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LOAN AND SUBSCRIPTION AGREEMENT
AD-STAR SERVICES, INC., a New York corporation, with its principal office
at 4553 Glencoe Avenue, Suite 325, Marina del Rey, California 90292 and any
successor thereto (hereinafter referred to as "Borrower"), and INTEREQUITY
CAPITAL PARTNERS, L.P., a Delaware limited partnership, having an office at 220
Fifth Avenue, New York, N.Y. 10001 (hereinafter referred to as "Lender"), hereby
enter into this Loan Agreement ("Agreement") dated as of July 13, 1999.
SECTION 1. CERTAIN DEFINITIONS
1.1 The following terms used in this Agreement will have the meanings
given below:
ADDITIONAL LOAN Defined in Section 4.8 of the Security
Agreement.
ADDITIONAL LOAN NOTE Defined in Section 4.8 of the Security
Agreement.
AFFIDAVIT OF CONFESSION OF JUDGMENT Defined in Section 6.1(c).
CASH FLOW ANALYSIS PROJECTIONS Defined in Section 10.1(r).
CASH IN-FLOWS All Cash In-Flows realized including,
without limitation, revenues, cash
balances from borrowings and asset sales.
CASH OUTFLOWS All expenditures, including, without
limitation, general expenses and
financing liabilities
CLAIMS AND EXPENSES Any and all claims, lawsuits of any kind,
judgments, losses, damages, liabilities,
penalties, costs and reasonable expenses
arising out of transactions contemplated
under this Agreement or under the
Collateral Documents, including all
"Legal Costs and Expenses" (defined
below) incurred in connection therewith.
CLOSING SHARES Defined in Section 4.1.
COLLATERAL Shall have the meaning assigned to such
term in the Security Agreement.
COLLATERAL DOCUMENTS The Note, any Additional Loan Note, the
Security Agreement, the Affidavit of
Confession of Judgment, the Patent and
Trademark Collateral Assignment, the
Copyright Security Agreement, and the
applicable UCC-1 Statements.
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COMPANY Borrower
COPYRIGHT OFFICE Defined in Section 6.3.
COPYRIGHT SECURITY AGREEMENT Defined in Section 6.3
DOCUMENTATION Technical specifications; information
regarding version numbers and usage of
the development environment, editors,
assemblers, compilers, library managers,
linkers; any worksheets, flowcharts or
other programming materials relating to
the Programs; any user manuals, reference
manuals, training manuals or installation
guides relating to the Programs; and
other licensed third party programs used
in connection with the Programs.
EBIT Earnings of the Borrower before interest
and taxes of the Borrower.
EBITDA Earnings of the Borrower before interest,
taxes, depreciation and amortization of
the Borrower.
EIGHTEEN MONTH ANNIVERSARY DATE The eighteen month anniversary of the
Loan Closing Date.
FIRST YEAR ANNIVERSARY DATE The first year anniversary of the Loan
Closing Date.
HOLDER Lender and any transferee of Lender's
Equity.
INTEREST COVERAGE Ratio of EBIT of the Borrower to interest
expense of the Borrower.
JUNIOR LENDERS Shall mean, collectively, each of the
purchasers of a Junior Note pursuant to
the terms of the Subscription Agreement,
and any of their successors and assigns.
JUNIOR NOTE Shall mean a 12% convertible subordinated
unsecured note issued by the Company
pursuant to the terms of the Subscription
Agreement.
LEGAL COSTS AND EXPENSES Any and all reasonable attorneys' fees and
disbursements, court costs and other
litigation expenses.
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LENDER EQUITY Defined in Section 4.2(e).
LICENSEE PROGRAMS Programs in the form delivered to
licensees of the Company.
LOAN Defined in Section 2.1.
LOAN CLOSING AND THE Defined in Section 2.2.
LOAN CLOSING DATE
MANDATORY COMPENSATION REDUCTIONS Defined in Section 10.1(r)
MATURITY DATE The expiration of five years from the
Loan Closing Date.
NET WORTH Total assets of the Borrower minus total
liabilities of the Borrower.
NINE MONTH ANNIVERSARY DATE The ninth month anniversary of the Loan
Closing Date.
NOTE Defined in Section 2.2.
OFFERING The public offering of Shares where the
Company raises gross proceeds of at least
$12,000,000.
PATENT AND TRADEMARK ASSIGNMENT Defined in Section 6.1(b).
PERMITTED LIENS Defined in Section 9.1(k).
POST-CLOSING SHARES Defined in Section 4.2.
PRINCIPALS Leslie Bernhard, President; Eli Rousso,
Executive Vice President;
PRO FORMA BALANCE SHEET A balance sheet delivered by Borrower to
Lender prior to the Loan Closing Date
taking into account the proceeds of the
Loan and other costs and expenditures
from March 31, 1999, in form and
substance satisfactory to Lender.
PROGRAMS All computer programs in object code and
source code formats and accompanying
documentation licensed by the Company as
part of its business.
QUALIFIED SALE Defined in Section 4.4(b).
REGISTRATION RIGHTS AGREEMENT The Registration Rights Agreement dated
as of the date hereof between the Company
and the Lender,
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in form and substance satisfactory to
Lender.
SBA REGULATIONS Defined in Section 5.2.
SEC United States Securities and Exchange
Commission and any successor thereto.
SECURITY AGREEMENT Defined in Section 6.1(a).
SHARE CERTIFICATE A certificate representing the Shares.
SHARES Borrower's shares of Common Stock,
without par value.
SIX MONTH ANNIVERSARY DATE The sixth month anniversary of the Loan
Closing Date.
SOURCE CODE Shall mean uncompiled and/or unassembled
program coding that is used to produce
the object code files or libraries that
are subsequently linked together to make
the non-modifiable runtime format of the
Programs. This Source Code shall be the
same that is used by the Company's
programming staff to maintain, modify and
enhance the Programs.
SUBORDINATION AGREEMENT Each Subordination Agreement between the
Company, a Junior Lender and the Lender,
in form and substance satisfactory to
Lender.
SUBSCRIPTION AGREEMENT As the context may require, any or all of
the Subscription Agreements dated as of
April 30, 1999 and March 12, 1999 and
March 22, 1999 pursuant to which the
Company collectively offered the Junior
Notes in a maximum aggregate principal
amount of $1,500,000 (and any additional
subscription agreement which may be
subsequently executed in connection with
such offering of the Junior Notes), as
may be applicable to the respective
Junior Note.
TEMPLATE SOURCE CODE Source Code for the Programs which are the
basis for any Licensee Program.
UNIFORM COMMERCIAL CODE The Uniform Commercial Code as is in
effect in the State of New York.
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SECTION 2. THE LOAN
2.1 Simultaneously with the execution of this Agreement, Lender is
purchasing a note of the Borrower for a purchase price equal to 99.88235% of the
principal amount of $850,000 US Dollars (such purchase referred to either as the
"Note Purchase" or the "Loan"; and, together with any Additional Loans that may
be advanced pursuant to Section 4.8 of the Security Agreement, the "Loans")
receipt of which is acknowledged by Borrower.
2.2 The Loan is evidenced by a promissory note (the "Note") made by the
Borrower payable to Lender, which is being executed and delivered to Lender
contemporaneously herewith (such loan and delivery being hereinafter called the
"Loan Closing" and the date thereof being hereinafter called the "Loan Closing
Date"). A copy of the Note is attached to this Agreement as Exhibit 1.
