-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QSyv7Qaz7ca6T1HABX4ZS06NDQyECS3h7oymdR97GwtZZ3LAXS6iY3/izX1KmmK/ iOXrAfMlwVcQ8mBof5hyBQ== 0000910680-97-000059.txt : 19970223 0000910680-97-000059.hdr.sgml : 19970223 ACCESSION NUMBER: 0000910680-97-000059 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19961031 FILED AS OF DATE: 19970213 DATE AS OF CHANGE: 19970221 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARISTO INTERNATIONAL CORP CENTRAL INDEX KEY: 0000782145 STANDARD INDUSTRIAL CLASSIFICATION: 7372 IRS NUMBER: 112706304 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-25296 FILM NUMBER: 97532329 BUSINESS ADDRESS: STREET 1: 152 W 57TH ST STREET 2: 29TH FL CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 2125862400 MAIL ADDRESS: STREET 1: 152 WEST 57TH STREET CITY: NEW YORK STATE: NY ZIP: 10019 FORMER COMPANY: FORMER CONFORMED NAME: ASTRO STREAM CORP DATE OF NAME CHANGE: 19920703 10KSB 1 FOR FYE 10/31/96 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-KSB [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED OCTOBER 31, 1996 [_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________ Commission File No. 0-25296 PLAYNET TECHNOLOGIES, INC. ---------------------------------------------- (Name of small business issuer in its charter) Delaware 11-2706304 - - --------------------------------- ------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 152 West 57th Street, 29th Floor, New York, New York 10019 ---------------------------------------------------------- (Address of principal executive offices) (Zip Code) (212) 586-2400 ---------------------------------------------- (Issuer's telephone number, including area code) Securities registered under Section 12(b) of the Securities Exchange Act: None Securities registered under Section 12(g) of the Securities Exchange Act: Common Stock, par value $0.001 per share ---------------------------------------------- (Title of Class) Check whether the issuer has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of the issuer's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] Issuer's revenues for its most recent fiscal year were $200,775. As of February 11 , 1997, the aggregate market value of the issuer's Common Stock (the only class of voting stock) held by non-affiliates was approximately $73,717,609. The number of shares of the issuer's Common Stock (the only class of common equity) outstanding on February 11, 1997 was 14,966,755 Transitional Small Business Disclosure Format (check one): Yes [_] No [X] PART I ITEM 1. DESCRIPTION OF BUSINESS General PlayNet Technologies, Inc. ("PlayNet" or the "Company") designs and develops location-based, pay-per-play electronic game and entertainment units and music juke boxes which are networked through the Internet. The Company's products utilize the Internet to enhance traditional video game products and juke boxes through innovations such as linking multiple players in remote locations and offering competitive tournament prize play. The Company intends to initially market these products to location-based venues such as bars, restaurants as well as other hospitality venues. The Company plans to introduce three products in 1997: the PlayNet Web(R) electronic game system, the PlayNet Music(R) juke box and the PlayNet Team(R) electronic game system. COMPANY BACKGROUND; RECENT EVENTS The Company was incorporated in the state of Delaware on July 12, 1984, under the name "The Astro-Stream Corporation." On May 3, 1995, Aristo International Corporation, a New York corporation (the "Merging Corporation"), was merged (the "Merger") with and into the Company, with the Company being the surviving corporation. Pursuant to the Merger, the name of the Company was changed to "Aristo International Corporation" and the former stockholders of the Merging Corporation became the owners of 90% of the issued and outstanding common stock of the Company. Prior to the Merger, the Company had no operations. On October 29, 1996, the stockholders at their Annual Meeting approved a resolution to amend the Company's Amended Certificate of Incorporation to change the name of the company from Aristo International Corporation to PlayNet Technologies, Inc., which change was effected on November 6, 1996. On November 19, 1996, the Company's Common Stock trading symbol on the NASDAQ SmallCap Market was changed to "PLNT." PRODUCTS The Company's products are designed to utilize the Internet as a communications network and an entertainment medium in a social setting, allowing users to play networked games, compete in local or national tournaments and contests, browse the World Wide Web, participate in chat room discussions and use credit cards to purchase merchandise. The Company's business reflects the growing trend to connect people via computer networks and, as a result, to create new forms of interactive entertainment in a social setting. According to the Vending Times 1996 Census, total