver
such number of copies of such supplement or amendment to each Investor as such
Investor may reasonably request.
g. The Company shall use its best efforts to prevent the
issuance of any stop order or other suspension of effectiveness of any
Registration Statement, and, if such an order is issued, use its best efforts to
obtain the withdrawal of such order at the earliest possible moment and to
notify each Investor who holds Registrable Securities being sold (or, in the
event of an underwritten offering, the managing underwriters) of the issuance of
such order and the resolution thereof.
h. The Company shall permit legal counsel designated by each
Initial Investor to review such Registration Statement and all amendments and
supplements thereto (as well as all requests for acceleration or effectiveness
thereof) a reasonable period of time prior to their filing with the SEC, and not
file any document in a form to which such counsel reasonably objects and will
not request acceleration of such Registration Statement without prior notice to
such counsel. The sections of such Registration Statement covering information
with respect to the Investors, the Investors' beneficial ownership of securities
of the Company or the Investors' intended method of disposition of Registrable
Securities shall conform to the information provided to the Company in writing
by each of the Investors.
i. The Company shall make generally available to its security
holders as soon as practicable, but not later than 90 days after the close of
the period covered thereby, an earnings statement (in form complying with the
provisions of Rule 158 under the Securities Act) covering a twelve-month period
beginning not later than the first day of the Company's fiscal quarter next
following the effective date of the Registration Statement.
j. At the request of any Investor, the Company shall, on the
date that Registrable Securities are delivered to an underwriter for sale in
connection with any Registration Statement (i) furnish an opinion, dated as of
such date, from counsel representing the Company for purposes of such
Registration Statement in form, scope and substance as is customarily given in
an underwritten public offering, addressed to the underwriters and the Investors
and (ii) use its best efforts to furnish a letter, dated such date, from the
Company's independent certified public accountants in form and substance as is
customarily given by independent certified public accountants to underwriters in
an underwritten public offering, addressed to the underwriters and the
Investors.
k. The Company shall make available for inspection on
reasonable notice and at reasonable times by (i) any Investor, (ii) any
underwriter participating in any disposition pursuant to a Registration
Statement, (iii) one firm of attorneys and one firm of accountants or other
agents retained by each Initial Investor and (iv) one firm of attorneys retained
by all such underwriters (collectively, the "INSPECTORS") all pertinent
financial and other records, and pertinent corporate documents and properties of
the Company (collectively, the "RECORDS"), as shall be reasonably deemed
necessary by each Inspector to enable each Inspector to exercise its due
diligence
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<PAGE>
responsibility, and cause the Company's officers, directors and employees to
supply all information which any Inspector may reasonably request for purposes
of such due diligence; PROVIDED, HOWEVER, that each Inspector shall hold in
confidence and shall not make any disclosure (except to an Investor) of any
Record or other information which the Company determines in good faith to be
confidential, and of which determination the Inspectors are so notified, unless
(a) the disclosure of such Records is necessary to avoid or correct a
misstatement or omission in any Registration Statement, (b) the release of such
Records is ordered pursuant to a subpoena or other order from a court or
government body of competent jurisdiction, or (c) the information in such
Records has been made generally available to the public other than by disclosure
in violation of this or any other agreement. The Company shall not be required
to disclose any confidential information in such Records to any Inspector until
and unless such Inspector shall have entered into confidentiality agreements (in
form and substance satisfactory to the Company) with the Company with respect
thereto, substantially in the form of this Section 3(k). Each Investor agrees
that it shall, upon learning that disclosure of such Records is sought in or by
a court or governmental body of competent jurisdiction or through other means,
give prompt notice to the Company and allow the Company, at its expense, to
undertake appropriate action to prevent disclosure of, or to obtain a protective
order for, the Records deemed confidential. Nothing herein (or in any other
confidentiality agreement between the Company and any Investor) shall be deemed
to limit the Investors' ability to sell Registrable Securities in a manner which
is otherwise consistent with applicable laws and regulations.
l. The Company shall hold in confidence and not make any
disclosure of information concerning an Investor provided to the Company unless
(i) disclosure of such information is necessary to comply with federal or state
securities laws, (ii) the disclosure of such information is necessary to avoid
or correct a misstatement or omission in any Registration Statement, (iii) the
release of such information is ordered pursuant to a subpoena or other order
from a court or governmental body of competent jurisdiction, or (iv) such
information has been made generally available to the public other than by
disclosure in violation of this or any other agreement. Subject to the foregoing
limitation, the Company agrees that it shall, upon learning that disclosure of
such information concerning an Investor is sought in or by a court or
governmental body of competent jurisdiction or through other means, give prompt
notice to such Investor prior to making such disclosure, and allow the Investor,
at its expense, to undertake appropriate action to prevent disclosure of, or to
obtain a protective order for, such information.
m. The Company shall use its best efforts to (i) cause all the
Registrable Securities covered by the Registration Statement to be quoted on the
NNM or listed on the NYSE or the AMEX or another national securities exchange
and on each additional national securities exchange on which securities of the
same class or series issued by the Company are then listed, if any, if the
listing of such Registrable Securities is then permitted under the rules of such
exchange, or (ii) to the extent the securities of the same class or series are
not then quoted on the NNM or listed on a national securities exchange, secure
the designation and quotation, of all the Registrable Securities covered by the
Registration Statement on the Nasdaq SmallCap and, without limiting the
generality of the foregoing, to arrange for or maintain at least two market
makers to register with the National Association of Securities Dealers, Inc.
("NASD") as such with respect to such Registrable Securities.
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<PAGE>
n. The Company shall provide a transfer agent and registrar,
which may be a single entity, for the Registrable Securities not later than the
effective date of the Registration Statement.
o. The Company shall cooperate with the Investors who hold
Registrable Securities being offered and the managing underwriter or
underwriters, if any, to facilitate the timely preparation and delivery of
certificates (not bearing any restrictive legends) representing Registrable
Securities to be offered pursuant to any Registration Statement and enable such
certificates to be in such denominations or amounts, as the case may be, as the
managing underwriter or underwriters, if any, or the Investors may reasonably
request and registered in such names as the managing underwriter or
underwriters, if any, or the Investors may request, and, within three business
days after a Registration Statement which includes Registrable Securities is
ordered effective by the SEC, the Company shall cause legal counsel selected by
the Company to deliver to the transfer agent for the Registrable Securities
(with copies to the Investors whose Registrable Securities are included in such
Registration Statement) an opinion of such counsel in the form attached hereto
as EXHIBIT 1.
p. At the request of any Investor, the Company shall prepare
and file with the SEC such amendments (including post-effective amendments) and
supplements to a Registration Statement and any prospectus used in connection
with the Registration Statement as may be necessary in order to change the plan
of distribution (solely with respect to such Investor's Registrable Securities)
set forth in such Registration Statement.
q. The Company shall comply in all material respects with all
applicable laws related to a Registration Statement and offering and sale of
securities and all applicable rules and regulations of governmental authorities
in connection therewith (including without limitation the Securities Act and the
Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated by the SEC).
r. The Company shall not, and shall not agree to, allow the
holders of any securities of the Company (other than those holders who, as of
the date hereof, have a contractual right to require the Company to include
their securities in any Registration Statement under Section 2(a) hereof and who
have not, prior to the filing date of the Registration Statement, waived such
right) to include any of their securities in any Registration Statement under
Section 2(a) hereof or any amendment or supplement thereto under Section 3(b)
hereof without the consent of the holders of a majority in interest of the
Registrable Securities.
s. The Company shall take all other reasonable actions
necessary to effect the registration of Registrable Securities pursuant to a
Registration Statement in accordance with the plan of distribution therein and
applicable law.
4. OBLIGATIONS OF THE INVESTORS.
In connection with the registration of the Registrable Securities, the
Investors shall have the following obligations:
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<PAGE>
a. It shall be a condition precedent to the obligations of the
Company to complete the registration pursuant to this Agreement with respect to
the Registrable Securities of a particular Investor that such Investor shall
furnish to the Company in writing such information regarding itself, the
Registrable Securities held by it and the intended method of disposition of the
Registrable Securities held by it as shall be reasonably required to effect the
registration of such Registrable Securities and shall execute such documents in
connection with such registration as the Company may reasonably request. At
least five business days prior to the first anticipated filing date of the
Registration Statement, the Company shall notify each Investor of the
information the Company requires from each such Investor and each Investor shall
respond within three business days after the date of receipt of such notice.
b. Each Investor, by such Investor's acceptance of the
Registrable Securities, agrees to cooperate with the Company as reasonably
requested by the Company in connection with the preparation and filing of the
Registration Statements hereunder, unless such Investor has notified the Company
in writing of such Investor's election to exclude all of such Investor's
Registrable Securities from the Registration Statements.
c. In the event Investors holding a majority in interest of
the Registrable Securities being registered (treating the Preferred Stock as
fully converted for purposes of such calculation (notwithstanding any
limitations on conversion applicable to the Preferred Stock)) determine to
engage the services of an underwriter, each Investor agrees to enter into and
perform such Investor's obligations under an underwriting agreement, in usual
and customary form, including, without limitation, customary indemnification and
contribution obligations, with the managing underwriter of such offering and
take such other actions as are reasonably required in order to expedite or
facilitate the disposition of the Registrable Securities, unless such Investor
has notified the Company in writing of such Investor's election to exclude all
of such Investor's Registrable Securities from such Registration Statements
(provided that the Company's obligations hereunder with respect to any such
Investor shall not be affected by any such election).
d. Each Investor agrees that, upon receipt of any notice from
the Company of the happening of any event of the kind described in Section 3(f)
or 3(g), such Investor will immediately discontinue disposition of Registrable
Securities pursuant to the Registration Statement covering such Registrable
Securities until such Investor's receipt of the copies of the supplemented or
amended prospectus contemplated by Section 3(f) or 3(g) and, if so directed by
the Company, such Investor shall deliver to the Company (at the expense of the
Company) or destroy (and deliver to the Company a certificate of destruction)
all copies in such Investor's possession, of the prospectus covering such
Registrable Securities current at the time of receipt of such notice.
e. No Investor may participate in any underwritten
registration hereunder unless such Investor (i) agrees to sell such Investor's
Registrable Securities on the basis provided in any underwriting arrangements in
usual and customary form entered into by the Company, (ii) completes and
executes all questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents reasonably required under the terms of such
underwriting arrangements, and (iii) agrees
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<PAGE>
to pay its pro rata share of all underwriting discounts and commissions and any
expenses in excess of those payable by the Company pursuant to Section 5 below.
