0000950133-01-502755.txt : 20011009 0000950133-01-502755.hdr.sgml : 20011009 ACCESSION NUMBER: 0000950133-01-502755 CONFORMED SUBMISSION TYPE: SC 13D/A PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 20011002 GROUP MEMBERS: FRANK A. MCGREW IV GROUP MEMBERS: IMAGES INVESTOR PORTFOLIO GROUP MEMBERS: MEMPHIS ANGELS, LLC GROUP MEMBERS: PARADIGM CAPITAL EQUITY PARTNER GROUP MEMBERS: PARADIGM HOLDINGS FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: IMAGE INVESTOR PORTFOLIO A SEP SER OF MEMPHIS ANGELS LLC CENTRAL INDEX KEY: 0001141302 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D/A BUSINESS ADDRESS: STREET 1: 6410 POPLAR AVENUE STREET 2: SUITE 395 CITY: MEMPHIS STATE: TN ZIP: 38119 BUSINESS PHONE: 9016826060 SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: INTERNET PICTURES CORP CENTRAL INDEX KEY: 0001088022 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 522213841 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D/A SEC ACT: 1934 Act SEC FILE NUMBER: 005-57597 FILM NUMBER: 1750199 BUSINESS ADDRESS: STREET 1: 1009 COMMERCE PARK DR CITY: OAK RIDGE STATE: TN ZIP: 37830 BUSINESS PHONE: 8654823000 MAIL ADDRESS: STREET 1: 1009 COMMERCE PARK DR CITY: OAK RIDGE STATE: TN ZIP: 37830 FORMER COMPANY: FORMER CONFORMED NAME: BAMBOO COM INC DATE OF NAME CHANGE: 19990604 SC 13D/A 1 w53607sc13da.txt AMENDMENT #2 TO SCHEDULE 13D 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 SCHEDULE 13D AMENDMENT NO. 2 UNDER THE SECURITIES EXCHANGE ACT OF 1934 Internet Pictures Corporation --------------------------------- (Name of Issuer) COMMON STOCK -------------------------------- (Title of Class of Securities) 46059S200 ----------------- (CUSIP Number) Warner B. Rodda, Esq. Paradigm Capital Equity Partners, LLC 6410 Poplar Ave., Ste 395 Memphis, TN 38119 (901) 682-6060 ---------------------------------------- (Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications) September 26, 2001 --------------------------------------- (Date of Event which Requires Filing of this Statement) If the filing person has previously filed a statement on Schedule 13G to report the acquisition that is the subject of this Schedule 13D, and is filing this schedule because of Sections 240.13d-1(e), 240.13d-1(f) or 240.13d-1(g), check the following box. |_| NOTE: Schedules filed in paper format shall include a signed original and five copies of the schedule, including all exhibits. See Section 240.13d-7(b) for other parties to whom copies are to be sent. * The remainder of this cover page shall be filled out for a reporting person's initial filing on this form with respect to the subject class of securities, and for any subsequent amendment containing information which would alter disclosures provided in a prior cover page. The information required on the remainder of this cover page shall not be deemed to be "filed" for the purpose of Section 18 of the Securities Exchange Act of 1934 ("Act") or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes). (Continued on following page(s)) Page 1 of 13 pages 2 Page 2 of 14 pages CUSIP No. 46059S200 13D --------- ----------------------------------------------------------------------------------------------------- (1) Names of Reporting Persons. SS or I.R.S. Identification Nos. of Above Persons Image Investor Portfolio, a separate series of Memphis Angels, LLC ----------------------------------------------------------------------------------------------------- (2) Check The Appropriate Box If A Member Of A Group (a) : X (b) : ----------------------------------------------------------------------------------------------------- (3) SEC Use Only ----------------------------------------------------------------------------------------------------- (4) Source Of Funds* WC ----------------------------------------------------------------------------------------------------- (5) Check Box If Disclosure Of Legal Proceedings Is Required Pursuant To Items 2(d) Or 2(e): ----------------------------------------------------------------------------------------------------- (6) Citizenship Or Place Of Organization Delaware ----------------------------------------------------------------------------------------------------- Number Of Shares (7) Sole Voting Power 7,030,640 (1) Beneficially Owned By Each Reporting Person With (8) Shared Voting Power 0 (9) Sole Dispositive Power 7,030,640 (1) (10) Shared Dispositive Power 0 (11) Aggregate Amount Beneficially Owned By Each Reporting Person 7,030,640 (1) ----------------------------------------------------------------------------------------------------- (12) Check If The Aggregate Amount In Row (11) Excludes Certain Shares* [ ] ----------------------------------------------------------------------------------------------------- (13) Percent Of Class Represented By Amount In Row (11) 51.2% (2) ----------------------------------------------------------------------------------------------------- (14) Type Of Reporting Person OO -------------------------------------------------------------------------------- (1) Consists of shares of Common Stock issuable upon conversion of (i) 500,000 shares of Series B Preferred Stock acquired in the Third Closing (as defined herein) upon conversion of the outstanding principal of a convertible promissory note that had been issued in connection with the First Closing and Second Closing (each as defined herein) and 13,830 shares of Series B Preferred Stock issued in consideration for substantially all of the accrued interest on such promissory note at the time of conversion; (ii) 250,000 shares of Series B Preferred Stock underlying warrants (the "Tranche A Warrants") issued in the First Closing and Second Closing; and (iii) 115,000 shares of Series B Preferred Stock acquired upon partial exercise of a warrant (the "Tranche B Warrant") in the Third Closing. Each share of Series B Preferred Stock is initially convertible into 8 shares of Common Stock (subject to adjustment--See Item 4 of this Amendment). (2) Calculated in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended. The Reporting Person's actual voting interest is 39.9% because all shares of Series B Preferred Stock, including the shares acquired by the New Investors (as defined herein), vote on an as-converted basis with the Common Stock. SEE INSTRUCTION BEFORE FILLING OUT! 3 Page 3 of 14 pages CUSIP No. 46059S200 13D --------- ---------------------------------------------------------------------------------------------- (1) Names of Reporting Persons. SS or I.R.S. Identification Nos. of Above Persons Memphis Angels, LLC ---------------------------------------------------------------------------------------------- (2) Check The Appropriate Box If A Member Of A Group (a) : X (b) : ---------------------------------------------------------------------------------------------- (3) SEC Use Only ---------------------------------------------------------------------------------------------- (4) Source Of Funds* WC ---------------------------------------------------------------------------------------------- (5) Check Box If Disclosure Of Legal Proceedings Is Required Pursuant To Items 2(d) Or 2(e): ---------------------------------------------------------------------------------------------- (6) Citizenship Or Place Of Organization Delaware ---------------------------------------------------------------------------------------------- Number Of Shares (7) Sole Voting Power 7,030,640 (1) Beneficially Owned By Each Reporting Person With (8) Shared Voting Power 0 (9) Sole Dispositive Power 7,030,640 (1) (10) Shared Dispositive Power 0 (11) Aggregate Amount Beneficially Owned By Each Reporting Person 7,030,640 (1) ----------------------------------------------------------------------------------------------------- (12) Check If The Aggregate Amount In Row (11) Excludes Certain Shares* [ ] ----------------------------------------------------------------------------------------------------- (13) Percent Of Class Represented By Amount In Row (11) 51.2% (2) ----------------------------------------------------------------------------------------------------- (14) Type Of Reporting Person OO -------------------------------------------------------------------------------- (1) Consists of shares of Common Stock issuable upon conversion of (i) 500,000 shares of Series B Preferred Stock acquired in the Third Closing (as defined herein) upon conversion of the outstanding principal of a convertible promissory note that had been issued in connection with the First Closing and Second Closing (each as defined herein) and 13,830 shares of Series B Preferred Stock issued in consideration for substantially all of the accrued interest on such promissory note at the time of conversion; (ii) 250,000 shares of Series B Preferred Stock underlying warrants (the "Tranche A Warrants") issued in the First Closing and Second Closing; and (iii) 115,000 shares of Series B Preferred Stock acquired upon partial exercise of a warrant (the "Tranche B Warrant") in the Third Closing. Each share of Series B Preferred Stock is initially convertible into 8 shares of Common Stock (subject to adjustment--See Item 4 of this Amendment). All of such shares are held or may be acquired by Image Investor Portfolio, a separate series of Memphis Angels LLC, a Delaware limited liability company. (2) Calculated in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended. The Reporting Person's actual voting interest is 39.9% because all shares of Series B Preferred Stock, including the shares acquired by the New Investors (as defined herein), vote on an as-converted basis with the Common Stock. SEE INSTRUCTION BEFORE FILLING OUT! 4 Page 4 of 13 pages CUSIP No. 46059S200 13D --------- ---------------------------------------------------------------------------------------------- (1) Names of Reporting