coin-drop revenue in the U.S. in 1995 for all amusements was $6.3 billion, and the U.S. electronic pay-per-play video game business (which excludes pinball and redemption machines) generated $2.0 billion of that revenue. The Company has designed an open, PC-based system architecture which blends proprietary game development, secure communications protocol, and operations software in a client/server environment. Communications take place over the Internet utilizing standard Internet protocols. This integrated system allows the Company to offer networked, location-based entertainment that can be remotely updated with the latest games and entertainment content. The Company's initial product line is intended to consist of the following location-based entertainment systems: PlayNet Web(R) - A terminal engineered to sit on a counter top and accommodate 8 to 12 different games, including trivia, parlor, strategy and action games. PlayNet Web allows users to choose which game to play and then to choose whether to play against the computer or against other players through an Internet connection. In addition to playing games and participating in contests and prize tournaments, customers can choose to browse the Internet and participate in chat room discussions using attached telephone handsets. PlayNet Music(R) - A juke box which provides access to thousands of music titles via an Internet connection, thereby providing significantly greater choices than a standard juke box. In addition to providing the ability to select songs from an extensive library, PlayNet Music will allow customers to purchase CDs and merchandise relating to their favorite music artists. PlayNet Team(R) - An interactive system which allows two teams of up to four players each to compete against each other in sports simulations and other games. Both teams may be physically present in the same location, competing on the same game system, or may be in separate locations competing through an Internet connection. The system has been specifically designed to support tournament play. The Company has entered into a one year, annually renewable agreement with an unaffiliated vendor to manufacture PlayNet Web units, production having begun in January, 1997. PlayNet is negotiating to acquire the digital music and related ancillary rights to content from the libraries of several record labels and publishers for use on its PlayNet Music system. Concurrently, the Company is negotiating to enter into sponsorship and advertising programs for its sports games, tournaments and prize contests with high-profile consumer goods and beverage companies. The company has entered into a comprehensive Internet server delivery and support contract with IBM Global Services on January 24, 1997 and intends to work with IBM Global Services in the same manner to support the Company's global expansion objectives. The Company also intends to establish various contractual arrangements, joint ventures and other mutually advantageous programs with technology providers, equipment manufacturers, distributors, major hospitality chains, consumer products companies, music-related companies, content providers and others, to develop broader, more efficient, more profitable and higher-profile products and services. The Company's research and development costs for its last two fiscal years were $5,039,337 and $314,320, respectively. The Company's distribution strategies include the traditional location-based game distribution channels. Further, the Company is in negotiations with major fast food and hotel chains to provide additional venues for its products. COMPETITION The market for Internet-enabled, location-based entertainment products is new, and subject to rapid technological change. The markets served by the Company are extremely competitive. Because there are no substantial barriers to entry, an influx of new entrants into the market is expected to 2 continue in response to the growing demand for digital entertainment, information and data communication technology products and services. The Company expects competition to persist, intensify and increase in the future. Many of the Company's current and potential competitors have longer operating histories, enjoy a greater market presence and possess substantially greater technical, financial and marketing resources than the Company. Such competition could materially adversely affect the Company's business, operating results or financial condition. The Company is aware that other attempts are being undertaken to develop Internet-enabled products for the location-based entertainment marketplace. The Company believes that it competes for discretionary spending in the overall entertainment business which includes (i) home-based entertainment, such as television and home video, pre-recorded music, books and magazines, and personal computer and console based entertainment, and (ii) location-based entertainment, such as