LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT ("Agreement"), dated as of the 29th day of
September 1997, is made and entered into on the terms and conditions hereinafter
set forth, among INTERACTIVE MAGIC, INC., a Maryland corporation ("Borrower"),
iMAGICONLINE Corporation, a North Carolina Corporation ("iMagicOnline"), and
OBERLIN CAPITAL, L.P., a Delaware limited partnership ("Lender").
RECITALS:
WHEREAS, Borrower has requested that Lender make available to Borrower a
loan in the principal amount of up to $1,200,000 (the "Loan") on the terms and
conditions hereinafter set forth, and for the purposes hereinafter set forth;
and
WHEREAS, in order to induce Lender to make the Loan to Borrower, Borrower
and iMagicOnline have made certain representations to Lender and Borrower has
agreed to issue and sell to Lender a warrant to purchase shares of Borrower's
common stock; and
WHEREAS, Lender, in reliance upon the representations and inducements of
Borrower and iMagicOnline, has agreed to make the Loan upon the terms and
conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the agreement of Lender to make the
Loan, the mutual covenants and agreements hereinafter set forth, and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Borrower, iMagicOnline and Lender hereby agree as follows.
ARTICLE I
DEBENTURE AND WARRANT
1.01 Authorization of Debenture and Warrant. Borrower has authorized the
issue and sale of (a) its Junior Subordinated Debenture due August 30, 2002, in
the aggregate principal amount of up to $1,200,000 (the "Debenture"), which
shall be in substantially the form attached hereto as Exhibit A, and (b) a Stock
Purchase Warrant (the "Warrant"), which shall be in substantially the form
attached hereto as Exhibit B.
1.02 Description of Debenture. The Debenture shall be dated the date of
issue, to mature on August 30, 2002, and shall bear interest from the date of
issuance at the rate of 11%
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per annum for the 12-month period ending August 30, 1998, 12.0% per annum for
the 12-month period ending August 30, 1999, and 12.5% per annum thereafter to
maturity, payable in arrears every six months from the date of issue (with the
first such interest payment being due on February 28, 1998) and at maturity, and
to bear interest on overdue principal (including any overdue required or
optional prepayment of principal) and premium, if any, and on any overdue
installment of interest at the rate of 15.5% per annum after maturity, whether
by acceleration or otherwise, until paid. Interest on the Debenture shall be
computed on the basis of a 360-day year of twelve 30-day months. The Debenture
is not subject to prepayment or redemption prior to its expressed maturity dates
except on the terms and conditions and in the amounts and with the premium, if
any, set forth in the Debenture. The term "Debenture" as used herein shall
include each Debenture delivered pursuant to this Agreement.
1.03 Sale and Purchase of Debenture and Warrant.
(a) Closing. Subject to the terms and conditions hereof and on the basis of
the representations and warranties hereinafter set forth, Borrower agrees to
issue and sell to Lender and Lender agrees to purchase from Borrower upon the
purchase and sale of the Debenture and Warrant hereunder (the "Closing"), (i)
the Debenture in the aggregate principal amount of $1,200,000 at a price of 100%
of the principal amount thereof, and (ii) the Warrant, at a price of $100, which
shall entitle Lender to purchase shares of Borrower's Common Stock (the "Warrant
Shares").
(b) Delivery. Delivery of the Debenture and the Warrant will be made at the
office of Borrower against payment therefore by federal funds wire transfer to
Borrower's account in immediately available funds and to the accounts and in the
amounts in accordance with Borrower's written instructions, at 10:00 a.m. on
September 29th, 1997, or such later date as Borrower and Lender shall agree (the
"Closing Date"). The Debenture and the Warrant delivered to Lender on the First
Closing Date will be delivered to Lender in the form of a single Debenture and a
single Warrant for the full amount of such purchase (unless different
denominations are specified by Lender, each registered in Lender's name or in
the name of such nominee as Lender may specify and, with appropriate insertions)
all as Lender may specify at least 24 hours prior to the date fixed for
delivery.
(c) Investment Representations. Lender represents and warrants that it is
purchasing the Warrant and the Warrant Shares for its own account, for
investment purposes and not with a view to the distribution thereof. The
foregoing representations and warranties shall not be construed as imposing any
limitation on Lender's right to transfer the Warrant or any of the Warrant
Shares that is not otherwise expressly set forth herein or in the Warrant or
required by applicable law.
1.04 Closing Fee. Borrower agrees to pay to Lender on or before the Closing
Date a closing fee in an amount equal to $24,000, payable $12,000 in cash and
$12,000 by crediting Borrower's application fee held by Lender.
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ARTICLE II
SECURITY; SUBORDINATION
2.01 Security. The Secured Obligations (as hereinafter defined) are and
shall continue to be secured as follows.
Borrower and iMagicOnline hereby grant, assign and pledge to Lender a
security interest in the following described property and interests in property,
together with all proceeds thereof (collectively, "the Collateral"):
(a) Equipment. All machinery and equipment, all data processing and office
equipment, all computer equipment, hardware and firmware, all furniture,
fixtures, appliances and all other goods of every type and description, whether
now owned or hereafter acquired and wherever located, together with all parts,
accessories and attachments and all replacements thereof and additions thereto;
and
(b) Inventory. All inventory and goods of Borrower and iMagicOnline,
whether held for lease, sale or furnishing under contracts of service, all
agreements for lease of same and rentals therefrom, whether now in existence or
owned or hereafter acquired and wherever located; and
(c) General Intangibles. All rights, interests, choses in action, causes of
action, claims and all other intangible property of Borrower and iMagicOnline of
every kind and nature, in each instance whether now owned or hereafter acquired
including, but not limited to, all corporate and business records; all loans,
royalties, and other obligations receivable; all trade secrets, inventions,
designs, patents, patent applications, registered or unregistered service marks,
trade names, trademarks, copyrights and the goodwill associated therewith and
incorporated therein, and all registrations and applications for registration
related thereto; goodwill, licenses, permits, franchises, customer lists and
credit files; all customer and supplier contracts, firm sale orders, rights
under license and franchise agreements, and other contracts and contract rights;
all right, title and interest under leases, subleases, licenses and concessions
and other agreements relating to real or personal property and any security
agreements relating thereto; all rights to indemnification; all proceeds of
insurance of which Borrower and iMagicOnline are beneficiaries; all letters of
credit, guarantees, liens, security interests and other security held by or
granted to Borrower and iMagicOnline; and all other intangible property, whether
or not similar to the foregoing; and
(d) Accounts, Chattel Paper, Instruments and Documents. All Borrower's and
iMagicOnline's accounts, accounts receivable, chattel paper, instruments and
documents, whether now in existence or owned or hereafter acquired, entered
into, created or arising, and wherever located; and
(e) Other Property. All property or interests in any other property now
owned or hereafter acquired by Borrower and iMagicOnline.
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This Agreement and any other instruments, documents or agreements now or
hereafter securing the Secured Obligations, including, without limitation
documents to be filed with the U.S. Copyright Office and/or the Patent and
Trademark Office, are herein collectively referred to as the "Security
Instruments." The Security Instruments, together with the Debenture and any
other instruments and documents now or hereafter evidencing, securing or
delivered to Lender by Borrower and iMagicOnline in connection with the
indebtedness evidenced by the Debenture are herein individually referred to as a
"Loan Document" and collectively referred to as the "Loan Documents".
2.02 Secured Obligations. Without limiting any of the provisions thereof,
the Security Instruments shall secure:
(a) The full and timely payment of the indebtedness evidenced by the
Debenture, together with interest thereon, and any extensions,
modifications, consolidations, and/or renewals thereof, and any notes given
in payment thereof;
(b) The full and prompt performance of all of the obligations of
Borrower and iMagicOnline to Lender under the Loan Documents to which
Borrower and iMagicOnline are parties; and
(c) The full and prompt payment of all court costs, and other
reasonable expenses and costs of whatever kind incident to the collection
of the indebtedness evidenced by the Debenture, the enforcement or
protection of the security interests of the Security Instruments or the
exercise by Lender of any rights or remedies of Lender with respect to the
indebtedness evidenced by the Debenture, including without limitation
reasonable attorney's fees incurred by Lender, all of which Borrower and
iMagicOnline agree to pay to Lender upon demand.
All of the foregoing indebtedness and other obligations are herein collectively
referred to as the "Secured Obligations".
2.03 Subordination. Notwithstanding anything to the contrary in this
Agreement or in the Debenture, the indebtedness evidenced by the Debenture,
including principal and interest, shall be subordinate and junior to the prior
payment of the indebtedness of Borrower for borrowed money (except such
indebtedness of Borrower other than the Debenture that is expressly stated to be
subordinate or junior in any respect to indebtedness of Borrower to Lender),
whether outstanding as of the date of this Agreement (including any obligations
of Borrower under any guaranty or suretyship agreement relating to indebtedness
for borrowed money by subsidiaries of Borrower), or hereafter created,
constituting borrowed money from Coast Business Credit, a division of Southern
Pacific Thrift and Loan Association, but only up to $7,000,000, or from
federally or state chartered banks, to the extent that such indebtedness (a)
does not exceed the amounts permitted by Section 4.22 hereof, (b) is approved by
the Board of Directors of Borrower and (c) is designated as being senior to the
Debenture (but only to the extent so designated), together with all obligations
issued in renewal, deferral, extension, refunding, amendment or modification of
any such indebtedness, all to the extent not exceeding
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the amounts permitted by Section 4.22 hereof (collectively, the "Senior
Indebtedness"). Nothing herein shall be deemed to preclude payments of principal
and interest or other amounts pursuant to the Security Obligations to the extent
that no event of default has occurred with respect to the Senior Indebtedness
such that the Senior Indebtedness has become due in full.
2.04 Liquidation, etc. (a) Upon any distribution of assets of Borrower in
connection with any dissolution, winding up, liquidation or reorganization of
the Company (whether in bankruptcy, insolvency, or receivership proceedings or
upon an assignment for the benefit of creditors or otherwise), the holders of
all Senior Indebtedness shall first be entitled to receive payment in full of
the principal thereof, premium, if any, and interest due thereon, and all costs
and expenses (including reasonable attorneys' fees) related thereto, before the
holders of the Debenture shall be entitled to receive any payment on account of
the principal of or interest on or any other amount owing with respect to the
Debenture (other than payment in shares of capital stock of Borrower as
reorganized or readjusted, or securities of Borrower or any other corporation
provided for by a plan of reorganization or readjustment, which stock and
securities are subordinated to the payment of all Senior Indebtedness and
securities received in lieu thereof that may at the time be outstanding). Under
the circumstances provided herein, the holders of the Senior Indebtedness shall
have the right to receive and collect any distributions made with respect to the
Debenture until such time as the Senior Indebtedness is paid in full, and shall
have the further right to take such actions as may be deemed necessary or
required to so receive and collect such distributions including making or filing
any proofs of claim relating thereto.