Persons. SS or I.R.S. Identification Nos. of Above Persons Paradigm Capital Equity Partners, LLC ---------------------------------------------------------------------------------------------- (2) Check The Appropriate Box If A Member Of A Group (a) : X (b) : ---------------------------------------------------------------------------------------------- (3) SEC Use Only ---------------------------------------------------------------------------------------------- (4) Source Of Funds* AF ---------------------------------------------------------------------------------------------- (5) Check Box If Disclosure Of Legal Proceedings Is Required Pursuant To Items 2(d) Or 2(e): ---------------------------------------------------------------------------------------------- (6) Citizenship Or Place Of Organization Delaware ---------------------------------------------------------------------------------------------- Number Of Shares (7) Sole Voting Power 7,030,640 (1) Beneficially Owned By Each Reporting Person With (8) Shared Voting Power 0 (9) Sole Dispositive Power 7,030,640 (1) (10) Shared Dispositive Power 0 (11) Aggregate Amount Beneficially Owned By Each Reporting Person 7,030,640 (1) ---------------------------------------------------------------------------------------------- (12) Check If The Aggregate Amount In Row (11) Excludes Certain Shares* [ ] ---------------------------------------------------------------------------------------------- (13) Percent Of Class Represented By Amount In Row (11) 51.2% (2) ---------------------------------------------------------------------------------------------- (14) Type Of Reporting Person OO -------------------------------------------------------------------------------- (1) Consists of shares of Common Stock issuable upon conversion of (i) 500,000 shares of Series B Preferred Stock acquired in the Third Closing (as defined herein) upon conversion of the outstanding principal of a convertible promissory note that had been issued in connection with the First Closing and Second Closing (each as defined herein) and 13,830 shares of Series B Preferred Stock issued in consideration for substantially all of the accrued interest on such promissory note at the time of conversion; (ii) 250,000 shares of Series B Preferred Stock underlying warrants (the "Tranche A Warrants") issued in the First Closing and Second Closing; and (iii) 115,000 shares of Series B Preferred Stock acquired upon partial exercise of a warrant (the "Tranche B Warrant") in the Third Closing. Each share of Series B Preferred Stock is initially convertible into 8 shares of Common Stock (subject to adjustment--See Item 4 of this Amendment). All of such shares are held or may be acquired by Image Investor Portfolio, a separate series of Memphis Angels LLC, a Delaware limited liability company, of which Paradigm Capital Equity Partners, LLC, a Delaware limited liability company, is the Manager. (2) Calculated in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended. The Reporting Person's actual voting interest is 39.9% because all shares of Series B Preferred Stock, including the shares acquired by the New Investors (as defined herein), vote on an as-converted basis with the Common Stock. SEE INSTRUCTION BEFORE FILLING OUT! 5 Page 5 of 13 pages CUSIP No. 46059S200 13D --------- ----------------------------------------------------------------------------------------------------- (1) Names of Reporting Persons. SS or I.R.S. Identification Nos. of Above Persons Paradigm Holdings ----------------------------------------------------------------------------------------------------- (2) Check The Appropriate Box If A Member Of A Group (a) : X (b) : ----------------------------------------------------------------------------------------------------- (3) SEC Use Only ----------------------------------------------------------------------------------------------------- (4) Source Of Funds* AF ----------------------------------------------------------------------------------------------------- (5) Check Box If Disclosure Of Legal Proceedings Is Required Pursuant To Items 2(d) Or 2(e): ----------------------------------------------------------------------------------------------------- (6) Citizenship Or Place Of Organization Delaware ----------------------------------------------------------------------------------------------------- Number Of Shares (7) Sole Voting Power 7,030,640 (1) Beneficially Owned By Each Reporting Person With (8) Shared Voting Power 0 (9) Sole Dispositive Power 7,030,640 (1) (10) Shared Dispositive Power 0 (11) Aggregate Amount Beneficially Owned By Each Reporting Person 7,030,640 (1) ----------------------------------------------------------------------------------------------------- (12) Check If The Aggregate Amount In Row (11) Excludes Certain Shares* [ ] ----------------------------------------------------------------------------------------------------- (13) Percent Of Class Represented By Amount In Row (11) 51.2% (2) ----------------------------------------------------------------------------------------------------- (14) Type Of Reporting Person PN -------------------------------------------------------------------------------- (1) Consists of shares of Common Stock issuable upon conversion of (i) 500,000 shares of Series B Preferred Stock acquired in the Third Closing (as defined herein) upon conversion of the outstanding principal of a convertible promissory note that had been issued in connection with the First Closing and Second Closing (each as defined herein) and 13,830 shares of Series B Preferred Stock issued in consideration for substantially all of the accrued interest on such promissory note at the time of conversion; (ii) 250,000 shares of Series B Preferred Stock underlying warrants (the "Tranche A Warrants") issued in the First Closing and Second Closing; and (iii) 115,000 shares of Series B Preferred Stock acquired upon partial exercise of a warrant (the "Tranche B Warrant") in the Third Closing. Each share of Series B Preferred Stock is initially convertible into 8 shares of Common Stock (subject to adjustment--See Item 4 of this Amendment). All of such shares are held or may be acquired by Image Investor Portfolio, a separate series of Memphis Angels LLC, a Delaware limited liability company, of which Paradigm Capital Equity Partners, LLC, a Delaware limited liability company, is the Manager, of which Paradigm Holdings, a Delaware general partnership, is the Managing Member. (2) Calculated in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended. The Reporting Person's actual voting interest is 39.9% because all shares of Series B Preferred Stock, including the shares acquired by the New Investors (as defined herein), vote on an as-converted basis with the Common Stock. SEE INSTRUCTION BEFORE FILLING OUT! 6 Page 6 of 13 pages CUSIP No. 46059S200 13D --------- ----------------------------------------------------------------------------------------------------- (1) Names of Reporting Persons. SS or I.R.S. Identification Nos. of Above Persons Frank A. McGrew IV ----------------------------------------------------------------------------------------------------- (2) Check The Appropriate Box If A Member Of A Group (a) : X (b) : ----------------------------------------------------------------------------------------------------- (3) SEC Use Only ----------------------------------------------------------------------------------------------------- (4) Source Of Funds* AF ----------------------------------------------------------------------------------------------------- (5) Check Box If Disclosure Of Legal Proceedings Is Required Pursuant To Items 2(d) Or 2(e): ----------------------------------------------------------------------------------------------------- (6) Citizenship Or Place Of Organization Tennessee ----------------------------------------------------------------------------------------------------- Number Of Shares (7) Sole Voting Power 7,030,640 (1) Beneficially Owned By Each Reporting Person With (8) Shared Voting Power 0 (9) Sole Dispositive Power 7,030,640 (1) (10) Shared Dispositive Power 0 ----------------------------------------------------------------------------------------------------- (11) Aggregate Amount Beneficially Owned By Each Reporting Person 7,030,640 (1) ----------------------------------------------------------------------------------------------------- (12) Check If The Aggregate Amount In Row (11) Excludes Certain Shares* [ ] ----------------------------------------------------------------------------------------------------- (13) Percent Of Class Represented By Amount In Row (11) 51.2% (2) ----------------------------------------------------------------------------------------------------- (14) Type Of Reporting Person IN -------------------------------------------------------------------------------- (1) Consists of shares of Common Stock issuable upon conversion of (i) 500,000 shares of Series B Preferred Stock acquired in the Third Closing (as defined herein) upon conversion of the outstanding principal a convertible promissory note that had been issued in connection with the First Closing and Second Closing (each as defined herein) and 13,830 shares of Series B Preferred Stock issued in consideration for substantially all of the accrued interest on such promissory note at the time of conversion; (ii) 250,000 shares of Series B Preferred Stock underlying warrants (the "Tranche A Warrants") issued in the First Closing and Second Closing; and (iii) 115,000 shares of Series B Preferred Stock acquired upon partial exercise of a warrant (the "Tranche B Warrant") in the Third Closing. Each share of Series B Preferred Stock is initially convertible into 8 shares of Common Stock (subject to adjustment--See Item 4 of this Amendment). All of such shares are held or may be acquired by Image Investor Portfolio, a separate series of Memphis Angels LLC, a Delaware limited liability company, of which Paradigm Capital Equity Partners, LLC, a Delaware limited liability company, is the Manager, of which Paradigm Holdings, a Delaware general partnership, is the Managing Member, of which Mr. McGrew is the Managing Partner. (2) Calculated in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended. The Reporting Person's actual voting interest is 39.9% because all shares of Series B Preferred Stock, including the shares acquired by the New Investors (as defined herein), vote on an as-converted basis with the Common Stock. SEE INSTRUCTION BEFORE FILLING OUT! 7 Page 7 of 13 pages ITEM 1. SECURITY AND ISSUER. This Amendment No. 2 to Schedule 13D (this "Amendment") relates to the Common Stock, $.001 par value per share (the "shares"), of Internet Pictures Corporation, a Delaware corporation (the "Company"), and is being filed on behalf of the undersigned to amend the Schedule 13D originally filed on May 24, 2001 (the "Schedule 13D") and amended on May 30, 2001. The principal executive offices of the Company are located at 3160 Crow Canyon Road, Suite 400, San Ramon, CA 94503, (925) 242-4000. Unless otherwise indicated, all capitalized terms used herein but not defined shall have the same meaning as set forth in the Schedule 13D. ITEM 3. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION. Item 3 of the Schedule 13D is amended, in pertinent part, to add the following paragraph: On September 26, 2001, pursuant to the Third Closing to the Purchase Agreement, Image exercised a portion of the Tranche B Warrant, acquiring 115,000 shares of Series B Preferred Stock of the Company in exchange for an aggregate exercise price of $2,300,000. Additionally, Image transferred a portion of the Tranche B Warrant that it did not exercise to certain unaffiliated third parties (the "New Investors"). The New Investors exercised such portion of the Tranche B Warrant for their own accounts, acquiring an aggregate of 486,250 shares of Series B Preferred Stock of the Company for an aggregate exercise price of $9,725,000. The unexercised remainder of the Tranche B Warrant expired according to its terms at the time of the Third Closing. The source of funds used by Image in connection with the exercise of the Tranche B Warrant in the Third Closing was working capital and other funds. In connection with the Third Closing, the principal amount of the Promissory Note was automatically converted, along with substantially all of the accrued interest, into an aggregate of 513,830 shares of Series B Preferred Stock. ITEM 4. PURPOSE OF TRANSACTION. Item 4 of the Schedule 13D is amended and restated in its entirety as follows: Image acquired the securities of the Company to obtain a controlling equity interest in the Company. Depending on its evaluation of the Company's business and prospects, and upon future developments (including, but not limited to, performance of the Common Stock in the market, availability of funds, alternative uses of funds, and money, stock market and general economic conditions), Image may, from time to time, purchase additional securities of the Company, dispose of all or a portion of the securities held by it, or cease buying or selling such securities. Any such additional purchases or sales of the securities of the Company may be in open market or privately negotiated transactions or otherwise. Pursuant to the Purchase Agreement, in the First Closing, Image received the Promissory Note in the principal amount of $3,000,000 in exchange for its initial cash investment of $3,000,000. The Promissory Note was secured by substantially all of the assets of the Company and its subsidiaries and was initially convertible into 150,000 shares of the Company's newly authorized Series B Preferred Stock. In addition, the Company issued to Image two warrants (the "Tranche A Warrants") to purchase shares of the Series B Preferred Stock. One of the Tranche A Warrants was initially exercisable for 45,000 shares of Series B Preferred Stock at an 8 Page 8 of 13 pages exercise price of $20 per share and the other Tranche A Warrant was initially exercisable for 30,000 shares of Series B Preferred Stock at an exercise price of $40 per share. Except for standard adjustment provisions in connection with stock splits, stock dividends, combinations, recapitalizations and other similar corporate events, the exercise prices of the Tranche A Warrants are fixed. On May 29, 2001, pursuant to the terms and conditions of the Purchase Agreement, Image exercised its right to make an additional investment in the Company in connection with the Second Closing (as defined in the Purchase Agreement). In the Second Closing, Image invested an additional $7,000,000 in the Company. In exchange for such additional investment, the principal amount of the Promissory Note was increased to $10,000,000 and the Promissory Note became convertible into 500,000 shares of Series B Preferred Stock. The number of shares underlying each of the Tranche A Warrants also increased in connection with the Second Closing. The first Tranche A Warrant became exercisable for 150,000 shares of Series B Preferred Stock (at an exercise price of $20 per share) and the second Tranche A Warrant became exercisable for 100,000 shares of Series B Preferred Stock (at an exercise price of $40 per share). In addition, Image received a warrant (the "Tranche B Warrant") to purchase 1,000,000 shares of Series B Preferred Stock at an exercise price of $20 per share. The Promissory Note had a 15-month term, accrued interest at 8% per annum and was, by its terms, automatically convertible into Shares of Series B Preferred Stock upon the Third Closing. The Tranche A Warrants expire on May 14, 2006. The expiration date of the Tranche B Warrant was the earlier of (i) the date of the Third Closing (as defined in the Purchase Agreement) or (ii) if no Third Closing occurred, 15 months from the date of issuance. The Third Closing occurred on September 26, 2001. In connection with the Third Closing, the principal amount of the Promissory Note automatically converted into 500,000 shares of Series B Preferred Stock and substantially all of the accrued interest on the Promissory Note converted into 13,830 shares of Series B Preferred Stock. Additionally, Image exercised a portion of the Tranche B Warrant, acquiring 115,000 shares of Series B Preferred Stock upon the payment of an exercise price of $2,300,000. Additionally, in connection with the Third Closing, Image transferred a portion of the Tranche B Warrant to the New Investors who exercised such portion of the Tranche B Warrant for their own accounts, acquiring an aggregate of 486,250 shares of Series B Preferred Stock of the Company for an aggregate exercise price of $9,725,000. The unexercised remainder of the Tranche B Warrant expired according to its terms at the time of the Third Closing. The foregoing description of the Purchase Agreement and the description of the Purchase Agreement throughout this Schedule 13D are qualified in their entirety by reference to the copy of the Purchase Agreement, which was filed as Exhibit 1 to the Schedule 13D and is incorporated herein by reference. Image has also been granted certain registration rights pursuant to a Registration Rights Agreement dated as of May 14, 2001, between Image and the Company (the "Registration Rights Agreement"). Under the Registration Rights Agreement, Image may require the Company to file a registration statement covering resales of Common Stock issuable upon conversion of the Series B Preferred Stock within twenty days of each of the Second Closing and the Third Closing. In addition, Image has demand and piggy-back registration rights with respect to the shares purchased by it pursuant to the Purchase Agreement. Image agreed to waive its right to 9 Page 9 of 13 pages require the Company to file a registration statement covering resales within twenty days of the Second Closing, but has not waived its right to require such a filing within twenty days of the Third Closing. The foregoing summary of the Registration Rights Agreement is qualified in its entirety by reference to the Registration Rights Agreement filed as Exhibit 2 to the Schedule 13D and incorporated herein by reference. In accordance with the provisions of the Purchase Agreement, the Company's Board of Directors was reduced from nine to seven members at the time of the Second Closing. At the time of the Second Closing, four directors resigned from the Board of Directors of the Company and four nominees of Image, including Mr. McGrew, were appointed to fill the resulting vacancies in the Board of Directors of the Company. Pursuant to the Purchase Agreement, Image was entitled to retain its representatives on the Board of Directors until the Third Closing. In connection with the Third Closing, Mr. McGrew resigned from the Board of Directors of the Company and the resulting vacancy was filled by a representative of First Avenue Partners, L.P ("First Avenue"), a New Investor. Pursuant to the terms of the Preferred Stockholders Agreement described below, following the Third Closing, one additional representative of Image will resign from the board and the resulting vacancy will be filled by a representative designated by NewSouth Capital Management Inc. ("NewSouth"), another New Investor, at such time as NewSouth designates such representative. Following the Third Closing, the holders of Series B Preferred Stock are entitled, as a class, to elect four of the Company's seven directors. In connection with the Third Closing, Image, PCEP and each of the New Investors entered into a Preferred Stockholders Agreement (the "Stockholders Agreement"). The Stockholders Agreement sets