2.3 The Note is payable in accordance with its provisions which include,
inter alia:
(a) Interest (computed on the basis of a 360-day year) on the unpaid
principal amount of the Loan for the period from and including the date
the Loan is disbursed to but excluding the date the Loan shall be paid in
full shall be at the rate of fourteen percent (14 %) per annum. Interest
payments only shall be payable monthly in arrears commencing on the first
day of the month following the date of the Note and continuing on the
first day of each succeeding month until the first day of the month
following the Six Month Anniversary Date. After the first day of the month
following the Six Month Anniversary Date, the principal of the Note
together with interest thereon shall be amortized and payable in
fifty-four (54) equal successive monthly installments commencing on March
1, 2000 and concluding on the Maturity Date.
(b) The principal of the Note and accrued interest thereon shall
become immediately due and payable upon the occurrence of an Event of
Default as defined in Article 5 of the Security Agreement.
(c) Notwithstanding any provision in this Agreement or in the Note,
in no event shall the interest rate applicable to the Loan exceed that
permitted by the laws or governmental regulations applicable to the Lender
that limit rates of interest that may be charged or collected by Lender.
If any payment hereunder or under the Note shall be found to constitute a
payment of interest in excess of that permitted under the laws or
governmental regulations applicable to the Lender that limit rates of
interest that may be charged or collected by the Lender, then the amount
of such excess payment shall be refunded to Borrower.
(d) The Note may be prepaid in full or in part at any time without
penalty; provided, however, that such prepayments are made in increments
of at least $100,000 (or the unpaid balance on the Note, if less).
SECTION 3. COMMITMENT FEE
3.1 As of the Loan Closing Date, Borrower has paid Lender a commitment fee
of $17,000, receipt of which is hereby acknowledged by Lender.
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SECTION 4. LENDER EQUITY
4.1 Simultaneously with the Loan Closing Date hereunder, the Lender is
purchasing 1.603 shares from the Borrower, representing 1.5% of the total common
equity of the Borrower (the "Closing Shares") and the rights described in
Section 4.2 hereof for a purchase price equal to $1,000. The Closing Shares when
delivered shall be validly issued, fully paid and nonassessable, and not subject
to preemptive rights.
4.2 (a) If the Loans have not been repaid in full on the Nine Month
Anniversary Date, the Ten Month Anniversary Date or the Eleventh Month
Anniversary Date, then on each such anniversary date where any portion of the
Loans remain unpaid, Borrower shall deliver to Lender additional Shares
representing 1/3 of 1% of Borrower's total common equity then outstanding after
giving effect to the issuance of such additional Shares to Lender (after taking
into account (i) any dividend paid or distribution made to the holders of such
common equity in Shares or any security or other instrument convertible into
common equity, (ii) any subdivision or combination of the Shares or (iii) any
reclassification of the Shares).
(b) On the First Year Anniversary Date, if repayment of the Loans in
full has not occurred, Borrower shall deliver to Lender Shares
representing an additional 1% of Borrower's total common equity then
outstanding after giving effect to such issuance of additional shares
(after taking into account (i) any dividend paid or distribution made to
the holders of such common equity in Shares or any security or other
instrument convertible into common equity, (ii) any subdivision or
combination of the Shares or (iii) any reclassification of the Shares).
(c) On the Eighteen Month Anniversary Date, if repayment of Loans in
full has not occurred, or if before then at any time an Offering has
occurred and no repayment in full of the Loan has been made (within 3
business days of the completion of the Offering), Lender may exchange all
of its Shares for Shares representing 14% of Borrower's total common
equity then outstanding after giving effect to such exchange (after taking
into account (i) any dividend paid or distribution made to the holders of
such common equity in Shares or any security or other instrument
convertible into common equity (ii) any subdivision or combination of the
Shares or (iii) any reclassification of the Shares).
(d) For every six-month period following the Eighteen Month
Anniversary Date, Borrower shall deliver to Lender Shares representing
0.5% of Borrower's then outstanding total common equity then outstanding
after giving effect to the issuance of such additional Shares to Lender
(after taking into account (i) any dividend paid or distribution made to
the holders of such common equity in Shares or any security or other
instrument convertible into common equity, (ii) any subdivision or
combination of the Shares or (iii) any reclassification of the Shares) so
long as any portion of the Loans remains unpaid at the end of each such
six-month period.
(e) The Shares issued and delivered by Borrower to Lender in
accordance with this Section 4.2 (collectively, the "Post-Closing Shares";
and, together with the Closing Shares, "Lender Equity") shall be reserved
by the Company and shall, in each
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case, be, when delivered, validly issued, fully paid and nonassessable,
and not subject to preemptive rights, and the Company acknowledges that in
connection with any such issuance or exchange of Post-Closing Shares,
Lender has given Borrower consideration for such Post-Closing Shares and
that a portion of such consideration in an amount equal to or greater than
(i) if such post-closing shares are assigned par value in the Company's
Certificate of Incorporation, the par value or (ii) if such Post-Closing
Shares are without par value, the value of the Post-Closing Shares (as
duly determined by the Company's Board of Directors in accordance with the
corporate law of the jurisdiction of its incorporation) has been allocated
to the Company's capital account. Upon Lender's request, in connection
with any issuance of Post-Closing Shares pursuant to this Section 4.2
(including Post-Closing Shares issued in connection with the exchange
contemplated by Section 4.2(c)), Borrower shall deliver to Lender prior to
such issuance a legal opinion from counsel reasonably satisfactory to
Lender stating that the Post-Closing Shares then being issued are validly
issued, fully paid and nonassessable and are not subject to preemptive
rights.
(f) Lender acknowledges that each of the Shares and the Post-Closing
Shares shall be subject to certain lock-up restrictions imposed by any
underwriter in connection with any future public offering of such shares,
and Lender shall execute and deliver any lock-up agreement requested by
such underwriter to evidence such lock-up restrictions; provided, however,
that the terms of any such lock-up agreement shall be no more restrictive
to Lender than the terms of any other lock-up agreement executed by any
other holder of the Company's Shares.
4.3 Lender shall receive the demand and piggyback registration rights set
forth in the Registration Rights Agreement being delivered to Lender as of the
Closing Date. In addition, (i) the Shares held by Lender are not freely
transferable without first being registered with the SEC or (ii) if the exchange
of Shares for Post-Closing Shares described in Section 4.2(c) hereof has
occurred, then Lender will receive demand and piggyback registration rights
whenever such rights are granted to others on terms which are superior to the
terms (including, without limitation, any holding periods) set forth in
Registration Rights Agreement.
4.4 (a) If at the Maturity Date, or at any time thereafter, a "Qualified
Sale", as hereinafter defined, has not occurred, Lender may sell its Shares to
the Borrower for a purchase price equal to the value of such Shares pro rata to
the total value of the Borrower, when the total value of the Borrower shall be
deemed equal to (i) ten times EBITDA (as calculated by the most recent year-end
financial statements or by reference to the twelve months prior to the date of
such sale, whichever is higher) or (ii) if more than the amount calculated in
(i), that price established by an independent valuation by an appraiser chosen
by Lender ("Lender's Appraiser"). The independent valuation shall be at the
expense of Lender. If Borrower disagrees with such appraised value, Borrower may
hire another appraiser at its sole cost and expense ("Borrower's Appraiser"). If
Lender's Appraiser and Borrower's Appraiser cannot agree on a value within
fifteen days after Borrower's Appraiser has been designated, Borrower's
Appraiser and Lender's Appraiser shall select a third appraiser (the "Third
Appraiser") to determine the value of the Company. The determination of the
Third Appraiser shall be final and binding, and the fees and expenses of the
Third Appraiser shall be shared equally by the parties. If the Lender shall
decide to exercise its option to sell its Shares to the Company as
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described herein, the Lender shall send to the Company written notice of such
decision in accordance with Section 17 of this Agreement, and, the Company shall
effectuate within thirty (30) days after receipt of such notice, the sale of
such Shares. The closing of such sale shall be held at a place and time
satisfactory to Lender.