(b) Without in any way modifying the provisions of this Article II or
affecting the subordination effected hereby if such notice is not given,
Borrower shall give prompt written notice to Lender of any dissolution, winding
up, liquidation or reorganization of Borrower (whether in bankruptcy, insolvency
or receivership proceedings or upon an assignment for the benefit of creditors
or otherwise).
2.05 Senior Indebtedness Default. Borrower shall not declare or pay any
dividends or make any distributions to the holders of capital stock of Borrower
or purchase or acquire for value any of the Debenture if any default has
occurred and is continuing with respect to the payment of principal of, or
premium (if any) or interest on any Senior Indebtedness.
2.06 Subrogation. Upon the prior payment in full of all Senior
Indebtedness, Lender shall be subrogated to the rights of the holders of the
Senior Indebtedness to receive payments or distributions of assets of Borrower
applicable to the Senior Indebtedness until all amounts owing on the Debenture
shall be paid in full, and for the purpose of such subrogation, no payments or
distributions to Lender otherwise payable or distributable to the holders of
Senior Indebtedness shall, as between Borrower, its creditors (other than the
holders of Senior Indebtedness) and Lender, be deemed to be payment by Borrower
to or on account of the Debenture, it being understood that the provisions of
this Article II are and are intended solely for the purpose of defining the
relative rights of Lender, on the one hand, and the holders of the Senior
Indebtedness, on the other hand.
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2.07 Borrower's Obligations Not Impaired. (a) Nothing contained in this
Article II or in the Debenture is intended to or shall impair, as between
Borrower and Lender, the obligation of Borrower, which is absolute and
unconditional, to pay Lender the principal of and interest on the Debenture as
and when the same shall become due and payable in accordance with the terms of
the Debenture or is intended to or shall affect the relative rights of Lender
other than with respect to the holders of the Senior Indebtedness, nor, except
as expressly provided in this Article II shall anything herein or therein
prevent Lender from exercising all remedies otherwise permitted by applicable
law upon the occurrence of an Event of Default under this Agreement or under the
Debenture.
(b) If any payment or distribution shall be received in respect of the
Debenture in contravention of the terms of this Article II, such payment or
distribution shall be held in trust for the holders of the Senior Indebtedness,
and shall be immediately delivered to such holders in the same form as received.
2.08 Power of Attorney. Borrower and iMagicOnline hereby appoint Lender as
Borrower's and iMagicOnline's true and lawful attorney, with full power of
substitution, to do any or all of the following, in the name, place and stead of
Borrower and iMagicOnline, as the case may be: (a) file this Agreement (or an
abstract hereof) or any other document describing lender's interest in the
Collateral, including without limitation filings with the U.S. Patent and
Trademark Office (the "PTO"), and (b) take any action and execute any instrument
that Lender may reasonably deem necessary or advisable to accomplish the
purposes of this Agreement after providing prior notice to Borrower.
2.09 Further Assurances. If reasonably requested by Borrower or a holder or
proposed holder of Senior Indebtedness, Lender hereby agrees to negotiate in
good faith with such holder or proposed holder of Senior Indebtedness the terms
and conditions of a subordination or intercreditor agreement that would
supersede the provisions for subordination set forth herein.
ARTICLE III
WARRANTIES
Borrower and iMagicOnline hereby warrant to Lender as follows:
3.01 Corporate Status. Borrower and iMagicOnline each is a corporation duly
organized, validly existing and in good standing under the laws of its state of
incorporation, and has the corporate power to own and operate its properties, to
carry on its business as now conducted and to enter into and to perform its
obligations under this Agreement and the other Loan Documents to which it is a
party. Borrower and iMagicOnline each is duly qualified to do business and is in
good standing in each state in which a failure to be so qualified would have a
materially adverse effect on such entity's financial position or its ability to
conduct its business in the manner now conducted.
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3.02 Subsidiaries. Except as disclosed on Schedule 3.02, Borrower and
iMagicOnline each has no subsidiaries and has no direct or indirect ownership
interests in any other entity.
3.03 Authorization. Except as disclosed on Schedule 3.05, Borrower and
iMagicOnline each has full legal right, power and authority to enter into and
perform its obligations under the Loan Documents, without the consent or
approval of any other person, firm, governmental agency or other legal entity
other than such consents and approvals as have or shall have been obtained as of
the Closing. The execution and delivery of this Agreement, the borrowing
hereunder, the execution and delivery of each Loan Document to which Borrower
and iMagicOnline each is a party, and the performance by Borrower of its
obligations hereunder and/or thereunder are within its corporate powers and have
been duly authorized by all necessary corporate action properly taken, have
received all necessary governmental approvals, if any were required, and do not
and will not contravene or conflict with any provision of law, any applicable
judgment, ordinance, regulation or order of any court or governmental agency,
the charter or bylaws of Borrower or iMagicOnline, as the case may be, or any
agreement binding upon it or its properties. The officer(s) executing this
Agreement, the Debenture and all of the other Loan Documents to which Borrower
and iMagicOnline each is a party, is (are) duly authorized to act on behalf of
Borrower.
3.04 Validity and Binding Effect. This Agreement and the other Loan
Documents are the legal, valid and binding obligations of Borrower and
iMagicOnline, enforceable in accordance with their terms.
3.05 No Consent Required. Except as disclosed on Schedule 3.05, the
execution, delivery and performance of the Loan Documents by Borrower and
iMagicOnline do not require the consent or approval of or the giving of notice
to any person or entity other than the approval of the Board of Directors of
Borrower and iMagicOnline and such other consents or approvals as have or shall
have been obtained as of the Closing.
3.06 Other Transactions. Except as disclosed on Schedule 3.06, there are no
outstanding loans, liens, pledges, security interests, agreements or other
facilities upon which Borrower and iMagicOnline are obligated or by which
Borrower and iMagicOnline each are bound that will in any way permit any third
person to have or obtain priority over Lender as to any of the collateral
security granted to Lender pursuant to this Agreement and the other Security
Instruments. Consummation of the transactions hereby contemplated and the
performance of the obligations of Borrower and iMagicOnline under and by virtue
of the Loan Documents to which Borrower is a party will not result in any breach
of, or constitute a default under, any mortgage, security deed or agreement,
deed of trust, lease, bank loan or credit agreement, corporate charter or
bylaws, license, franchise or any other instrument or agreement to which
Borrower or iMagicOnline is a party or by which Borrower or iMagicOnline or
their properties may be bound or affected or as to which Borrower or
iMagicOnline has not obtained an effective waiver.
3.07 Capitalization. As of the date hereof, and upon consummation of the
transactions contemplated by the Loan Documents, Borrower will have a total
authorized capitalization consisting of ten million (10,000,000) shares of Class
A Common Stock (voting), par value
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$0.10 per share (the "Class A Common Stock"), of which 6,291,392 shares will be
outstanding, and ten million (10,000,000) shares of Class B Common Stock
(non-voting), par value $0.10 per share (the "Class B Common Stock"), of which
13,500 shares will be outstanding, and five million (5,000,000) shares of Series
A Preferred Stock, par value $100 per share (the "Preferred Stock"), of which
165,268 shares will be outstanding. The Class A Common Stock and the Class B
Common Stock will be referred to collectively herein as the "Common Stock". As
of September 29, 1997 the Company has reserved sufficient shares of Class A
Common Stock for issuance upon exercise of the Warrant, and 983,980 shares of
Class A Common Stock for issuance upon exercise of other outstanding warrants as
set forth in Schedule 3.07. A complete list of all outstanding shares of Common
Stock, Preferred Stock and warrants, options and other rights to purchase or
otherwise acquire Common Stock, Preferred Stock or other securities or
instruments exchangeable for or convertible into Common Stock or Preferred
Stock, and the names in which they are or will be registered is set forth in
Schedule 3.07. All the outstanding shares of capital stock of Borrower have been
duly authorized, are validly issued and are fully paid and nonassessable. Except
as set forth in Schedule 3.07 hereto, there are no options, warrants or rights
to acquire shares of the capital stock or other securities of Borrower
authorized, issued or outstanding, nor is Borrower obligated in any other manner
to issue shares of its capital stock or other securities, and there are no
restrictions on the transfer of shares of capital stock of Borrower other than
those imposed by relevant state and federal securities laws. Except as set forth
in Schedule 3.07 hereto, no holder of any security of Borrower is entitled to
preemptive or similar statutory or contractual rights, either arising pursuant
to any agreement or instrument to which Borrower is a party or that are
otherwise binding upon Borrower.
3.08 Places of Business. The records with respect to all intangible
personal property constituting the collateral security for the Secured
Obligations are maintained at the offices of Borrower at 215 Southport Drive,
Suite 1000, Morrisville, North Carolina 27560 or at 1701 West Northwest Highway,
Suite 220, Grapevine, Texas 76051.
3.09 Litigation. Except as disclosed on Schedule 3.09, there are no
actions, suits or proceedings pending, or, to the knowledge of Borrower,
threatened, against or affecting Borrower or involving the validity or
enforceability of any of the Loan Documents or the priority of the liens
thereof, at law or in equity, or before any governmental or administrative
agency, except actions, suits and proceedings that are fully covered by
insurance and that, if adversely determined, would not impair the ability of
Borrower to perform each and every one of its obligations under and by virtue of
the Loan Documents; and Borrower is not in default with respect to any order,
writ, injunction, decree or demand of any court or any governmental authority.
3.10 Financial Statements. The financial statement(s) of Borrower as of and
for the year ended March 31, 1997, and heretofore delivered to Lender have been
prepared on the basis of generally accepted accounting principles consistently
applied ("GAAP"), and fairly present the financial condition of the subjects
thereof as of the date(s) thereof. No materially adverse change has occurred in
the financial condition of Borrower since the date(s) thereof, and no additional
borrowings have been made by Borrower since the date(s) thereof.
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3.11 No Defaults. Consummation of the transactions hereby contemplated and
the performance of the obligations of Borrower under and by virtue of the Loan
Documents will not result in any breach of, or constitute a default under, the
charter documents or bylaws of Borrower or iMagicOnline or any mortgage,
security deed or agreement, deed of trust, lease, loan or credit agreement,
partnership agreement, license, franchise or any other material instrument or
agreement to which Borrower or iMagicOnline is a party or by which Borrower or
iMagicOnline or its properties may be bound or, to the knowledge of Borrower or
iMagicOnline, affected.
3.12 Compliance With Law. Borrower and iMagicOnline each has obtained all
material licenses, permits and governmental approvals and authorizations
necessary or proper in order to conduct its business and affairs as heretofore
conducted and as hereafter intended to be conducted. Borrower and iMagicOnline
each is in compliance with all laws, regulations, decrees and orders applicable
to it (including but not limited to laws, regulations, decrees and orders
relating to environmental, occupational and health standards and controls,
antitrust, monopoly, restraint of trade or unfair competition) and any
noncompliance, in the aggregate, cannot reasonably be expected to have a
materially adverse effect on its business, operations, property or financial
condition and will not adversely affect its ability to perform its obligations
under the Loan Documents.
3.13 No Burdensome Restrictions. No instrument, document or agreement to
which Borrower or iMagicOnline is a party or by which Borrower or iMagicOnline,
or its properties may be bound or affected materially adversely affects, or may
reasonably be expected so to affect, the business, operations, property or
financial condition thereof.