forth, among other things, restrictions on transfer of Series B Preferred Stock, including rights of first refusal, drag-along and tag-along rights, as well as certain voting agreements. For the purposes of the following description of the Stockholders Agreement, PCEP, Image, Paradigm and Memphis Angels are each individually referred to as a "Paradigm Entity" and collectively as the "Paradigm Entities." The Paradigm Entities and the New Investors are collectively referred to as the "Series B Stockholders." Prior to transferring any shares of Series B Preferred Stock to a third party, a New Investor must first provide PCEP with the opportunity to purchase such shares on the same terms as those of the proposed sale. Any shares not acquired by PCEP or its designee must then be offered to the other New Investors on the same terms. Any shares not acquired by PCEP or the other New Investors may then be transferred to such third party on the terms originally proposed. Notwithstanding the foregoing, each New Stockholder may transfer an unlimited number of shares of Series B Preferred Stock to one or more of its affiliates, or to its partners, members or stockholders as part of a distribution, and may transfer up to 20% of the aggregate shares of Series B Preferred Stock owned by such stockholder on the date of the Stockholders Agreement, without complying with the above provisions. In the event that a Paradigm Entity wishes to transfer any of its shares of Series B Preferred Stock, other than to another Paradigm Entity or to an affiliate of PCEP, the Paradigm Entity must allow the New Investors to participate in such proposed sale (the "Tag-Along Right"). A New Investor who exercises its Tag-Along Right will be entitled to include in the transaction a portion of its shares of Series B Preferred Stock that represents the same percentage of its total shares of Series B Preferred Stock as the shares being transferred by the Paradigm Entity represent to the total number of shares of Series B Preferred Stock held by all Paradigm Entities. Notwithstanding the foregoing, any Paradigm Entity may transfer an unlimited number 10 Page 10 of 13 pages of shares of Series B Preferred Stock to one or more of its affiliates or to any other Paradigm Entity, or to its partners, members or stockholders as part of a distribution, and may transfer up to 20% of the aggregate shares of Series B Preferred Stock owned by the Paradigm Entities on the date of the Stockholders Agreement without complying with the above provisions. In the event that any one or more of the Paradigm Entities wish to sell at least 50% of the aggregate shares of Series B Preferred Stock held by the Paradigm Entities on the date of the Stockholders Agreement, the Paradigm Entity may require the New Investors to participate in the proposed sale (the "Drag-Along Right"). If the Paradigm Entity exercises the Drag-Along Right, each New Investor will be obligated to transfer a portion of its shares of Series B Preferred Stock that represents the same percentage of its total shares of Series B Preferred Stock as the shares being transferred by the Paradigm Entities represent to the total number of shares of Series B Preferred Stock held by all Paradigm Entities. Notwithstanding the foregoing, no Series B Stockholder may transfer any shares of Series B Preferred Stock to any competitor of the Company (or any employee, shareholder, officer, director or other affiliate of any such competitor) without the Company's prior written consent. The Stockholders Agreement also prohibits any of the Series B Stockholders from transferring any shares of Common Stock (or securities convertible into, or exercisable or exchangeable for, Common Stock) for a period of 180 days after the date of the Stockholders Agreement (the "Lock-Up Period"), otherwise than: (i) a bona fide gift, provided that the donee agrees to be bound by this restriction; (ii) a distribution to a Series B Stockholder's partners, members or stockholders; or (iii) transfers of Series B Preferred Stock in compliance with the paragraphs above. This prohibition prohibits the Series B Stockholders from engaging in any hedging or other transaction that is designed or reasonably expected to result in a transfer of Common Stock by a third party during the Lock-Up Period (e.g., short sale, put or call option, etc.). Additionally, the Stockholders Agreement includes an agreement among the Series B Stockholders to vote all shares of Series B Preferred Stock held by them so as to elect two representatives of Image, one representative of First Avenue and one representative of NewSouth to serve as the four members of the Company's Board of Directors that are elected by the holders of the Series B Preferred Stock. The Stockholders Agreement will terminate and be of no further force and effect upon the first to occur of (i) the date that the Paradigm Entities no longer own at least 25% of the Series B Preferred Stock and (ii) the date upon which PCEP and the holders of at least fifty percent (50%) of the shares of Series B Preferred Stock then held by the New Investors agree to terminate the Stockholders Agreement. The foregoing description of the Stockholders Agreement and the description of the Stockholders Agreement throughout this Schedule 13D are qualified in their entirety by reference to the copy of the Stockholders Agreement, which is filed as Exhibit 4 hereto and is incorporated herein by reference. The Company's amended certificate of designation setting forth the rights and privileges of the Series B Preferred Stock (the "Certificate of Designation") provides, in pertinent part, that 11 Page 11 of 13 pages the shares of Series B Preferred Stock vote on an as-converted basis with the Common Stock (subject to certain class vote matters). The Series B Preferred Stock accrues dividends at 8% per annum and has a liquidation preference of $20 per share plus all accrued and unpaid dividends (as adjusted for any stock dividends, stock splits, combinations, recapitalizations or other similar corporate events). The Series B Preferred Stock is initially convertible into Common Stock at a conversion price of $2.50 (the "Conversion Price") per share (or 8 shares of Common Stock per share of Series B Preferred Stock). The Conversion Price is subject to adjustment for stock splits, stock dividends, combinations, recapitalizations and other similar corporate events. Additionally, the Series B Preferred Stock contains a reset feature (the "Reset Feature") that would result in a one-time reduction of the Conversion Price if the average daily trading price of the Common Stock for the twenty days prior to the 180 day anniversary of the Third Closing (the "Average Trading Price") is below $2.50. If the Reset Feature is triggered, the Conversion Price will be reset to the greater of the Average Trading Price or $2.00. As a result, the number of shares issuable upon conversion of the Series B Preferred Stock may increase by as much as 25% (with each share of Series B Preferred Stock converting into a maximum of 10 shares of Common Stock). If the Average Trading Price ultimately is less than or equal to $2.00 and, as a result of the Reset Feature, the Conversion Price is reset to $2.00, the total number of shares of Common Stock beneficially owned by the Filing Persons would increase to 8,788,300 and the corresponding percentage ownership of the Filing Persons would be 56.7% (assuming no intervening change in the total outstanding shares of the Company). Because it is based solely on the trading price of the Common Stock during a period after the date of this Amendment, there can be no assurance that the Reset Feature will not be triggered, or if it is triggered, what the resulting Conversion Price will be. The Conversion Price is also subject to a weighted-average antidilution adjustment in the event that the Company sells shares of Common Stock (or securities convertible into, or exercisable or exchangeable for Common Stock) at a price less than the Conversion Price, subject to certain exceptions. The Series B Preferred Stock is also redeemable at the option of the Company any time on or after May 29, 2006, upon the affirmative vote of at least five of the Company's directors. If the Company elects to redeem the Series B Preferred Stock, the redemption price shall be equal to $20 per share plus all accrued and unpaid dividends. Other than as described above, none of the Filing Persons have any current plans or proposals which relate to or would result in any transaction, change or event specified in clauses (a) through (j) of Item 4 of Schedule 13D. The Filing Persons reserve the right to develop such plans or proposals in the future. ITEM 5. INTEREST IN SECURITIES OF THE ISSUER. Item 5 of the Schedule 13D is amended and restated in its entirety as follows: Each of the Filing Persons may be deemed to beneficially own 7,030,640 shares of Common Stock. Such shares, based on the capitalization of the Company as of September 26, 2001 as represented to Image in the Purchase Agreement in connection with the Third Closing, constitute 51.2% of the Common Stock. However, the Filing Persons' actual voting interest is 39.9% because all shares of Series B Preferred Stock, including the shares acquired by the New Investors, vote on an as-converted basis with the Common Stock. 