(b) For purposes of Section 4.4(a), "Qualified Sale" shall mean (i)
a public offering by Borrower resulting in total gross proceeds to the Borrower
of not less than $8,000,000, or (ii) a sale by Borrower of a significant part of
its assets and business not in the ordinary course of its business or a merger
or consolidation, in any of which cases the aggregate consideration received by
Borrower and/or its stockholders is not less than $8,000,000.
4.5 The Company further covenants and agrees that it will pay, when due
and payable, any and all federal and state stamp, original issue or similar
taxes that may be payable in respect of the original issue of any Closing Shares
or Post-Closing Shares or certificates therefor.
4.6 The Lender acknowledges the following restrictions on any transfer of
the Shares issued in connection with this Agreement:
(a) Neither the Closing Shares nor the Post-Closing Shares issuable
upon the terms of Section 4.2 hereof have been registered under the Securities
Act of 1933, as amended (the "Securities Act"), or under any state securities
laws, and unless so registered, may not be transferred, sold, pledged,
hypothecated or otherwise disposed of unless an exemption from such registration
is available. In the event a Holder desires to transfer the Closing Shares or
any of the Post-Closing Shares issued hereunder, the Holder must give the
Company prior written notice of such proposed transfer including the name and
address of the proposed transferee. Such transfer may be made only upon receipt
by the Company of an opinion of counsel to the Company to the effect that the
proposed transfer will not violate the provisions of the Securities Act, the
rules and regulations promulgated thereunder, or any applicable state securities
or "blue sky" laws, because such transfer is exempt from the registration
requirements.
(b) Prior to any such proposed transfer, and as a condition thereto,
if such transfer is not made pursuant to an effective registration statement
under the Securities Act, the Holder will, if requested by the Company, deliver
to the Company (i) an investment covenant signed by the proposed transferee,
(ii) an agreement by such transferee to the impression of the restrictive
investment legend set forth herein on the certificate or certificates
representing the securities acquired by such transferee, (iii) and an agreement
by such transferee that the Company may place a "stop transfer order" with its
transfer agent or registrar.
(c) Except as restricted hereby, the Shares may be transferred by
the Holder in whole or in part at any time or from time to time. Upon surrender
of the Shares Certificate to the Company or at the office of its stock transfer
agent, if any, with assignment documentation duly executed and funds sufficient
to pay any transfer tax, and upon compliance with the foregoing provisions, the
Company shall, without charge, execute and deliver a new Share Certificate in
the name of the assignee named in such instrument or assignment, and this Share
Certificate shall promptly be canceled. Any assignment, transfer, pledge,
hypothecation or other disposition of
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the shares attempted contrary to these provisions, or any levy of execution,
attachment or other process attempted upon the Shares, shall be null and void
and without effect.
(d) Unless the Shares have been registered under the Securities Act,
upon issuance of any of the Closing or Post-Closing Shares, the Company shall
instruct its transfer agent to enter stop transfer orders with respect to such
shares, and all certificates representing such Shares shall bear on the face
thereof substantially the following legend:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1993, AS AMENDED (THE "SECURITIES ACT"), OR THE "BLUE SKY" OR
SECURITIES LAWS OF ANY STATE AND MAY NOT BE OFFERED, SOLD, PLEDGED,
HYPOTHECATED, ASSIGNED OR TRANSFERRED, AND ANY TRANSFER OR PURPORTED
TRANSFER SHALL NOT BE RIGHTFUL UNDER THE UNIFORM COMMERCIAL CODE,
AND THE COMPANY SHALL HAVE NO DUTY TO REGISTER A TRANSFER OF THESE
SECURITIES EXCEPT (i) PURSUANT TO A REGISTRATION STATEMENT UNDER THE
SECURITIES ACT WHICH HAS BECOME EFFECTIVE AND IS CURRENT WITH
RESPECT TO THESE SECURITIES, OR (ii) PURSUANT TO A SPECIFIC
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF ANY
APPLICABLE "BLUE SKY" OR SIMILAR STATE SECURITIES LAWS, BUT ONLY
UPON THE HOLDER HEREOF FIRST HAVING OBTAINED THE WRITTEN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT THE PROPOSED
DISPOSITION IS CONSISTENT WITH THE SECURITIES ACT. THESE SECURITIES
ARE GOVERNED BY THE TERMS OF A LOAN AND SUBSCRIPTION AGREEMENT
BETWEEN THE COMPANY AND THE HOLDER HEREOF DATED __________, 1999.
THE RESTRICTIONS CONTAINED HEREIN ARE BINDING ON THE HOLDER HEREOF
AND HIS/HER SUCCESSORS AND ASSIGNS.
4.7 Upon receipt of evidence satisfactory to the Company of the loss,
theft, destruction or mutilation of a Share Certificate and of an unsecured
indemnity from the Holder reasonably satisfactory to the Company, if lost,
stolen or destroyed, and upon surrender and cancellation of the Share
Certificate, if mutilated, the Company shall execute and deliver to the Holder a
new Share Certificate of like date, tenor and denomination.
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SECTION 5. USE OF PROCEEDS
5.1 The proceeds of the Loan will be used by the Borrower for marketing,
expansion, implementation of internet capability, and transaction costs
associated with this Agreement and for general operating and working capital
purposes.
5.2 Borrower shall not use the proceeds of the Loan for any purpose
contrary to the purposes contemplated by the Small Business Investment Act of
1958, as amended, including any subsequent amendments, or for any purpose that
may be in conflict with any regulations issued by the U. S. Small Business
Administration as they relate to the Small Business Investment Company program
(such regulations, the "SBA Regulations"). Such prohibited uses include:
(i) personal use by shareholders, officers and employees of
Borrower;
(ii) use for any relending or reinvesting purposes, if the primary
business activity of such person involves, directly or indirectly,
providing funds to others, the purchase of debt obligations,
factoring, or long term leasing of equipment with no provision for
maintenance or repair;
(iii) use for purchasing any stock in or providing capital to any
small business investment company;
(iv) use for making any real estate purchases if a Borrower is
classified under Major Group 65 of the Standard Industrial
Classification Manual unless such transaction would otherwise be
exempt by virtue of Section 901(c) of the SBA Regulations pertaining
to Small Business Investment Companies;
(v) use for purposes contrary to the public interest, including but
not limited to activities which are in violation of law, or
inconsistent with free competitive enterprise; or
(vi) use for foreign investment and use outside the United States
except as may be permitted under Section 901 (e) of the SBA
Regulations pertaining to Small Business Investment Companies.
SECTION 6. COLLATERAL
6.1 The Loan is secured as provided in the following documents, which are
being executed and delivered simultaneously with this Agreement:
(a) a security agreement from Borrower in substantially the form
attached hereto as Exhibit 2 granting Lender the security interests set
forth therein (the "Security Agreement");
(b) a collateral assignment of all of Borrower's patents and
trademarks in form appropriate for recording and satisfactory to Lender's
counsel (the "Patent and Trademarks Assignment") in substantially the form
attached hereto as Exhibit 3;
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(c) an Affidavit of Confession of Judgment against, and executed by,
Borrower in favor of Lender (in the form attached hereto as Exhibit 4);
and
(d) UCC-1 Financing Statements granting Lender a security interest
in property of Borrower in form and content satisfactory to Lender.
