INVESTOR'S RIGHTS AGREEMENT
THIS INVESTOR'S RIGHTS AGREEMENT (the "Agreement") is made as of February
4, 1998, by and between INTERACTIVE MAGIC, INC., a corporation organized under
the laws of the State of Maryland (the "Company"), and VERTICAL FINANCIAL
HOLDINGS, a corporation organized under the laws of Liechtenstein (the
"Investor").
RECITALS
WHEREAS, the Company and the Investor are parties to that certain Stock
Purchase Agreement of even date herewith (the "Stock Purchase Agreement");
WHEREAS, to induce the Investor to invest funds in the Company pursuant to
the Stock Purchase Agreement, the Investor and the Company hereby agree that
this Agreement shall govern the rights of the Investor to cause the Company to
register shares of Class A Common Stock issuable to the Investor upon conversion
of shares of Series B Convertible Preferred Stock purchased by the Investor
pursuant to the Stock Purchase Agreement, and certain other matters as set forth
herein;
NOW, THEREFORE, in consideration of the mutual promises and covenants set
forth herein, the parties hereto agree as follows:
1. Registration Rights. The Company covenants and agrees as follows:
1.1 Definitions.
(a) "Act" means the Securities Act of 1933, as amended.
(b) "Common Stock" means shares of the (i) Class A Common Stock
(Voting) of the Company, par value $.10 per share (the "Class A Common
Stock"), and (ii) Class B Common Stock (Nonvoting) of the Company, par
value $.10 per share.
(c) "Form S-3" means such form under the Act as in effect on the date
hereof or any registration form under the Act subsequently adopted by the
SEC which permits inclusion or incorporation of substantial information by
reference to other documents filed by the Company with the SEC.
(d) "Holder" means any person owning or having the right to acquire
Registrable Securities or any assignee thereof in accordance with Section
1.12 hereof.
(e) "1934 Act" means the Securities Exchange Act of 1934, as amended.
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(f) "Series B Preferred Stock" means the Company's Series B
Convertible Preferred Stock, par value $.10 per share.
(g) "Register," "registered," and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Act, and the declaration or ordering of effectiveness
of such registration statement.
(h) "Registrable Securities" means (i) the Class A Common Stock
issuable or issued upon conversion of the Series B Preferred Stock and (ii)
any Common Stock of the Company issued as (or issuable upon the conversion
or exercise of any warrant, right or other security which is issued as) a
dividend or other distribution with respect to, or in exchange for or in
replacement of the shares referenced in (i) above, excluding in all cases,
however, any Registrable Securities sold by a person in a transaction in
which his rights under this Section 1 are not assigned, or any shares of
Common Stock which have previously been registered or which have been sold
to the public either pursuant to a registration statement or Rule 144
promulgated under the Act.
(i) "SEC" shall mean the Securities and Exchange Commission.
1.2 Request for Registration.
(a) If the Company shall receive, at any time commencing one hundred
eighty (180) days after the effective date of the first registration
statement for a public offering of securities of the Company (the "IPO"), a
written request from the Investor or any Holder of at least 50% of the then
outstanding Registrable Securities that the Company file a registration
statement under the Act covering the registration of Registrable Securities
having a reasonably anticipated aggregate offering price to the public of
at least $7,500,000, the Company shall:
(i) within ten (10) days of the receipt thereof, give written
notice, in accordance with Section 3.5 hereof, of such request to all
Holders; and
(ii) file as soon as practicable, and in any event within sixty
(60) days of the receipt of such request, and use its best efforts to
cause to become effective as soon as practicable, the registration
under the Act of all Registrable Securities which the Holders request
to be registered as specified in a written request received by the
Company within twenty (20) days after such written notice from the
Company is mailed or delivered, subject to the limitations of
Subsection 1.2(b);
provided, that, if requested in writing by the managing underwriter of the
IPO, the Investor shall agree to refrain from exercising its rights
pursuant to this Section 1.2 until the first annual anniversary of the
effective date of the IPO.
(b) If the Holders initiating the registration request hereunder
("Initiating Holders") intend to distribute the Registrable Securities
covered by their request by means of an underwriting, they shall so advise
the Company as a part of their request made pursuant to
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Subsection 1.2(a) and the Company shall include such information in the
written notice referred to in Subsection 1.2(a). The underwriter will be
selected by the Company and shall be acceptable to a majority in interest
of the Initiating Holders. In such event, the right of any Holder to
include his Registrable Securities in such registration shall be
conditioned upon such Holder's participation in such underwriting and the
inclusion of such Holder's Registrable Securities in the underwriting
(unless otherwise mutually agreed by a majority in interest of the
Initiating Holders and such Holder) to the extent provided herein. All
Holders proposing to distribute their securities through such underwriting
shall (together with the Company as provided in Subsection 1.4(e)) enter
into an underwriting agreement in customary form with the underwriter or
underwriters selected for such underwriting. Notwithstanding any other
provision of this Section 1.2, if the underwriter advises the Initiating
Holders in writing that marketing factors require a limitation of the
number of shares to be underwritten, then the Company shall exclude from
such underwriting (x) first, the maximum number of securities, if any,
other than Registrable Securities, as is necessary to reduce the size of
the offering and (y) then the minimum number of Registrable Securities, pro
rata to the extent practicable, on the basis of the number of Registrable
Securities requested to be registered among the participating holders of
Registrable Securities, as is necessary in the opinion of the managing
underwriter(s) to reduce the size of the offering.