12 Page 12 of 13 pages The 7,030,640 shares of Common Stock beneficially owned by the Filing Persons include 4,110,640 shares of Common Stock underlying the 513,830 shares of Series B Preferred Stock that Image acquired upon conversion of the principal amount of, and substantially all of the accrued interest on, the Promissory Note at the Third Closing and 920,000 shares of Common Stock underlying the 115,000 shares of Series B Preferred Stock that Image acquired upon exercise of a portion of the Tranche B Warrant at the Third Closing. It also includes an additional 2,000,000 shares of Common Stock issuable upon conversion of 250,000 shares of Series B Preferred Stock currently underlying the Tranche A Warrants. Other than under the transactions described above, no transactions in the Common Stock of the Company have been effected by Image, Memphis Angels, PCEP, Paradigm or Mr. McGrew, or to the knowledge of Image, Memphis Angels, PCEP, Paradigm or Mr. McGrew, by any of the general partners of Paradigm, during the past 60 days. To the knowledge of the Filing Persons, no other person has the right to receive or the power to direct the receipt of dividends from, or the proceeds from the sale of, the securities covered by this Schedule 13D. ITEM 6. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT TO THE SECURITIES OF THE ISSUER. Item 6 of the Schedule 13D is amended and restated in its entirety as follows: Other than the Securities Purchase Agreement, the Registration Rights Agreement, the Stockholders Agreement and the Certificate of Designation, to the knowledge of the Filing Persons, there are no contracts, arrangements, understandings or relationships among the persons named in Item 2 and between such persons and any person with respect to any securities of the Company, including but not limited to transfer or voting of any of the securities, finder's fees, joint ventures, loan or option arrangements, puts or calls, guarantees of profits, division of profits or loss, or the giving or withholding of proxies. ITEM 7. MATERIAL TO BE FILED AS EXHIBITS. Exhibit 1: Securities Purchase Agreement, dated May 14, 2001, by and between Image and the Company. (1) Exhibit 2: Registration Rights Agreement, dated May 14, 2001, by and between Image and the Company. (1) Exhibit 3: Joint Filing Statement. (1) Exhibit 4: Series B Preferred Stockholders Agreement, dated September 26, 2001, by and among Image, PCEP, the New Investors and the Company. (1) previously filed as an exhibit to the Schedule 13D (File No. 5-57597) on May 24, 2001. 13 Page 13 of 13 pages SIGNATURES After reasonable inquiry and to the best of its knowledge and belief, the undersigned each certifies that the information set forth in this statement is true, complete and correct. Dated October 1, 2001 IMAGE INVESTOR PORTFOLIO, a separate series of MEMPHIS ANGELS, LLC, a Delaware limited liability company By: PARADIGM CAPITAL EQUITY PARTNERS, LLC, its Manager By: PARADIGM HOLDINGS, its Managing Member By: /s/ Frank A. McGrew IV ---------------------- Name: Frank A. McGrew IV Title: Managing Partner PARADIGM CAPITAL EQUITY PARTNERS, LLC, a Delaware limited liability company By: PARADIGM HOLDINGS, its Managing Member By: /s/ Frank A. McGrew IV ----------------------------- Name: Frank A. McGrew IV Title: Managing Partner PARADIGM HOLDINGS, a Delaware general partnership By: /s/ Frank A. McGrew IV -------------------------------- Name: Frank A. McGrew IV Title: Managing Partner FRANK A. MCGREW IV /s/ Frank A. McGrew IV -------------------------------------- EX-4 3 w53607ex4.txt PREFERRED STOCKHOLDERS AGREEMEND 1 PREFERRED STOCKHOLDERS AGREEMENT THIS PREFERRED STOCKHOLDERS AGREEMENT (this "AGREEMENT"), dated as of September 26, 2001, is entered into by and among Paradigm Capital Equity Partners, LLC, a Delaware limited liability company ("PARADIGM"), Image Investor Portfolio, a separate series of Memphis Angels, LLC, a Delaware limited liability company ("IMAGE"), and the stockholders listed on Schedule A hereto (herein, together with Image, the "PREFERRED STOCKHOLDERS"), each of which is a holder of Preferred Stock (as defined) of Internet Pictures Corporation, a Delaware corporation (the "COMPANY"). RECITALS 1. Certain terms are defined in Section 1 of this Agreement and will have the meanings specified in Section 1. 2. In connection with the execution of this Agreement, Paradigm has Transferred, or caused to be Transferred, to the Preferred Stockholders rights to acquire Preferred Stock. 3. The Preferred Stockholders own all of the issued and outstanding shares of the Series B Convertible Preferred Stock, $0.001 par value, of the Company (the "PREFERRED STOCK"). 4. The Preferred Stockholders desire to agree upon certain terms and conditions that will govern the ownership and transfer of the Shares. AGREEMENTS NOW, THEREFORE, in consideration of the premises and the mutual covenants and provisions set forth in this Agreement, the parties agree as follows: SECTION 1. DEFINITIONS As used in this Agreement, the following terms have the following respective meanings: "ACCEPTANCE PERIOD" means the fifteen (15) business days from and after the date of receipt by the Company of a Notice of Intention to Sell. "AFFILIATE" means with respect to any Person, any other Person (other than the Company or any Subsidiary of the Company) that directly or indirectly controls, is controlled by or is under common control with such Person. "AGREEMENT" has the meaning set forth in the preamble hereto. "BOARD OF DIRECTORS" means the Board of Directors of the Company. "COMMON STOCK" means the common stock, $0.001 par value, of the Company. "COMPANY" has the meaning set forth in the preamble hereto. "COMPETITOR" shall mean those persons who compete against the Company by offering immersive images and digital media formatting and infrastructure products and services. "IMAGE" has the meaning set forth in the preamble hereto, together with its successors and transferees. "LOCK-UP PERIOD" has the meaning set forth in Section 5. "NOTICE" has the meaning set forth in Section 3.3. 2 "NOTICE OF INTENTION TO SELL" means the written notice specified in Section 3.1. "OFFERED SHARES" has the meaning set forth in Section 3.1. "OTHER STOCKHOLDER" means any Preferred Stockholder other than a Paradigm Entity, together with their respective heirs, administrators, executors, successors and assigns, as applicable. "PARADIGM" has the meaning set forth in the preamble hereto, together with its successors and transferees. "PARADIGM ENTITIES" means Paradigm, Image, Memphis Angels, LLC, a Delaware limited liability company, and Paradigm Holdings, a Delaware partnership, together with each of their successors and transferees identified in clauses (i), (ii) and (iv) of Section 2.1(c).. "PARADIGM SHARES" means any and all Shares held by the Paradigm Entities. "PARTICIPATION OFFER" has the meaning set forth in Section 4.1(a). "PERSON" means any individual, corporation, partnership, limited liability company, trust, unincorporated association or other entity. "PREFERRED STOCKHOLDER" means each of the signatories to this Agreement and each other Person who hereafter becomes the owner of any Shares. "SALE" has the meaning set forth in Section 4.1(a). "SECURITIES ACT" means the Securities Act of 1933, as amended from time to time. "SELLING STOCKHOLDER" has the meaning set forth in Section 3.1. "SHARES" means shares of Preferred Stock now or hereafter outstanding and any securities now or hereafter outstanding (including the Warrants) that may be exercised, converted or exchanged for Preferred Stock. "SUBSIDIARY" means any Person of which at least a majority of the voting stock or voting interests of such Person are owned, directly or indirectly, by any other Person. "SUBSTANTIAL SALE" means the sale of the Company or its business to any Person whether by merger, consolidation, sale of all or substantially all of the assets or capital stock of the Company or otherwise, which has been approved by the Board of Directors but shall not include a public offering of equity securities by the Company or any Subsidiary of the Company. "TRANSFER" means sale, transfer, assignment, gift, pledge, hypothecation, encumbrance, or other disposition, whether voluntary or involuntary, or any contract to do any of the forgoing. "WARRANTS" means any and all warrants to purchase Shares, whether such warrants are now or hereafter outstanding. SECTION 2. RESTRICTIONS ON TRANSFER 2.1 RESTRICTION ON TRANSFER. At no time during the term of this Agreement may a Preferred Stockholder Transfer any Shares or any interest in Shares except: (a) in the case of an Other Stockholder, to the extent permitted and under the conditions set forth in Sections 3 or 4; 3 (b) subject to the restrictions of Section 3.7(b), that any Other Stockholder may Transfer any of its Shares to (i) any Affiliate of such Other Stockholder (ii) any Person (other than an Affiliate of such Other Stockholder) so long as all Transfers to any Persons on a cumulative basis pursuant to this clause (ii) do not, in the aggregate, exceed 20% of the aggregate Shares held by such Other Stockholder on the date of this Agreement or (iii) the partners, members or stockholders, as the case may be, of such Other Stockholder as part of a distribution by such Other Stockholder; (c) subject to the restrictions of Section 3.7(b), that any Paradigm Entity may Transfer any of its Shares to (i) any Affiliate of any Paradigm Entity, (ii) any other Paradigm Entity, (iii) any Person (other than a Paradigm Entity) so long as all Transfers to any Persons on a cumulative basis pursuant to this clause (iii) do not, in the aggregate, exceed 20% of the aggregate Shares held by Paradigm Entities on the date of this Agreement or (iv) the partners, members or stockholders, as the case may be, of any Paradigm Entity as part of a distribution by such Paradigm Entity; and (d) subject to the restrictions of Section 3.7(b), that any Paradigm Entity may Transfer any of its Shares to any Person provided that such Paradigm Entity complies with the provisions of Section 4, if applicable. Each Preferred Stockholder agrees and consents to the entry of stop transfer instructions with the Company's transfer agent against the Transfer of Shares unless such Transfer is made in full compliance with all provisions of this Agreement. Any transferee of any Shares must agree in writing to become a party to, and to be bound by the provisions of, this Agreement. 