live events, theatrical exhibitions, video games, billiards, pinball machines and movies. DEPENDENCE UPON SUPPLIERS, MANUFACTURERS, LICENSORS AND THIRD-PARTY FINANCING SOURCES; LIMITED SOURCES OF SUPPLY; DEPENDENCE UPON NETWORK INFRASTRUCTURE. The Company relies on other companies to supply certain key components of its network infrastructure, including telecommunications services and networking equipment, which, in the quantities and quality demanded by the Company, are available only from sole or limited sources. The Company is also dependent upon local exchange carriers ("LECs") to provide telecommunications services to, and the Internet service provider ("ISP") IBM Global Services to provide Internet connection for the Company and its customers. Any failure to obtain such services on a timely basis at an acceptable cost would have a material adverse effect on the Company's business, financial condition and results of operations. The Company is also dependent on its suppliers' ability to provide necessary products and components that comply with various Internet and telecommunications standards and that operate with products and components from other vendors. PROPRIETARY RIGHTS The Company relies on trademark, copyright, patent and trade-secret laws as well as contractual rights to protect its proprietary technologies. The Company has filed trademark applications to register and protect the names PlayNet Web, PlayNet Music, PlayNet Team, PlayNet Technologies, Pay-per-Play, PlayNet and the Company's logo design. The source codes for the Company's proprietary software are protected as trade secrets. In accordance with the Company's policy, the Company's key employees and all consultants have entered, and all future key employee and all consultants are expected to enter, into agreements containing confidentiality, nondisclosure and nonsolicitation covenants. Similarly, the Company's agreements with customers and suppliers include provisions prohibiting or restricting the disclosure of proprietary information and products, the use of software in source code form and the sublicensing of licensed software. The Company is negotiating with record labels and music publishers to acquire the rights to music content and is negotiating with these entities regarding the scales and rates associated with the digital transmission of music, video and ancillary content through the PlayNet Music juke box system. The Company believes that its proprietary encryption/decryption technology is critical to securing the right to transmit music over the Internet. The Company also believes that its ability to track the individual titles played by its juke boxes will be attractive to music publishers and record 3 labels, as they will, for the first time, be able to identify volumetrically the popularity of the individual titles played on juke boxes. GOVERNMENT REGULATION In the United States and many other countries games of chance must be expressly authorized by law. Once authorized, such games may be subject to extensive and evolving federal, state, local and foreign governmental regulation. While the Company believes that its games are based on skill and thus are exempt from such regulation, there can be no assurance that the operation of the Company's games will be approved by any jurisdictions. In light of the increasing use and commercial importance of the Internet and other wide-area information networks, various issues, including pricing and competitive practices, service quality, user privacy and content, are drawing the attention of Congress, regulators, and industry and consumer groups. The adoption of any such laws or regulations could inhibit the continued growth of the Internet or other wide-area information networks, impose additional costs on the Company, expose the Company to greater potential liability from regulatory actions or private legal proceedings, or otherwise adversely affect the Company's business operations or performance. EMPLOYEES As of October 31, 1996, the Company had sixty-seven employees, all of whom were full-time and based in the United States. Of these, six were executive, forty-one were principally engaged in research and development, four were principally engaged in engineering, four were principally engaged in sales, marketing and customer support and twelve were principally engaged in administration and finance. None of the Company's employees are represented by a labor union and the Company considers its relations with its employees to be good. ITEM 2. DESCRIPTION OF PROPERTY The Company's executives offices occupy approximately 8,600 square feet in a modern office building at 152 West 57th Street, New York, New York 10019-3310 at an annual rent of $358,693 under a lease expiring on March 31, 2002. The Company's engineering and design facility at the Loudon Technology Center in Sterling, Virginia occupies approximately 7,000 square feet at an annual rent of $99,354 under