3.14 Taxes. Except as disclosed on Schedule 3.14 hereto, Borrower and
iMagicOnline each has filed or caused to be filed all tax returns that are
required to be filed (except for returns that have been appropriately extended),
and has paid all taxes shown to be due and payable on said returns and all other
taxes, impositions, assessments, fees or other charges imposed on it by any
governmental authority, agency or instrumentality, prior to any delinquency with
respect thereto (other than taxes, impositions, assessments, fees and charges
currently being contested in good faith by appropriate proceedings, for which
appropriate amounts have been reserved). No tax liens have been filed against
Borrower or iMagicOnline or any of their property.
3.15 Collateral. Borrower and iMagicOnline each has all necessary right,
power and authority to grant to Lender a valid and enforceable security interest
in the collateral security for the Secured Obligations. Except as provided on
Schedule 3.06, Lender's security interest in such collateral security
constitutes a first and prior lien upon and security interest in such
collateral, and, except for liens arising by operation of law in the ordinary
course of Borrower's or iMagicOnline's business, and that do not materially
impair, in the aggregate, Lender's rights or priority in such collateral, no
other person or entity has any right, title, interest, security interest, claim
or lien with respect thereto.
3.16 Certain Transactions. Except as provided on Schedule 3.16, Borrower
and iMagicOnline each is not indebted, directly or indirectly, to any of its
officers or directors or to their spouses or children; none of said officers or
directors or any members of their immediate
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families are indebted to Borrower or iMagicOnline or have any direct or indirect
ownership interest in any firm or corporation with which Borrower or
iMagicOnline is affiliated or with which Borrower or iMagicOnline has a business
relationship, or any firm or corporation that competes with Borrower or
iMagicOnline, except that officers and/or directors of Borrower or iMagicOnline
may own no more than one percent (1%) of the outstanding stock of publicly
traded companies that compete directly with Borrower or iMagicOnline. Except as
provided on Schedule 3.16, no officer or director or any member of their
immediate families, is, directly or indirectly, interested in any material
contract with Borrower or iMagicOnline, and Borrower or iMagicOnline is not a
guarantor or indemnitor of any indebtedness.
3.17 Title to Property. Borrower and iMagicOnline each does not own any
real property. As of the date hereof, Borrower and iMagicOnline each has good
and marketable title to all of its personal property, free and clear of any and
all claims, liens, encumbrances, equities and restrictions of every kind and
nature whatsoever, except as disclosed on Schedule 3.17 hereto and except for
such claims, liens, encumbrances, equities and restrictions as are not in the
aggregate material to the business, operations or financial condition of
Borrower taken as a whole.
3.18 Intellectual Property. Except as disclosed in Schedule 3.17, Borrower
and iMagicOnline each is the lawful owner of its proprietary information (as
defined herein), free and clear of any claim, right, trademark, patent or
copyright protection of any third party. As used herein, "proprietary
information" includes without limitation any computer software and related
documentation, inventions, technical and nontechnical data related thereto, and
other documentation, inventions and data related to patterns, plans, methods,
techniques, drawings, finances, customer lists, suppliers, products, pricing and
cost information, designs, processes, procedures, formulas, research data owned
or used by Borrower or iMagicOnline or marketing studies conducted by Borrower
or iMagicOnline, all of which Borrower or iMagicOnline considers to be
commercially important and competitively sensitive and which generally has not
been disclosed to third parties other than customers in the ordinary course of
business. Borrower and iMagicOnline each has good and marketable title to all
patents, trademarks, trade names, service marks, copyrights and registrations or
applications for registration with respect to any of the foregoing, all of which
are described on Schedule 3.18 hereto, owned by Borrower or iMagicOnline or used
or required by Borrower or iMagicOnline in the operation of its business. There
is no infringement of or conflict with rights of others with respect to
copyrights, patents, trademarks, service marks, trade names, trade secrets or
other intangible property rights or know-how that could result in any materially
adverse effect upon Borrower or iMagicOnline. No products or processes of
Borrower or iMagicOnline infringe or conflict with any rights of patent or
copyright, or any discovery, invention, product or process, that is the subject
of a patent or copyright application or registration known to Borrower or
iMagicOnline. Borrower and iMagicOnline each has no knowledge or belief that any
third party's proprietary information infringes Borrower's proprietary
information. Borrower and iMagicOnline each follows such procedures as are
necessary or appropriate to protect Borrower's trade secrets and proprietary
rights in intellectual property of all kinds. To the knowledge of Borrower and
iMagicOnline, no person employed by or affiliated with Borrower or iMagicOnline
has employed or proposes to employ any trade secret or any information or
documentation proprietary to any former employer,
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and to the knowledge of Borrower and iMagicOnline, no person employed by or
affiliated with Borrower or iMagicOnline has violated any confidential
relationship that such person may have had with any third person, in connection
with the development, manufacture or sale of any product or proposed product or
the development or sale of any service or proposed service of Borrower or
iMagicOnline.
3.19 Investment Company Act. Borrower and iMagicOnline each is not an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940, as amended.
3.20 Margin Requirements. Without expanding the limited uses of proceeds of
the Loan set forth in Section 4.03 of this Agreement, Borrower agrees that
Borrower shall not use any of the funds advanced under the Loan for the purpose
of acquiring or carrying "margin stock" for the purposes of Regulations G, T, X
or U of the Federal Reserve Board.
3.21 Solvency. Borrower and iMagicOnline each is solvent as of the date of
this Agreement. For purposes of this Section 3.21, "solvent" shall mean Borrower
and iMagicOnline each (i) has capital sufficient to carry on its business and
transactions and all business and transactions in which it is about to engage,
(ii) is able to pay its debts as they mature, and (iii) owns assets having
present fair saleable value greater than the amount required to pay its debts.
3.22 Environmental Compliance. To the best of its knowledge, Borrower and
iMagicOnline each has duly complied with, and its properties are owned and
operated in compliance with all federal, state and local environmental laws and
regulations. There have been no citations, notices or orders of noncompliance
issued to Borrower or iMagicOnline or relating to their respective businesses or
properties. To the best of its knowledge, Borrower and iMagicOnline each has
obtained all federal, state and local licenses, certificates or permits required
by such environmental laws and regulations relating to Borrower and iMagicOnline
and their respective properties.
3.23 OSHA Compliance. To the best of its knowledge, Borrower and
iMagicOnline each is in compliance in all material respects with the Federal
Occupational Safety and Health Act, as amended, and all regulations thereunder.
3.24. ERISA Compliance. With respect to the Employee Retirement Income
Security Act of 1974, as amended from time to time, and the regulations
promulgated and rulings issued thereunder ("ERISA"):
(a) Plans. Schedule 3.24 sets forth any and all "employee benefit
plans" maintained by or on behalf of Borrower or iMagicOnline or any ERISA
Affiliates as defined in Section 3(3) of ERISA (a "Plan"), including, but
not limited to, any defined benefit pension plan, profit sharing plan,
money purchase pension plan, savings or thrift plan, stock bonus plan,
employee stock ownership plan, Multiemployer Plan, or any plan, fund,
program, arrangement or practice providing for medical (including
post-retirement medical), hospitalization, accident, sickness, disability,
or life insurance benefits. For purposes of this Agreement, "ERISA
Affiliate" shall
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mean each trade or business (whether or not incorporated) which, together
with Borrower or iMagicOnline, is treated as a single employer under
Section 414(b), (c), (m) or (o) of the Internal Revenue Code of 1986, as
amended from time to time, and the regulations promulgated and the rulings
issued thereunder (the "Code"); and "Multiemployer Plan" shall mean a
"multiemployer plan" as defined in Section 4001(a)(3) of ERISA. Neither
Borrower or iMagicOnline nor any ERISA Affiliate maintains or contributes
to, or has maintained or contributed to, any defined benefit pension plan
or Multiemployer Plan.
(b) Compliance. To the best of its knowledge, Borrower has at all
times maintained each Plan, by its terms and in operation, in accordance in
all materials respects with all applicable laws.
(c) Liabilities. Except for liabilities and expenses which become
payable and are timely paid pursuant to the terms and usual operations of
the Plans, Borrower and iMagicOnline each is not currently and, to the best
of its knowledge, will not become subject to any material liability
(including withdrawal liability), tax or penalty whatsoever to any person
whomsoever with respect to any Plan including, but not limited to, any
material tax, penalty or liability arising under Title I or Title IV or
ERISA or Chapter 43 of the Code.
(d) Funding. Borrower and iMagicOnline and each of their ERISA
Affiliates has made full and timely payment of all amounts (i) required to
be contributed under the terms of each Plan and applicable law and (ii)
required to be paid as expenses of each Plan. No Plan or Plans have an
"amount of unfunded benefit liabilities" (as defined in Section 4001(a)(18)
of ERISA) which, in the aggregate, exceed $100,000.
3.25 Small Business Concern. Borrower and iMagicOnline each, together with
its "affiliates" (as that term is defined in 13 C.F.R. Section 121.401), if any,
is a "Smaller Business" within the meaning of 15 U.S.C. Section 662(5), that is
Section 103(5) of the Small Business Investment Act of 1958, as amended (the
"SBIC Act"), and the regulations thereunder, including 13 C.F.R. Section
107.710, and meets the applicable size eligibility criteria set forth in 13
C.F.R. Section 121.301(c)(1) or the industry standard covering the industry in
which the Borrower is primarily engaged as set forth in 13 C.F.R. Section
121.301(c)(2). Neither the Borrower or iMagicOnline each, nor any of its
subsidiaries, presently engages in any activities for which a small business
investment company is prohibited from providing funds by the SBIC Act and the
regulations thereunder, including 13 C.F.R. Section 107.
3.26 Statements Not False or Misleading. Borrower and iMagicOnline each has
fully advised Lender of all matters involving Borrower's and iMagicOnline's
financial condition, operations, properties or industry that management of
Borrower and iMagicOnline reasonably expects might have a materially adverse
effect on Borrower or iMagicOnline. No representation or warranty given as of
the date hereof by Borrower or iMagicOnline contained in this Agreement or any
schedule attached hereto or any statement in any document, certificate or other
instrument furnished or to be furnished to Lender pursuant hereto, taken as a
whole, contains or will (as of the
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Closing) contain any untrue statement of a material fact, or omits or will (as
of the Closing) omit to state any material fact that is necessary in order to
make the statements contained therein not misleading.
3.27 Survival. The representations and warranties of Borrower and
iMagicOnline each contained in this Agreement shall survive until this Agreement
terminates in accordance with Article VIII hereof.
ARTICLE IV
COVENANTS AND AGREEMENTS
4.01 Payment of Secured Obligations. Borrower shall pay the indebtedness
evidenced by the Debenture according to the terms thereof, and shall timely pay
or perform, as the case may be, all the other Secured Obligations.