(c) In addition, the Company shall not be obligated to effect, or to
take any action to effect, any registration pursuant to this Section 1.2:
(i) In any particular jurisdiction in which the Company would be
required to execute a general consent to service of process in
effecting such registration, qualification, or compliance, unless the
Company is already subject to service in such jurisdiction and except
as may be required by the Act;
(ii) After the Company has effected one (1) registration pursuant
to this Section 1.2, excluding any registrations effected on Form S-3,
and such registration has been declared or ordered effective;
provided, that in the event that any Holders determine in good faith,
based on market conditions, not to sell substantially all of their
Registrable Securities registered pursuant to Section 1.2, such
Holders shall be entitled to require the Company to effect one (1)
additional registration pursuant to this Section 1.2;
(iii) If the Initiating Holders propose to dispose of shares of
Registrable Securities that may be immediately registered on Form S-3
pursuant to a request made pursuant to Section 1.11 below;
(iv) If the Company delivers to the Initiating Holders an
opinion, in form and substance acceptable to such Initiating Holders,
of counsel satisfactory to the Initiating Holders that the Registrable
Securities requested to be registered by the Initiating Holders may be
sold or transferred without restriction pursuant to Rule 144(k) of the
Act;
(v) During the period starting with the date sixty (60) days
prior to the Company's good faith estimate of the date of filing of,
and ending on (A) a date ninety (90) days after the effective date or
(B) the date of abandonment of, a Company-initiated registration
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statement relating to the offering of any of the Company's securities;
provided, that the Company is actively employing in good faith all
reasonable efforts to cause such registration statement to become
effective; or
(vi) If the Company reasonably anticipates that it will
consummate, within sixty (60) days after the date of receipt of any
request pursuant to this Section 1.2, a significant business
transaction that would be materially adversely affected, to the
material detriment of the Company, by a registration pursuant to this
Section 1.2 (all in the good faith determination of the Company's
Board of Directors as certified by a certificate of the President or
Chief Executive Officer of the Company); provided, that the
registration statement relating to the request pursuant to this
Section 1.2 shall be filed no later than sixty (60) days after the
closing (or any such similar event) of agreements or documents
consummating such transaction or the abandonment of such transaction,
but in any event not later than 120 days after the receipt of the
request pursuant to this Section 1.2; and provided, further, that the
Company shall not be permitted to delay, pursuant to this Section
1.2(c)(vi) or Section 1.2(c)(v), its obligations pursuant to this
Section 1.2 more than once in any twelve month period.
1.3 Company Registration. If (but without any obligation to do so) the
Company proposes to register (including for this purpose a registration effected
by the Company for stockholders other than the Holders) any of its stock or
other securities under the Act in connection with the public offering of such
securities (other than a registration relating solely to the sale of securities
to participants in a Company stock plan, a registration relating solely to a
Rule 145 transaction, a registration on any form which does not include
substantially the same information as would be required to be included in a
registration statement covering the sale of the Registrable Securities, a
registration in which the only Common Stock being registered is Common Stock
issuable upon conversion of debt securities which are also being registered, or
a registration on any registration form that does not permit secondary sales),
the Company shall, at such time, promptly give each Holder written notice of
such registration. Upon the written request of each Holder given within twenty
(20) days after giving of such notice by the Company in accordance with Section
3.5, the Company shall, subject to the provisions of Section 1.8, use its best
efforts to cause to be registered under the Act all of the Registrable
Securities that each such Holder has requested to be registered.
1.4 Obligations of the Company. Whenever required under this Section 1 to
effect the registration of any Registrable Securities, the Company shall, as
expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its best efforts to cause
such registration statement to become effective, and keep such registration
statement effective for a period of up to one hundred twenty (120) days or
until the distribution contemplated in the Registration Statement has been
completed, whichever first occurs; provided, however, that such one hundred
twenty (120) day period shall be extended for a period of time equal to the
period the Holder refrains from selling any securities included in such
registration at the request of an underwriter of Common Stock (or other
securities) of the Company, and provided further that in the case of any
registration of Registrable Securities on Form S-3 that are intended to be
offered on a continuous or delayed
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basis, such one hundred twenty (120) day period shall be extended until all
such Registrable Securities are sold, if applicable rules under the Act
governing the obligation to file a post-effective amendment permit, in lieu
of filing a post-effective amendment which (I) includes any prospectus
required by Section 10(a)(3) of the Act or (II) reflects facts or events
representing a material or fundamental change in the information set forth
in the registration statement, the incorporation by reference of
information required to be included in (I) and (II) above to be contained
in periodic reports filed pursuant to Section 13 or 15(d) of the 1934 Act
in the registration statement.
(b) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as, in the opinion of counsel to the Company, may be
necessary to comply with the provisions of the Act with respect to the
disposition of all securities covered by such registration statement.
(c) Furnish to the Holders such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of
the Act, and such other documents as they may reasonably request in order
to facilitate the disposition of Registrable Securities owned by them.