5. EXPENSES OF REGISTRATION.
All reasonable expenses, other than underwriting discounts and
commissions, incurred in connection with registrations, filings or
qualifications pursuant to Sections 2 and 3, including, without limitation, all
registration, listing and qualification fees, printers and accounting fees, the
fees and disbursements of counsel for the Company, and the reasonable fees and
disbursements of counsel selected by each of the Initial Investors pursuant
hereto (in an amount not to exceed $15,000 in the aggregate, or $5,000 for each
of three counsels if the Initial Investors cannot agree on one counsel), shall
be borne by the Company. In addition, the Company shall pay all of the
Investors' costs and expenses (including reasonable legal fees) incurred in
connection with the enforcement of the rights of the Investors hereunder.
6. INDEMNIFICATION.
In the event any Registrable Securities are included in a Registration
Statement under this Agreement:
a. To the extent permitted by law, the Company will indemnify,
hold harmless and defend (i) each Investor who holds such Registrable
Securities, and (ii) the directors, officers, partners, members, employees and
agents of such Investor and each person who controls any Investor within the
meaning of the Securities Act or the Securities Exchange Act of 1934, as amended
(the "EXCHANGE ACT"), if any, (iii) any underwriter (as defined in the
Securities Act) for the Investors, and (iv) the directors, officers, partners,
employees and each person who controls any such underwriter within the meaning
of the Securities Act or the Exchange Act, if any (each, an "INDEMNIFIED
PERSON"), against any joint or several losses, claims, damages, liabilities or
expenses (collectively, together with actions, proceedings or inquiries by any
regulatory or self-regulatory organization, whether commenced or threatened, in
respect thereof, "CLAIMS") to which any of them may become subject insofar as
such Claims arise out of or are based upon: (i) any untrue statement or alleged
untrue statement of a material fact in a Registration Statement or the omission
or alleged omission to state therein a material fact required to be stated or
necessary to make the statements therein not misleading, (ii) any untrue
statement or alleged untrue statement of a material fact contained in any
preliminary prospectus if used prior to the effective date of such Registration
Statement, or contained in the final prospectus (as amended or supplemented, if
the Company files any amendment thereof or supplement thereto with the SEC) or
the omission or alleged omission to state therein any material fact necessary to
make the statements made therein, in light of the circumstances under which the
statements therein were made, not misleading, or (iii) any violation or alleged
violation by the Company of the Securities Act, the Exchange Act, any other law,
including, without limitation, any state securities law, or any rule or
regulation thereunder relating to the offer or sale of the Registrable
Securities (the matters in the foregoing clauses (i) through (iii) being,
collectively, "VIOLATIONS"). Subject to the restrictions set forth in Section
6(c) with respect to the number of legal counsel, the Company shall reimburse
the Indemnified Person, promptly as such expenses are incurred and are due
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and payable, for any reasonable legal fees or other reasonable expenses incurred
by them in connection with investigating or defending any such Claim.
Notwithstanding anything to the contrary contained herein, the indemnification
agreement contained in this Section 6(a): (i) shall not apply to a Claim arising
out of or based upon a Violation which occurs in reliance upon and in conformity
with information furnished in writing to the Company by or on behalf of such
Indemnified Person or underwriter for such Indemnified Person expressly for use
in connection with the preparation of such Registration Statement or any such
amendment thereof or supplement thereto; (ii) shall not apply to amounts paid in
settlement of any Claim if such settlement is effected without the prior written
consent of the Company, which consent shall not be unreasonably withheld; and
(iii) with respect to any preliminary prospectus, shall not inure to the benefit
of any Indemnified Person if the untrue statement or omission of material fact
contained in the preliminary prospectus was corrected on a timely basis in the
prospectus, as then amended or supplemented, if such corrected prospectus was
timely made available by the Company pursuant to Section 3(c) hereof, and the
Indemnified Person was promptly advised in writing not to use the incorrect
prospectus prior to the use giving rise to a Violation and such Indemnified
Person, notwithstanding such advice, used it. Such indemnity shall remain in
full force and effect regardless of any investigation made by or on behalf of
the Indemnified Person and shall survive the transfer of the Registrable
Securities by the Investors pursuant to Section 9.
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<PAGE>
b. In connection with any Registration Statement in which an
Investor is participating, each such Investor agrees, severally and not jointly,
to indemnify, hold harmless and defend, to the same extent and in the same
manner set forth in Section 6(a), the Company, each of its directors, each of
its officers who signs the Registration Statement, each person, if any, who
controls the Company within the meaning of the Securities Act or the Exchange
Act, and any other stockholder selling securities pursuant to the Registration
Statement or any of its directors or officers or any person who controls such
stockholder or underwriter within the meaning of the Securities Act or the
Exchange Act (collectively and together with an Indemnified Person, an
"INDEMNIFIED PARTY"), against any Claim to which any of them may become subject,
under the Securities Act, the Exchange Act or otherwise, insofar as such Claim
arises out of or is based upon any Violation by such Investor, in each case to
the extent (and only to the extent) that such Violation occurs in reliance upon
and in conformity with written information furnished to the Company by or on
behalf of such Investor expressly for use in connection with such Registration
Statement; and subject to Section 6(c) such Investor will reimburse any legal or
other expenses (promptly as such expenses are incurred and are due and payable)
reasonably incurred by an Indemnified Party under this Section 6(b) in
connection with investigating or defending any such Claim; PROVIDED, HOWEVER,
that the indemnity agreement contained in this Section 6(b) shall not apply to
amounts paid in settlement of any Claim if such settlement is effected without
the prior written consent of such Investor, which consent shall not be
unreasonably withheld; PROVIDED, FURTHER, HOWEVER, that the Investor shall be
liable under this Agreement (including this Section 6(b) and Section 7) for only
that amount as does not exceed the net proceeds to such Investor as a result of
the sale of Registrable Securities pursuant to such Registration Statement. Such
indemnity shall remain in full force and effect regardless of any investigation
made by or on behalf of such Indemnified Party and shall survive the transfer of
the Registrable Securities by the Investors pursuant to Section 9.
Notwithstanding anything to the contrary contained herein, the indemnification
agreement contained in this Section 6(b) with respect to any preliminary
prospectus shall not inure to the benefit of any Indemnified Party if the untrue
statement or omission of material fact contained in the preliminary prospectus
was corrected on a timely basis in the prospectus, as then amended or
supplemented.
c. Promptly after receipt by an Indemnified Person or
Indemnified Party under this Section 6 of notice of the commencement of any
action (including any governmental action), such Indemnified Person or
Indemnified Party shall, if a Claim in respect thereof is to be made against any
indemnifying party under this Section 6, 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
control of the defense thereof with counsel mutually satisfactory to the
indemnifying party and the Indemnified Person or the Indemnified Party, as the
case may be; PROVIDED, HOWEVER, that, if the defendants include both the
Indemnified Person or Indemnified Party, as the case may be, and the
indemnifying party, an Indemnified Person or Indemnified Party shall have the
right to retain its own counsel with the fees and expenses to be paid by the
indemnifying party, if, in the reasonable opinion of counsel retained by the
indemnifying party, the representation by such counsel of the Indemnified Person
or Indemnified Party and the indemnifying party would be inappropriate due to
actual or potential differing interests between such Indemnified Person or
Indemnified Party and any other party represented by such counsel in such
proceeding. The indemnifying party shall pay for only
-14-
<PAGE>
one separate legal counsel for the Indemnified Persons or the Indemnified
Parties, as applicable, and such legal counsel shall be selected by Investors
holding a majority in interest of the Registrable Securities included in the
Registration Statement to which the Claim relates (with the approval of a
majority in interest of the Initial Investors, if the Investors are entitled to
indemnification hereunder, or by the Company, if the Company is entitled to
indemnification hereunder, as applicable. The failure to deliver written notice
to the indemnifying party within a reasonable time of the commencement of any
such action shall not relieve such indemnifying party of any liability to the
Indemnified Person or Indemnified Party under this Section 6, except to the
extent that the indemnifying party is actually prejudiced in its ability to
defend such action. The indemnification required by this Section 6 shall be made
by periodic payments of the amount thereof during the course of the
investigation or defense, as such expense, loss, damage or liability is incurred
and is due and payable.
7. CONTRIBUTION.
To the extent any indemnification by an indemnifying party is
prohibited or limited by law, the indemnifying party agrees to make the maximum
contribution with respect to any amounts for which it would otherwise be liable
under Section 6 to the fullest extent permitted by law; PROVIDED, HOWEVER, that
(i) no contribution shall be made under circumstances where the maker would not
have been liable for indemnification under the fault standards set forth in
Section 6, (ii) no seller of Registrable Securities guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any seller of Registrable Securities who
was not guilty of such fraudulent misrepresentation, and (iii) contribution
(together with any indemnification or other obligations under this Agreement) by
any seller of Registrable Securities shall be limited in amount to the net
amount of proceeds received by such seller from the sale of such Registrable
Securities.
8. REPORTS UNDER THE EXCHANGE ACT.
With a view to making available to the Investors the benefits of Rule
144 promulgated under the Securities Act or any other similar rule or regulation
of the SEC that may at any time permit the Investors to sell securities of the
Company to the public without registration ("RULE 144"), the Company agrees to:
a. make and keep public information available, as those terms
are understood and defined in Rule 144;
b. file with the SEC in a timely manner and make and keep
available all reports and other documents required of the Company under the
Securities Act and the Exchange Act so long as the Company remains subject to
such requirements (it being understood that nothing herein shall limit the
Company's obligations under Section 4(c) of the Securities Purchase and Exchange
Agreement) and the filing of such reports and other documents is required for
the applicable provisions of Rule 144; and
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<PAGE>
c. furnish to each Investor so long as such Investor owns the
Preferred Stock or Registrable Securities, promptly upon request, (i) a written
statement by the Company that it has complied with the reporting requirements of
Rule 144, the Securities Act and the Exchange Act, (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 to permit the Investors to sell such securities pursuant to
Rule 144 without registration.