2.2 SECURITIES LAW RESTRICTIONS. Notwithstanding any other provision in this Agreement, no Preferred Stockholder may Transfer any Shares without the registration of the Transfer of such Shares under the Securities Act unless such Transfer is exempt from the registration requirements under the Securities Act and applicable state securities laws. SECTION 3. RIGHT OF FIRST REFUSAL 3.1 INTENTION TO SELL. If any Other Stockholder wishes to sell all or any portion of the Shares owned by such Other Stockholder to a bona fide third party for cash (other than a Transfer pursuant to Section 4 or permitted pursuant to Section 2.1(b)), such Other Stockholder (a "SELLING STOCKHOLDER") promptly shall deliver to Paradigm a Notice of Intention to Sell setting forth the number of Shares to be sold (the "OFFERED SHARES"), the proposed purchase price per Offered Share, the proposed purchaser (including any information concerning such purchaser and its Affiliates as Paradigm may reasonably request) and the other terms of sale. 3.2 ACCEPTANCE PERIOD. Upon receipt of a Notice of Intention to Sell and for the duration of the Acceptance Period, Paradigm or its designee will have the right and option to elect to purchase all or any portion of such Offered Shares at the purchase price and on the terms stated in the Notice of Intention to Sell. On or before the expiration of the Acceptance Period, Paradigm may give the Selling Stockholder written notice of Paradigm's intention to exercise its rights to purchase, or cause such designee to purchase, the Offered Shares. 3.3 NOTICE OF ELECTION TO PURCHASE; FAILURE TO EXERCISE OPTION TO PURCHASE. If Paradigm or such designee fails to elect to purchase all of the Offered Shares in accordance with the provisions of Sections 3.1 and 3.2, then, prior to the expiration of the Acceptance Period, Paradigm shall give written notice to each Other Stockholder (the "NOTICE") setting forth the number of Offered Shares remaining available for purchase pursuant to the Notice of Intention to Sell, and each Other Stockholder will then have the right and option to, within ten (10) business days after receiving the Notice from Paradigm, elect to purchase (i) all of such Offered Shares so remaining available (if there is only one Other Stockholder electing to purchase such Shares) or (ii) up to its pro rata share of such Offered Shares so remaining available (if there is more than one Other Stockholder electing to purchase such Shares), or (iii) such Offered Shares so remaining available in such other proportions as the Other Stockholders may mutually agree, at the purchase price and on the terms stated in the Notice of Intention to Sell, such election to be made by giving written notice to Paradigm within ten (10) business days after the receipt of the Notice. 4 3.4 SELLING STOCKHOLDER'S RIGHTS UPON FAILURE TO EXERCISE RIGHT TO PURCHASE ALL OFFERED SHARES. If Paradigm and the Other Stockholders fail to elect to purchase all of the Offered Shares under Sections 3.1, 3.2 and 3.3, then the Selling Stockholder who or which delivered the Notice of Intention to Sell may sell all (but not less than all) of the Offered Shares to the purchaser specified in the Notice of Intention to Sell at the price and upon the same terms set forth in the Notice of Intention to Sell, at any time within twenty (20) business days after the last date on which any Other Stockholder will be entitled to make any election pursuant to the provisions of Section 3.3. The purchaser specified in the Notice of Intention to Sell must, prior to purchasing the Offered Shares, agree in writing to become a party to, and to be bound by the provisions of, this Agreement, and the Company will not recognize any Transfer to such purchaser of Offered Shares until such agreement has been executed and delivered to Paradigm. If the Offered Shares are not sold by the Selling Stockholder during such twenty (20) business-day period, the right of the Selling Stockholder to sell such Offered Shares will expire and such remaining Offered Shares again will be subject to the restrictions contained in this Agreement and may not thereafter be Transferred except in compliance with this Agreement. 3.5 PAYMENT FOR OFFERED SHARES. Payment by Paradigm or the Other Stockholders for the Offered Shares will be made by certified or official bank check, payable to the order of the Selling Stockholder of the Offered Shares against delivery by such seller of (a) a certificate or certificates representing the Offered Shares so sold, duly endorsed for transfer to the purchasing party or accompanied by a stock transfer power duly endorsed for transfer, with all requisite stock transfer taxes paid and stamps affixed and (b) written representations and warranties of such Selling Stockholder to the effect that: (i) such Selling Stockholder is the record and beneficial owner of the Shares being purchased and sold, has good and valid title to the Shares and the absolute right to transfer the same to the purchaser, and the same, upon transfer to the purchaser, will be free and clear of all claims, liens, pledges, restrictions (other than restrictions imposed by this Agreement and restrictions under federal and state securities laws) or encumbrances of any nature whatsoever; (ii) such Selling Stockholder has full power, authority or capacity, as applicable, to perform the terms of this Agreement relating to such purchase and sale; and (iii) any consent or approval of any governmental authority, court or third person required to be obtained by such Selling Stockholder to permit the Transfer of the Shares has been obtained. 3.6 CLOSING DATE. The closing of the sale and delivery of Offered Shares being purchased and sold pursuant to this Section 3 to Paradigm (or its designee) or an Other Stockholder, and payment for such Offered Shares, will be held at a time and place designated by Paradigm as follows: (a) If Paradigm has elected to purchase, or cause its designee to purchase, all of the Offered Shares, any date on or prior to the twentieth (20th) business day after the date on which the Other Stockholder receives notification of Paradigm's intention to, or cause its designee to, so purchase; or (b) In all other cases, any date on or prior to the twentieth (20th) business day after the last day upon which any Other Stockholder can elect to purchase Offered Shares pursuant to this Section 3. 3.7 RESTRICTIONS. Notwithstanding the foregoing provisions of this Section 3 to the contrary, (a) no Other Stockholder shall deliver any Notice of Intention to Sell if such Other Stockholder did not at the time of giving such Notice of Intention to Sell have a good faith belief that such purchaser would purchase all of the Offered Shares at the price and on the terms contained in the Notice of Intention to Sell and (b) no Preferred Stockholder shall Transfer any Shares to any Competitor or any employee, shareholder, officer, director or other Affiliate of any Competitor, without the prior written consent of the Company. SECTION 4. TAG-ALONG/CO-SALE RIGHTS 4.1 TAG-ALONG RIGHTS. (a) If any Paradigm Entity desires to Transfer any Shares (other than a Transfer pursuant to Section 2.1(c) of this Agreement) whether by sale, merger or otherwise (a "SALE") and Paradigm does not elect to or is not entitled to exercise its rights under Section 4.2, then at least fifteen (15) days prior to the closing of such Sale, Paradigm shall make an offer (the "PARTICIPATION OFFER") to the Other Stockholders to include in the proposed Sale a portion of each Other Stockholder's Shares that represents the same percentage of such Shares as the Shares being Transferred by the Paradigm Entities represent to all Shares held by the Paradigm Entities. 5 (b) The Participation Offer must describe the terms (including purchase price) and conditions of the proposed Sale and the number of Shares that an Other Stockholder may Transfer in the proposed Sale and must be conditioned upon (i) the consummation of the transactions contemplated in the Participation Offer, and (ii) each Other Stockholder's execution and delivery of all agreements and other documents as may be reasonably required by the acquiror in connection with such Sale. If any Other Stockholder accepts the Participation Offer, the Paradigm Entities will reduce, to the extent necessary, the number of Shares they otherwise would have Transferred in the proposed Sale so as to permit those Other Stockholders who have accepted the Participation Offer to Transfer the number of Shares that they are entitled to Transfer under this Section 4, and such Other Stockholders shall Transfer the number of Shares specified in the Participation Offer to the proposed transferee in accordance with the terms set forth in the Participation Offer. (c) Any Other Stockholder that desires to exercise its right to Transfer Shares in the Participation Offer shall deliver notice to Paradigm within ten (10) days after its receipt of the Participation Offer, specifying the number of Shares (up to the number of such Shares specified in the Participation Offer) that such Other Stockholder desires to Transfer in the Participation Offer, whereupon such Other Stockholder shall be obligated to Transfer such Shares at the closing of such Sale, if and when it occurs. All Shares Transferred by the Other Stockholders pursuant to this Section 4.1 must be Transferred at the same price and terms (including form of consideration) as the Shares being Transferred by the Paradigm Entities. 