6.2 It is understood and agreed that Lender shall have a first priority
security interest in all Borrower' assets, which security interest may be freely
assigned by Lender. Lender hereby acknowledges that Borrower has entered into
the Subscription Agreement with the Junior Lenders for the issuance of the
Junior Notes in a maximum aggregate principal amount not to exceed $1.5 million
and, in connection therewith, the Borrower shall procure that each Junior Lender
execute and deliver a Subordination Agreement in form and substance satisfactory
to Lender (x) with respect to Junior Notes outstanding as of the Loan Closing
Date in an aggregate principal amount of not less than $850,000 on the Loan
Closing Date, (y) with respect to the remainder of any Junior Notes outstanding
as of the Loan Closing Date, in accordance with Section 10.1(n) hereof and (z)
prior to issuance of any additional Junior Notes.
6.3 Within fourteen (14) days of the Loan Closing Date, Borrower shall
deliver to Lender a Copyright Security Agreement describing in detail each
software program subject to copyright protection (the "Copyright Security
Agreement"), in form and substance satisfactory to Lender, to be filed with the
United States Copyright Office (the "Copyright Office"). In the event that
Borrower decides to register any copyright of the Borrower with the Copyright
Office subsequent to the Loan Closing Date and prior to the date the Loans have
been paid in full, Borrower, without further request or action on the part of
Lender, shall, (a) prior to such registration, deliver to Lender a proposed
amendment to the Copyright Security Agreement (referencing the registration
application of such copyright), and, (b) after Lender has approved such
amendment to the Copyright Security Agreement (each such amendment to be
reasonably satisfactory to Lender and Lender's counsel), arrange to file such
amendment to the Copyright Security Agreement with the Copyright Office
simultaneously with the registration of such copyrights.
SECTION 7. CLOSING DOCUMENTS
7.1 Simultaneously with the execution and delivery of this Agreement, the
Loan is being funded and Borrower is delivering or has delivered to Lender the
following documents, duly executed and (where required) witnessed or notarized:
(a) the Note;
(b) the documents set forth in Section 6. 1;
(c) Secretary's Certificate of Borrower as to (i) Certificate of
Incorporation, (ii) By-laws (iii) resolutions of its Board of Directors
authorizing (A) the borrowing hereunder, (B) the issuance of the Closing Shares
and the issuance of the Post-Closing Shares, and (C) the execution and delivery
of this Agreement and the transactions contemplated hereby and thereby;
(d) Opinion Letter of Attorneys for Borrower (in form and content
attached hereto as Exhibit 5);
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(e) Remaining commitment fee in the amount of $8,500 by checks;
(f) Share Certificate(s), duly executed by the Company in accordance
with the By-laws of the Company, representing the Closing Shares;
(g) Registration Rights Agreement; and
(h) Subordination Agreements in respect of the Junior Notes
representing an aggregate principal amount of not less than $850,000.
SECTION 8. CONDITIONS PRECEDENT TO PERFORMANCE BY LENDER
Lender's obligation to make the Loan on the Loan Closing Date is subject
to the satisfaction of the following conditions (or waiver thereof by Lender):
(a) All documents required to be executed and delivered by Borrower
in accordance with Section 7 shall have been executed in fact and made available
to Lender;
(b) Lender shall be satisfied with all personal and business credit
checks;
(c) Lender shall have reviewed and found satisfactory a signed
commitment letter for the underwriting of the Offering;
(d) Lender shall be satisfied with all of its legal and financial
due diligence;
(e) Lender shall be satisfied with all employment agreements and
non-compete agreements with the Borrower's key management, operating and
technical personnel;
(f) There shall have been no material change in the ownership or
corporate structure of the Borrower since March 31, 1999; provided, however,
that Lender acknowledges that the shares of Jeff Diamond (representing nineteen
(19%) of the common equity of the Borrower) may be repurchased by the Borrower
(or purchased by one or more third parties with the consent of the Lender,
provided, that the Lender shall not be unreasonable in withholding any such
consent) for a price not to exceed $500,000 (such purchase price limitation to
apply only to a repurchase by the Borrower) so long as Lender is satisfied with
any additional financing arrangements related to the repurchase;
(g) All appraisals of the Collateral requested by Lender shall have
been accomplished and shall be satisfactory to Lender;
(h) All environmental impact statements requested by Lender shall
have been delivered to Lender and shall be satisfactory to Lender;
(i) The Loan shall be in compliance with any and all regulations
issued by the U.S. Small Business Administration as they relate to the Small
Business Investment Company program;
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(j) All representations and warranties of Borrower shall be true and
correct as of the Loan Closing Date and a Principal shall have certified
thereto;
(k) The Registration Rights Agreement shall be in form and substance
satisfactory to Lender; and
(l) Borrower shall have delivered to Lender the Pro Forma Balance
Sheet.
SECTION 9. REPRESENTATIONS, WARRANTIES AND AGREEMENTS
9.1 To induce Lender to make the Loan hereunder, the Borrower represents,
warrants and agrees that:
(a) Borrower validly exists and is in good standing under the laws
of New York and is qualified to do business in California and in other
states where the ownership of property or the nature of the business
conducted by it requires such qualification except for where the failure
to be so qualified would not have a material adverse affect (it being
understood that the failure to be qualified in California would have a
material adverse effect); Borrower has no subsidiaries.
(b) Borrower has the requisite corporate authority and power to
enter into this Agreement, to borrow money as contemplated hereby, to
issue the Note and the Closing Shares and the Post-Closing Shares, and to
execute and deliver this Agreement, each of the Collateral Documents and
any other documents required and described in this Agreement, and the
execution and delivery of this Agreement, the Collateral Documents and the
documents to be delivered hereunder have been duly authorized by Borrower;
The Agreement, the Collateral Documents, and such other documents are
valid and enforceable against Borrower in accordance with their terms.
(c) Borrower's financial statements consisting of a balance sheet as
of December 31, 1998 and a statement of operations for the year then
ended, a balance sheet as of December 31, 1997 and a statement of
operations for the year then ended, and an unaudited interim balance sheet
as of March 31, 1999 and a statement of operations for the three months
then ended, have been prepared in accordance with United States generally
accepted accounting principles ("GAAP") applied on a consistent basis and
present fairly in all material respects the financial position of Borrower
as of the dates of the respective balance sheets and the results of its
operations for the applicable periods then ended.
(d) All representations made by Borrower to Lender in this Agreement
or in any Collateral Document are true and correct in all material
respects as of this date.
(e) Borrower is not a party to, or threatened by, any suits,
actions, claims, or investigations by any governmental body or legal,
administrative or arbitration proceeding which may result, either singly
or in the aggregate, in any material adverse change in the business,
prospects or assets of the Borrower.
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(f) There are no outstanding orders, judgments, writs, injunctions
or decrees of any court, governmental agency, or arbitration tribunal
which may result, either singly or in the aggregate, in any material
adverse change in the business, prospects or assets of Borrower.
(g) Borrower is not a party to, or bound by, any contract or
instrument which would be in breach as a result of any of the transactions
contemplated by this Agreement.
(h) Borrower is not in breach of, in default under, or in violation
of, any decree, order, rule or regulation, or any indenture, contract,
agreement, deed, lease, loan agreement, commitment, bond, note, deed of
trust, restrictive covenant, license, instrument or obligation or, to its
knowledge, any law to which it is a party or by which it is bound, or to
which any of its assets is subject, in each case which breach, default or
violation would have a material adverse effect on Borrower, and the
execution, delivery and performance of this Agreement and the Collateral
Documents will not constitute any such breach, default or violation, or
require consent or approval of any court, governmental agency, or body,
except as may be expressly provided herein or shall have been obtained.
(i) Since March 31, 1999, there has not been a material adverse
change in the condition (financial or otherwise) of the Borrower, except
as previously disclosed in writing by Borrower to Lender.
(j) Borrower is a small business concern, as defined under the Small
Business Investment Act and Regulations, in accordance with SBA Form 480
thereunder and accordingly is entitled to receive the proceeds of this
Loan.