9. ASSIGNMENT OF REGISTRATION RIGHTS.
The rights of the Investors hereunder, including the right to have the
Company register Registrable Securities pursuant to this Agreement, shall be
automatically assignable by each Investor to any permitted transferee of all or
any portion of the shares of Preferred Stock or the Registrable Securities if:
(i) the Investor agrees in writing with the transferee or assignee to assign
such rights, and a copy of such agreement is furnished to the Company within a
reasonable time after such assignment, (ii) the Company is, within a reasonable
time after such transfer or assignment, furnished with written notice of (a) the
name and address of such transferee or assignee and (b) the securities with
respect to which such registration rights are being transferred or assigned,
(iii) following such transfer or assignment, the further disposition of such
securities by the transferee or assignee is restricted under the Securities Act
and applicable state securities laws, (iv) at or before the time the Company
receives the written notice contemplated by clause (ii) of this sentence, the
transferee or assignee agrees in writing with the Company to be bound by all of
the provisions contained herein, (v) such transfer shall have been made in
accordance with the applicable requirements of the Securities Purchase and
Exchange Agreement or the Subscription Agreements, as applicable, and (vi) such
transferee shall be an "ACCREDITED INVESTOR" as that term defined in Rule 501 of
Regulation D promulgated under the Securities Act.
10. AMENDMENT OF REGISTRATION RIGHTS.
Provisions of this Agreement may be amended and the observance thereof
may be waived (either generally or in a particular instance and either
retroactively or prospectively), only with written consent of the Company, a
majority in interest of the Initial Investors, based on the number of
Registrable Securities then held by them (treating the Preferred Stock as fully
converted for purposes of such calculation (notwithstanding any limitations on
conversion applicable to the Preferred Stock)), and Investors who hold a
majority in interest of the Registrable Securities (treating the Preferred Stock
as fully converted for purposes of such calculation (notwithstanding any
limitations on conversion applicable to the Preferred Stock)) or, in the case of
a waiver, with the written consent of the party charged with the enforcement of
any such provision. Any amendment or waiver effected in accordance with this
Section 10 shall be binding upon each Investor and the Company.
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<PAGE>
11. MISCELLANEOUS.
a. A person or entity is deemed to be a holder of Registrable
Securities whenever such person or entity owns of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more persons or entities with respect to the same
Registrable Securities, the Company shall act upon the basis of instructions,
notice or election received from the registered owner of such Registrable
Securities.
b. Any notices required or permitted to be given under the
terms hereof shall be sent by certified or registered mail (return receipt
requested) or delivered personally or by courier (including a recognized
overnight delivery service) or by facsimile, and shall be effective five days
after being placed in the mail, if mailed, or upon receipt or refusal of
receipt, if delivered personally or by courier (including a recognized overnight
delivery service) or by facsimile, in each case addressed to a party. The
addresses for such communications shall be:
If to the Company:
Interactive Magic, Inc.
215 Southport Drive
Suite 1000
Morrisville, NC 27560
Facsimile: (919) 461-0723
Attention: Chief Executive Officer
If to an Investor, at such address as such Investor shall have provided in
writing to the Company or such other address as such Investor furnishes by
notice given in accordance with this Section 11(b).
c. Failure of any party to exercise any right or remedy under
this Agreement or otherwise, or delay by a party in exercising such right or
remedy, shall not operate as a waiver thereof.
d. This Agreement shall be enforced, governed by and construed
in accordance with the laws of the State of New York applicable to agreements
made and to be performed entirely within such state (without regard to
principles of conflict of laws). In the event that any provision of this
Agreement is invalid or unenforceable under any applicable statute or rule of
law, then such provision shall be deemed inoperative to the extent that it may
conflict therewith and shall be deemed modified to conform with such statute or
rule of law. Any provision hereof which may prove invalid or unenforceable under
any law shall not affect the validity or enforceability of any other provision
hereof. The parties hereto hereby submit to the exclusive jurisdiction of the
United States federal courts and the state courts located in New York County,
New York with respect to any dispute arising under this Agreement, the
agreements entered into in connection herewith or the transactions contemplated
hereby or thereby. The Company irrevocably waives the defense of an inconvenient
forum to the maintenance of such suit or proceeding. The Company further agrees
that service of process upon the Company mailed by first class mail shall be
deemed in every respect effective service
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<PAGE>
of process upon the Company in any such suit or proceeding. Nothing herein shall
affect an Investor's right to serve process in any other manner permitted by
law. The Company agrees that a final non-appealable judgment in any such suit or
proceeding shall be conclusive and may be enforced in other jurisdictions by
suit on such judgment or in any other lawful manner.
e. Except as otherwise provided in the Securities Purchase and
Exchange Agreement or the Subscription Agreements, as applicable, this
Agreement, the Securities Purchase and Exchange Agreement, the Subscription
Agreements and the Articles of Amendment (including all schedules and exhibits
thereto), as applicable with respect to any Investor, collectively constitute
the entire agreement among the parties hereto with respect to the subject matter
hereof and thereof. There are no restrictions, promises, warranties or
undertakings, other than those set forth or referred to herein and therein.
Except as otherwise provided in the Securities Purchase and Exchange Agreement
or the Subscription Agreements, as applicable, this Agreement, the Securities
Purchase and Exchange Agreement, the Subscription Agreements and the Articles of
Amendment, as applicable with respect to any Investor, supersede all prior
agreements and understandings among the parties hereto and thereto with respect
to the subject matter hereof and thereof.
f. Subject to the requirements of Section 9 hereof, this
Agreement shall inure to the benefit of and be binding upon the successors and
assigns of each of the parties hereto.
g. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
h. This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original but all of which shall constitute one
and the same agreement. This Agreement, once executed by a party, may be
delivered to the other party hereto by facsimile transmission of a copy of this
Agreement bearing the signature of the party so delivering this Agreement.
i. Each party shall do and perform, or cause to be done and
performed, all such further acts and things, and shall execute and deliver all
such other agreements, certificates, instruments and documents, as the other
party may reasonably request in order to carry out the intent and accomplish the
purposes of this Agreement and the consummation of the transactions contemplated
hereby.
j. Except as otherwise provided herein, all consents,
approvals and other determinations to be made by the Investors pursuant to this
Agreement shall be made by the Investors holding a majority in interest of the
Registrable Securities (determined as if all of the Preferred Stock then
outstanding had been fully converted into Registrable Securities
(notwithstanding any limitations on conversion applicable to the Preferred
Stock)) then held by all Investors.
k. The initial number of Registrable Securities included on
any Registration Statement and each increase to the number of Registrable
Securities included thereon shall be allocated pro rata among the Investors
based on the number of Registrable Securities held by each
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<PAGE>
Investor at the time of such establishment or increase, as the case may be. In
the event an Investor shall sell or otherwise transfer any of such holder's
Registrable Securities, each transferee shall be allocated a pro rata portion of
the number of Registrable Securities included on a Registration Statement for
such transferor. Any shares of Common Stock included on a Registration Statement
and which remain allocated to any person or entity which does not hold any
Registrable Securities shall be allocated to the remaining Investors, pro rata
based on the number of shares of Registrable Securities then held by such
Investors. For the avoidance of doubt, the number of Registrable Securities held
by an Investor shall be determined as if all of the Preferred Stock then
outstanding and held by an Investor were converted into or exercised for
Registrable Securities (notwithstanding any limitations on conversion applicable
to the Preferred Stock).
l. For purposes of this Agreement, the term "business day"
means any day other than a Saturday or Sunday or a day on which banking
institutions in the State of New York are authorized or obligated by law,
regulation or executive order to close.
m. The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to each Investor by vitiating
the intent and purpose of the transactions contemplated hereby. Accordingly, the
Company acknowledges that the remedy at law for breach of its obligations
hereunder will be inadequate and agrees, in the event of a breach or threatened
breach by the Company of any of the provisions hereunder, that each Investor
shall be entitled, in addition to all other available remedies in law or in
equity, to an injunction or injunctions to prevent or cure breaches of the
provisions of this Agreement and to enforce specifically the terms and
provisions hereof.
n. The language used in this Agreement will be deemed to be
the language chosen by the parties to express their mutual intent, and no rules
of strict construction will be applied against any party.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the date first above written.
INTERACTIVE MAGIC, INC.
By:
---------------------------------
Name:
-------------------------------
Its:
--------------------------------
Initial Investors:
RGC INTERNATIONAL INVESTORS, LDC
By: Rose Glen Capital Management, L.P.,
Investment Manager
By: RGC General Partner Corp.,
as General Partner
By:
---------------------------------
Name:
-------------------------
Managing Director
- ------------------------------------
J. W. STEALEY
VALUE MANAGEMENT & RESEARCH AG
By:
---------------------------------
Name:
-------------------------
Title:
------------------------
VERTICAL FINANCIAL HOLDINGS
By:
---------------------------------
Name:
-------------------------
Title:
------------------------
<PAGE>
EXHIBIT 1
TO REGISTRATION
RIGHTS AGREEMENT
[Date]
[Name and address
of transfer agent]
RE: INTERACTIVE MAGIC, INC.
Ladies and Gentlemen:
We are counsel to INTERACTIVE MAGIC, INC., a corporation organized
under the laws of the State of North Carolina (the "COMPANY"). We understand
that (i) RGC International Investors LDC ("RGC") has been issued by the Company
shares of the Company's Series D Convertible Preferred Stock (the "PREFERRED
STOCK"), which are convertible into shares of the Company's common stock, $.10
par value per share (the "COMMON STOCK") and (ii) each of James W. Stealey
("STEALEY"), Value Management & Research AG ("VALUE") and Vertical Financial
Holdings ("VERTICAL") has been issued shares of Common Stock (collectively, the
"COMMON SHARES"). The Preferred Stock was issued by the Company pursuant to a
Securities Purchase and Exchange Agreement, dated as of November 8, 1999,
between the Company and RGC and the Common Shares were issued to each of
Stealey, Value and Vertical pursuant to their respective Subscription Agreements
with the Company. Under certain circumstances, the Company is obligated to issue
shares of Common Stock in connection with the conversion of the Preferred Stock.
Pursuant to a Registration Rights Agreement dated as of November 11, 1999
between the Company and RGC, Stealey, Value and Vertical (the "REGISTRATION
RIGHTS AGREEMENT"), the Company agreed, among other things, to register the
resale of the Registrable Securities (as that term is defined in the
Registration Rights Agreement) under the Securities Act of 1933, as amended (the
"SECURITIES ACT"), upon the terms provided in the Registration Rights Agreement.
The shares of Common Stock issuable upon conversion of the Preferred Stock and
the Common Shares are included in the Registrable Securities. In connection with
the Company's obligations under the Registration Rights Agreement, on
[_______________], the Company filed a Registration Statement on Form S-3 (File
No. 333- [____________]) (the "REGISTRATION STATEMENT") with the Securities and
Exchange Commission (the "SEC") relating to the Registrable Securities, which
names each of RGC, Stealey, Value and Vertical as a selling stockholder
thereunder, which Registration Statement has been declared effective by the SEC.