4.02 Transfer of Collateral. Except in the ordinary course of business,
Borrower and iMagicOnline each will not sell, exchange, lease, negotiate,
pledge, assign or otherwise dispose of the collateral security described in
Section 2.01 or the Security Instruments to anyone other than Lender, except as
permitted by Section 4.18, and except that (i) Borrower and iMagicOnline each
may sell or lease inventory in the ordinary course of business, and (ii)
Borrower and iMagicOnline each may sell or otherwise dispose of obsolete or
retired equipment in the ordinary course of business.
4.03 Use of Proceeds; Restrictions on Activities.
(a) Neither Borrower nor any of its subsidiaries will engage in any
activities or use directly or indirectly the proceeds from the Loan for any
purpose for which a small business investment company is prohibited from
providing funds by the SBIC Act and the regulations promulgated thereunder,
including 13 C.F.R. ss.107.
(b) Borrower will use the proceeds from the Loan for the purposes and in
the amounts set forth on Schedule 4.03 attached to this Agreement. Borrower will
deliver within ninety (90) days of the Closing to Lender a written report,
certified as correct by Borrower's chief executive officer or chief financial
officer, verifying the purposes and the amounts for which proceeds from the Loan
have been disbursed, and, if the proceeds have not been fully disbursed within
that 90-day period, an additional report also so certified, delivered not later
than the end of each succeeding 90-day period, verifying the purposes and the
amounts for which proceeds have been disbursed. Borrower will supply to Lender
such additional information and documents as Lender reasonably requests with
respect to use of proceeds and will permit Lender to have reasonable access to
any and all Company records and information and personnel as Lender reasonably
deems necessary to verify how proceeds have been or are being used and to assure
that the proceeds have been used for the purposes specified.
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(c) Borrower will not, without obtaining the prior written approval of
Lender, change within one year of the Closing hereunder Borrower's business
activity from that described in Schedule 4.03 to a business activity for which a
small business investment company is prohibited from providing funds by the SBIC
Act and the regulations promulgated thereunder. Borrower agrees that any such
changes in its business activity without such prior written consent of Lender
will constitute an event of default under the Debenture (an "Activity Event of
Default"). If an Activity Event of Default occurs, the affected SBIC Purchaser
has the right to demand immediate repayment of the Debenture with interest to
the date of repayment, and Borrower will immediately make such payment within
three (3) days of receipt of a demand. The payment remedy is in addition to any
and all other rights and remedies against Borrower and others to which Lender
may be entitled.
4.04 Further Assurances. Borrower and iMagicOnline each will take all
actions reasonably requested by Lender to create and maintain in Lender's favor
valid liens upon, security titles to and/or perfected security interests in any
collateral security described in Section 2.01 or the Security Instruments and
all other security for the Secured Obligations now or hereafter held by or for
Lender. Without limiting the foregoing, Borrower and iMagicOnline each agrees to
execute such further instruments (including financing statements and
continuation statements) as may reasonably be required or permitted by any law
relating to notices of, or affidavits in connection with, the perfection of
Lender's security interests, and to cooperate with Lender in the filing or
recording and renewal thereof.
4.05 Limitations on Debt and Obligations. Borrower and iMagicOnline each
shall not issue, assume, guarantee or otherwise become liable or permit to exist
any indebtedness except: (i) indebtedness permitted under Section 4.22 hereof;
(ii) the indebtedness incurred pursuant to the Debenture; (iii) accounts payable
and other trade payables incurred in the ordinary course of business; (iv)
obligations of Borrower or iMagicOnline pursuant to capitalized leases and/or
purchase money financing of equipment, (v) indebtedness that refinances secured
indebtedness under clause (i) above, provided that the collateral for such new
indebtedness is the collateral from the refinanced secured indebtedness and the
aggregate principal amount of such indebtedness does not exceed the principal
amount outstanding under the refinanced indebtedness; or (vi) indebtedness
incurred in connection with the acquisition of a business (including the assets
of a business) provided such indebtedness is secured solely by the assets of the
business so acquired. Notwithstanding the foregoing, the aggregate principal
amount of any indebtedness secured by the accounts receivable and/or inventory
of Borrower and its subsidiaries (whether such indebtedness is permitted under
clause (i) or in clause (v)), may be increased based upon the amount of the
accounts receivable and/or inventory eligible as collateral, so long as the
ratio of outstanding principal amount of such indebtedness to "eligible
receivables" (howsoever defined) and/or "inventory" does not exceed eighty
percent (80%).
4.06 Financial Statements and Reports. Until such time as the Loan is no
longer outstanding, Borrower shall furnish to Lender (i) within one hundred
twenty (120) days after the end of each fiscal year of Borrower, an audited,
consolidated balance sheet of Borrower as of the close of such fiscal year, an
audited income statement of Borrower for such fiscal year, and audited
statements of cash flows for Borrower for such fiscal year, all in reasonable
detail,
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prepared in accordance with generally accepted accounting principles
consistently applied, and in such form as has customarily been prepared by
Borrower; (ii) within forty-five (45) days of the end of each calendar month,
balance sheets of Borrower as of the close of such month and an income statement
of Borrower for such month, all in reasonable detail, and prepared on the basis
of accounting principles consistently applied, together with a certificate of
Borrower's Chief Executive Officer and/or Chief Financial Officer confirming the
Borrower's compliance (or lack thereof) with all the terms and conditions of the
Loan Documents; and (iii) with reasonable promptness, such other financial data
as Lender may reasonably request.
4.07 Maintenance of Books and Records; Inspection. Borrower and
iMagicOnline each shall maintain its books, accounts and records on the basis of
accounting principles consistently applied, and permit a representative of
Lender, at Lender's expense and upon ten (10) days' prior written notice to
Borrower or iMagicOnline, as the case may be, to visit and inspect any of its
properties (including but not limited to the collateral security described in
Section 2.01 or the Security Instruments), corporate books and financial
records, and to discuss its accounts, affairs and finances with Borrower or
iMagicOnline or the principal officers of Borrower or iMagicOnline during
business hours, and without interruption of Borrower's or iMagicOnline's
business, all at such times as Lender may reasonably request.
4.08 Insurance. Without limiting any of the requirements of any of the
other Loan Documents, Borrower and iMagicOnline each shall maintain, in amounts
customary for entities engaged in comparable business activities, life, fire,
liability and other forms of insurance on its properties (including but not
limited to the collateral security now or hereafter securing payment and
performance of the Secured Obligations), against such hazards and in at least
such amounts as is customary in Borrower's business. At the request of Lender,
Borrower and iMagicOnline each will deliver forthwith a certificate specifying
the details of such insurance in effect.
4.09 Taxes and Assessments. Borrower and iMagicOnline each shall (a) file
all tax returns and appropriate schedules thereto that are required to be filed
under applicable law, prior to the date of delinquency, (b) pay and discharge
all taxes, assessments and governmental charges or levies imposed upon it, upon
its income and profits or upon any properties belonging to it, prior to the date
on which penalties attach thereto, and (c) pay all taxes, assessments and
governmental charges or levies that, if unpaid, might become a lien or charge
upon any of its properties; provided, however, that Borrower or iMagicOnline in
good faith may contest any such tax, assessments and governmental charge or levy
described in the foregoing clauses (b) and (c) so long as adequate reserves are
maintained with respect thereto.
4.10 Corporate Existence. Borrower and iMagicOnline each shall maintain its
corporate existence and good standing in the state of its incorporation and its
qualification and good standing as a foreign corporation in each jurisdiction in
which such qualification is required by applicable law.
4.11 Compliance with Law and Agreements. Borrower and iMagicOnline each
shall maintain its business operations and property owned or used in connection
therewith in compliance with (i) all applicable federal, state and local laws,
regulations and ordinances
15
governing such business operations and the use and ownership of such property,
and (ii) all agreements, licenses, franchises, indentures and mortgages to which
Borrower or iMagicOnline is a party or by which Borrower or iMagicOnline or any
of its properties is bound. Without limiting the foregoing, Borrower and
iMagicOnline each shall pay all of its indebtedness promptly in accordance with
the terms thereof.
4.12 Notice of Default. Borrower and iMagicOnline each shall give written
notice to Lender of the occurrence of any default, event of default or Event of
Default (as defined below) under this Agreement or any other Loan Document
promptly upon the occurrence thereof.
4.13 Notice of Litigation. Borrower and iMagicOnline each shall give
notice, in writing, to Lender of (i) any actions, suits or proceedings
instituted by any persons whomsoever against Borrower or iMagicOnline or
materially affecting any of the assets of Borrower or iMagicOnline, and (ii) any
dispute between Borrower or iMagicOnline on the one hand and any governmental
regulatory body on the other hand, which dispute might interfere with the normal
operations of Borrower or iMagicOnline; provided, however, that Lender shall not
disclose any such information to any third party other than Lender's counsel and
except to the extent compelled by legal process or law or otherwise authorized
by Borrower or iMagicOnline.
4.14 Informational Covenant. Borrower will furnish or cause to be furnished
to the U.S. Small Business Administration (the "SBA") information required by
the SBA concerning the economic impact of Lender's investment, including but not
limited to information concerning federal, state, and local income taxes paid,
number of employees, gross revenues, source of revenue growth, after tax profit
or loss, and federal, state and employee income tax withholding. Borrower will
furnish annually all information required on the appropriate SBA Forms. Borrower
will also furnish or cause to be furnished to the SBA such other information
regarding the business, affairs and condition of Borrower as the SBA may from
time to time reasonably request. Borrower will permit SBA examiners to inspect
the books and any of the properties or assets of Borrower and its subsidiaries
and to discuss Borrower's business with senior management employees at such
reasonable times as the SBA may from time to time request.
4.15 ERISA Plan. If Borrower has in effect, or hereafter institutes, a
pension plan that is subject to the requirements of Title IV of the Employee
Retirement Income Security Act of 1974, Pub. L. No. 93-406, September 2, 1974,
88 Stat. 829, 29 U.S.C.A. 1001 et. seq. (1975), as amended from time to time
("ERISA"), then the following warranty and covenants shall be applicable during
such period as any such plan (the "Plan") shall be in effect: (i) Borrower
hereby warrants that no fact that might constitute grounds for the involuntary
termination of the Plan, or for the appointment by the appropriate United States
District Court of a trustee to administer the Plan, exists at the time of
execution of this Agreement, (ii) Borrower hereby covenants that throughout the
existence of the Plan, Borrower's contributions under the Plan will meet the
minimum funding standards required by ERISA and Borrower will not institute a
distress termination of the Plan, and (iii) Borrower covenants that it will send
to Lender a copy of any notice of a reportable event (as defined in ERISA)
required by ERISA to be filed with the Labor Department or the Pension Benefit
Guaranty Corporation, at the time that such notice is so filed.
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4.16 Observer Rights. Borrower shall invite one representative of Lender to
attend, at Lender's expense, all meetings of Borrower's Board of Directors and
all committees of Borrower's Board of Directors in a nonvoting capacity and, in
this respect, shall give such representative copies of all notices and other
materials provided to directors in preparation for such or as part of meetings.