(k) There are no liens, security interests or encumbrances of any
kind on any of the assets of Borrower other than Permitted Liens and
Lender shall upon the filing of UCC statements as appropriate and the
recording of the Patent and Trademark Assignment have a first priority
perfected security interest in all such assets. As used herein, "Permitted
Liens" shall mean: (i) liens for taxes or assessments which are either (A)
not delinquent or (B) being contested diligently and in good faith by
appropriate proceedings and as to which Borrower has posted a bond in an
amount satisfactory to Lender; and (ii) statutory liens, such as
mechanic's, materialman's warehouseman's carrier's or other like liens
incurred in good faith in the ordinary course of business provided that
the underlying obligations relating to such liens are paid when due in
accordance with their terms.
(l) Each employment and non-compete agreement relating to the
Principals, a copy of which has been previously delivered to Lender, has
not been modified or amended and is, as of the date hereof, in full force
and effect.
(m) As of the date hereof the number of Shares of each class of
Borrower's outstanding stock are as set forth in Schedule 9.1(m) hereto.
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(n) Except as set forth in Schedule 9.1(n), there are no outstanding
options, warrants or agreements by the Borrower to issue any additional
Shares or securities convertible into Shares.
(o) Since December 31, 1998, there has not been any material change
in the ownership or control of Borrower or in the corporate structure or
business of Borrower.
(p) Borrower owns or validly licenses all trademarks, trademark
applications, tradenames (including, without limitation, all rights in and
to the trademark and tradename and all derivatives thereof), logos,
copyrights, copyrightable works, computer software (including data and
related documentation), trade secrets, patents, know how, inventions and
similar intellectual property rights and patents and patent applications
(collectively "Rights") utilized in and necessary to the conduct of its
business as currently being conducted or as is proposed to be conducted
(the "Borrower Rights"). Schedule 9.1(p) contains a complete and correct
list of all patents and patent applications, trademarks, trademark
applications, tradenames, logos and copyrights currently owned by or
licensed by or to Borrower in the conduct of its business indicating,
where applicable, the registered and beneficial owner and the expiration
date thereof and if the subject of a license, the name of each Licensee.
The conduct of the business of Borrower as currently conducted and as
proposed to be conducted does not, and will not, infringe upon valid
Rights of others in any way. Neither the validity of any Borrower Rights,
nor the use thereof by Borrower, is the subject of any pending or
threatened action to which Borrower, is a party. Borrower does not know of
any material use that has been made or is now being made of any of
Borrower Rights except by Borrower.
(q) Borrower is in full compliance with the rules, regulations,
procedures and requirements of the U.S. Small Business Administration as
they relate to the Small Business Investment Company program and this
transaction.
(r) Borrower's opening balance sheet at the Loan Closing Date shall
be substantially the same as the Pro Forma Balance Sheet submitted by the
Borrower on July 12, 1999.
(s) As of the Loan Closing Date, Borrower has issued Junior Notes in
an aggregate principal amount of $1,050,000. Borrower further represents
that the maximum aggregate principal amount of Junior Notes authorized to
be offered by the Company pursuant to the Subscription Agreement is
$1,500,000.
(t) As of the Loan Closing Date, no "Associate" (as such term is
defined in the SBA Regulations) of the Lender owns either voting equity
interests or total equity interests (including potential interests) of
five percent (5%) or more in the Borrower.
SECTION 10. CERTAIN AFFIRMATIVE COVENANTS
10.1 While the Note is outstanding, the Borrower will do and comply with
the following:
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(a) Borrower will promptly make all payments of interest and
principal on the Note when due;
(b) Borrower will comply with the terms and conditions in this
Agreement and in those contained in each Collateral Document;
(c) Borrower will keep accurate and complete books and records and
maintain them at its principal office set forth in the first sentence of the
Agreement;
(d) Borrower will furnish to Lender:
(i) within ninety (90) days after the end of each calendar
year a balance sheet of Borrower and an income statement of
Borrower showing the financial condition as of the close of
such fiscal year and the results of its operations for such
fiscal year and statements of shareholders' equity of Borrower
and statements of cash flows of Borrower. All of the foregoing
financial statements shall be audited by an independent
certified public accountants ("CPA") selected by Borrower and
reasonably acceptable to Lender, it being agreed that Price
Waterhouse Coopers is acceptable to Lender;
(ii) within forty-five (45) days after the end of each
calendar quarter, unaudited balance sheets, income statements,
statements of shareholders' equity and statements of cash
flows of Borrower as of the end of such quarterly period,
prepared and certified by the Chief Financial Officer of
Borrower as presenting fairly in all material respects the
financial condition and results of operations of Borrower,
prepared in accordance with GAAP applied on a consistent basis
subject to year-end adjustments;
(e) For purposes of verifying Borrower's compliance with the
provisions of this Agreement and the Collateral Documents, upon five (5)
business day's prior notice, Borrower shall permit any authorized representative
of Lender and its attorneys and accountants to inspect, examine and make copies
and abstracts of the books of account and records of Borrower at reasonable
times during normal business hours, and to inspect the Collateral given as
security for the Loans; provided, however, that prior to an Event of Default,
such inspections will occur no more than once a year and Borrower shall pay all
of Lender's reasonable expenses in connection therewith in an amount not to
exceed Five Thousand Dollars ($5,000.00), and provided further that (x) from and
after the occurrence of an Event of Default and during the continuance thereof,
there shall be no limit on either the number of such inspections which can be
made by or on behalf of Lender or on the expenses therefor payable by Borrower
and (y) from and after the third occurrence of an Event of Default, there shall
be no limit on either the number of such inspections which can be made on behalf
of Lender or on the expenses therefor payable by Borrower;
(f) Borrower shall notify Lender of (i) litigation involving amounts
of $15,000. or more to which Borrower is a party by mailing to Lender by
certified mail within five (5) business days of receipt thereof, a copy of the
complaint, motion for judgment, or other such
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pleadings served on or by Borrower and (ii) any litigation to which Borrower is
not a party but which it becomes aware of and which could substantially and
adversely affect the operation of Borrower's business or the collateral pledged
for this Loan by mailing to Lender by certified mail, a copy of all pleadings
obtained by Borrower regarding such litigation within five (5) business days of
Borrower's receipt therefor, or if no pleadings are obtained, a letter setting
out the facts known about the litigation within five (5) business days after
Borrower learns of such litigation. Mailings under this paragraph shall be
addressed to:
Abraham Goldstein, Managing Director
InterEquity Capital Partners, L.P.