[Other customary introductory and scope of examination language to be
inserted]
Based on the foregoing, we are of the opinion that the Registrable
Securities have been registered under the Securities Act.
[Other customary language to be included.]
Very truly yours,
cc: [The Investors]
EXHIBIT 10.39
ASSET PURCHASE AGREEMENT
BY AND AMONG
INTERACTIVE MAGIC, INC.,
VIRTUAL BUSINESS DESIGNS, INC.
DBA THE GAMERS NET
AND
DAVID HEATH
August 27, 1999
<PAGE>
TABLE OF CONTENTS
1. Definitions
2. Basic Transaction
(a) Purchase and Sale of Assets
(b) Assumption of Liabilities
(c) Purchase Price
(d) The Closing
(e) Deliveries at the Closing
(f) Allocation
3. Representations and Warranties of the Seller
(a) Organization of the Seller
(b) Authorization of Transaction
(c) Noncontravention
(d) Brokers' Fees
(e) Title to Assets
(f) Absence of Material Events
(g) Undisclosed Liabilities
(h) Legal Compliance
(i) Tax Matters
(j) Intellectual Property
(k) Contracts
(l) Powers of Attorney
(m) Insurance
(n) Litigation
(o) Product Warranty
(p) Product Liability
(q) Disclosure
(r) Investment
(s) Year 2000 Compliance
4. Representations and Warranties of the Buyer
(a) Organization of the Buyer
(b) Authorization of Transaction
(c) Noncontravention
(d) Brokers' Fees
5. Post-Closing Covenants
(a) General
(b) Litigation Support
(c) Transition
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(d) Confidentiality
(e) Buyer's Acquisition Shares
6. Remedies for Breaches of This Agreement
(a) Survival of Representations and Warranties
(b) Indemnification Provisions for Benefit of the Buyer
(c) Indemnification Provisions for Benefit of the Seller
(d) Matters Involving Third Parties
(e) Determination of Adverse Consequences
(f) Other Indemnification Provisions
7. Holdback Shares
(a) Purpose
(b) Adjustments
(c) Indemnification
(d) Termination of Holdback
8. Miscellaneous
(a) Press Releases and Public Announcements
(b) No Third-Party Beneficiaries
(c) Entire Agreement
(d) Succession and Assignment
(e) Counterparts
(f) Headings
(g) Notices
(h) Governing Law
(i) Amendments and Waivers
(j) Severability
(k) Expenses
(l) Construction
(m) Incorporation of Exhibits and Schedules
(n) Specific Performance
(o) Submission to Jurisdiction
(p) Bulk Transfer Laws
(q) Sales, Transfer and Documentary Taxes, etc.
Disclosure Schedule
Schedule of Assigned Contracts
Exhibit A--Form of Bill of Sale and Assignment
Exhibit B--Form of Assumption
Exhibit C--Consulting Agreement
Exhibit D - Registration Rights Agreement
Exhibit E--Allocation Schedule
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ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement (the "Agreement") is entered into as of
August 27, 1999, by and among Interactive Magic, Inc., a North Carolina
corporation (the "Buyer"), Virtual Business Designs, Inc. (d/b/a The Gamers
Net), a Delaware corporation (the "Seller"), the sole owner of the Gamers Net
web site, located at www.thegamers.net on the World-Wide Web, including its
related business (the "Web Site"), and David Heath, the sole shareholder of
Seller ("Shareholder"). The Buyer, the Seller and the Shareholder are referred
to collectively herein as the "Parties".
This Agreement contemplates a transaction in which the Buyer will
purchase certain of the assets of the Seller in return for Common Stock of the
Buyer.
Now, therefore, in consideration of the premises and the mutual
promises herein made, and in consideration of the representations, warranties,
and covenants herein contained, the Parties agree as follows.
1. DEFINITIONS.
"Acquired Assets" means all right, title and interest in and to all of
the tangible and intangible assets of the Seller relating to the Web Site,
including the following items to the extent related to the Web Site:
(a) all current, unreleased or Beta versions of the software
relating to the Web Site, in both object and source code format,
including (but not limited to) games, game scenarios, game patches,
opponent locating and matching software and databases, bulletin boards,
chat programs, or other message posting systems;
(b) all customer names, lists, addresses, contact names and
registered user or player lists;
(c) Intellectual Property, goodwill associated therewith,
licenses and sublicenses granted and obtained with respect thereto, and
rights thereunder, remedies against infringements thereof, and rights
to protection of interests therein under the laws of all jurisdictions;
(d) the agreements, contracts, instruments, Security
Interests, other similar arrangements, and rights thereunder as listed
on the Schedule of Assigned Contracts (if any) attached hereto;
(e) claims, deposits, prepayments, refunds, causes of action,
choses in action, rights of recovery, rights of set off, and rights of
recoupment;
(f) franchises, approvals, permits, licenses, orders,
registrations, certificates and similar rights obtained from
governments and governmental agencies; and
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(g) books, records, ledgers, files, documents, correspondence,
lists, creative materials, advertising and promotional materials,
studies, reports, scenario archives, articles, reviews, electronic
message board content, and other printed or written materials;
"Adverse Consequences" means all actions, suits, proceedings, hearings,
investigations, charges, complaints, claims, demands, injunctions, judgments,
orders, decrees, rulings, damages, dues, penalties, fines, costs, amounts paid
in settlement, Liabilities, obligations, Taxes, liens, losses, expenses, and
fees, including court costs and reasonable attorneys' fees and expenses.
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
"Assigned Contracts" means the agreements, contracts, leases, licenses
and other arrangements being assigned to the Buyer hereunder, if any, as set
forth on the Schedule of Assigned Contracts attached hereto.
"Assumed Liabilities" means all obligations of the Seller under the
Assigned Contracts, including up to $6,000 of liabilities as set forth on the
Schedule of Assigned Contracts. The Assumed Liabilities specifically shall
exclude the Retained Liabilities.
"Basis" means any past or present fact, situation, circumstance,
status, condition, activity, practice, plan, occurrence, event, incident,
action, failure to act, or transaction that forms or could form the basis for
any specified consequence.
"Buyer" has the meaning set forth in the preface above.
"Buyer's Acquisition Shares" means collectively the shares of the
Buyer's Common Stock issuable to the Seller in connection with the Buyer's
acquisition of the Acquired Assets pursuant to this Agreement.
"Cash" means cash and cash equivalents (including marketable securities
and short term investments) calculated in accordance with GAAP applied on a
basis consistent with the preparation of the Financial Statements.
"Closing" has the meaning set forth in Section 2(d) below.
"Closing Date" has the meaning set forth in Section 2(d) below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means any information concerning the
businesses and affairs of the Seller relating to the Web Site that is not
already generally available to the public.
"Disclosure Schedule" has the meaning set forth in Section 3 below.
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"Financial Statements" has the meaning set forth in Section 3(f) below.
"GAAP" means United States generally accepted accounting principles as
in effect from time to time.
"Indemnified Party" has the meaning set forth in Section 6(d) below.
"Indemnifying Party" has the meaning set forth in Section 6(d) below.
"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements thereto,
and all patents, patent applications, and patent disclosures, together with all
reissuances, continuations, continuations-in-part, revisions, extensions, and
reexaminations thereof, (b) all trademarks, service marks, trade dress, logos,
trade names, and corporate names, together with all translations, adaptations,
derivations, and combinations thereof and including all goodwill associated
therewith, and all applications, registrations, and renewals in connection
therewith, (c) all copyrightable works, all copyrights, and all applications,
registrations, and renewals in connection therewith, (d) all mask works and all
applications, registrations, and renewals in connection therewith, (e) all trade
secrets and confidential business information (including ideas, research and
development, know-how, formulas, compositions, manufacturing and production
processes and techniques, technical data, designs, drawings, specifications,
customer and supplier lists, subscriber or user lists, pricing and cost
information, and business and marketing plans and proposals), (f) all computer
software (including web pages, game scenarios and patches, data and related
documentation) used independently or in conjunction with other programs, (g) all
registered or licensed domain names (including "www.thegamers.net"), IP
addresses, and email addresses (including all those using the "@thegamers.net"
suffix), (h) other proprietary rights, and (i) all copies and tangible
embodiments thereof (in whatever form or medium).
"Knowledge" means actual knowledge after reasonable investigation.
"Liability" means any liability (whether known or unknown, whether
asserted or unasserted, whether absolute or contingent, whether accrued or
unaccrued, whether liquidated or unliquidated, and whether due or to become
due), including any liability for Taxes.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity and
frequency).
"Party" has the meaning set forth in the preface above.
"Person" means an individual, a partnership, a corporation, a limited
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization, or a governmental entity (or any
department, agency, or political subdivision thereof).
"Process Agent" has the meaning set forth in Section 8(o) below.
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"Purchase Price" has the meaning set forth in Section 2(c) below.
"Retained Liabilities" means, without limitation, all of the following
liabilities being retained by the Seller:
(i) any Liability of the Seller for unpaid Taxes;
(ii) any Liability of the Seller for income, transfer, sales,
use, and other Taxes arising in connection with the consummation of the
transactions contemplated hereby (including any income Taxes arising
because the Seller is transferring the Acquired Assets);
(iii) any obligation of the Seller to indemnify any Person by
reason of the fact that such Person was an employee, independent
contractor, or agent of the Seller or was serving at the request of the
Seller as a partner, trustee, director, officer, employee, or agent of
another entity (whether such indemnification is for judgments, damages,
penalties, fines, costs, amounts paid in settlement, losses, expenses,
or otherwise and whether such indemnification is pursuant to any
statute, charter document, bylaw, agreement, or otherwise);
(iv) any Liability of the Seller for costs and expenses
incurred in connection with this Agreement and the transactions
contemplated hereby;
(v) any Liability relating to the ownership or operation of
the Web Site prior to Closing (except any Liability specifically
identified as an Assumed Liability as defined herein); and
(vi) any Liability or obligation of the Seller under this
Agreement.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance,
charge, or other security interest.
"Seller" has the meaning set forth in the preface above.
"Shareholder" has the meaning set forth in the preface above.
"Tax(es)" means any federal, state, local, or foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp, occupation,
premium, windfall profits, environmental (including taxes under Code ss.59A),
customs duties, capital stock, franchise, profits, withholding, social security
(or similar), unemployment, disability, real property, personal property, sales,
use,
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transfer, registration, value added, alternative or add-on minimum, estimated,
or other tax of any kind whatsoever, including any interest, penalty, or
addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund,
or information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Third Party Claim" has the meaning set forth in Section 6(d) below.