4.17 Information. Borrower will furnish to Lender such financial data and
other information relating to the business of Borrower as Lender may from time
to time reasonably request. Borrower will cooperate fully with Lender, Lender's
representatives and counsel in the preparation of any document or other material
which may be required by the United States Small Business Administration or any
other governmental agency as a predicate to or result of the transaction herein
contemplated.
4.18 Limitation on Liens. Without the prior written consent of Lender,
which consent shall not unreasonably be withheld, Borrower and iMagicOnline each
will not, and will not permit any subsidiary to, create or incur, or suffer to
be incurred or to exist, any mortgage, pledge, security interest, encumbrance,
lien or charge of any kind (collectively, "Liens") on its or their property or
assets, whether now owned or hereafter acquired, or upon any income or profits
therefrom, or transfer any property for the purpose of subjecting the same to
the payment of obligations in priority to the payment of its or their general
creditors, or acquire or agree to acquire, or permit any subsidiary to acquire,
any property or assets upon conditional sales agreement or other title retention
devices, except (i) those Liens which exist as of the date hereof; (ii) Liens
hereafter created on Senior Indebtedness; or (iii) in the case of Borrower,
purchase money security interests or leasehold interests on property acquired by
Borrower or any subsidiary in an amount not to exceed in the aggregate 10% more
than the amount approved by the Board of Directors for such expenditures in
Borrower's annual budget provided to Lender.
4.19 Dividends; Redemptions. Borrower and iMagicOnline each will not (i)
declare, set aside, or pay any dividend or make any other distribution, whether
in cash, in kind, or otherwise, on account of or with respect to, or (ii) apply
any of its funds, property or assets to the purchase, redemption or other
retirement of, any class of its capital stock or any warrants, options or other
rights with respect to any class of its capital stock; provided, however, that
Borrower and iMagicOnline each may apply its funds to the purchase, redemption
or other retirement of its capital stock held by former employees of Borrower or
iMagicOnline or options to purchase its capital stock held by former employees
of Borrower or iMagicOnline provided the aggregate amount of funds applied to
all such purchases, redemptions and other retirements during the term of this
Agreement does not exceed $100,000.
4.20 Investments. Borrower will not, and will not permit any subsidiary to,
make any investments (including acquisitions) outside the ordinary course of
business for Borrower or any subsidiary, without the prior written consent of
Lender, not to be unreasonably withheld, except:
(a) Investments in direct obligations of the United States of America,
or any agency or instrumentality of the United States of America, the
payment or guaranty of which constitutes
17
a full faith and credit obligation of the United States of America, in
either case maturing in twelve months or less from the date of acquisition
thereof;
(b) Investments in certificates of deposit maturing within one year
from the date of origin, issued by a bank or trust company organized under
the laws of the United States of any state thereof, having capital, surplus
and undivided profits aggregating at least $100,000,000 and whose long-term
certificates of deposit are, at the time of acquisition thereof, rated AA
or better by Standard & Poor's Corporation or AA or better by Moody's
Investors Service, Inc.;
(c) Investments in commercial paper maturing in two hundred seventy
(270) days or less from the date of issuance which, at the time of
acquisition by Borrower or any subsidiary is accorded the highest rating by
Standard & Poor's Corporation, Moody's Investors Service, Inc. or another
nationally recognized credit rating agency of similar standing;
(d) Loans or advances in the usual and ordinary course of business to
officers, directors and employees for expenses incidental to carrying on
the business of Borrower or any subsidiary;
(e) Receivables arising from the sale of goods and services in the
ordinary course of business of Borrower and its subsidiaries; and
(f) Investments that do not exceed $250,000 in the aggregate during
the term of this Agreement.
4.21 Mergers, Consolidations and Sales of Assets. Without Lender's prior
written consent, which consent shall not be withheld unreasonably, (a) Borrower
will not, and will not permit any subsidiary to (1) consolidate with or be a
party to a merger or share exchange with any other corporation or (2) sell,
lease or otherwise dispose of all or any substantial part (as defined in
paragraph (d) of this Section 4.21) of the assets of Borrower and its
subsidiaries; provided, however, that:
(i) any subsidiary may merge or consolidate with or into Borrower or
any wholly owned subsidiary so long as in any merger or consolidation
involving Borrower, Borrower shall be the surviving or continuing
corporation;
(ii) any subsidiary may sell, lease or otherwise dispose of all or any
substantial part of its assets to Borrower or any wholly owned subsidiary;
and
(iii) any subsidiary may merge or consolidate with or into another
entity, provided that the value of the aggregate consideration paid by
Borrower therefor (whether in cash, securities or other property) for all
such acquisitions made during the term of this Agreement shall not exceed
$500,000.
(b) Without Lender's prior written consent, which consent shall not be
withheld unreasonably, Borrower will not permit any subsidiary to issue or sell
any shares of stock of any
18
class (including as "stock" for the purposes of this Section 4.21, any warrants,
rights or options to purchase or otherwise acquire stock or other securities
exchangeable for or convertible into stock) of such subsidiary to any person
other than Borrower or a wholly owned subsidiary.
(c) Without Lender's prior written consent, which consent shall not be
withheld unreasonably, Borrower will not sell, transfer or otherwise dispose of
any shares of stock in any subsidiary (except to dispose of any shares of stock
in any subsidiary or any indebtedness of any subsidiary, and will not permit any
subsidiary to sell, transfer or otherwise dispose of (except to Borrower or a
wholly owned subsidiary) any shares of stock or any indebtedness of any other
subsidiary, unless:
(i) simultaneously with such sale, transfer or disposition, all shares
of stock and all indebtedness of such subsidiary at the time owned by
Borrower and by every other subsidiary shall be sold, transferred or
disposed of as an entirety;
(ii) the Board of Directors of Borrower shall have determined, as
evidenced by a resolution thereof, that the retention of such stock and
indebtedness is no longer in the best interests of Borrower;
(iii) such stock and indebtedness is sold, transferred or otherwise
disposed of to a Borrower for a cash consideration and on terms reasonably
deemed by the Board of Directors to be adequate and satisfactory;
(iv) the subsidiary being disposed of shall not have any continuing
investment in Borrower or any other subsidiary not being simultaneously
disposed of; and
(v) such sale or other disposition does not involve a substantial part
(as hereinafter defined) of the assets of Borrower and its subsidiaries.
4.22 Maintenance of Certain Financial Conditions. As long as the Loan or
any portion thereof is outstanding, Borrower shall at all times maintain the
following financial condition: Borrower's total debt from asset based lenders
shall not exceed eighty percent (80%) of Borrower's eligible United States
accounts receivable, where eligible accounts receivable shall include those
accounts receivable reflected in Borrower's books and records, excluding any
accounts that are more than one hundred twenty (120) days' past due or that are
due more than one hundred twenty (120) days from the date in question, plus
forty percent (40%) of Borrower's finished goods inventory reflected on
Borrower's books and records, plus forty percent (40%) of Borrower's
fully-insured foreign accounts receivable all of which shall be maintained in
accordance with GAAP. In no event shall Borrower's (i) Senior Indebtedness
exceed $5,000,000 and (ii) total indebtedness including the Debenture (but not
including shareholder debt subordinate to Lender and unsecured indebtedness of
Borrower to Branch Bank and Trust Company) exceed the greater of (A) $9,200,000,
and (B) three and one-half (3-1/2) times Borrower's earnings before interest,
taxes, depreciation and amortization, determined in accordance with GAAP, for
the preceding twelve-month period.
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4.23 Transactions with Affiliates.
(a) Except as set forth on Schedule 4.23, Borrower will not, and will not
permit any subsidiary to, enter into or be a party to any transaction or
arrangement with any officer, director or affiliate (including, without
limitation, the purchase from, sale to or exchange of property with, or the
rendering of any service by or for, any affiliate), except in the ordinary
course of and pursuant to the reasonable requirements of Borrower's or such
subsidiary's business and upon fair and reasonable terms no less favorable to
Borrower or such subsidiary than would obtain in a comparable arm's-length
transaction with a person other than an affiliate, in each case as determined in
good faith by a majority of the disinterested directors of Borrower (as the term
"disinterested" is used in Section 144 of the Delaware General Corporation Law).
(b) Borrower will not, and will not permit any subsidiary to, make any
payments on or with respect to any indebtedness of Borrower to any shareholder
of Borrower (excluding High Point Capital, LLC, and Petra Capital, LLC), or any
family member of any such shareholder, or repurchase or retire any such
indebtedness, so long as the Loan shall be outstanding.
4.24 Change in Control. Borrower will not, without Lender's prior written
approval, which approval shall not be withheld unreasonably, permit to occur any
(a) transaction, or series of related transactions, in which any person or
entity that is not a shareholder on the date hereof acquires securities
representing greater than 50% of the voting power with respect to Borrower's
capital stock; (b) change in the composition of Borrower's Board of Directors in
connection with any series of related transactions such that a majority of the
Board shall not have served previously as directors of the Company; or (c)
termination of status of Robert L. Pickens, William Stealey or William Kaluza as
President, Chief Executive Officer or Chief Financial Officer, respectively of
Borrower.
4.25 Changes in Equity; No Impairment of Warrant. Borrower will not, so
long as the Warrant remains outstanding:
(a) without at least ten (10) days' prior written notice to Lender,
amend or repeal any provision of, or add any provision to, Borrower's
Articles of Incorporation or Bylaws;
(b) without the prior written consent of Lender, which consent will
not be withheld unreasonably, authorize or issue any new or existing class
or classes or series of capital stock having any preference or priority as
to dividends, voting or assets to the Common Stock, or authorize or issue
shares of stock of any class or any bonds, debentures, notes or other
obligations convertible into or exchangeable for, or having option rights
to purchase, any shares of stock of Borrower having any preference or
priority as to dividends, voting or assets superior to the Common Stock;
(c) without the prior written consent of Lender, which consent will
not be withheld unreasonably, reclassify any Common Stock into shares
having any preference or priority as to dividends, voting or assets
superior to the Common Stock;
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(d) establish or suffer to exist a par value for the Common Stock that
results in the shares issuable upon exercise of the Warrant to being issued
or issuable at less than the par value per share of such Common Stock; or
(e) avoid or seek to avoid the observance or performance of any of the
terms to be observed or performed under the Warrant, and Borrower will at
all times in good faith assist in the carrying out of all of the provisions
of the Warrant and in the taking of all such action as may be necessary or
appropriate in order to protect the rights of the holders of the Warrant
against impairment.
4.26 Key-Man Insurance. Borrower will obtain within 90 days after the
Closing Date and maintain $1,200,000 in term insurance, naming Borrower as
beneficiary, and Lender as an additional loss payee, on the life of William
Stealey.
ARTICLE V
CONDITIONS TO CLOSING
The obligation of Lender to purchase and pay for the Debenture on any
Closing Date shall be subject to the fulfillment on or before such Closing Date
of each of the following conditions.
5.01 Representations and Warranties. The representations and warranties of
Borrower and iMagicOnline each contained in this Agreement and in any Schedule
hereto or any document or instrument delivered to Lender or its representatives
hereunder, shall have been true and correct when made and shall be true and
correct as of the Closing Date as if made on such date, except to the extent
such representations and warranties expressly relate to a specific date.