a lease expiring on August 31, 1998. ITEM 3. LEGAL PROCEEDINGS The Company is a party to the following legal proceedings (other than routine litigation that is incidental to its business): (a) In an action entitled Orbach, Inc. v. Aristo International Corporation, commenced on or about October 10, 1996 in the Supreme Court of the State of New York, plaintiff seeks to recover damages from the Company in an amount not less than $232,500 based on the alleged breach of a finder's fee agreement and alleged unjust enrichment. (b) On or about December 24, 1996 MicroLeague Media Inc. filed a demand for arbitration with the American Arbitration Association asserting claims against the Company's subsidiary, PlayNet 4 Studios, Inc. (formerly Borta, Inc.) for an unspecified amount of damages based on the alleged breach of a licensing/co-development agreement between the parties. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The annual meeting of stockholders of the company was held on October 29, 1996. The following matters were voted upon at the meeting: (a) The Company's three incumbent directors were nominated and re-elected by the following vote: Director Votes - - -------- ----- For Withheld --- -------- Shmuel Cohen 11,605,092 25,036 Joseph Ettinger 11,630,092 36 Yael Cohen 11,605,075 25,036 (b) A proposal to amend the Company's certificate of incorporation (i) to change its name to "PlayNet Technologies, Inc." and (ii) to increase its authorized stock to 40,000,000 shares, consisting of 1,000,000 shares of preferred stock and 39,000,000 shares of common stock was approved by the following vote: Abstentions and For Against Broker Non-Votes - - --- ------- ---------------- 11,629,755 225 148 c) A proposal to adopt the Company's 1996 Stock Option Plan was approved by the following vote: Abstentions and For Against Broker Non-Votes - - --- ------- ---------------- 10,562,030 83,684 213 5 PART II ITEM 5 MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's Common Stock, par value $.001 per share, commenced trading on November 19, 1996 on the Nasdaq SmallCap Market under the symbol PLNT. Prior to that date the Company traded on the Nasdaq SmallCap Market under the symbol ATSP. Prior to October 4, 1996, the Company's shares were quoted in the so-called "pink sheets' in the over-the-counter market, and a market price for the shares could not be identified. The following table sets forth for the periods indicated the high and low sales prices for the Common Stock as reported on the Nasdaq SmallCap Market: High Low ---- --- Fiscal 1995 Fourth Quarter (from October 4, 1995)........... $101/2 $7 Fiscal 1996 First Quarter................................... 91/4 63/4 Second Quarter.................................. 113/4 63/4 Third Quarter................................... 11 4 Fourth Quarter .......................................... 10 63/4 On October 31, 1996, the last reported sales price of the Common Stock on the Nasdaq SmallCap Market was $9 per share. As of that date, there were 753 holders of record and the Company believes its common stock is beneficially owned by approximately 1,350 holders. DIVIDEND POLICY It has not been the policy of the Company to pay dividends on its Common Stock nor does it anticipate paying dividends on its Common Stock in the foreseeable future. The Company plans to retain any earnings to finance the development and expansion of its business. However, pursuant to a settlement with certain stockholders of the Astro-Stream corporation related to the Merger, a special dividend of $0.0932 per share was paid on or about August 6, 1996 to stockholders on the record date of May 5, 1995. 6 ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Summary Consolidated Financial data, the Consolidated Financial Statements and the Notes thereto contained in Item 7 of this 10KSB. OVERVIEW The Company designs and develops location-based, pay-per-play electronic game and entertainment units and music juke boxes which are networked through the Internet. The Company's products utilize the Internet to enhance traditional video game products and juke boxes through innovations such as linking multiple players in remote locations and offering cash-prize tournament play. The Company intends to initially target location-based venues such as sports bars and "theme" restaurants. The Company plans to introduce three products in the next six months: the PlayNet Music juke box and the TeamNet and TouchNet electronic game systems. The Company's products are designed to utilize the Internet as a communications network and an entertainment medium in a social setting, allowing users to play networked games, compete in local or national tournaments and contests, browse the World Wide Web, participate in chat room discussions and use credit cards to purchase merchandise. On May 3, 1995, Aristo International Corporation, a New York corporation (the "Predecessor"), was merged (the "Merger") with