"Web Site" has the meaning set forth in the preface above.
2. BASIC TRANSACTION.
(a) Purchase and Sale of Assets. On and subject to the terms
and conditions of this Agreement, the Buyer agrees to purchase from the
Seller, and the Seller agrees to sell, transfer, convey and deliver to
the Buyer, all of the Acquired Assets at the Closing for the
consideration specified below in this Section 2.
(b) Assumption of Liabilities. On and subject to the terms and
conditions of this Agreement, the Buyer agrees to assume and become
responsible only for the Assumed Liabilities (if any) at the Closing.
The Buyer will not assume or have any responsibility, however, with
respect to any other obligation or Liability of the Seller or the Web
Site not specifically included within the definition of Assumed
Liabilities.
(c) Purchase Price. The Buyer agrees to issue to the Seller
one hundred seven thousand one hundred forty-three (107,143) shares of
the Buyer's Common Stock (the "Purchase Price"). Ten percent (10%) of
the Buyer's Common Stock included in the Purchase Price will be held
back pursuant to Section 7 (the "Holdback Shares").
(i) No fraction of a share of the Buyer's Common
Stock will be issued as part of the Purchase Price, but in
lieu thereof the Seller will receive from the Buyer an amount
of cash (rounded to the nearest whole cent) equal to the
product of (i) such fraction multiplied by (ii) the average of
the closing price per share of the Buyer's Common Stock on the
National Association of Securities Dealers Automated Quotation
System ("Nasdaq") as reported in THE WALL STREET JOURNAL for
the twenty (20) trading days prior to the date hereof.
(ii) The parties acknowledge and agree that the
Buyer's Acquisition Shares and the transactions contemplated
under this Agreement are and will be subject to the applicable
federal and state securities laws and regulations.
(iii) Promptly after the Closing Date, the Holdback
Shares will be delivered to the Buyer to be held pursuant to
Section 7.
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(d) The Closing. The closing of the transactions contemplated
by this Agreement (the "Closing") shall take place simultaneous with
the execution of this Agreement at the offices of Wyrick Robbins Yates
& Ponton, LLP in Raleigh, North Carolina, commencing at 9:00 a.m. local
time or such other date as the Parties may mutually determine (the
"Closing Date").
(e) Deliveries at the Closing. At the Closing,
(i) the Seller will execute and deliver to the Buyer
(A) the Bill of Sale and Assignment in the form attached
hereto as Exhibit A and (B) such other instruments of sale,
transfer, conveyance and assignment as the Buyer and its
counsel reasonably may request;
(ii) the Buyer will execute and deliver to the Seller
(A) an assumption in the form attached hereto as Exhibit B and
(B) such other instruments of assumption as the Seller and its
counsel reasonably may request;
(iii) the Seller shall deliver to the Buyer UCC-3
termination statements signed by any party with a Security
Interest in any of the Acquired Assets in such form that will
permit the Buyer to terminate such interests of record;
(iv) the Seller shall deliver to the Buyer signed
consents and releases from any third parties whose consent or
release is required in connection with consummation of the
transactions contemplated by this Agreement;
(v) the Buyer will deliver to the Seller a copy of
its letter to the Buyer's stock transfer agent, authorizing
and directing the issuance of the Buyer's Acquisition Shares
issuable pursuant to Section 2(c) above (less the Holdback
Shares to be held by the Buyer) and otherwise in accordance
with the provisions of this Agreement;
(vi) the Buyer and the Shareholder shall have entered
into a Consulting Agreement with respect to the ongoing work
to be performed on the Web Site by the Seller in the form
attached hereto as Exhibit C (the "Consulting Agreement"); and
(vii) the Buyer and the Seller shall have entered
into a Registration Rights Agreement with respect to Seller's
registration rights in the Buyer's Acquisition Shares in
substantially the form of Exhibit D (the "Registration Rights
Agreement").
(f) Allocation. The Parties agree to allocate the Purchase
Price (and all other capitalizable costs) among the Acquired Assets for
all purposes (including financial accounting and tax purposes) in
accordance with the allocation schedule attached hereto as Exhibit E.
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(g) Forfeiture.
(i) In the event that the Buyer is forced or elects
to declare bankruptcy, thus terminating the business, within
the initial twenty-four (24) months of the Consulting
Agreement period associated with this agreement, all rights
and property purchased within and by the terms of this
agreement will be forfeited and returned to the Seller, to
include intellectual property. Additional property both
physical and intellectual, acquired, purchased or developed
after the signing of this contract, for the purpose of
maintaining and developing the website/property, will remain
the property of the Buyer.
3. REPRESENTATIONS AND WARRANTIES OF THE SELLER AND THE SHAREHOLDER.
The Seller and the Shareholder jointly and severally represent and
warrant to the Buyer that the statements contained in this Section 3 are correct
as of the date of this Agreement and as of the Closing Date, except as set forth
in the disclosure schedule accompanying this Agreement and initialed by the
Parties (the Disclosure Schedule). The Disclosure Schedule will be arranged in
paragraphs corresponding to the lettered and numbered paragraphs contained in
this Section 3.
(a) Good Standing of the Seller. The Seller is a corporation
duly incorporated, validly existing and in good standing under the laws
of the State of Delaware and is duly authorized to conduct business and
is in good standing under the laws of each jurisdiction where such
qualification is required, except where such failure to be qualified
would not have a material adverse effect on the Web Site.
(b) Authorization of Transaction. The Seller has full
corporate power and authority to execute and deliver this Agreement and
to perform its obligations hereunder. The execution, delivery and
performance of this agreement by the Seller have been duly and validly
authorized by all necessary corporate and shareholder action. This
Agreement constitutes the valid and legally binding obligation of the
Seller, enforceable in accordance with its terms and conditions.
(c) Noncontravention. Neither the execution and the delivery
of this Agreement, nor the consummation of the transactions
contemplated hereby (including the assignments and assumptions referred
to in Section 2 above), will (i) conflict with or result in a breach of
the charter or bylaws of the Seller, (ii) violate any constitution,
statute, regulation, rule, injunction, judgment, order, decree, ruling,
charge, or other restriction of any government, governmental agency, or
court to which the Seller or Web Site is subject or (iii) conflict
with, result in a breach of, constitute a default under, result in the
acceleration of, create in any party the right to accelerate,
terminate, modify, or cancel, or require any notice under any
agreement, contract, lease, license, instrument or other arrangement to
which the Seller or the Web Site is a party or by which either of them
is bound or to which any of their assets is subject (or result in the
imposition of any Security Interest upon any of their assets). Neither
the Seller nor the Web Site needs to give any notice to, make any
filing with, or obtain any authorization, consent, or approval of any
government or
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governmental agency in order for the Parties to consummate the
transactions contemplated by this Agreement.
(d) Brokers' Fees. The Seller has no Liability or obligation
to pay any fees or commissions to any broker, finder, or agent with
respect to the transactions contemplated by this Agreement for which
the Buyer could become liable or obligated.
(e) Title to Assets. The Seller has good and marketable title
to the Acquired Assets, free and clear of all Security Interests or
restrictions on transfer.
(f) Absence of Material Events. Since the date of the Web
Site's formation, there has not been any material adverse change in the
business, financial condition, operations, results of operations or
future prospects of the Seller or Web Site relating to the Acquired
Assets. Without limiting the generality of the foregoing, since that
date through the Closing Date:
(i) the Seller has not sold, leased, licensed,
transferred or assigned any of the Acquired Assets;
(ii) the Seller has not entered into any agreement,
contract, lease or license (or series of related agreements,
contracts, leases and licenses) relating to the Acquired
Assets either involving more than $5,000 or outside the
Ordinary Course of Business;
(iii) no party has accelerated, terminated, modified
or cancelled any agreement, contract, lease or license (or
series of related agreements, contracts, leases and licenses)
relating to the Acquired Assets involving more than $5,000 to
which the Seller is a party or by which it is bound;
(iv) the Seller has not imposed any Security Interest
upon any of the Acquired Assets;
(v) the Seller has not cancelled, compromised, waived
or released any right or claim (or series of related rights
and claims) relating to the Acquired Assets either involving
more than $5,000 or outside the Ordinary Course of Business;
(vi) the Seller has not granted any license or
sublicense of any rights under or with respect to any
Intellectual Property relating to the Acquired Assets;
(vii) there has been no change made or authorized in
the Seller's ownership and complete control of the Web Site;
(viii) the Seller has not experienced any damage,
destruction or loss (whether or not covered by insurance) to
the Acquired Assets;
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(ix) there has not been any other material
occurrence, event, incident, action, failure to act or
transaction outside the Ordinary Course of Business involving
the Acquired Assets; and
(x) the Seller has not committed to any of the
foregoing.
(g) Undisclosed Liabilities. The Seller does not have any
Liability (and there is no Basis for any present or future action,
suit, proceeding, hearing, investigation, charge, complaint, claim or
demand against it giving rise to any Liability) relating to or
affecting, directly or indirectly, any of the Acquired Assets.
(h) Legal Compliance. No violation by the Seller or its
predecessors of any applicable laws (including rules, regulations,
codes, plans, injunctions, judgments, orders, decrees, rulings, and
charges thereunder) of federal, state, local and foreign governments
(and all agencies thereof), nor any action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand or notice has been
filed or commenced that will prohibit or adversely affect its ability
to enter into and to perform its obligations under this Agreement.
(i) Tax Matters.
(i) The Seller has filed all Tax Returns that he was
required to file. All such Tax Returns were correct and
complete in all respects. All Taxes owed by the Seller
(whether or not shown on any Tax Return) have been paid. No
claim has ever been made by an authority in a jurisdiction
where the Seller does not file Tax Returns that he is or may
be subject to taxation by that jurisdiction. There are no
Security Interests on any of the assets of the Seller that
arose in connection with any failure (or alleged failure) to
pay any Tax.
(ii) The Seller does not expect any authority to
assess any additional Taxes with respect to the Seller or any
of the Acquired Assets for any period for which Tax Returns
have been filed. There is no dispute or claim concerning any
Tax Liability of the Seller or pertaining to the Acquired
Assets.
(j) Intellectual Property.