220 Fifth Avenue
New York, New York 10001
(g) Borrower shall continue to conduct its business in substantially
the same general character and manner as conducted as of the date of this
Agreement and as proposed to be conducted as set forth in Schedule 10.1(g) and
to maintain, preserve and keep, in all material respects its properties,
buildings, equipment and fixtures necessary for the operation of its business in
reasonable repair and condition (ordinary wear and tear excepted) and promptly
pay and discharge or cause to be paid and discharged as and when due any and all
income taxes, federal or otherwise, lawfully assessed and imposed upon them, and
any and all lawful taxes, rates, levies and assessments whatsoever upon its
properties and every part thereof and, on demand, will deliver to Lender
certificates or other evidence satisfactory to Lender attesting thereto,
provided however that, if Borrower has posted a bond in an amount satisfactory
to Lender, nothing contained herein shall be construed as prohibiting Borrower
from contesting in good faith the validity of any such income taxes, federal or
otherwise, or such other taxes, rates, levies or assessments, and provided,
further that Lender, in its sole discretion, shall have the right to remove any
liens imposed on the Collateral and Borrower shall promptly reimburse Lender for
all amounts so paid by it, including expenses incurred by Lender in connection
therewith;
(h) Borrower shall defend at all times any claim by a third party
relating to the possession of, or interest in its assets, including, without
limitation, the Borrower Rights;
(i) Borrower shall make all payments to creditors as shall be
necessary to preserve Lender's security interests in the Collateral given to
secure the Loans;
(j) Borrower shall execute and deliver to Lender any additional
documents necessary to perfect Lender's security interests in the Collateral
given to secure the Loans including (but not limited to) extensions of the
Affidavit of Confession of Judgment referred to in Section 6. 1 (c);
(k) The Chief Executive Officer or Chief Financial Officer of
Borrower shall submit a certificate to Lender within forty-five (45) days after
the end of each fiscal quarter that to the best of such officer's knowledge and
belief, Borrower is in compliance with all of the terms, provisions, conditions
and covenants set forth in this Loan Agreement;
(l) Borrower shall, at all times, keep reserved for issuance that
number of Shares as may be required to be issued under Section 4 of this
Agreement and, if necessary to
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effectuate this covenant, shall take prompt action and use its best efforts to
cause the number of authorized shares to be increased;
(m) Each employment and non-compete agreement between the Borrower
and each of the Principals and other key management, operating, and technical
personnel, as has been reviewed and deemed satisfactory to the Lender shall
remain in full force and effect without any modification or amendment thereof;
(n) Borrower shall: (i)(A) within thirty (30) days of the Loan
Closing Date, escrow the Template Source Code, (B) within seventy-five (75) days
of the Loan Closing Date, escrow the Source Code relating to the Licensee
Programs for the five licensees of the Company then producing the greatest
revenues for the Company, (C) within ninety (90) days of the Loan Closing Date,
escrow the Documentation relating to the Template Source Code, (D) within 120
days of the Loan Closing Date, escrow the Source Code relating to all Licensee
Programs (to the extent not previously escrowed in accordance with subsection
(i)(B) hereof), (E) within 150 days of the Loan Closing Date, escrow the
Documentation relating to the Source Code for the licensee then-producing the
greatest revenues for the Company, (F) within 180 days of the Loan Closing Date,
escrow the Documentation relating to the Source Code for approximately one-third
of the Licensee Programs, (G) within 210 days of the Loan Closing Date, escrow
the Documents relating to the Source Code for approximately one-third of the
Licensee Programs (it being understood that such obligation is in addition to
the escrow of Documentation relating to Source Code for Licensee Programs under
subsection (i) (E) and (i) (F) hereof, so that, as of the date 210 days from the
Loan Closing Date, approximately two-thirds of the Documentation relating to the
Source Code for Licensee Programs will have been delivered into escrow), and (G)
within 240 days from the Loan Closing Date, escrow the remaining Documentation
relating to the Source Code for Licensee Programs (so that, as of the date 240
days from the Loan Closing Date, Documentation relating to the Source Code for
ninety-five percent (95%) of the Licensee Programs has been escrowed), in each
case, for purpose of this subsection (i), with a software escrow agent
satisfactory to Lender, and pursuant to a software escrow agreement in form and
substance satisfactory to Lender, which escrow agreement shall include a
worldwide, perpetual, royalty-free license (with full rights to grant
sublicenses) to use and create derivative works from the Programs in object code
and source code format; (ii) (A) within three (3) days of the Loan Closing Date,
obtain (and thereafter maintain) business interruption insurance and insurance
on the business assets of Borrower in the amount equal to the value of such
business assets; and (B) within twenty (20) days of the Loan Closing Date obtain
(and thereafter maintain) key man life insurance on the life of each of the
Principals in the amount of $850,000 (in the case of (A) and (B) of this
subsection (ii) such insurance to be from licensed carriers acceptable to
Lender, with the policies thereon made payable to Lender as its interest may
appear); (iii) within thirty (30) days of the Loan Closing Date, furnish to
Lender, Subordination Agreements for any Junior Lender which did not execute and
deliver a Subordination Agreement on the Loan Closing Date; and (iv) upon the
proposed issuance of any additional Junior Notes, furnish to Lender a
Subordination Agreement duly executed and delivered by such Junior Lender
simultaneously with such issuance;
(o) Borrower shall comply with all federal, state and local laws,
ordinances, regulations and requirements applicable to it and to its business,
including (without limitation)
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federal and state securities laws and zoning laws and ordinances except where
the failure to so comply would not have a material adverse effect on Borrower;
(p) For so long as the Note is outstanding the Borrower shall meet
the following financial tests:
(i) MINIMUM REVENUES. Revenues of the Borrower for the
financial quarters listed below shall be equal to or greater than
the amount specified opposite such date:
Quarter ending on or about Minimum Revenues
-------------------------- ----------------
September 30, 1999 $375,000
December 31, 1999 375,000
March 31, 2000 550,000
June 30, 2000 600,000
September 30, 2000 625,000
December 31, 2000 625,000
March 31, 2001 875,000
All subsequent quarters 875,000
(ii) EBITDA. EBITDA of the Borrower for the financial quarters
listed below shall be equal to or greater than the amount specified
opposite such date:
Quarter ending on or about EBITDA
-------------------------- ------
September 30, 1999 $(500,000)
December 31, 1999 (350,000)
March 31, 2000 (200,000)
June 30, 2000 50,000
September 30, 2000 100,000
December 31, 2000 150,000
March 31, 2001 200,000
All subsequent quarters 200,000
(iii) INTEREST COVERAGE. After September 30, 2000, Interest
Coverage of the Borrower for the financial quarters listed below
shall be equal to or greater than the coverage ratio specified
opposite such date:
Quarter ending on or about Coverage Ratio
-------------------------- --------------
September 30, 2000 and all subsequent quarters 1.5:1
(iv) MINIMUM NET WORTH. The Net Worth of the Borrower for the
periods listed below shall be equal to or greater than the amount
specified opposite such periods:
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Period Minimum Net Worth
------ -----------------
July 13, 1999 - March 31, 2000 $ (1.5 million)
April 1, 2000 - December 31, 2000 (1.2 million)
January 1, 2001 - December 31, 2001 (500,000)
January 1, 2002 - December 31, 2002 300,000
All subsequent periods through 500,000
the Maturity Date
(v) CASH FLOW COVERAGE. The ratio represented by all Cash
In-Flows divided by all Cash Outflows at all times shall be equal to
or greater than 1.1:1;
(q) The Borrower will complete the proposed Offering in an
amount of not less than $12 million by December 31, 2000;
(r) If (i)(A) at year end 1999 or (B) if at the end of each
month from January 2000 through April 2000, the Borrower has not achieved the
revenue and EBITDA levels for such period shown on the cash flow analysis
projections attached hereto as Schedule 10.1(r) (the "Cash Flow Analysis
Projections") or (ii) for each month after April 2000, -- the Borrower has not
achieved (A) revenues of at least $300,000 and (B) --- a positive EBITDA, the
compensation amounts of the Principals are to be reduced by an annualized rate
of $100,000 (a monthly rate of $8,333) (such reductions, the "Mandatory
Compensation Reductions"). The Mandatory Compensation Reductions are to be for
the full rate specified in the preceding sentence and shall not take into
account any payments required to be made for any applicable federal and state
income taxes or any other withholdings on any such deferred amount. The Company
may not, and hereby covenants that it shall not, designate any cash amounts to
be paid to the Principals in lieu of the Mandatory Compensation Reductions. Such
Mandatory Compensation Reductions shall be deferred for payment until certain
commercial targets (such targets to be determined by Lender (taking into account
the amount by which the Cash Flow Analysis Projections were not met) at its sole
discretion at such time) have been attained;
(s) Borrower shall keep all Source Code in a fireproof,
storage facility separate from the Borrower's chief place of operations; and
(t) Borrower shall ensure that, prior to repayment in full of
the Loans, no "Associate" (as such term is defined in the SBA Regulations) of
the Lender shall own five percent (5%) or more of voting equity interests or
total equity interests (including potential interests) in the Borrower.