4.2 DRAG-ALONG RIGHTS. (a) In connection with any Sale by any one or more of the Paradigm Entities of at least 50% of the aggregate Shares held by the Paradigm Entities on the date of this Agreement, Paradigm has the right to require each Other Stockholder to Transfer a portion of such Other Stockholder's Shares that represents the same percentage of such Other Stockholders Shares as the Shares being Transferred by the Paradigm Entities. All Shares Transferred by the Other Stockholders pursuant to this Section 4.2 must be Transferred at the same price and terms (including form of consideration) as the Shares being Transferred by the Paradigm Entities. All Warrants Transferred by Other Stockholders pursuant to this Section 4.2 must be Transferred at the same price (less the applicable exercise price in respect of each such Warrant) and terms (including form of consideration) as the Shares being Transferred by the Paradigm Entities. (b) Paradigm shall give the Company and the Other Stockholders at least fifteen (15) days' prior written notice of any Sale as to which Paradigm intends to exercise its rights under Section 4.2(a). 4.3 SALE REQUIREMENTS. All Other Stockholders, if Paradigm elects to exercise its rights under Section 4.2(a), or the electing Other Stockholders if such Other Stockholders elect to exercise their rights under Section 4.1(a), shall (i) take such actions as may be reasonably requested by Paradigm in connection with consummating the Sale, (ii) vote in favor of, consent to, and raise no objections against, the Sale or the process pursuant to which the Sale was arranged, (iii) waive any dissenter's rights and other similar rights, (iv) if the Sale is structured as a sale of Shares, agree to sell its Shares on the terms and conditions of the Sale and (v) execute and deliver such documents as may be reasonably requested by Paradigm in connection with any Sale, including, without limitation, written consents of stockholders, proxies, letters of transmittal, purchase agreements and stock powers, in each case so long as the Paradigm Entities also have executed such documents on no more favorable a basis than the Other Stockholders. At the closing of such Sale, the participating Other Stockholders shall deliver certificates for all Shares (or, in the case of the Warrants, such reasonable and customary transfer documentation as may be specified by Paradigm) to be Transferred by Other Stockholders, duly endorsed for transfer, to the purchaser against delivery of the appropriate purchase price. 4.4 COST OF SALE. In connection with any Sale, Paradigm may, or may cause the Company or the Company's Subsidiaries to, hire legal counsel and other professional advisors as it deems necessary or desirable to effectuate the contemplated transaction on behalf of all of the participating Preferred Stockholders. In the case of a sale pursuant to Section 4.1, all Preferred Stockholders participating in such Sale agree to bear their pro rata share (based upon the number of Shares sold or to be sold) of the reasonable costs of such Sale to the extent such costs are not otherwise paid by the Company or the acquiring Person whether or not such Sale closes. Costs incurred by any Preferred Stockholder on its own behalf (other than the costs of the professional advisors hired by Paradigm) will not be considered costs of a Sale and must be paid solely by such Preferred Stockholder. 6 4.5 ASSET SALE. In the event that Paradigm determines to pursue a sale of all or substantially all of the assets of the Company, the Other Stockholders shall participate therein and take the action contemplated in this Section 4 to the extent applicable so long as the Other Stockholders are treated no less favorably than the Paradigm Entities (including form of consideration) in any such transaction. 4.6 PRICE. For the purposes of this Section 4, unless the context otherwise requires, the term "PRICE" shall mean all consideration received by the Paradigm Entities and their Affiliates in connection with a Sale. SECTION 5. COMMON STOCK LOCKUP The Paradigm Entities and each Other Stockholder hereby agree for a period of 180 days after the date of this Agreement (the "LOCK-UP PERIOD") that each of them will not Transfer any shares of Common Stock, any options or warrants to purchase any shares of Common Stock or any securities convertible into or exchangeable for shares of Common Stock now owned or hereafter acquired directly by such Person or with respect to which such Person has or hereafter acquires the power of disposition, otherwise than (i) as a bona fide gift or gifts, provided the donee or donees thereof agree in writing to be bound by this restriction, (ii) as a distribution to partners, members or stockholders of such Person, provided that the distributees thereof agree in writing to be bound by the terms of this restriction, or (iii) Transfers of Preferred Stock in compliance with this Agreement. The foregoing restriction has been expressly agreed to by each Other Stockholder so as to preclude such Other Stockholder from engaging in any hedging or other transaction that is designed to or reasonably expected to lead to or result in a Transfer of Common Stock during the Lock-up Period, even if such Common Stock would be Transferred by someone other than such Other Stockholder. Such prohibited hedging or other transactions would include, without limitation, any short sale (whether or not against the box) or any purchase, sale or grant of any right (including, without limitation, any put or call option) with respect to any Common Stock or with respect to any security (other than a broad-based market basket or index) that included, relates to or derives any significant part of its value from the Common Stock. Each Other Stockholder also agrees and consents to the entry of stop transfer instructions with the Company's transfer agent and registrar against the Transfer of Common Stock held by such Other Stockholder except in compliance with the foregoing restrictions. SECTION 6. LEGEND ON SHARE CERTIFICATES All certificates representing Shares now or hereafter held by a Preferred Stockholder will be endorsed with the following legend: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") OR UNDER THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS EITHER (A) THEY ARE REGISTERED UNDER THE ACT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR (B) THE COMPANY HAS RECEIVED EVIDENCE SATISFACTORY TO IT (WHICH MAY INCLUDE AN OPINION OF COUNSEL) THAT SUCH PROPOSED DISPOSITION IS EXEMPT FROM SUCH REGISTRATION. THE SECURITIES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS AND CONDITIONS OF A PREFERRED STOCKHOLDERS AGREEMENT DATED AS OF SEPTEMBER __, 2001. A COPY OF SUCH AGREEMENT IS ON FILE AT THE CORPORATION'S PRINCIPAL PLACE OF BUSINESS AND MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE CORPORATE SECRETARY OF THE COMPANY." SECTION 7. DURATION OF AGREEMENT This Agreement will terminate and be of no further force and effect upon the first to occur of (a) the date that less than 25% of the Shares are outstanding, and (b) the date upon which Paradigm and the holders of at least fifty percent (50%) of the Shares then held by Other Stockholders agree in writing to terminate this Agreement. 7 SECTION 8. BOARD OF DIRECTORS. On all matters relating to the election of directors of the Company where the holders of Preferred Stock are entitled to elect directors as a class, the Preferred Stockholders agree to vote all Shares held by them (or the holders thereof shall consent pursuant to an action by written consent) so as to elect members of the Board of Directors as follows: (i) one representative designated by First Avenue Partners, L/P.; (ii) one representative designated by NewSouth Capital Management Inc.; and (iii) two representatives designated by the Paradigm Entities. Any vote taken to remove any director elected pursuant to this Section 8), or to fill any vacancy created by the resignation, removal or death of a director elected pursuant to this Section 8, shall also be subject to the provisions of this Section 8. SECTION 9. REPRESENTATIONS AND WARRANTIES OF THE PREFERRED STOCKHOLDERS Each Preferred Stockholder severally represents and warrants to each other Preferred Stockholder as follows as may be applicable to such Preferred Stockholder: (a) If a corporation, the Preferred Stockholder is a corporation duly organized, validly existing, and in good standing under the laws of the state of its incorporation and has requisite corporate power and authority to enter into this Agreement and to undertake the transactions contemplated in this Agreement; (b) If a partnership, the Preferred Stockholder is a partnership duly organized, validly existing, and in good standing under the laws of the state of its formation and has requisite partnership power and authority to enter into this Agreement and to undertake the transactions contemplated in this Agreement; (c) If a limited liability company, the Preferred Stockholder is a limited liability company duly organized, validly existing, and in good standing under the laws of the state of its formation and has the requisite limited liability company power and authority to enter into this Agreement and to undertake the transactions contemplated in this Agreement; (d) If an individual, the Preferred Stockholder is legally competent to enter into this Agreement and to undertake the transactions contemplated in this Agreement; (e) The address of the Preferred Stockholder set forth on Schedule A is true, correct and complete; and (f) This Agreement has been duly and validly authorized, as applicable, executed, and delivered by the Preferred Stockholder and constitutes the legal, valid, and binding obligation of the Preferred Stockholder, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium, liquidation, fraudulent conveyance and other similar laws and principles of equity affecting creditors' rights and remedies generally. SECTION 10. GOVERNING LAW; CONSTRUCTION