(i) The Seller owns or has the right to use pursuant
to license, sublicense, agreement or permission all
Intellectual Property necessary or desirable for the operation
of the Web Site. Each item of Intellectual Property relating
to the Acquired Assets owned, licensed or used by the Seller
immediately prior to the Closing hereunder will be owned,
licensed or available for use by the Buyer on identical terms
and conditions immediately subsequent to the Closing
hereunder. The Seller has taken all necessary and desirable
action to maintain and protect each item of Intellectual
Property being transferred to the Buyer under this Agreement.
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(ii) The Seller has not interfered with, infringed
upon, misappropriated or otherwise come into conflict with any
Intellectual Property rights of third parties relating to the
Acquired Assets, and the Seller (and employees or agents with
responsibility for Intellectual Property matters of the Web
Site) has never received any charge, complaint, claim, demand
or notice alleging any such interference, infringement,
misappropriation or violation (including any claim that the
Seller or Web Site must license or refrain from using any
Intellectual Property rights of any third party relating to
the Acquired Assets). To the Knowledge of the Seller (and
employees or agents with responsibility for Intellectual
Property matters of the Web Site), no third party has
interfered with, infringed upon, misappropriated or otherwise
come into conflict with any Intellectual Property rights
relating to the Acquired Assets.
(iii) Section 3(j)(iii) of the Disclosure Schedule
identifies, to the extent applicable, each: (i) patent or
registration which has been issued to the Seller, its
employees, partners, agents, or the Web Site with respect to
any of its Intellectual Property relating to the Acquired
Assets; (ii) pending patent application or application for
registration which the Seller, its employees, partners,
agents, or the Web Site has made with respect to any of its
Intellectual Property relating to the Acquired Assets; and
(iii) license, agreement or other permission which the Seller,
its employees, partners, agents, or the Web Site has granted
to any third party with respect to any of its Intellectual
Property relating to the Acquired Assets. The Seller has
delivered to the Buyer correct and complete copies of all such
patents, registrations, applications, licenses, agreements and
permissions (as amended to date). Section 3(j)(iii) of the
Disclosure Schedule also identifies each trade name or
unregistered trademark used by the Seller in connection with
the Web Site. With respect to each item of Intellectual
Property required to be identified in Section 3(j)(iii) of the
Disclosure Schedule:
(A) the Seller possesses all right, title
and interest in and to the item, free and clear of
any Security Interest, license or other restriction;
(B) the item is not subject to any
outstanding injunction, judgment, order, decree,
ruling or charge;
(C) no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand is
pending or, to the Knowledge of the Seller, is
threatened which challenges the legality, validity,
enforceability, use or ownership of the item; and
(D) the Seller has never agreed to indemnify
any Person for or against any interference,
infringement, misappropriation or other conflict with
respect to the item.
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(iv) Section 3(j)(iv) of the Disclosure Schedule
identifies each item of Intellectual Property that any third
party owns and that the Seller uses in the Web Site pursuant
to license, sublicense, agreement or permission. The Seller
has delivered to the Buyer correct and complete copies of all
such licenses, sublicenses, agreements and permissions (as
amended to date). With respect to each item of Intellectual
Property required to be identified in Section 3(j)(iv) of the
Disclosure Schedule:
(A) the license, sublicense, agreement or
permission covering the item is legal, valid,
binding, enforceable and in full force and effect;
(B) the license, sublicense, agreement or
permission will continue to be legal, valid, binding,
enforceable and in full force and effect on identical
terms following the consummation of the transactions
contemplated hereby;
(C) no party to the license, sublicense,
agreement or permission is in breach or default, and
no event has occurred which with notice or lapse of
time would constitute a breach or default or permit
termination, modification or acceleration thereunder;
and
(D) no party to the license, sublicense,
agreement or permission has repudiated any provision
thereof.
(k) Contracts. Section 3(k) of the Disclosure Schedule lists
all contracts and other agreements, if any, being assigned to the Buyer
hereunder and to which the Seller or Web Site is a party. The Seller
has delivered to the Buyer a correct and complete copy of each written
agreement listed in Section 3(k) of the Disclosure Schedule (as amended
to date) and a written summary setting forth the terms and conditions
of each oral agreement referred to in Section 3(k) of the Disclosure
Schedule, if any. With respect to each such agreement: (A) the
agreement is legal, valid, binding, enforceable and in full force and
effect; (B) the agreement will continue to be legal, valid, binding,
enforceable and in full force and effect on identical terms following
the consummation of the transactions contemplated hereby; (C) no party
is in breach or default, and no event has occurred which with notice or
lapse of time would constitute a breach or default, or permit
termination, modification or acceleration under the agreement; and (D)
no party has repudiated any provision of the agreement.
(l) Powers of Attorney. There are no outstanding powers of
attorney executed on behalf of the Seller or Web Site.
(m) Litigation. Section 3(n) of the Disclosure Schedule sets
forth each instance relating to the Acquired Assets in which the Seller
(i) is subject to any outstanding injunction, judgment, order, decree,
ruling or charge or (ii) is a party or, to the Knowledge of the Seller,
is threatened to be made a party to any action, suit, proceeding,
hearing or
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investigation of, in, or before any court or quasi-judicial
or administrative agency of any federal, state, local or foreign
jurisdiction or before any arbitrator. None of the actions, suits,
proceedings, hearings, and investigations set forth in Section 3(n) of
the Disclosure Schedule could result in any material adverse change in
the business, financial condition, operations, results of operations or
future prospects of the Web Site. The Seller has no reason to believe
that any such action, suit, proceeding, hearing or investigation may be
brought or threatened against the Seller or Web Site relating to or
adversely affecting the Acquired Assets.
(n) Product Warranty. Each product manufactured, displayed,
transmitted, sold, licensed, leased or delivered by the Seller related
to the Acquired Assets has been in conformity with all applicable
contractual commitments and all express and implied warranties, and the
Seller has no Liability (and there is no Basis for any present or
future action, suit, proceeding, hearing, investigation, charge,
complaint, claim or demand against it giving rise to any Liability) for
replacement or repair thereof or other damages in connection therewith.
No product manufactured, displayed, transmitted, sold, licensed, leased
or delivered by the Seller is subject to any guaranty, warranty or
other indemnity.
(o) Product Liability. The Seller has no Liability arising out
of any injury to individuals or property as a result of the ownership,
possession or use of any product manufactured, displayed, transmitted,
sold, leased, licensed or delivered by the Seller related to the
Acquired Assets.
(p) Disclosure. The representations and warranties contained
in this Section 3 do not contain any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements and information contained in this Section 3 not misleading.
(q) Investment. The Seller (i) understands that the Buyer's
Acquisition Shares will not be registered under the Securities Act and
are being offered and sold in reliance upon federal and state
exemptions for transactions not involving any public offering, (ii) is
acquiring the Buyer's Acquisition Shares solely for its own account for
investment purposes, and not with a view to the distribution thereof,
(iii) is a sophisticated investor with knowledge and experience in
business and financial matters, (iv) has received certain information
concerning the Buyer and has had the opportunity to obtain additional
information as desired in order to evaluate the merits and the risks
inherent in holding the Buyer's Acquisition Shares, and (v) is able to
bear the economic risk and lack of liquidity inherent in holding the
Buyer's Acquisition Shares.
(r) Year 2000 Compliance. The software of the Web Site and all
software which is part of the Acquired Assets are Year 2000 Compliant.
The term "Year 2000 Compliant" as used herein means that the software
(1) is capable of recognizing, processing, managing, representing,
interpreting, and manipulating correctly date related data for dates
earlier, during and later than January 1, 2000, including, but not
limited to, calculating, comparing, sorting, storing, tagging and
sequencing, without resulting in or causing logical
12
<PAGE>
or mathematical errors or inconsistencies in any user-interface
functionalities or otherwise, including data input and retrieval, data
storage, data fields, calculations, reports, processing, or any other
input or output, (2) has the ability to provide date recognition for
any data element without limitation (including, but not limited to,
date-related data presented without a century designation, date-related
data whose year is represented by only two digits and date fields
assigned special values), (3) has the ability to automatically function
into and beyond the year 2000 without human intervention and without
any change in operations associated with the advent of the year 2000,
(4) has the ability to correctly interpret data, dates and time into
and beyond the year 2000, (5) has the ability not to produce
noncompliance in existing information, nor otherwise corrupt such data
into and beyond the year 2000, (6) has the ability to correctly process
after January 1, 2000 data containing dates before that date, and (7)
has the ability to recognize all "leap years," including February 29,
2000.
(i) The software which is part of the Acquired Assets
has the ability to properly interface and will continue to
properly interface with internal and external applications and
systems of third parties whether or not they have achieved
Year 2000 Compliance.
(ii) The Seller has inquired of all such third
parties whose lack of Year 2000 Compliance would be materially
or significantly adverse to the Seller or the Acquired Assets,
and all such third parties have represented that they are Year
2000 Compliant.
4. REPRESENTATIONS AND WARRANTIES OF THE BUYER.
The Buyer represents and warrants to the Seller and the Shareholder
that the statements contained in this Section 4 are correct as of the date of
this Agreement and as of the Closing Date, except as set forth in the Disclosure
Schedule. The Disclosure Schedule will be arranged in paragraphs corresponding
to the lettered and numbered paragraphs contained in this Section 4.
(a) Organization of the Buyer. The Buyer is a corporation duly
organized, validly existing, and in good standing under the laws of the
jurisdiction of its incorporation. The Buyer is duly authorized to
conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required, except where such
failure to be qualified would not have a material adverse effect on the
Buyer. The Buyer has made available to the Seller or its counsel
correct and complete copies of the Articles of Incorporation and Bylaws
of the Buyer (as amended to date).
(b) Authorization of Transaction. The Buyer has full power and
authority (including full corporate power and authority) to execute and
deliver this Agreement and to perform its obligations hereunder. This
Agreement constitutes the valid and legally binding obligation of the
Buyer, enforceable in accordance with its terms and conditions.
13
<PAGE>
(c) Noncontravention. Neither the execution and the delivery
of this Agreement, nor the consummation of the transactions
contemplated hereby (including the assignments and assumptions referred
to in Section 2 above), will (i) violate any constitution, statute,
regulation, rule, injunction, judgment, order, decree, ruling, charge,
or other restriction of any government, governmental agency, or court
to which the Buyer is subject or any provision of its Articles of
Incorporation or Bylaws or (ii) conflict with, result in a breach of,
constitute a default under, result in the acceleration of, create in
any party the right to accelerate, terminate, modify, or cancel, or
require any notice under any agreement, contract, lease, license,
instrument, or other arrangement to which the Buyer is a party or by
which it is bound or to which any of its assets is subject. The Buyer
does not need to give any notice to, make any filing with, or obtain
any authorization, consent, or approval of any government or
governmental agency in order for the Parties to consummate the
transactions contemplated by this Agreement (including the assignments
and assumptions referred to in Section 2 above).