SECTION 11. CERTAIN NEGATIVE COVENANTS
11.1 Until such date as the Loan is repaid in full, except with the prior
written consent of Lender (whose consent may be refused without explanation and
without any legal recourse by Borrower), Borrower will not:
(a) [intentionally omitted]
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(b) except for the subordinated loans (evidenced by the Junior Notes
in an aggregate maximum principal amount of $1,500,000) permitted herein, incur
any indebtedness for borrowed money including any capitalized lease arrangements
or;
(c) engage in any line of business materially different from those
which Borrower is now engaged in except as set forth in Schedule 10.1(g);
(d) become a party to any merger or consolidation with any
corporation, company or entity of any kind whatsoever, or sell substantially all
of its assets, or otherwise liquidate or dispose of its business;
(e) sell any of its securities in a public offering, sell any of its
assets other than in the ordinary course of business or sell Shares at such
prices or in such amounts that the holdings of the Principals of common equity
will be reduced to below 51% of the outstanding Shares;
(f) become a guarantor of obligations of any other person, firm,
corporation or entity, except in connection with depositing checks and other
instruments for the payment of money acquired in the normal course of its
business;
(g) transfer, sell, lease or in any other manner convey to any
person other than in the ordinary course of its business any equitable,
beneficial or legal interest in any of the Collateral securing the Loan;
(h) except as otherwise contemplated herein, create or permit to
exist any mortgage interest, pledge, security interest, title retention device,
or other encumbrance in the Collateral securing the Note junior to Lender's lien
or security interest thereon, except for liens of taxes and assessments not
delinquent or contested in good faith, or those machinery and equipment
purchases and leases which may arise in the ordinary and necessary course of
business;
(i) knowingly permit any judgment obtained against Borrower which is
not covered by insurance (as evidenced by a written acknowledgement of such
coverage by the applicable insurance company) in an amount exceeding $10,000 to
remain unpaid for a period of thirty (30) days following the entry thereof,
without obtaining a stay of execution or bonding or causing such judgment to be
bonded;
(j) except as otherwise contemplated herein, pay any dividends or
make any other distributions with respect to its capital stock (including,
without limitation, the Shares);
(k) pay any bonus to or increase the salary of any employee if the
effect of such payment would cause a breach of any other representation or
covenant made by Borrower in this Agreement;
(l) increase the salary of and/or pay a bonus to any executive
officer of Borrower which in the aggregate exceeds 10% of his compensation for
the year;
(m) [intentionally omitted]
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(n) make any payment to the Principals for salary, bonus, expenses
or otherwise (whether or not such salary has been earned or such other payment
is due) if the effect of such payment would cause a breach of any other
representation or covenant made by Borrower in this Agreement; provided that any
payment so deferred may thereafter be made to the extent that such payment would
not at the time of such payment cause a breach of any representation or covenant
made by Borrower in this Agreement;
(o) organize or acquire any subsidiary without the prior written
consent of Lender in each instance, it being agreed by Borrower that in the
event of the organization or acquisition by it of any subsidiary, each and every
covenant contained in this Agreement shall apply to each such subsidiary and the
financial covenants shall include Borrower and each such subsidiary on a
consolidated basis;
(p) in the event of the organization or acquisition of any
subsidiary by Borrower, permit any such subsidiary to perform any act which
Borrower has agreed not to perform hereunder; or
(q) If there has been an Event of Default as described in Section
5.11(a) of the Security Agreement (a "Payment Default"), then, until such
Payment Default has been cured, Borrower shall not make any compensation payment
whatsoever (whether scheduled or unscheduled) to the Principals or grant to the
Principals any bonus or benefit in lien of such compensation payment.
SECTION 12. REPRESENTATION ON BORROWER'S BOARD OF DIRECTORS
12.1 For so long as the Loan, remains outstanding Lender shall have the
right, but not the obligation, to send an observer to all meetings of Borrower's
Board of Directors and the Lender shall be entitled to receive notice of all
Board meetings in the same course and manner as the directors comprising the
Board. Each year, the Borrower shall reimburse Lender's representative for all
reasonable costs and expenses incurred by Lender's representative in connection
with observing one of Borrower's Board of Directors' meetings.
12.2 Upon the occurrence, and continuation, for three months of a default
by Borrower of any of its covenants under this Agreement or any of the
Collateral Documents, Lender shall have the right to designate a director to
Borrower's Board of Directors. Under the circumstances set forth in the
preceding sentence, Borrower shall take such steps, or cause such steps to be
taken, including, if necessary, amending the by-laws and increasing the size of
the Board so as to permit the election of Lender's designee to the Board. Upon
appointment of Lender's representative to the Board, Borrower shall reimburse
Lender's representative for all costs and expenses incurred by Lender's
representative in connection with attending each of Borrower's Board of
Directors' meetings and performing his services as a member of the Borrower's
Board of Directors.
SECTION 13. IRREGULAR PAYMENT
13.1 Lender may accept late payments and partial payments even though
marked "payment in full" or words of similar import, without losing any of its
rights under this Agreement or under the Notes.
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SECTION 14. DELAY IN ENFORCEMENT
14.1 Lender may delay in enforcing its rights under this Agreement or a
Collateral Document without losing or prejudicing such rights.
SECTION 15. NO BROKER
15.1 Borrower represents and warrants to Lender that it has not dealt with
any broker or finder, whether or not licensed, in connection with this Agreement
or the loan transactions under this Agreement.
15.2 Borrower agrees to defend, indemnify and hold harmless Lender from
any and all Claims and Expenses based on, or arising from, its representations
and warranties in Section 9.
SECTION 16. LOAN EXPENSES
16.1 Borrower agrees to pay, promptly after demand is made, all reasonable
out-of-pocket expenses incurred by Lender in connection with the making,
amending, perfection, enforcement or payment or liquidation of the Loan which is
the subject of this Agreement, including (but not limited to) Lender's legal
fees and disbursements. It is understood that the legal fees shall be capped at
$20,000 plus reasonable disbursements for the making of this Agreement only.
SECTION 17. NOTICES
17.1 Unless otherwise expressly provided elsewhere in this Agreement, any
notice, request, consent, election, demand or other communication ("notice") to
be given or made by the parties under this Agreement must be in writing and
either:
(a) delivered by hand, telecopier or overnight delivery by Federal
Express or other recognized carrier; or
(b) sent by certified or registered mail, return receipt requested,
postage prepaid.
17.2 Each notice to be given:
(a) to Lender, will be addressed to:
Abraham Goldstein, Managing Director
InterEquity Capital Partners, L.P.
220 Fifth Avenue
New York, New York 10001
(b) to Borrower, will be addressed to it at its address set forth in
the preamble on page 1 of this Agreement, Attn: Chief Financial Officer.
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17.3 A copy of each notice must be sent simultaneously and in like manner
to the following persons:
(a) (in case of a notice to Lender) to:
Rosenman & Colin LLP
575 Madison Avenue
New York, NY 10022
Attn: Elizabeth Evans, Esq.
(b) (in the case of a notice to Borrower) to:
Morse, Zelnick, Rose & Lander, LLP
450 Park Avenue
New York, NY 10022
Attn: Howard L. Weinreich, Esq.
17.4 Borrower and Lender may, by notice to the others, change the address
to which future notices are to be sent or add or change a person to whom a
notice or a copy of a notice is to be sent.