Borrower and iMagicOnline each shall have duly performed all of the covenants
and agreements to be performed by it hereunder on or prior to the Closing Date.
5.02 Satisfactory Proceedings. All proceedings taken in connection with the
transactions contemplated by this Agreement, and all documents necessary to the
consummation thereof, shall be satisfactory in form and substance to Lender and
Lender's counsel.
5.03 Required Consents. Any consents or approvals required to be obtained
from any third party, including any holder of indebtedness or any outstanding
security of Borrower, and any amendments of agreements which shall be necessary
to permit the consummation of the transactions contemplated hereby on the
Closing Date, shall have been obtained and all such consents or amendments shall
be satisfactory in form and substance to Lender and Lender's counsel.
5.04 Conditions of Lender's Obligations. Lender shall have received the
following documents, in form and substance satisfactory to Lender in its sole
discretion.
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(a) Corporate Documents. A copy of the Articles of Incorporation of each of
Borrower and iMagicOnline, as amended, and restated, certified by the Secretary
of State of Maryland and the Secretary of the State of North Carolina
respectively, and certificates of good standing from the Secretaries of State of
each state where Borrower and iMagicOnline is required to be qualified to do
business, all as of a recent date.
(b) Officer's Certificate. A certificate of the President and Chief
Executive Officer of each of Borrower and iMagicOnline to the effect set forth
in Exhibit C hereto.
(c) Opinion of Counsel. The opinion of counsel to Borrower, in form
reasonably satisfactory to Lender, substantially in the form of Exhibit D
hereto.
(d) Debenture. The Debenture, duly completed and executed.
(e) Stock Purchase Warrant. The Warrant duly completed and executed.
(f) UCC-1 Financial Statements. Financing Statements on Form UCC-1 duly
completed and executed by Borrower securing the rights of Lender to the
collateral security listed in Section 2.01.
(g) SBA Documentation. SBA Form 480 (Size Status Declaration) and SBA Form
652 (Assurance of Compliance), which have been completed and executed by
Borrower, and SBA Form 1031 (portfolio Finance Report), Part A and Part B of
which have been completed by Borrower.
(h) Closing Fee. Evidence that the Closing Fee provided in Section 1.04 has
been or is being paid in full.
ARTICLE VI
DEFAULT AND REMEDIES
6.01 Events of Default. The occurrence of any of the following shall
constitute an Event of Default hereunder:
(a) Default in the payment of the principal of or interest on the
indebtedness evidenced by the Debenture in accordance with the terms of the
Debenture, which default is not cured within ten (10) business days;
(b) Any material misrepresentation by Borrower or iMagicOnline as to
any matter hereunder or under any of the other Loan Documents, or delivery
by Borrower or iMagicOnline of any material schedule, statement,
resolution, report, certificate, notice or writing to Lender that is untrue
in any material respect on the date as of which the facts set forth therein
are stated or certified;
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(c) Failure of Borrower and iMagicOnline each to perform any of its
material obligations under this Agreement, any of the Security Instruments
or any of the other Loan Documents;
(d) Borrower's or iMagicOnline's (i) admission in writing of its
inability to pay its debts generally as they become due; or (ii) assignment
for the benefit of creditors or petition or application to any tribunal for
the appointment of a custodian, receiver or trustee for it or a substantial
part of its assets; or (iii) voluntary commencement of any proceeding under
any bankruptcy, reorganization, arrangement, readjustment of debt,
dissolution or liquidation law or statute of any jurisdiction, whether now
or hereafter in effect, or the involuntary commencement of any such
proceeding that is not dismissed within ninety (90) days; or (iv) suffering
to exist any such petition or application or any such proceeding against it
in which an order for relief is entered or an adjudication or appointment
is made; or (v) indication, by any act or omission, of its consent to,
approval of or acquiescence in any such petition, application, proceeding
or order for relief or the appointment of a custodian, receiver or trustee
for it or a substantial part of its assets; or (vi) permitting any such
custodianship, receivership or trusteeship to continue undischarged for a
period of ninety (90) days or more;
(e) Borrower's or iMagicOnline's liquidation, dissolution, partition
or termination;
(f) A default or event of default under any of the other Loan
Documents that, if subject to a cure right, is not cured within any
applicable cure period;
(g) Borrower's default in the timely payment or performance of any
obligation now or hereafter owed to Lender in connection with any
indebtedness of Borrower now or hereafter owed to Lender other than the
Loan;
(h) Borrower's default in the timely payment or performance of any
principal of or premium or interest on any debt owed by Borrower (other
than the Loan), which is outstanding in a principal amount of at least
$100,000 in the aggregate, when the same becomes due and payable (whether
by scheduled maturity, acceleration, demand or otherwise), if such failure
shall continue after any cure period applicable thereto; or (ii) the
occurrence of any other event or condition under any agreement or
instrument relating to any such indebtedness that continues after any
applicable cure period, if the effect of such event or condition is to
accelerate or permit the acceleration of such indebtedness; or (iii) the
acceleration of any such indebtedness or otherwise declaration to be due
and payable prior to the stated maturity thereof of any such indebtedness;
or (iv) requirement that any such indebtedness be prepaid, redeemed,
purchased or defeased prior to the stated maturity thereof;
(i) The termination of employment of any of the persons set forth on
Schedule 6.01 from the positions set forth opposite their names; or
(j) The sale, transfer or disposal by any of the persons set forth on
Schedule 6.01 of more than ten percent (10%) of shares of Common Stock held
by such person as of the date hereof.
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With respect to any Event of Default described above that is capable of being
cured and that does not already provide its own cure procedure (a "Curable
Default"), the occurrence of such curable Default shall not constitute an Event
of Default hereunder if such Curable Default is fully cured and/or corrected
within thirty (30) days (ten (10) days, if such Curable Default may be cured by
payment of a sum of money) of notice thereof to Borrower.
6.02 Acceleration of Maturity; Remedies. Upon the Occurrence of any Event
of Default described in subsection 6.01, the indebtedness evidenced by the
Debenture shall be immediately due and payable in full; and Lender at any time
thereafter may at its option accelerate the maturity of the indebtedness
evidenced by the Debenture. Upon the occurrence of any such Event of Default and
the acceleration of the maturity of the indebtedness evidenced by the Debenture,
as set forth herein:
(a) Lender immediately shall be entitled to exercise any and all
rights and remedies possessed by Lender pursuant to the terms of the
Security Instruments and all of the other Loan Documents;
(b) Lender shall have all of the rights and remedies of a secured
party under the Uniform Commercial Code; and
(c) Lender shall have any and all other rights and remedies that
Lender may now or hereafter possess at law, in equity or by statute.
6.03 Remedies Cumulative; No Waiver. No right, power or remedy conferred
upon or reserved to Lender by this Agreement or any of the other Loan Documents
is intended to be exclusive of any other right, power or remedy, but each and
every such right, power and remedy shall be cumulative and concurrent and shall
be in addition to any other right, power and remedy given hereunder, under any
of the other Loan Documents or now or hereafter existing at law, in equity or by
statute. No delay or omission by Lender to exercise any right, power or remedy
accruing upon the occurrence of any Event of Default shall exhaust or impair any
such right, power or remedy or shall be construed to be a waiver of any such
Event of Default or an acquiescence therein, and every right, power and remedy
given by this Agreement and the other Loan Documents to Lender may be exercised
from time to time and as often as may be deemed expedient by Lender.
6.04 Proceeds of Remedies. Any or all proceeds resulting from the exercise
of any or all of the foregoing remedies shall be applied as set forth in the
Loan Document(s) providing the remedy or remedies exercised; if none is
specified, or if the remedy is provided by this Agreement, then as follows:
First, to the costs and expenses, including reasonable attorney's
fees, incurred by Lender in connection with the exercise of its remedies;
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Second, to the expenses of curing the default that has occurred, in
the event that Lender elects, in its reasonable discretion, to cure the
default that has occurred;
Third, to the payment of the Secured Obligations, including but not
limited to the payment of the principal of and interest on the indebtedness
evidenced by the Debenture, in such order of priority as Lender shall
determine in its sole discretion; and
Fourth, the remainder, if any, to Borrower or to any other person
lawfully thereunto entitled.
ARTICLE VII
RIGHTS WITH RESPECT TO WARRANT SHARES
7.01 Put Option.
(a) Grant of Put Option. Borrower hereby grants to Lender an option to sell
to Borrower, and Borrower is obligated to purchase from Lender under such option
(the "Put Option"), all (but not less than all) of the Warrant Shares (including
shares issuable upon exercise of the Warrant) (the "Put Shares"). The Put Option
will be effective beginning on the fifth anniversary of the Closing Date, or at
any time prior to such date upon the occurrence but only during the continuance
of an Event of Default (as defined in Section 6.01 hereof) (the "Put Option
Period").
(b) Put Price. In the event that Lender exercises the Put Option, the price
(the "Put Price") to be paid to Lender pursuant to this Section 7.01 shall be
the higher of the following amounts:
(i) the product of five times Borrower's per-share earnings before
interest, taxes, depreciation and amortization for Borrower's most
recent 12-month period before exercise of the Put Option, determined
in accordance with generally accepted accounting principles ("GAAP")
by Borrower's independent auditors, less debt per share of Borrower's
outstanding Common Stock on a fully diluted basis for borrowed money
as at the end of such 12-month period, plus Cash (as hereinafter
defined) per share of Borrower's outstanding Common Stock on a fully
diluted basis as at the end of such 12-month period all multiplied by
the number of Put Shares. For purposes of this Section 7.01, "Cash"
shall include currency, funds in deposit accounts, certificates of
deposit with maturities of one year or less from the date of
determination, readily marketable securities and other similar assets
of Borrower; or
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(ii) Borrower's book value per share at the end of the most recently
completed month before exercise of the Put Option, determined in
accordance with GAAP, multiplied by the number of Put Shares.
For purposes of this Agreement "fully diluted basis" means, as of any date of
determination the shares of Common Stock outstanding on such date, such number
of shares of Class A Common Stock as actually are issued and outstanding on such
date, plus the number of shares of Class B Common Stock as actually are issued
and outstanding on such date (such Class A Common Stock and Class B Common Stock
being referred to hereinafter collectively as the "Common Stock"), together with
all shares of Common Stock that would be outstanding on such date assuming the
issuance of all shares of Common Stock issuable upon the exercise, exchange or
conversion of (i) any securities outstanding as of such date and convertible
into or exchangeable for Common Stock (whether or not the rights to exchange or
convert thereunder are immediately exercisable) (such convertible or
exchangeable securities being herein called "Convertible Securities"), (ii) any
rights outstanding as of such date to subscribe for or to purchase, or any
warrants or options outstanding (but specifically excluding options for up to
1,215,000 shares, subject to adjustment for stock splits, stock dividends and
the like, of Class B Common Stock to be granted upon the achievement of certain
performance objectives pursuant to the company's 1995 Employees' Incentive Stock
Option Plan (the "1995 Incentive Plan")) for the purchase of, Common Stock or
Convertible Securities (whether or not immediately exercisable) (such rights,
warrants or options being herein called "Option Securities") and (iii) any such
Common Stock and/or Convertible Securities issued upon the exercise of such
Option Securities. The Company represents and warrants that, as of the date of
this Agreement the outstanding shares of Common Stock, calculated on a fully
diluted basis, are 10,232,040.