(d) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue
Sky laws of such jurisdictions as shall be reasonably requested by the
Holders; provided that the Company shall not be required in connection
therewith or as a condition thereto to qualify to do business or to file a
general consent to service of process in any such states or jurisdictions,
unless the Company is already subject to service in such jurisdiction and
except as may be required by the Act.
(e) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(f) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Act of the happening of any event as a
result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading in the light of the circumstances
then existing.
(g) Cause all such Registrable Securities registered pursuant
hereunder to be listed on each securities exchange on which similar
securities issued by the Company are then listed.
(h) Provide a transfer agent and registrar for all Registrable
Securities registered pursuant hereunder and a CUSIP number for all such
Registrable Securities, in each case not later than the effective date of
such registration.
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(i) Use its best efforts to furnish, on the date that such Registrable
Securities are delivered to the underwriters for sale in connection with
the registration pursuant to this Section 1, if such Registrable Securities
are being sold through underwriters, (i) an opinion, dated such date, of
counsel representing the Company for the purposes of such registration, in
form and substance as is customarily given to underwriters in an
underwritten public offering, addressed to the underwriters, and (ii) a
letter, dated such date, from the independent certified public accountants
of the Company, in form and substance as is customarily given by
independent certified public accountants to underwriters in an underwritten
public offering, addressed to the underwriters.
1.5 Furnish Information. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Section 1 with
respect to the Registrable Securities of any selling Holder that such Holder
shall furnish to the Company such information regarding itself, the Registrable
Securities held by it, and the intended method of disposition of such securities
as shall be required to effect the registration of such Holder's Registrable
Securities.
1.6 Expenses of Demand Registration. All expenses other than underwriting
discounts and commissions incurred in connection with registrations, filings or
qualifications pursuant to Section 1.2, including (without limitation) all
registration, filing and qualification fees, printers' and accounting fees, fees
and disbursements of counsel for the Company and the reasonable fees and
disbursements of one counsel for the selling Holders shall be borne by the
Company if such registration occurs after the one year anniversary of the IPO;
provided, that the Company shall not be responsible for fees and disbursements
of counsel for the selling Holders to the extent that they exceed $15,000. All
expenses including underwriting discounts and commissions incurred in connection
with a registration pursuant to Section 1.2 shall be borne by the selling
Holders if such registration occurs on or prior to the one year anniversary of
the IPO.
1.7 Expenses of Company Registration. The Company shall bear and pay all
expenses incurred in connection with any registration, filing or qualification
of Registrable Securities with respect to the registrations pursuant to Section
1.3 for each Holder, including (without limitation) all registration, filing,
and qualification fees, printers' and accounting fees relating or apportionable
thereto and, for one such registration only, the reasonable fees and
disbursements of one counsel for the selling Holders, but excluding underwriting
discounts and commissions relating to Registrable Securities.
1.8 Underwriting Requirements. In connection with any offering involving an
underwriting of shares of the Company's capital stock pursuant to Section 1.3,
the Company shall not be required under Section 1.3 to include any of a Holder's
securities in such underwriting unless such Holder accepts the terms of the
underwriting as agreed upon between the Company and the underwriters (or by
other persons entitled to select the underwriters), and then only in such
quantity as the underwriters determine in their sole discretion will not
jeopardize the success of the offering by the Company. If the total amount of
securities, including Registrable Securities, requested by stockholders and the
Company to be included in such offering exceeds the amount of securities that
the underwriters determine in their sole discretion is compatible with the
success of the offering, then the following priorities shall govern:
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(a) If the underwritten offering has been initiated by the Company,
the Company shall include in such underwriting (x) first, the securities
the Company proposes to sell, (y) second, the Registrable Securities, any
other securities entitled to the benefit of registration rights existing on
the date of this Agreement ("Third Party Registrable Securities") requested
to be included in such registration and up to 15% of the then outstanding
shares of Common Stock to the extent that such shares are owned by
directors or employees of the Company ("Management Registrable Securities")
and are requested to be included in such registration, pro rata to the
extent practicable, on the basis of the number of Registrable Securities,
Third Party Registrable Securities and Management Registrable Securities
requested to be registered among the participating holders of such
securities, and (z) third, any other securities, including Management
Registrable Securities that exceed the 15% threshold above, requested to be
included in such registration, all as is necessary in the opinion of the
managing underwriter(s) to reduce the size of the offering; and
(b) If the underwritten offering has been initiated by any holder of
Third Party Registrable Securities entitled to the benefit of any duly
exercised demand registration right, the Company shall include in such
underwriting (x) first, the securities requested to be included therein by
the holder of Third Party Registrable Securities requesting such
registration, (y) second, the Registrable Securities and any other Third
Party Registrable Securities or Management Registrable Securities
(provided, that such Management Registrable Securities shall not exceed 15%
of the then outstanding shares of Common Stock) requested to be included in
such registration, pro rata to the extent practicable, on the basis of the
number of Registrable Securities and such other Third Party Registrable
Securities and Management Registrable Securities requested to be registered
among the participating holders of such securities, and (z) third, any
other securities, including Management Registrable Securities that exceed
the 15% threshold above, requested to be included in such registration, all
as is necessary in the opinion of the managing underwriter(s) to reduce the
size of the offering.