(d) Brokers' Fees. The Buyer has no Liability or obligation to
pay any fees or commissions to any broker, finder, or agent with
respect to the transactions contemplated by this Agreement for which
the Seller could become liable or obligated.
5. POST-CLOSING COVENANTS.
The Parties agree as follows with respect to the period following the
Closing.
(a) General. In case at any time after the Closing any further
action is necessary or desirable to carry out the purposes of this
Agreement, each of the Parties will take such further action (including
the execution and delivery of such further instruments and documents)
as the other Party reasonably may request, all at the sole cost and
expense of the requesting Party (unless the requesting Party is
entitled to indemnification therefor under Section 6 below). The Seller
and the Shareholder acknowledge and agree that from and after the
Closing the Buyer will be entitled to possession of all documents,
books, records, agreements and financial data of any sort relating to
the Acquired Assets.
(b) Litigation Support. In the event and for so long as any
Party actively is contesting or defending against any action, suit,
proceeding, hearing, investigation, charge, complaint, claim, or demand
in connection with (i) any transaction contemplated under this
Agreement or (ii) any fact, situation, circumstance, status, condition,
activity, practice, plan, occurrence, event, incident, action, failure
to act or transaction on or prior to the Closing Date involving the
Acquired Assets, the other Party will cooperate with the contesting or
defending Party and its counsel in the contest or defense, make
available its personnel, and provide such testimony and access to its
books and records as shall be necessary in connection with the contest
or defense, all at the sole cost and expense of the contesting or
defending Party (unless the contesting or defending Party is entitled
to indemnification therefor under Section 6 below).
14
<PAGE>
(c) Transition. Neither the Seller nor the Shareholder will
take any action that is designed or intended to have the effect of
discouraging any lessor, licensor, customer, supplier or other business
associate of the Seller's Web Site from maintaining the same business
relationships with the Buyer after the Closing as it maintained with
the Seller prior to the Closing. The Seller and the Shareholder will
refer all customer inquiries relating to the Web Site to the Buyer from
and after the Closing. If requested by the Buyers, the Seller agrees to
prepare and deliver, with the Buyer's guidance and approval, a letter
to the Seller's customers and business associates relating to the Web
Site announcing the sale and endorsing the Buyer as the successor to
its business relationship with such parties.
(d) Confidentiality. The Seller, the Shareholder, the Web
Site, and their agents will treat and hold confidential all of the
Confidential Information, refrain from using any of the Confidential
Information except in connection with this Agreement, and deliver
promptly to the Buyer or destroy, at the request and option of the
Buyer, all tangible embodiments (and all copies) of the Confidential
Information which are in their possession.
(e) Buyer's Acquisition Shares. The Buyer's Acquisition Shares
will be imprinted with a legend substantially in the following form:
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 OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OF SUCH ACT.
Each holder desiring to transfer the Buyer's Acquisition Shares first
must furnish the Buyer with a written opinion reasonably satisfactory to the
Buyer in form and substance from counsel reasonably satisfactory to the Buyer by
reason of experience to the effect that the holder may transfer the Buyer's
Acquisition Shares as desired under the Securities Act.
6. REMEDIES FOR BREACHES OF THIS AGREEMENT.
(a) Survival of Representations and Warranties. All of the
representations and warranties of the Buyer, the Seller and the
Shareholder contained in this Agreement shall survive the Closing (even
if the damaged Party knew or had reason to know of any
misrepresentation or breach of warranty at the time of Closing) and
continue in full force and effect forever thereafter (subject to any
applicable statutes of limitations).
(b) Indemnification Provisions for Benefit of the Buyer.
15
<PAGE>
(i) In the event the Seller or the Shareholder
breaches (or in the event any third party alleges facts that,
if true, would mean the Seller or the Shareholder has
breached) any of its or his representations, warranties and
covenants contained in this Agreement, and, if there is an
applicable survival period pursuant to Section 6(a) above,
provided that the Buyer makes a written claim for
indemnification against the Seller or the Shareholder pursuant
to Section 8(g) below within such survival period, then the
Seller and the Shareholder agree, jointly and severally, to
indemnify the Buyer from and against the entirety of any
Adverse Consequences the Buyer may suffer through and after
the date of the claim for indemnification (including any
Adverse Consequences the Buyer may suffer after the end of any
applicable survival period) resulting from, arising out of,
relating to, in the nature of or caused by the breach (or the
alleged breach).
(ii) The Seller and the Shareholder agree, jointly
and severally, to indemnify the Buyer from and against the
entirety of any Adverse Consequences the Buyer may suffer
resulting from, arising out of, relating to, in the nature of
or caused by:
(A) any Liability of the Seller or the
Shareholder which is not an Assumed Liability
(including any Liability of the Seller or the
Shareholder that becomes a Liability of the Buyer
under any bulk transfer law of any jurisdiction,
under any common law doctrine of de facto merger or
successor liability or otherwise by operation of
law); or
(B) any Liability of any of the Seller or
the Shareholder for any unpaid Taxes.
(c) Indemnification Provisions for Benefit of the Seller and
the Shareholder.
(i) In the event the Buyer breaches (or in the event
any third party alleges facts that, if true, would mean the
Buyer has breached) any of its representations, warranties,
and covenants contained in this Agreement, and, if there is an
applicable survival period pursuant to Section 6(a) above,
provided that the Seller or the Shareholder makes a written
claim for indemnification against the Buyer pursuant to
Section 8(g) below within such survival period, then the Buyer
agrees to indemnify the Seller or the Shareholder from and
against the entirety of any Adverse Consequences the Seller or
the Shareholder may suffer through and after the date of the
claim for indemnification (including any Adverse Consequences
the Seller or the Shareholder may suffer after the end of any
applicable survival period) resulting from, arising out of,
relating to, in the nature of or caused by the breach (or the
alleged breach).
(ii) The Buyer agrees to indemnify the Seller and the
Shareholder from and against the entirety of any Adverse
Consequences the Seller or the Shareholder
16
<PAGE>
may suffer resulting from, arising out of, relating to, in the
nature of or caused by any Assumed Liability.
(d) Matters Involving Third Parties.
(i) If any third party shall notify any Party (the
"Indemnified Party") with respect to any matter (a "Third
Party Claim") which may give rise to a claim for
indemnification against the other Party (the "Indemnifying
Party") under this Section 6, then the Indemnified Party shall
promptly notify the Indemnifying Party thereof in writing;
provided, however, that no delay on the part of the
Indemnified Party in notifying the Indemnifying Party shall
relieve the Indemnifying Party from any obligation hereunder
unless (and then solely to the extent) the Indemnifying Party
thereby is prejudiced.
(ii) The Indemnifying Party will have the right to
defend the Indemnified Party against the Third Party Claim
with counsel of its choice reasonably satisfactory to the
Indemnified Party so long as (A) the Indemnifying Party
notifies the Indemnified Party in writing within 15 days after
the Indemnified Party has given notice of the Third Party
Claim that the Indemnifying Party will indemnify the
Indemnified Party from and against the entirety of any Adverse
Consequences the Indemnified Party may suffer resulting from,
arising out of, relating to, in the nature of, or caused by
the Third Party Claim, (B) the Indemnifying Party provides the
Indemnified Party with evidence reasonably acceptable to the
Indemnified Party that the Indemnifying Party will have the
financial resources to defend against the Third Party Claim
and fulfill its indemnification obligations hereunder, (C) the
Third Party Claim involves only money damages and does not
seek an injunction or other equitable relief, (D) settlement
of, or an adverse judgment with respect to, the Third Party
Claim is not, in the good faith judgment of the Indemnified
Party, likely to establish a precedential custom or practice
materially adverse to the continuing business interests of the
Indemnified Party, and (E) the Indemnifying Party conducts the
defense of the Third Party Claim actively and diligently.
(iii) So long as the Indemnifying Party is conducting
the defense of the Third Party Claim in accordance with
Section 6(d)(ii) above, (A) the Indemnified Party may retain
separate co-counsel at its sole cost and expense and
participate in the defense of the Third Party Claim, (B) the
Indemnified Party will not consent to the entry of any
judgment or enter into any settlement with respect to the
Third Party Claim without the prior written consent of the
Indemnifying Party (not to be withheld unreasonably), and (C)
the Indemnifying Party will not consent to the entry of any
judgment or enter into any settlement with respect to the
Third Party Claim without the prior written consent of the
Indemnified Party (not to be withheld unreasonably).
(iv) In the event any of the conditions in Section
6(d)(ii) above is or becomes unsatisfied, however, (A) the
Indemnified Party may defend against, and
17
<PAGE>
consent to the entry of any judgment or enter into any
settlement with respect to, the Third Party Claim in any
manner it reasonably may deem appropriate (and the Indemnified
Party need not consult with, or obtain any consent from, the
Indemnifying Party in connection therewith), (B) the
Indemnifying Party will reimburse the Indemnified Party
promptly and periodically for the costs of defending against
the Third Party Claim (including reasonable attorneys' fees
and expenses), and (C) the Indemnifying Party will remain
responsible for any Adverse Consequences the Indemnified Party
may suffer resulting from, arising out of, relating to, in the
nature of, or caused by the Third Party Claim to the fullest
extent provided in this Section 6.
(e) Determination of Adverse Consequences. The Parties shall
take into account the time cost of money (using the Applicable Rate as
the discount rate) in determining Adverse Consequences for purposes of
this Section 6. All indemnification payments under this Section 6 shall
be deemed adjustments to the Purchase Price.
(f) Other Indemnification Provisions. The foregoing
indemnification provisions are in addition to, and not in derogation
of, any statutory, equitable, or common law remedy any Party may have
for breach of representation, warranty, or covenant any Party may have
with respect to the Seller or Web Site, or the transactions
contemplated by this Agreement.
7. HOLDBACK SHARES.
(a) Purpose. The Holdback Shares will be available to
compensate the Buyer for any Adverse Consequences, to the extent of the
amount of such Adverse Consequences that the Buyer has incurred by
reason of any of the items set forth in Section 6(b) and any reduction
in the Purchase Price pursuant to Section 7(b) below; provided,
however, if the Holdback Shares are exhausted or insufficient to cover
such resulting amount, Seller will immediately reimburse Buyer in cash
for any resulting amount over and above the available amount of
Holdback Shares.