This Agreement is governed by and construed in accordance with the laws of the State of Delaware, without regard to its conflict of law rules. The headings or titles to Sections in this Agreement are intended solely for convenience and no provision of this Agreement is to be construed by reference to the heading or title of any Section. Unless otherwise specifically stated, references in this Agreement to Sections or Schedules refer to Sections and Schedules of this Agreement. SECTION 11. CONSENT TO JURISDICTION AND SERVICE OF PROCESS Each Preferred Stockholder irrevocably consents to the non-exclusive jurisdiction of the state and federal courts located in the State of Delaware, agrees that any action, suit or proceeding by or among the Preferred Stockholders (or any of them) or the Company and any Preferred Stockholder may be brought in any court in the 8 State of Delaware, and waives any objection which the Preferred Stockholder may now or hereafter have to the choice of forum whether personal jurisdiction, venue, forum non conveniens or on any other ground. Each Preferred Stockholder hereby irrevocably designates, appoints and empowers the Secretary of the State of Delaware to receive for and on behalf of such Preferred Stockholder service of process in the State of Delaware, and each Preferred Stockholder irrevocably consents to the service of process outside of the territorial jurisdiction of said courts by mailing copies thereof by registered or certified United States mail, postage prepaid, to such Preferred Stockholder's last known address as shown in the records of the Company with the same effect as if the Preferred Stockholder were a resident of the State of Delaware and had been lawfully served in such State. Nothing in this Agreement will affect the right to service of process in any other manner permitted by law. Each Preferred Stockholder further agrees that final judgment against it or him in any such action or proceeding will be conclusive and may be enforced in any other jurisdiction within or outside the State of Delaware by suit on the judgment, a certified or exemplified copy of which will be conclusive evidence of the fact and the amount of such judgment. SECTION 12. BENEFITS OF AGREEMENT; ASSIGNMENT This Agreement is irrevocable and is binding upon and inures to the benefit of the parties and their respective successors, permitted assigns, heirs, executors, administrators, and legal representatives. Except as otherwise provided in this Agreement, no Preferred Stockholder may assign or delegate any of its rights or obligations under this Agreement without the prior written consent of Paradigm. SECTION 13. NOTICES (a) All notices, requests, consents, and other communications required by this Agreement must be in writing, delivered in person or duly sent by recognized overnight courier or sent by facsimile or by first-class registered or certified mail, postage prepaid, addressed to Paradigm or the applicable Preferred Stockholders at the addresses set forth for such Persons on Schedule A hereto, or to such other address which has been designated by notice in writing by such party to the others in accordance with the provisions of this Section 13. (b) Each party will at all times have an address to which any communications may be sent. All such notices, requests, consents and other communications will be deemed to have been received (i) in the case of personal delivery or facsimile, on the date of such delivery, (ii) in the case of delivery by recognized overnight courier service, on the first business day following delivery of such notice to the overnight courier, and (iii) in the case of mailing, on the third (3rd) business day following such mailing. SECTION 14. MODIFICATION AND WAIVER Except as otherwise provided in this Agreement, neither this Agreement, nor any provision of this Agreement, may be modified, changed, waived, discharged or terminated except by an instrument in writing signed by the holders of at least two-thirds of the Shares. SECTION 15. ENTIRE AGREEMENT This Agreement constitutes the entire agreement among the parties with respect to matters or understandings involving the ownership, control or disposition of the Shares, and supersedes in its entirety any and all prior agreements or understandings, oral or written, among any or all of the undersigned relating to such ownership, control or disposition. SECTION 16. SEVERABILITY If any provision of this Agreement, or the application of such provision to any Person or circumstance, is adjudged or ruled to be invalid or unenforceable, the remaining provisions of this Agreement and the application of such provisions to other Persons or circumstances will not be affected by such invalidity or unenforceability. SECTION 17. REMEDIES 9 The parties recognize and agree that if Paradigm or any of the Preferred Stockholders breaches its or his obligations under this Agreement, the other parties may not have an adequate remedy at law. Such breach will cause such other parties irreparable harm for which there may be no adequate remedy at law. If any party institutes an action or proceeding to enforce the provisions of this Agreement, such party will be entitled to the remedies of specific performance and injunctive relief, and any such Person against whom such action or proceeding is brought hereby waives any claim or defense that there is an adequate remedy at law. The right to obtain an injunction hereunder will not be considered a waiver of any right on the part of the non-breaching parties to recover damages and to assert any other claims for remedies which such parties may have at law or in equity. The non-prevailing party in any such action agrees to bear any expenses incurred by the prevailing party, including reasonable attorneys' fees, in enforcing its rights under this Agreement. SECTION 18. GENDER Whenever the context requires, pronouns of any gender will be deemed to include and designate the feminine, masculine or neuter gender. SECTION 19. COUNTERPARTS This Agreement may be executed in two or more counterparts, each of which will be deemed to be an original, but all of which taken together will constitute one and the same instrument. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 10 SIGNATURE PAGE TO PREFERRED STOCKHOLDERS AGREEMENT IN WITNESS WHEREOF, the undersigned have duly executed or caused this Agreement to be executed as of the day and year first above written. IMAGE INVESTOR PORTFOLIO, a separate series of MEMPHIS ANGELS, LLC, a Delaware limited liability company By: PARADIGM CAPITAL EQUITY PARTNERS, LLC, (individually and as Manager of Memphis Angels, LLC) By: PARADIGM HOLDINGS, its Managing Member By: /s/ Frank A. McGrew IV ----------------------- Name: Frank A. McGrew IV Title: Managing Partner 11 SIGNATURE PAGE TO PREFERRED STOCKHOLDERS AGREEMENT IN WITNESS WHEREOF, the undersigned have duly executed or caused this Agreement to be executed as of the day and year first above written. NATIONAL FIRE & CASUALTY By: /s/ Charles K. Slatery ---------------------- Name: Charles K. Slatery Title: President 12 SIGNATURE PAGE TO PREFERRED STOCKHOLDERS AGREEMENT IN WITNESS WHEREOF, the undersigned have duly executed or caused this Agreement to be executed as of the day and year first above written. NEWSOUTH CAPITAL MANAGEMENT, INC. PROFIT SHARING PLAN By: /s/ D. Stephen Morrow --------------------- Name: D. Stephen Morrow Title: Executive Vice President 13 SIGNATURE PAGE TO PREFERRED STOCKHOLDERS AGREEMENT IN WITNESS WHEREOF, the undersigned have duly executed or caused this Agreement to be executed as of the day and year first above written. PHOTO OP, LLC By: /s/ D. Stephen Morrow --------------------- Name: D. Stephen Morrow Title: Chief Manager 14 SIGNATURE PAGE TO PREFERRED STOCKHOLDERS AGREEMENT IN WITNESS WHEREOF, the undersigned have duly executed or caused this Agreement to be executed as of the day and year first above written. NEWSOUTH SPECIAL EQUITIES, L.P. By: NewSouth Capital Management, Inc. General Partner By: /s/ D. Stephen Morrow --------------------- Name: D. Stephen Morrow Title: Executive Vice President 15 SIGNATURE PAGE TO PREFERRED STOCKHOLDERS AGREEMENT IN WITNESS WHEREOF, the undersigned have duly executed or caused this Agreement to be executed as of the day and year first above written. FIRST AVENUE PARTNERS, L.P. By: FRONT STREET, LLC, General Partner By: /s/ Croley W. Graham, Jr. ------------------------- Name: Croley W. Graham, Jr. Title: Member 16 SIGNATURE PAGE TO PREFERRED STOCKHOLDERS AGREEMENT IN WITNESS WHEREOF, the undersigned have duly executed or caused this Agreement to be executed as of the day and year first above written. eBAY INC. By: /s/ Michael R. Jacobson ----------------------- Name: Michael R. Jacobson Title: Vice President, Legal Affairs 17 SIGNATURE PAGE TO PREFERRED STOCKHOLDERS AGREEMENT IN WITNESS WHEREOF, the undersigned have duly executed or caused this Agreement to be executed as of the day and year first above written. /s/ John S. Cannon ------------------ By: A. Martin F. Cannon, POA ------------------------ 18 SIGNATURE PAGE TO PREFERRED STOCKHOLDERS AGREEMENT IN WITNESS WHEREOF, the undersigned have duly executed or caused this Agreement to be executed as of the day and year first above written. 1935 DALTON TRUST By: /s/ David P. Mixer ------------------ Name: David P. Mixer Title: Trustee 19 SIGNATURE PAGE TO PREFERRED STOCKHOLDERS AGREEMENT IN WITNESS WHEREOF, the undersigned have duly executed or caused this Agreement to be executed as of the day and year first above written. /s/ Brian Walsh ---------------- Brian Walsh 20 SCHEDULE A NATIONAL FIRE & CASUALTY NEWSOUTH CAPITAL MANAGEMENT, INC. PROFIT SHARING PLAN PHOTO OP, LLC NEWSOUTH SPECIAL EQUITIES, INC. FIRST AVENUE PARTNERS, L.P. EBAY INC. JOHN S. CANNON 1995 DALTON TRUST BRIAN WALSH