1.9 Indemnification. In the event any Registrable Securities are included
in a registration statement under this Section 1:
(a) To the extent permitted by law, the Company will indemnify and
hold harmless each Holder, the officers and directors of each Holder
participating in such registration, any underwriter (as defined in the Act)
for such Holder and each person, if any, who controls such Holder or
underwriter within the meaning of the Act or the 1934 Act, against any
losses, claims, damages, or liabilities (joint or several) to which they
may become subject under the Act or state securities and blue sky laws, or
otherwise insofar as such losses, claims, damages, or liabilities (or
actions in respect thereof) arise out of or are based upon any of the
following statements, omissions or violations (collectively a "Violation"):
(i) any untrue statement or alleged untrue statement of a material fact
contained in such registration statement, including any preliminary
prospectus or final prospectus contained therein or any amendments or
supplements thereto and any document filed in connection therewith or in
connection with any registration or qualification under the state
securities and blue sky laws, (ii) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary
to make the statements therein not misleading, or (iii) any violation or
alleged violation by the Company of the Act or state
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securities and blue sky laws or any rule or regulation promulgated under
the Act or state securities and blue sky laws and the Company will pay to
each such Holder, underwriter or controlling person, as incurred, any legal
or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability, expense
or action; provided, however, that the Company shall not be liable in any
such case for any such loss, claim, damage, liability, or action to the
extent that it arises out of or is based upon a Violation which occurs in
reliance upon and in strict conformity with written information furnished
expressly for use in connection with such registration by any such Holder,
underwriter or controlling person.
(b) To the extent permitted by law, each Holder will, if Registrable
Securities held by such Holder are included in the securities as to which
registration is being effected, indemnify and hold harmless the Company,
each of its directors, each of its officers who has signed the registration
statement, each person, if any, who controls the Company within the meaning
of the Act, any underwriter, any other Holder selling securities in such
registration statement and any controlling person of any such underwriter
or other Holder, against any losses, claims, damages, or liabilities (joint
or several) to which any of the foregoing persons may become subject, under
the Act, insofar as such losses, claims, damages, or liabilities (or
actions in respect thereto) arise out of or are based upon any Violation,
in each case to the extent (and only to the extent) that such Violation
occurs in reliance upon and in strict conformity with written information
furnished by such Holder expressly for use in connection with such
registration; provided, however, that the indemnity agreement contained in
this Subsection 1.9(b) shall not apply to amounts paid in settlement of any
such loss, claim, damage, liability or action if such settlement is
effected without the consent of the Holder, which consent shall not be
unreasonably withheld; and provided, further, that in no event shall any
selling Holder's liability under this Subsection 1.9(b) exceed the proceeds
received by such Holder from the offering (net of any underwriting
discounts and commissions).
(c) Promptly after receipt by an indemnified party under this Section
1.9 of notice of the commencement of any action (including any governmental
action), such indemnified party will, if a claim in respect thereof is to
be made against any indemnifying party under this Section 1.9, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the
extent the indemnifying party so desires, jointly with any other
indemnifying party similarly noticed, to assume the defense thereof with
counsel mutually satisfactory to the parties; provided, however, that an
indemnified party (together with all other indemnified parties which may be
represented without conflict by one counsel) shall have the right to retain
one separate counsel, with the fees and expenses to be paid by the
indemnifying party, if representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to
differing interests between such indemnified party and any other party
represented by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action, if prejudicial to its ability to defend
such action, shall relieve such indemnifying party of its liability under
this Section 1.9, but (i) only to the extent of the liability actually
resulting from the failure to deliver written notice and (ii) the omission
so to deliver written notice to the indemnifying party will not relieve it
of any liability that it may have to any indemnified party otherwise than
under this Section 1.9. The indemnifying party will not be subject to any
liability under this Section 1.9 for any settlement
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made by the indemnified party without its consent (which consent shall not
be unreasonably withheld).
(d) If the indemnification provided for in this Section 1.9 is held by
a court of competent jurisdiction to be unavailable to an indemnified party
with respect to any loss, liability, claim, damage, or expense referred to
therein, then the indemnifying party, in lieu of indemnifying such
indemnified party hereunder, shall contribute to the amount paid or payable
by such indemnified party as a result of such loss, liability, claim,
damage, or expense in such proportion as is appropriate to reflect the
relative fault of the indemnifying party on the one hand and of the
indemnified party on the other in connection with the statements or
omissions that resulted in such loss, liability, claim, damage, or expense
as well as any other relevant equitable considerations. The relative fault
of the indemnifying party and of the indemnified party shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission to state a material fact
relates to information supplied by the indemnifying party or by the
indemnified party and the parties' relative intent, knowledge, access to
information, and opportunity to correct or prevent such statement or
omission; provided, that in no event shall any selling Holder's liability
under this Section 1.9(d) exceed the proceeds received by such Holder from
the offering (net of any underwriting discounts and commissions).
(e) Notwithstanding the foregoing, to the extent that the provisions
on indemnification and contribution contained in the underwriting agreement
entered into in connection with the underwritten public offering are in
conflict with the foregoing provisions, the provisions in the underwriting
agreement shall control.