17.5 Unless otherwise provided elsewhere in this Agreement, each notice
shall be considered to be given on:
(a) the date delivered by hand or telecopier (unless it is not a
business day or is not received before 5:30 P.M., in which case the notice shall
be considered given on the next business day after being sent);
(b) the next business day after being sent by overnight courier;
(c) the third full business day following the date of mailing
postage prepaid in the United States Mail.
However, a notice of a change of address of person pursuant to Section 17.4
shall not be deemed given until received.
17.6 A notice that is mailed must be deposited into an official mail
depository maintained by the United States Postal Service or (if mailed outside
the United States) by an equivalent postal authority.
17.7 Failure to accept a notice is deemed receipt of it and does not
invalidate the notice or excuse the performance of an obligation.
SECTION 18. ENTIRE AGREEMENT
18.1 All prior and contemporaneous statements, representations, promises,
understandings, agreements, projections and opinions, whether written or oral
made to each other
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with regard to this transaction, are merged in this Agreement and the Collateral
Documents. This Agreement and the Collateral Documents constitute the entire
agreement of the parties.
18.2 The Borrower understands that the covenants set forth in this Loan
Agreement are in addition to the covenants set forth in the Security Agreement
and the Patent and Trademark Assignment.
SECTION 19. CHANGES AND WAIVERS
19.1 A provision of this Agreement will be considered to have been changed
or waived only if the change or waiver is expressly made in writing signed by
the party to be charged.
19.2 The failure to insist on strict performance of any provision will not
mean that the provision has been waived or that the right to insist thereafter
on strict performance of that or any other provision has been waived.
SECTION 20. FURTHER ASSURANCES
20.1 In furtherance of its obligations contained herein, Borrower agrees
to execute and deliver such documents as may be necessary in order to close or
effectuate or confirm any provisions of this Agreement or the Collateral
Documents.
20.2 Borrower acknowledges and agrees that Lender will not be required to
be party to that certain Shareholders' Agreement made as of April 30, 1999
between the Borrower and the Junior Lenders.
SECTION 21. GOVERNING LAW; VENUE FOR LAWSUITS
21.1 The laws of the State of New York will govern this Agreement and the
interpretation and enforcement of its provisions, without regard to legal
principles of conflict of laws.
21.2 The parties each hereby agree that any action, suit or proceeding
under this Agreement shall be brought in the State of New York, and each party
hereby submits to the jurisdiction of the courts of the State of New York (both
State and Federal). Borrower hereby irrevocably appoints Morse, Zelnick, Rose &
Lander, LLP as its authorized agent upon whom process may be served in any such
action, suit or proceeding. Borrower agrees that service of process on such
agent with a copy of such process delivered to it in the manner permitted under
Section 17 shall constitute effective service upon it. Borrower agrees to take
any and all actions, including the execution and filing of all documents and
instruments, as may be necessary or appropriate to effect and continue the
appointment of such agent in full force and effect, or if necessary by reason of
any fact or condition relating to such agent, to replace such agent to the
satisfaction of Lender and Borrower agrees that service of process upon such
agent or any replacement therefore with a copy to it shall be deemed in every
respect effective service of process in any such suit, action or proceeding in
any such court.
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SECTION 22. WAIVER OF JURY TRIAL
22.1 Each Party waives the right to a trial by jury in any litigation
arising under this agreement or under any Collateral Document.
22.2 Any claim for which a jury trial cannot legally be waived shall not
be asserted as a counterclaim or joined with any lawsuit in which a jury trial
is waived, unless the failure to assert it would prevent the claim from being
made later.
SECTION 23. INVALID PROVISIONS SEVERED
23.1 The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity of the other provisions, which shall be enforced
to the fullest extent permitted by law.
SECTION 24. CAPTIONS; EXHIBITS; AND GRAMMAR
24.1 The paragraph captions are for convenience only. They are not part of
the text of this Agreement and are not to be used to interpret its provisions.
24.2 All Exhibits and Schedules to this Agreement are incorporated in, and
are part of, this Agreement as fully as though set forth herein.
24.3 Unless otherwise specified, all references in this Agreement to a
Section, paragraph Schedule or Exhibit mean a Section, paragraph Schedule or
Exhibit of this Agreement or an Exhibit attached to this Agreement.
24.4 The use of the singular includes the plural and the use of any gender
includes any other gender whenever required by the sense of this Agreement.
SECTION 25. REIMBURSEMENT FOR ENFORCEMENT
25.1 In the event Borrower fails to perform any of its obligations under
this Agreement or under any Collateral Document, then Borrower shall pay any and
all Claims and Expenses incurred by the Lender in enforcing or establishing its
rights hereunder or thereunder.
SECTION 26. NO NEGATIVE CONSTRUCTION AGAINST DRAFTING PARTY
26.1 The parties acknowledge that they are sophisticated and are
represented by experienced, knowledgeable attorneys. The parties agree that the
normal rules of construction to resolve ambiguities against the party whose
counsel drafted this Agreement shall not be followed in the interpretation of
this Agreement. Consequently, no negative inference or interpretation shall be
made by a court in enforcing the provisions of this Agreement against the party
whose attorney drafted this Agreement.
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SECTION 27. NO OTHER PARTIES
27.1 The representations, warranties and agreements of Borrower contained
herein are intended solely for the benefit of Lender, and shall confer no rights
hereunder, whether legal or equitable, in any other third person, and no other
person shall be entitled to rely thereon.
SECTION 28. COUNTERPARTS
28.1 This Agreement may be signed in counterparts, each of which will be
deemed an original document. All counterparts will constitute one document which
may be sufficiently evidenced by one such counterpart. Each counterpart will be
binding on the signatory to such counterpart notwithstanding that it is not
signed by both signatories to this Agreement.
SECTION 29. INDEMNIFICATION
29.1 Borrower agrees to indemnify Lender, its officers, directors,
principals and affiliates from and against any Claims and Expenses incurred or
suffered by them or any of them arising out of the transactions contemplated
hereunder, except for any Claim or Expense that is solely the result of Lender's
gross negligence or willful misconduct.
29.2 If the facts giving rise to any such indemnification shall involve
any claim or demand by any third party against Lender, the Borrower shall be
entitled to defend or prosecute such claim at its expense and through counsel of
its own choosing reasonably acceptable to Lender, if it advises the Lender in
writing of its intention to do so within fifteen (15) days after notice of such
claim has been given to the Borrower (without prejudice to the right of Lender
to participate at its expense through counsel of its own choosing). Lender shall
cooperate in the defense and/or settlement of such claim, but shall be entitled
to be reimbursed for all costs and expenses incurred by it in connection
therewith.
SECTION 30. SUCCESSORS AND ASSIGNS
30.1 This Agreement shall bind Borrower and its successors. Borrower may
not assign this Agreement without the written consent of Lender.
30.2 This Agreement shall be binding upon and shall inure to the benefit
of Lender, its successors and assigns.
SECTION 31. RELEASE OF COLLATERAL
31.1 Upon complete satisfaction of all amounts owed in connection with any
Loan made hereunder Lender will (a) release the Assignment of Patents and
Trademarks assigned to it as Collateral herewith, (b) execute UCC-3 Termination
Statements in all appropriate jurisdictions and (c) release the Copyright
Security Agreement.
31.2 Lender acknowledges and agrees that, upon complete satisfaction of
all amounts owed in connection with any Loan, that the obligations set forth in
Section 4.4 hereof will no longer be secured by the Collateral.
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[INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF Borrower and Lender have executed this Agreement and affixed
their seals as of the date first above stated.
AD-STAR SERVICES INC.
/s/ Leslie Bernhard
____________________________________
Name: Leslie Bernhard
Title: President
INTEREQUITY CAPITAL PARTNERS, L.P.
By: /s/ Abraham Goldstein
____________________________________
Name: Abraham Goldstein
Title: Managing Director
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