(c) Exercise of Put Option. The Put Option may be exercised during the Put
Option Period with respect to all (but not less than all) of the Put Shares by
notice in writing given by Lender to Borrower of Lender's election to exercise
the Put Option. Lender and Borrower shall complete the exercise of the Put
Option and payment of the Put Price as soon as practicable and in no event later
than thirty (30) days following the giving of such notice. The Put Price shall
be payable in cash, or, at Borrower's option by delivery to Lender of a
promissory note, in form and substance reasonably satisfactory to Lender,
bearing interest at 12.5% per annum, due in one year, amortized in twelve (12)
equal monthly installments of principal and interest, and bearing interest at
15.5% per annum in case of any default by Borrower.
(d) Warrant Shares. For purposes of this Article VII below, "Warrant
Shares" shall be deemed to include shares issued or issuable upon exercise of
the Warrant and any securities into or for which the Warrant or Warrant Shares
are converted or exchanged, or which are issued with respect thereto as a result
of any stock split, recapitalization, reorganization, combination of shares,
merger, consolidation or otherwise, if any, with proper adjustment to the price
at which such securities shall be repurchased to eliminate the effect of such
capital change.
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(e) Termination. The Put Option shall terminate upon the earliest to occur
of (i) the initial public offering of Borrower's Common Stock generating net
proceeds to Borrower, after deducting underwriters' discounts and commissions,
of at least $15,000,000 or (ii) any event in which (A) Borrower sells all or a
majority of its assets or income generating capacity; or (B) Borrower
participates in any merger, consolidation, reorganization, share exchange or
similar transaction or series of related transactions involving a change of
control of Borrower (a "Liquidating Event").
7.02 Registration.
(a) Borrower agrees that if at any time after the date hereof Borrower
shall propose to file a registration statement with respect to any of its Common
Stock on a form suitable for a secondary offering (including Borrower's IPO), it
will give notice in writing to such effect to the Holders at least thirty (30)
days prior to such filing and, at the written request of any such Holder, made
within ten (10) days after the receipt of such notice, will use its best efforts
to include therein at Borrower's cost and expense (including the fees and
expenses of counsel to such Holders, but excluding underwriting discounts,
commissions and filing fees attributable to the Warrant Shares included therein)
such of the Warrant Shares as such Holders shall request; provided, however,
that if the offering being registered by Borrower is underwritten and if the
representative of the underwriters certifies in writing that the inclusion
therein of the Warrant Shares would materially and adversely affect the sale of
the securities to be sold by Borrower thereunder, then Borrower shall be
required to include in the offering only that number of securities owned by
shareholders, including the Warrant Shares, which the underwriters determine in
their sole discretion will not jeopardize the success of the offering (such
securities so included to be apportioned pro rata among all selling shareholders
not exercising demand registration rights according to the total amount of such
securities entitled to be included therein (but for this proviso and any other
similar cutback provisions to which other selling shareholders are subject).
Nothing in this subparagraph (b) shall be deemed to require Borrower to proceed
under this subparagraph with any registration of its securities after giving the
notice herein provided.
(b) Whenever required under this Agreement to use its best efforts to
effect the registration of any of the Warrant Shares, Borrower shall, as
expeditiously as reasonably possible:
(i) Prepare and file with the Securities and Exchange Commission (the
"Commission") a registration statement covering such Warrant Shares and use
its best efforts to cause such registration statement to be declared
effective by the Commission as expeditiously as possible and to keep such
registration effective until the earlier of (A) the date when all Warrant
Shares covered by the registration statement have been sold or (B) two
hundred seventy (270) days from the effective date of the registration
statement; provided, however, the Company may suspend such offering for
ninety (90) days in any twelve month period; and further provided, however,
that before filing a registration statement or prospectus or any amendment
or supplements thereto, Borrower will furnish to each Holder of Warrant
Shares covered by such registration statement and the underwriters, if any,
copies of all such documents proposed to be filed (excluding
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exhibits, unless any such person shall specifically request exhibits),
which documents will be subject to the review of such Holders and
underwriters, and Borrower will not file such registration statement or any
amendment thereto or any prospectus or any supplement thereto (including
any documents incorporated by reference therein) with the Commission if (A)
the underwriters, if any, shall reasonably object to such filing or (B) if
information in such registration statement or prospectus concerning a
particular selling Holder has changed and any such Holder or the
underwriters, if any, shall reasonably object;
(ii) Prepare and file with the Commission such amendment and
post-effective amendments to such registration statement as may be
necessary to keep such registration statement effective until the
transaction is consummated or the registration statement is suspended in
accordance with Section 7.02(c)(i) and to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by
such registration statement, and cause the prospectus to be supplemented by
any required prospectus supplement, and as so supplemented to be filed with
the Commission pursuant to Rule 424 under the Securities Act;
(iii) Furnish to the selling Holder(s) such numbers of copies of such
registration statement, each amendment thereto, the prospectus included in
such registration statement (including each preliminary prospectus), such
supplement thereto and such other documents as they may reasonably request
in order to facilitate the disposition of the Warrant Shares owned by them;
(iv) Use its best efforts to register and qualify under such other
securities laws of such jurisdictions as shall be reasonably requested by
any selling Holder and do any and all other acts and things which may be
reasonably necessary or advisable to enable such selling Holder to
consummate the disposition of the Warrant Shares owned by such Holder in
such jurisdictions; provided, however, that Borrower shall not be required
in connection therewith or as a condition thereto to qualify to transact
business or to file a general consent to service of process in any such
states or jurisdictions;
(v) Promptly notify each selling Holder of the happening of any event
as a result of which the prospectus included in such registration statement
contains any untrue statement of a material fact or omits any fact
necessary to make the statements therein not misleading and, at the request
of any such Holder, Borrower will prepare a supplement or amendment to such
prospectus so that, as thereafter delivered to the purchasers of such
Warrant Shares, such prospectus will not contain an untrue statement of a
material fact or omit to state any fact necessary to make the statements
therein not misleading;
(vi) Provide a transfer agent and registrar for all such Warrant
Shares not later than the effective date of such registration statement;
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(vii) Enter into such customary agreements (including underwriting
agreements in customary form for such offering) and take all such other
actions as the underwriters, if any, reasonably request in order to
expedite or facilitate the disposition of such Warrant Shares (including,
in connection with a registration statement requested pursuant to Section
7.02(a), effecting a stock split or a combination of shares);
(viii) Subject to customary confidentiality undertakings, make
available for inspection by any selling Holder or any underwriter
participating in any disposition pursuant to such registration statement
and any attorney, accountant or other agent retained by any such selling
Holder or underwriter, all financial and other records, pertinent corporate
documents and properties of Borrower, and cause the officers, directors,
employees and independent accountants of Borrower to supply all information
reasonably requested by any such seller, underwriter, attorney, accountant
or agent in connection with such registration statement;
(ix) Promptly notify the selling Holder(s) of Warrant Shares and the
underwriters, if any, of the following events and (if requested by any such
person) confirm such notification in writing: (A) the filing of the
prospectus or any prospectus supplement and the registration statement and
any amendment or post-effective amendment thereto and, with respect to the
registration statement or any post-effective amendment thereto, the
declaration of the effectiveness of such documents, (B) any requests by the
Commission for amendments or supplements to the registration statement or
the prospectus or for additional information, (C) the issuance or threat of
issuance by the Commission of any stop order suspending the effectiveness
of the registration statement or the initiation of any proceedings for that
purpose and (D) the receipt by Borrower of any notification with respect to
the suspension of the qualification of the Warrant Shares for sale in any
jurisdiction or the initiation or threat of initiation of any proceeding
for such purposes;
(x) Make every reasonable effort to prevent the entry of any order
suspending the effectiveness of the registration statement and obtain at
the earliest possible moment the withdrawal of any such order, if entered;
(xi) Cooperate with the selling Holder(s) and the underwriters, if
any, to facilitate the timely preparation and delivery of certificates
representing the Warrant Shares to be sold without restrictive legends if
so permitted by applicable warrant, shareholder and other agreements, and
enable such Warrant Shares to be in such lots and registered in such names
as the underwriters may request at least three (3) business days prior to
any delivery of the Warrant Shares to the underwriters;
(xii) Provide a CUSIP number for all the Warrant Shares not later than
the effective date of the registration statement;
(xiii) Prior to the effectiveness of the registration statement and
any post-effective amendment thereto and at each closing of an underwritten
offering, (A) make
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such representations and warranties to the selling Holder(s) and the
underwriters, if any, with respect to the Warrant Shares and the
registration statement as are customarily made by issuers in similar
offerings; (B) use its best efforts to obtain "cold comfort" letters and
updates thereof from Borrower's independent certified public accountants
addressed to the selling Holders and the underwriters, if any, such letters
to be in customary form and covering matters of the type customarily
covered in "cold comfort" letters by underwriters in connection with
similar offerings; (C) deliver such documents and certificates as may be
reasonably requested (1) by the Holders of a majority of the Warrant Shares
being sold, and (2) by the underwriters, if any, to evidence compliance
with clause (A) above and with any customary conditions contained in the
underwriting agreement or other agreement entered into by Borrower; and (D)
obtain opinions of counsel to Borrower and updates thereof (which counsel
and which opinions shall be reasonably satisfactory to the underwriters, if
any), covering the matters customarily covered in opinions requested in
similar offerings and such other matters as may be reasonably requested by
the selling Holders and underwriters or their counsel. If customary for
similar offerings, such counsel shall also state that no facts have come to
the attention of such counsel which cause them to believe that such
registration statement, the prospectus contained therein, or any amendment
or supplement thereto, as of their respective effective or issue dates,
contains any untrue statement of any material fact or omits to state any
material fact necessary to make the statements therein not misleading. If
for any reason Borrower's counsel is unable to give such opinion, Borrower
shall so notify the Holders of the Warrant Shares and shall use its best
efforts to remove expeditiously all impediments to the rendering of such
opinion; and
(xiv) Otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission, and make generally available to
its security holders earnings statements satisfying the provisions of
Section 11(a) of the Securities Act, no later than forty-five (45) days
after the end of any 12-month period (or ninety (90) days, if such period
is a fiscal year) (A) commencing at the end of any fiscal quarter in which
the Warrant Shares are sold to underwriters in a firm or best efforts
underwritten offering, or (B) if not sold to underwriters in such an
offering beginning with the first month of the first fiscal quarter of
Borrower commencing after the effective date of the registration statement,
which statements shall cover such 12-month periods.