(f) The obligations of the Company and Holders under this Section 1.9
shall survive the completion of any offering of Registrable Securities in a
registration statement under this Section 1, and otherwise.
1.10 Reports Under Securities Exchange Act of 1934. With a view to making
available to the Holders the benefits of Rule 144 promulgated under the Act and
any other rule or regulation of the SEC that may at any time permit a Holder to
sell securities of the Company to the public without registration or pursuant to
a registration on Form S-3, the Company agrees to use its best efforts to:
(a) make and keep public information available, as those terms are
understood and defined in SEC Rule 144, at all times after ninety (90) days
after the effective date of the first registration statement filed by the
Company for the offering of its securities to the general public;
(b) take such action, including the voluntary registration of its
Class A Common Stock under Section 12 of the 1934 Act, as is necessary to
enable the Holders to utilize Form S-3 for the sale of their Registrable
Securities, such action to be taken as soon as practicable after the end of
the fiscal year in which the first registration statement filed by the
Company for the offering of its securities to the general public is
declared effective;
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(c) file with the SEC in a timely manner all reports and other
documents required of the Company under the Act and the 1934 Act at any
time after the Company has become subject to any such reporting
requirements; and
(d) furnish to any Holder, so long as the Holder owns any Registrable
Securities, forthwith upon written request (i) a written statement by the
Company as to its compliance with the reporting requirements of SEC Rule
144 (at any time after ninety (90) days after the effective date of the
first registration statement filed by the Company for an offering of its
securities to the general public), the Act and the 1934 Act (at any time
after it has become subject to such reporting requirements), (ii) a copy of
the most recent annual or quarterly report of the Company and such other
reports and documents so filed by the Company, and (iii) such other
information as may be reasonably requested in availing any Holder of any
rule or regulation of the SEC which permits the selling of any such
securities without registration or pursuant to such form.
1.11 Form S-3 Registration. In case the Company shall receive at any time
after the completion of the first registration statement for a public offering
of securities of the Company (other than a registration statement relating
either to the sale of securities to employees of the Company pursuant to a stock
option, stock purchase or similar plan or an SEC Rule 145 transaction), a
written request from the Holders of at least fifteen percent (15%) of the
Registrable Securities then outstanding that the Company effect a registration
on Form S-3 and any related qualification or compliance with respect to all or a
part of the Registrable Securities owned by such Holder or Holders, the Company
will:
(a) promptly give written notice of the proposed registration, and any
related qualification or compliance, to all other Holders; and
(b) as soon as practicable, use its best efforts to effect such
registration and all such qualifications and compliances as may be so
requested and as would permit or facilitate the sale and distribution of
all or such portion of such Holder's or Holders' Registrable Securities as
are specified in such request, together with all or such portion of the
Registrable Securities of any other Holder or Holders joining in such
request as are specified in a written request given within twenty (20) days
after receipt of such written notice from the Company; provided, however,
that the Company shall not be obligated to effect any such registration,
qualification or compliance, pursuant to this Section 1.11: (1) if Form S-3
is not available for such offering by the Holders; or (2) in any particular
jurisdiction in which the Company would be required to qualify to do
business or to execute a general consent to service of process in effecting
such registration, qualification or compliance; (3) if the Holders,
together with the holders of any other securities of the Company entitled
to inclusion in such registration, propose to sell Registrable Securities
and such other securities on Form S-3 at a reasonably anticipated aggregate
offering price to the public of less than $1,000,000; (4) if, during any
twelve month period, the Company has already effected two registrations
pursuant to this Section 1.11; or (5) during the periods set forth in
Sections 1.2(c)(v) and (vi), if the provisions of such sections are
applicable to such proposed registration.
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(c) Subject to the foregoing, the Company shall file a registration
statement covering the Registrable Securities and other securities so
requested to be registered as soon as practicable after receipt of the
request or requests of the Holders. All expenses incurred in connection
with a registration requested pursuant to this Section 1.11, including,
without limitation, all registration, filing, qualification, printers' and
accounting fees, the reasonable fees and disbursements of one (1) counsel
for the selling Holder or Holders and the fees and disbursements of counsel
for the Company, but excluding any underwriting discounts or commissions
associated with Registrable Securities, shall be borne by the Company;
provided, that the Company shall not be responsible for fees and
disbursements of counsel for the selling Holders to the extent that they
exceed $15,000. Registrations effected pursuant to this Section 1.11 shall
not be counted as registrations effected pursuant to Sections 1.2 or 1.3.
1.12 Assignment of Registration Rights. The rights to cause the Company to
register Registrable Securities pursuant to this Section 1 may be assigned (but
only with all related obligations) by a Holder to any transferee or assignee who
acquires at least 25% of the Registrable Securities held by such Holder
immediately prior to such transfer or assignment, provided: (a) the Company is,
within a reasonable time after such transfer, furnished with written notice of
the name and address of such transferee or assignee and the securities with
respect to which such registration rights are being assigned; and (b) such
transferee or assignee agrees in writing to be bound by and subject to the terms
and conditions of this Agreement. In no event shall the Company be obligated to
effect more than one (1) registration pursuant to Section 1.2 hereof in the
aggregate except as otherwise provided in Section 1.2(c)(ii) hereof.