(b) Adjustments. Adjustments to the Purchase Price will be
made from the Holdback Shares and will be valued at the Average Closing
Price. Seller will have provided the Buyer with no less than five (5)
executed stock powers (with the date and number of shares left blank)
to facilitate the cancellation of the Holdback Shares in compensation
for Adverse Consequences, if any, suffered by the Buyer hereunder.
(c) Indemnification. This Section 7 and the provision and
utilization of the Holdback Shares will not limit the Seller's and the
Shareholder's indemnification obligations under Section 6 provided that
any amounts owed to the Buyer pursuant to Section 7(b) will first be
satisfied from the Holdback Shares to the extent available.
(d) Termination of Holdback. The Holdback Shares, minus
adjustments made, if any, under Section 7(b), will be paid to the
Seller one (1) year following the Closing Date.
18
<PAGE>
8. MISCELLANEOUS.
(a) Press Releases and Public Announcements. No Party shall
issue any press release or make any public announcement relating to the
subject matter of this Agreement without the prior written approval of
the other Party; provided, however, that any Party may make any public
disclosure it believes in good faith is required by applicable law or
any listing or trading agreement concerning its publicly-traded
securities (in which case the disclosing Party will use its reasonable
best efforts to advise the other Party prior to making the disclosure).
(b) No Third-Party Beneficiaries. This Agreement shall not
confer any rights or remedies upon any Person other than the Parties
and their respective successors and permitted assigns.
(c) Entire Agreement. This Agreement (including the documents
referred to herein) constitutes the entire agreement between the
Parties and supersedes any prior understandings, agreements, or
representations by or between the Parties, written or oral, to the
extent they have related in any way to the subject matter hereof.
(d) Succession and Assignment. This Agreement shall be binding
upon and inure to the benefit of the Parties named herein and their
respective successors and permitted assigns. No Party may assign either
this Agreement or any of its rights, interests, or obligations
hereunder without the prior written approval of the other Party;
provided however, that the Buyer may (i) assign any or all of its
rights and interests hereunder to one or more of its Affiliates and
(ii) designate one or more of its Affiliates to perform its obligations
hereunder (in any or all of which cases the Buyer nonetheless shall
remain responsible for the performance of all of its obligations
hereunder).
(e) Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original but all of
which together will constitute one and the same instrument.
(f) Headings. The section headings contained in this Agreement
are inserted for convenience only and shall not affect in any way the
meaning or interpretation of this Agreement.
(g) Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request,
demand, claim, or other communication hereunder shall be deemed duly
given if (and then two business days after) it is sent by registered or
certified mail, return receipt requested, postage prepaid, and
addressed to the intended recipient as set forth below:
19
<PAGE>
If to the Seller:
Virtual Business Designs, Inc.
DBA The Gamers Net
3835 Richmond Avenue, Suite. 192
Staten Island, New York 10312
Attn: Mr. David Heath
If to the Buyer:
Interactive Magic, Inc.
215 Southport Drive, Suite 1000
Morrisville, North Carolina 27560
Attn: Chief Executive Officer
Copy to:
Wyrick Robbins Yates & Ponton LLP
4101 Lake Boone Trail, Suite 300
Raleigh, North Carolina 27607
Attn: Kevin A. Prakke
Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set
forth above using any other means (including personal delivery,
expedited courier, messenger service, telecopy, telex, ordinary mail,
or electronic mail), but no such notice, request, demand, claim, or
other communication shall be deemed to have been duly given unless and
until it actually is received by the intended recipient. Any Party may
change the address to which notices, requests, demands, claims, and
other communications hereunder are to be delivered by giving the other
Party notice in the manner herein set forth.
(h) Governing Law. This Agreement shall be governed by and
construed in accordance with the domestic laws of the State of North
Carolina without giving effect to any choice or conflict of law
provision or rule that would cause the application of the laws of any
jurisdiction other than the State of North Carolina.
(i) Amendments and Waivers. No amendment of any provision of
this Agreement shall be valid unless the same shall be in writing and
signed by the Buyer and the Seller. No waiver by any Party of any
default, misrepresentation, or breach of warranty or covenant
hereunder, whether intentional or not, shall be deemed to extend to any
prior or subsequent default, misrepresentation, or breach of warranty
or covenant hereunder or affect in any way any rights arising by virtue
of any prior or subsequent such occurrence.
20
<PAGE>
(j) Severability. Any term or provision of this Agreement that
is invalid or unenforceable in any situation in any jurisdiction shall
not affect the validity or enforceability of the remaining terms and
provisions hereof or the validity or enforceability of the offending
term or provision in any other situation or in any other jurisdiction.
(k) Expenses. Each of the Buyer, the Seller and the
Shareholder will bear his or its own costs and expenses (including
legal fees and expenses) incurred in connection with this Agreement and
the transactions contemplated hereby.
(l) Construction. The Parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity
or question of intent or interpretation arises, this Agreement shall be
construed as if drafted jointly by the Parties and no presumption or
burden of proof shall arise favoring or disfavoring any Party by virtue
of the authorship of any of the provisions of this Agreement. Any
reference to any federal, state, local, or foreign statute or law shall
be deemed also to refer to all rules and regulations promulgated
thereunder, unless the context requires otherwise. The word "including"
shall mean including without limitation. Nothing in the Disclosure
Schedule shall be deemed adequate to disclose an exception to a
representation or warranty made herein unless the Disclosure Schedule
identifies the exception with reasonable particularity and describes
the relevant facts in reasonable detail. Without limiting the
generality of the foregoing, the mere listing (or inclusion of a copy)
of a document or other item shall not be deemed adequate to disclose an
exception to a representation or warranty made herein (unless the
representation or warranty has to do with the existence of the document
or other item itself). The Parties intend that each representation,
warranty, and covenant contained herein shall have independent
significance. If any Party has breached any representation, warranty,
or covenant contained herein in any respect, the fact that there exists
another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which
the Party has not breached shall not detract from or mitigate the fact
that the Party is in breach of the first representation, warranty, or
covenant.
(m) Incorporation of Exhibits and Schedules. The Exhibits and
Schedules identified in this Agreement are incorporated herein by
reference and made a part hereof.
(n) Specific Performance. Each of the Parties acknowledges and
agrees that the other Party would be damaged irreparably in the event
any of the provisions of this Agreement are not performed in accordance
with their specific terms or otherwise are breached. Accordingly, each
of the Parties agrees that the other Party shall be entitled to an
injunction or injunctions to prevent breaches of the provisions of this
Agreement and to enforce specifically this Agreement and the terms and
provisions hereof in any action instituted in any court of the United
States or any state thereof having jurisdiction over the Parties and
the matter (subject to the provisions set forth in Section 8(o) below),
in addition to any other remedy to which it may be entitled, at law or
in equity.
(o) Submission to Jurisdiction. Each of the Parties submits to
the jurisdiction of any state or federal court sitting in North
Carolina, in any action or proceeding arising out of
21
<PAGE>
or relating to this Agreement and agrees that all claims in respect of
the action or proceeding may be heard and determined in any such court.
Each of the Parties waives any defense of inconvenient forum to the
maintenance of any action or proceeding so brought and waives any bond,
surety, or other security that might be required of any other Party
with respect thereto. Each Party appoints the Buyer's corporate
registered agent in North Carolina (the "Process Agent") as its agent
to receive on its behalf service of copies of the summons and complaint
and any other process that might be served in the action or proceeding.
Any Party may make service on the other Party by sending or delivering
a copy of the process (i) to the Party to be served at the address and
in the manner provided for the giving of notices in Section 8(g) above
or (ii) to the Party to be served in care of the Process Agent at the
address and in the manner provided for the giving of notices in Section
8(g) above. Nothing in this Section 8(o), however, shall affect the
right of any Party to bring any action or proceeding arising out of or
relating to this Agreement in any other court or to serve legal process
in any other manner permitted by law or in equity. Each Party agrees
that a final judgment in any action or proceeding so brought shall be
conclusive and may be enforced by suit on the judgment or in any other
manner provided by law or in equity.
(p) Bulk Transfer Laws. The Buyer acknowledges that the Seller
will not comply with the provisions of any bulk transfer laws of any
jurisdiction in connection with the transactions contemplated by this
Agreement. The Seller agrees to indemnify the Buyer from and against
any Adverse Consequences arising from or related to the Buyer's
noncompliance with such laws.
(q) Sales, Transfer and Documentary Taxes, etc. The Seller
will pay all federal, state and local sales, documentary and other
transfer taxes, if any, due as a result of the purchase, sale or
transfer of the Acquired Assets in accordance herewith imposed by law
on the Seller or Buyer, and the Seller will indemnify, reimburse and
hold harmless Buyer in respect of the liability for payment of or
failure to pay any such taxes or the filing of or failure to file any
reports required in connection therewith.
[THE NEXT PAGE IS THE SIGNATURE PAGE.]
22
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement
effective as of the date first above written.
Interactive Magic, Inc.
By: ___________________________________
Name: _________________________________
Title: __________________________________
Virtual Business Designs, Inc. (d/b/a The Gamers Net)
By: ___________________________________
Name: _________________________________
Title: __________________________________
<PAGE>
Disclosure Schedule
None
<PAGE>
Schedule of Assigned Contracts
1) Worlds Apart Contract
2) Online Golf Challenge Contract
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated Balance Sheet of Interactive Magic, Inc. as of September 30, 1999
and the related Statement of Operations for the nine month period ended
September 30, 1999 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,570
<SECURITIES> 0
<RECEIVABLES> 1,188
<ALLOWANCES> 713
<INVENTORY> 61
<CURRENT-ASSETS> 2,465
<PP&E> 2,472
<DEPRECIATION> 1,362
<TOTAL-ASSETS> 7,398
<CURRENT-LIABILITIES> 3,553
<BONDS> 2,156
0
0
<COMMON> 1,250
<OTHER-SE> 244
<TOTAL-LIABILITY-AND-EQUITY> 7,398
<SALES> 0
<TOTAL-REVENUES> 3,648
<CGS> 2,899
<TOTAL-COSTS> 14,670
<OTHER-EXPENSES> (906)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,830
<INCOME-PRETAX> (13,947)
<INCOME-TAX> 52
<INCOME-CONTINUING> (13,999)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,999)
<EPS-BASIC> (1.31)
<EPS-DILUTED> (1.31)
</TABLE>