(c) After the date hereof, Borrower shall not grant to any holder of
securities of Borrower any registration rights which have a priority greater
than or equal to those granted to Holder(s) pursuant to this Warrant, unless
granted to holders of the Company's equity securities acquired in connection
with sales of such securities after the date hereof for an aggregate purchase
price of at least $1,000,000.
(d) Borrower's obligations under Sections 7.02(a) and (b) above with
respect to each Holder of Warrant Shares are expressly conditioned upon such
Holder furnishing to Borrower in writing such information concerning such Holder
and the terms of such Holder's proposed offering as Borrower shall reasonably
request for inclusion in the registration statement. If any registration
statement including any of the Warrant Shares is filed, then
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Borrower shall indemnify each Holder thereof (and each underwriter for such
Holder and each person, if any, who controls such underwriter within the meaning
of the Securities Act) from any loss, claim, damage or liability arising out of
or based upon any untrue statement of a material fact contained in such
registration statement or any omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
except for any such statement or omission based on information furnished in
writing by such Holder of the Warrant Shares expressly for use in connection
with such registration statement; and such Holder shall indemnify Borrower (and
each of its officers and directors who has signed such registration statement,
each other director and each other person, if any, who controls Borrower within
the meaning of the Securities Act, each underwriter for Borrower and each
person, if any, who controls such underwriter within the meaning of the
Securities Act) and each other such Holder against the loss, claim, damage or
liability arising out of or based upon any such statement or omission which was
made in reliance upon information furnished in writing to Borrower by such
Holder expressly for use in connection with such registration statement.
(e) For purposes of this Section 7.02, all of the Warrant Shares shall be
deemed to be issued and outstanding, and all Holders shall be deemed to be
holders of such Warrant Shares.
7.03 Co-Sale Rights.
(a) Co-Sale Rights. J.W. Stealey (the "Selling Shareholder") shall not
enter into any transaction that would result in the sale by him of any Common
Stock now or hereafter owned by him, unless prior to such sale he shall give
notice to Lender of his intention to effect such sale in order that Lender may
exercise its rights under this Section 7.03 as hereinafter described. Such
notice shall set forth (i) the number of shares to be sold by the Selling
Shareholder (ii) the principal terms of the sale, including the price at which
the shares are intended to be sold, and (iii) an offer by the Selling
Shareholder to cause to be included with the shares to be sold by him in the
sale, on the same terms and conditions, the Warrant Shares issuable or issued to
Lender.
(b) Rejection of Co-Sale Offer. If Lender has not accepted such offer in
writing within a period of ten (10) days from the date of receipt of the notice
specified in Section 7.03(a), then the Selling Shareholder shall thereafter be
free for a period of ninety (90) days to sell the number of shares specified in
such notice, at a price no greater than the price set forth in such notice on
the terms set forth in such notice, without any further obligation to Lender in
connection with such sale. In the event that the Selling Shareholder fails to
consummate such sale within such 90-day period, the shares specified in such
notice shall continue to be subject to this Section 7.03.
(c) Acceptance of Co-Sale Offer. If Lender accepts such offer in writing
within a period of ten (10) days from the date of receipt of the notice
specified in Section 7.03(a), such acceptance shall be irrevocable unless the
Selling Shareholder shall be unable to cause to be included in his sale the
number of shares of Warrant Stock held by Lender set forth in the written
acceptance. In that event, the Selling Shareholder and Lender shall participate
in the sale
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pro rata, based upon their respective percentage interests in Borrower on a
fully diluted basis in which the Warrant shall be deemed fully exercised;
provided that the number of shares to be sold by Lender shall be reduced to the
lesser of (a) the number of shares that Lender desires to sell and (b) a number
of shares that will not conflict with Selling Shareholder's obligations under
Section 12 of that Stock Purchase Warrant dated March 24, 1997, and issued by
Borrower to Petra Capital, LLC.
ARTICLE VIII
TERMINATION
This Agreement shall remain in full force and effect until the earlier of
September 29, 2007, or the repayment in full of the Debenture, provided that
Section 4.25 and Articles VII through IX of this Agreement shall survive any
such termination until the earlier of September 29, 2007, or the repurchase in
full of the Warrant and/or all Warrant Shares.
ARTICLE IX
MISCELLANEOUS
9.01 Performance By Lender. If Borrower shall default in the payment,
performance or observance of any covenant, term or condition of this Agreement,
Lender may, at its option, pay, perform or observe the same, and all payments
made or costs or expenses incurred by Lender in connection therewith (including
but not limited to reasonable attorney's fees), with interest thereon at the
highest default rate provided in the Debenture (if none, then at the maximum
rate from time to time allowed by applicable law), shall be immediately repaid
to Lender by Borrower and shall constitute a part of the Secured Obligations and
be secured hereby until fully repaid. Lender, in its reasonable discretion,
shall determine the necessity for any such actions and of the amounts to be
paid.
9.02 Successors and Assigns Included in Parties. Whenever in this Agreement
one of the parties hereto is named or referred to, the heirs, legal
representatives, successors, successors-in-title and assigns of such parties
shall be included, and all covenants and agreements contained in this Agreement
by or on behalf of Borrower or iMagicOnline or by or on behalf of Lender shall
bind and inure to the benefit of their heirs, legal representatives,
successors-in-title and assigns, whether so expressed or not.
9.03 Costs and Expenses. Borrower agrees to pay all costs and expenses
incurred by Lender in connection with the making of the Loan that is the subject
of this Agreement, including but not limited to filing fees, recording taxes and
reasonable attorneys fees, promptly upon demand of Lender. Borrower further
agrees to pay all premiums for insurance required to be maintained pursuant to
the terms of the Loan Documents and all of the out-of-pocket costs and
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expenses incurred by Lender in connection with the collection of the Loan upon
an Event of Default, including but not limited to reasonable attorneys fees,
promptly upon demand of Lender.
9.04 Assignment. The Debenture, this Agreement and the other Loan Documents
may be endorsed, assigned and/or transferred in whole but not in part by Lender,
and any such holder and/or assignee of the same shall succeed to and be
possessed of the rights and powers of Lender under all of the same to the extent
transferred and assigned. Notwithstanding the foregoing, the Debenture may be
transferred, at Lender's option, to one or more persons, in whole or in part, so
long as such transferees (a) are members, partners, shareholders or affiliates
of Lender, or members, partners or shareholders of any of the foregoing; (b)
agree to hold the Debenture subject to all the terms hereof; and (c) shall
appoint Lender as its sole agent for exercising the rights of such transferees
hereunder, excepting the right to collect amounts due on the Debenture (or part
thereof) held by such transferee, which collection rights may be exercised by
any transferee. Borrower and iMagicOnline each shall not assign any of its
rights nor delegate any of its duties hereunder or under any of the other Loan
Documents without the prior express written consent of Lender, which consent
shall not be withheld unreasonably.
9.05 Time of the Essence. Time is of the essence with respect to each and
every covenant, agreement and obligation of Borrower, iMagicOnline and Lender
hereunder and under all of the other Loan Documents.
9.06 Severability. If any provision(s) of this Agreement or the application
thereof to any person or circumstance shall be invalid or unenforceable to any
extent, the remainder of this Agreement and the application of such provisions
to other persons or circumstances shall not be affected thereby and shall be
enforced to the greatest extent permitted by law.
9.07 Interest and Loan Charges Not to Exceed Maximum Allowed by Law.
Anything in this Agreement, the Debenture, the Security Instruments or any of
the other Loan Documents to the contrary notwithstanding, in no event
whatsoever, whether by reason of advancement of proceeds of the loan made
pursuant to this Agreement, acceleration of the maturity of the unpaid balance
of the loan or otherwise, shall the interest and loan charges agreed to be paid
to Lender for the use of the money advanced or to be advanced hereunder exceed
the maximum amounts collectible under applicable laws in effect from time to
time. It is understood and agreed by the parties that, if for any reason
whatsoever the interest or loan charges paid or contracted to be paid by
Borrower in respect of the indebtedness evidenced by the Debenture shall exceed
the maximum amounts collectible under applicable laws in effect from time to
time, then ipso facto, the obligation to pay such interest and/or loan charges
shall be reduced to the maximum amounts collectible under applicable laws in
effect from time to time, and any amounts collected by Lender that exceed such
maximum amounts shall be applied to the reduction of the principal balance of
the indebtedness evidenced by the Debenture and/or refunded to Borrower so that
at no time shall the interest or loan charges paid or payable in respect of the
indebtedness evidenced by the Debenture exceed the maximum amounts permitted
from time to time by applicable law.
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9.08 Article and Section Headings; Defined Terms. Numbered and titled
article and section headings and defined terms are for convenience only and
shall not be construed as amplifying or limiting any of the provisions of this
Agreement.
9.09 Notices. Any and all notices, elections or demands permitted or
required to be made under this Agreement shall be in writing, signed by the
party giving such notice, election or demand and shall be delivered personally,
telecopied, telexed, or sent by certified mail or nationally recognized courier
service (such as Federal Express), to the other party at the address set forth
below, or at such other address as may be supplied in writing and of which
receipt has been acknowledged in writing, The date of personal delivery,
telecopy or telex or the date of mailing (or delivery to such courier service),
as the case may be, shall be the date of such notice, election or demand. For
the purposes of this Agreement:
The Address of
Lender is: Oberlin Capital, L.P.
702 Oberlin Road
Suite 150
Raleigh, North Carolina 27605
Attention: Robert G. Shepley
with a copy to: Wyrick Robbins Yates & Ponton LLP
4101 Lake Boone Trail, Suite 300
Raleigh, North Carolina 27607
Attention: J. Christopher Lynch, Esq.
The Address of
iMagicOnline and
Borrower is: Interactive Magic, Inc.
215 Southport Drive, Suite 1000
Morrisville, North Carolina 27560
Attention: William J. Kaluza
with a copy to: Smith, Anderson, Blount, Dorsett,
Mitchell & Jernigan, L.L.P.
2500 First Union Capital Center
Raleigh, North Carolina 27601
Attention: Amos U. Priester, IV, Esq.
9.10 Entire Agreement. This Agreement and the other written agreements
between Borrower and Lender represent the entire agreement between the parties
concerning the subject matter hereof, and all oral discussions and prior
agreements are merged herein.
9.11 Miscellaneous. This Agreement shall be construed and enforced under
the laws of the State of North Carolina. No amendment or modification hereof
shall be effective except in a writing executed by each of the parties hereto.
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[THE NEXT PAGE IS THE SIGNATURE PAGE]
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement, or
have caused this Agreement to be executed by their duly authorized officers, as
of the day and year first above written.
LENDER:
OBERLIN CAPITAL, L.P.
By: /s/ Robert G. Shepley, Jr.
_________________________________________
Robert G. Shepley, Jr.
President of the General Partner
BORROWER:
INTERACTIVE MAGIC, INC.
By: /s/ Robert L. Pickens
_________________________________________
Name: Robert L. Pickens
_______________________________________
Title: President
______________________________________
iMAGICONLINE CORPORATION
By: /s/ Robert L. Pickens
_______________________________________
Name: Robert L. Pickens
_______________________________________
Title: Vice President
______________________________________
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