Notwithstanding anything herein to the contrary, the Investor shall be permitted
to assign the rights to cause the Company to register Registrable Securities
pursuant to this Section 1 to certain assignees of the Investor who may
participate in the initial purchase of the Series B Preferred Stock.
1.13 Termination of Registration Rights. No Holder shall be entitled to
exercise any registration right provided for in this Section 1 after five (5)
years following the consummation of the sale of securities pursuant to a
registration statement filed by the Company under the Act in connection with a
firm commitment underwritten offering of its securities to the general public or
if all shares of Registrable Securities held or entitled to be held upon
conversion by such holder may immediately be sold without restriction under Rule
144(k); provided, that to the extent that such five year period would otherwise
lapse during any period in which a request pursuant to Section 1.2 hereof is
delayed pursuant to Sections 1.2(c)(v) or (vi), such five year period shall be
extended for a period of time equal to such delay.
1.14 "Market Stand-Off" Agreement. The Investor hereby agrees that, during
the period of duration specified by the Company and an underwriter of Common
Stock or other securities of the Company, following the effective date of a
registration statement of the Company filed under the Act, it shall not, to the
extent requested by the Company and such underwriter, directly or indirectly
sell, offer to sell, contract to sell (including, without limitation, any short
sale), grant any option to purchase or otherwise transfer or dispose of (other
than to donees who agree to be similarly bound) any securities of the Company
held by it at any time during such period except Common Stock included in such
registration; provided, however:
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(a) that such market stand-off time period shall not exceed one
hundred eighty (180) days following the effective date of the Company's
first registration of Common Stock or other securities under the Act and
ninety (90) days following the effective date with respect to all
subsequent registrations; and
(b) all officers and directors of the Company and all five percent
(5%) or greater stockholders of the Company enter into similar agreements.
In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to the Registrable Securities of the
Investor (and the shares or securities of every other person subject to the
foregoing restriction) until the end of such period.
2. Covenants of the Company.
2.1 Financial Statements and Other Information. Except as otherwise set
forth below in this Section 2.1, until the Company is subject to the reporting
requirements of the 1934 Act, the Company will deliver to the Investor, for so
long as the Investor holds any shares of the Class A Common Stock:
(a) as soon as available, but in any event within forty-five (45) days
after the end of each quarterly accounting period in each fiscal year,
unaudited consolidated statements of operations and consolidated cash flows
of the Company and its subsidiaries for such quarterly period and for the
period from the beginning of the fiscal year to the end of such quarter,
and consolidated balance sheets of the Company and its subsidiaries as of
the end of such quarterly period, setting forth in each case comparisons to
the annual budget and to the corresponding period in the preceding fiscal
year, and all such statements will be prepared in accordance with generally
accepted accounting principles, consistently applied (except for the
absence of notes and subject to normal year-end adjustments);
(b) as promptly as possible (but in any event within ninety (90) days)
after the end of each fiscal year, audited consolidated statements of
operations and a consolidated statement of cash flows of the Company and
its subsidiaries for such fiscal year and consolidated balance sheets and
statements of stockholders' equity of the Company and its subsidiaries as
of the end of such fiscal year, setting forth comparisons to the annual
budget and to the preceding fiscal year, all prepared in accordance with
United States generally accepted accounting principles, consistently
applied, and accompanied by an opinion of an independent accounting firm
selected by the Company's Board of Directors and, in the event such firm is
not Ernst & Young LLP, reasonably acceptable to the Investor;
(c) prior to the end of each fiscal year, an annual budget (approved
by the Board of Directors) prepared on a monthly, consolidated basis for
the Company and its subsidiaries for the succeeding fiscal year (displaying
detailed anticipated statements of operations and cash flows and balance
sheets), and promptly upon preparation thereof any other significant
budgets which the Company prepares and any revisions of such annual or
other budgets;
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(d) promptly (and in any event within thirty (30) days) after the
discovery or receipt of notice of any event or circumstance affecting the
Company or its subsidiaries that is determined in good faith by the Company
to be material to the Company and its subsidiaries, taken as a whole,
including but not limited to, the filing of any material litigation against
the Company or its subsidiaries, acquisitions, mergers, substantial sales
of assets, significant regulatory or legal developments, the commencement
of voluntary or involuntary bankruptcy proceedings, natural or other
disasters, significant changes in management or directors, changes in
auditors, and execution or termination of, or defaults under, material
contracts, a letter from the Chief Executive Officer or Chief Financial
Officer of the Company specifying the nature and period of existence
thereof and, in the case of material litigation, what actions the Company
and its subsidiaries have taken and propose to take with respect thereto;
(e) promptly after transmission thereof, copies of all financial
statements, proxy statements, reports and any other written communications
which the Company sends to its stockholders generally and copies of all
registration statements and all regular, special or periodic reports which
it files with the SEC or with any securities exchange on which any of its
securities are then listed, and copies of all press releases and other
statements made available generally by the Company to the public;
(f) a notice specifying the terms of all sales of the Company's
securities, promptly following the consummation thereof; and
(g) notice of the effectiveness under the Act of the registration
covering the Company's initial public offering, such notice to be provided
by telecopier immediately following the SEC's notification to the Company
of such effectiveness.
Each of the financial statements referred to in this Section 2.1 will be
true and correct in all material respects and will fairly present the Company's
consolidated financial position and results of operations as of the dates and
for the periods stated therein, subject in the case of the unaudited financial
statements to changes resulting from normal year-end audit adjustments (none of
which would, alone or in the aggregate, be materially adverse to the Company's
financial condition, operating results or business prospects). The Company's
obligation to provide to the Investor the materials described in Subsection (e)
above will continue after the Company is subject to the reporting requirements
of the 1934 Act until the Investor no longer holds at least 20% of the shares of
the Series B Preferred Stock (or Class A Common Stock issued upon conversion
thereof).
2.2 Inspection of Property. Until the Company is subject to the reporting
requirements of the 1934 Act, the Company will permit the Investor, or any
representatives designated by the Investor, upon reasonable notice and during
normal business hours and such other times as the Investor may reasonably
request, to (i) visit and inspect any of the properties of the Company and its
subsidiaries, (ii) examine the corporate and financial records of the Company
and its subsidiaries and make copies thereof or extracts therefrom, (iii)
discuss the affairs, finances and accounts of the Company and its subsidiaries
with the directors, senior management and independent accountants of the Company
and its subsidiaries, and (iv) consult
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with the management of the Company and its subsidiaries as to their affairs,
finances and accounts.
2.3 Positive Covenants. So long as any shares of the Series B Preferred
Stock (or Class A Common Stock issued upon conversion thereof) are outstanding,
the Company agrees as follows:
(a) The Company will retain Ernst & Young LLP or, in the event Ernst &
Young LLP is terminated by the Company, such other independent public
accountants reasonably acceptable to the Investor in its discretion who
shall certify the Company's financial statements at the end of each fiscal
year. In the event the services of the independent public accountants so
selected, or any firm of independent public accountants hereafter employed
by the Company are terminated, the Company will promptly thereafter notify
the Investor and will request the firm of independent public accountants
whose services are terminated to deliver to the Investor a letter from such
firm setting forth the reasons for the termination of their services. In
the event of such termination, the Company will promptly thereafter engage
another firm of independent public accountants of recognized national
standing. In its notice to the Investor the Company shall state whether the
change of accountants was recommended or approved by the Board of Directors
of the Company or any committee thereof.
(b) The Company's Board of Directors will meet at least once every
fiscal quarter. The number of directors shall not exceed seven.
(c) The Company shall maintain in full force and effect, fire,
casualty, workmen's compensation and liability insurance policies, with
extended coverage, in such amounts and with such coverage as are carried by
companies in a position similar to that of the Company.
2.4 Negative Covenants. the Company shall not without first obtaining the
written consent of the Investor:
(a) engage in any spin-out, distribution or sale of any business unit
of the Company;
(b) enter into any transactions with affiliates of the Company except
on arms-length terms;
(c) redeem or repurchase any outstanding equity securities of the
Company except for: repurchases of unvested or restricted shares of Common
Stock at cost from employees, consultants, or members of the Board of
Directors pursuant to repurchase options of the Company (i) currently
outstanding or (ii) hereafter entered into pursuant to a stock option plan
or restricted stock plan approved by the Company's Board of Directors; or
(d) pay any dividend on or any distribution in respect of any shares
of capital stock, other than required dividends on the Series A Preferred
Stock.
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2.5 Issuance of Additional Shares; Covenant Regarding Stock Options.
(a) On the date on which the last outstanding share of the Series B
Preferred Stock is converted (the "Final Conversion Date"), the Company
shall determine, and identify on a schedule provided to the Holders, the
maximum aggregate number of shares of Common Stock issuable upon exercise,
conversion or exchange (assuming the satisfaction of any conditions thereto
including, without limitation, the passage of time) of securities of the
Company that are exercisable for, convertible into or exchangeable for
shares of Common Stock outstanding on the Final Conversion Date (the
securities identified on the schedule shall be referred to herein as the
"Convertible Securities"); provided, that notwithstanding anything to the
contrary herein, the Convertible Securities outstanding on the Final
Conversion Date shall not include any portion of any Convertible Securities
to the extent that such Convertible Securities, by their explicit terms,
can no longer be exercised due to their expiration or the irrevocable
failure of any precondition to their exercisability, including the failure
to achieve performance goals required for exercisability. Each such share
of Common Stock underlying such Convertible Securities may hereinafter be
referred to as an "Underlying Share" and such maximum number of Underlying
Shares may hereinafter be referred to as the "Total Number of Underlying
Shares." If the Total Number of Underlying Shares exceeds 900,000, the
"Protected Amount" shall equal the Total Number of Underlying Shares minus
900,000; otherwise, the Protected Amount shall equal zero (0). After the
date (the "Trigger Date") upon which Convertible Securities outstanding on
the Final Conversion Date that are exercisable for, convertible into or
exchangeable for such number of Underlying Shares as shall equal the
Protected Amount shall have been exercised, converted or exchanged, or
shall have expired or terminated, the Company shall, within twenty (20)
days after the end of each fiscal quarter of the Company commencing with
the fiscal quarter in which the Trigger Date occurs, determine whether in
such prior fiscal quarter there have been any Underlying Shares issued in
excess of the Protected Amount ("Excess Shares") If any such Excess Shares
shall have been issued, the Company shall, within ten (10) days of such
determination, issue to the Holders, pro rata and without any additional
consideration, such number of additional shares of Class A Common Stock as
shall equal the aggregate number of such Excess Shares issued in such
fiscal quarter multiplied by the Applicable Percentage (as defined in the
Articles Supplementary to the Articles of Incorporation of the Company)
determined on the Final Conversion Date. The Company's obligations pursuant
to this Section 2.5(a) shall terminate at such time as all Convertible
Securities outstanding on the Final Conversion Date shall no longer be
outstanding (whether through exercise, conversion, exchange, expiration or
termination).
(b) During the period commencing on the date of conversion of the
Series B Preferred Stock and ending two years from such date, the Company
shall not without first obtaining the written consent of the Investor,
issue any security convertible into Common Stock to employees, advisors,
consultants or outside directors pursuant to a stock option plan or
restricted stock plan if the cumulative total number of shares of Common
Stock issuable or issued upon exercise of such securities issued during
such period (and not repurchased at cost by the Company in connection with
the termination of employment) exceeds 5% of the outstanding shares of
Common Stock determined on a fully diluted basis; provided, that the
Convertible Securities outstanding on the Final Conversion Date shall not
be considered outstanding for purposes of this Section 2.5(b).
15
2.6 Termination of Certain Covenants. The covenants set forth in Sections
2.3 and 2.4 shall terminate and be of no further force or effect upon the
consummation of a firm commitment underwritten initial public offering of
securities of the Company.
3. Miscellaneous.
3.1 Successors and Assigns. Except as otherwise provided herein, the terms
and conditions of this Agreement shall inure to the benefit of and be binding
upon the respective successors and assigns of the parties (including transferees
of any shares of Registrable Securities). Nothing in this Agreement, express or
implied, is intended to confer upon any party other than the parties hereto or
their respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
3.2 Governing Law. This Agreement shall be governed by and construed under
the laws of the State of New York, disregarding New York principles of conflicts
of laws which would otherwise provide for the application of the substantive
laws of another jurisdiction.
3.3 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
3.4 Titles and Subtitles. The titles and subtitles used in this Agreement
are used for convenience only and are not to be considered in construing or
interpreting this Agreement.
3.5 Notices. Unless otherwise provided, any notice required or permitted
under this Agreement shall be given in writing and shall be deemed effectively
given upon personal delivery to the party to be notified upon delivery by
registered or certified mail, postage prepaid, return receipt requested and
addressed to the party to be notified at the address indicated for such party on
the signature page hereof, or at such other address as such party may designate
by ten (10) days' advance written notice to the other parties with a copy for
the Company to Smith, Anderson, Blount, Dorsett, Xxxxxxxx & Xxxxxxxx, L.L.P.,
P.O. Box 2611, 0000 Xxxxx Xxxxx Xxxxxxx Xxxxxx, Xxxxxxx, Xxxxx Xxxxxxxx 00000,
Attention: Xxxxxx X. Xxxxx, Esq., and a copy for the Investor, to Bachner,
Tally, Xxxxxxx & Xxxxxx LLP, 000 Xxxxxxx Xxxxxx, Xxx Xxxx, Xxx Xxxx 00000-0000,
Attention: Xxxx X. Xxxxxxxx, Esq.
3.6 Expenses. If any action at law or in equity is necessary to enforce or
interpret the terms of this Agreement, the prevailing party shall be entitled to
reasonable attorneys' fees actually incurred, costs and necessary disbursements
in addition to any other relief to which such party may be entitled.
3.7 Amendments and Waivers. Any term of this Agreement may be amended and
the observance of any term of this Agreement may be waived (either generally or
in a particular instance and either retroactively or prospectively), only with
the written consent of the Company and the holders of two-thirds of the
Registrable Securities then outstanding. Any amendment or
16
waiver effected in accordance with this Section 3.7 shall be binding upon each
holder of any Registrable Securities then outstanding, each future holder of all
such Registrable Securities, and the Company.
3.8 Severability. If one or more provisions of this Agreement are held to
be unenforceable under applicable law, such provision shall be excluded from
this Agreement and the balance of the Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.
3.9 Entire Agreement. This Agreement constitutes the full and entire
understanding and agreement between the parties with regard to the subjects
hereof.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
INTERACTIVE MAGIC, INC.
By: /s/ Xxxxxx X. Xxxxxxx
_____________________________________
Name: Xxxxxx X. Xxxxxxx
Title: President
Address: X.X. Xxx 00000
Xxxxxxxx Xxxxxxxx Xxxx, XX 00000
VERTICAL FINANCIAL HOLDINGS
By: /s/ Xxxxx Xxxx
_____________________________________
Name: Xxxxx Xxxx
Title: Chairman
Address: Xxxxxxxxxxxxxxxxxxxx 00
XX-0000 Xxxxxxxxxx, Xxxxxxxxxxx
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