and into the Company, which was previously known as "The Astro-Stream Corporation." The Company was the surviving corporation in the Merger and, pursuant to the Merger, the name of the Company was changed to "Aristo International Corporation." Prior to the Merger, the Company had no operations. The Predecessor was incorporated in 1990 to invest in licensable and patentable consumer products for the mass market. From late 1994 until the effective date of the Merger, the Predecessor (and since the Merger, the Company) has focused on the business described in detail in this Prospectus. On July 31, 1995, the Company acquired 100% of the stock of Borta, Inc., an entertainment software engineering and development company (the "Acquisition"). See "Business." The Company's revenues historically have been comprised of software development fees. Salaries of the software programmers, networking specialists, engineers and graphic artists, as well as depreciation of the fixed assets used in the development of hardware and software, are included in research and development. During the next twelve months, the Company expects to continue the development of hardware and software for its networked, location-based entertainment products. The Company intends to sell its products through a network of over one hundred third party distributors. The Company's financial statements do not contain a provision for income tax expense from its inception through July 31, 1996 as the Company has incurred operating losses since inception. As of October 31, 1995, the Company had available unused net operating loss carry forwards of approximately $9,797,000, which may provide future tax benefits, expiring in various years from 2006 to 2010. The Company has fully reserved these potential future tax benefits. 7 COMPARISON OF THE FISCAL YEAR ENDED OCTOBER 31, 1996 VS. OCTOBER 31, 1995 Consolidated revenues for the twelve months ended October 31, 1996 were $200,775, an increase of approximately $43,000 as compared to the same period in 1995. Revenues from the development of software represented 96% and 94% of the 1996 and 1995 revenues, respectively. Royalties on the Company's consumer products represented 4% of revenues in 1996 compared to 6% of revenues in 1995. Selling, general and administrative expenses for the twelve months ended October 31, 1996 increased to $7,852,019 as compared to $3,678,823 for the twelve months ended October 31, 1995. Of the total selling, general and administrative expenses 54% or $2,001,000 for 1996 related to salaries and benefits as compared to approximately $600,000 for the prior period. This increase was attributable to an increase in personnel to 64 as of October 31, 1996 from 22 as of October 31, 1995, an increase of 42. The increase in headcount is primarily a result of the development of the infrastructure necessary to permit the Company to achieve its business objectives in product development and marketing. Occupancy expense for the current period amounted to $404,762 as compared to $251,303 for the same period in 1995. This increase is related to twelve months of expense for the Borta facility as compared to one month for the same period in 1995 and an engineering and design facility in California, which was occupied beginning in April 1996. Of the total selling, general and administrative expenses, occupancy expense represents 5% and 7% for the twelve months period in 1996 and 1995, respectively. Amortization and depreciation expenses totaled $49,502 and $37,762, respectively, for the twelve months ended October 31, 1996 and 1995. The increase of approximately $11,700 resulted from the capital expenditures in fiscal year 1996 related to the acquisition of equipment and leasehold improvements in the development of an infrastructure necessary achieve the Company's business objectives. Other selling, general and administrative expenses for the 1996 period of approximately $5,100,000 include $808,000 for legal and auditing services and $2,660,000 paid to consultants for services related to developing business plans, market strategies and funding of the Company. The balance of approximately $1,632,000 is primarily attributable to increased travel expenditures of $595,000 and certain other expenses, such as stationary and supplies, and telephone, related to the increased headcount and corporate activity. In 1996 the Company recorded amortization expense of $1,155,252 related to its Capitalized Software asset and a write down charge of $1,925,417 in connection with a change in accounting estimates. Also in 1996 the Company recorded a charge of $71,306 in connection with the write off of the unamortized balance of its Patents. Research and development costs for the twelve months ended October 31, 1996 increased to $5,039,337 as compared to $314,320 for the comparable period in 1995, which was primarily attributable to expenses related to prototypes and final test products and the purchase of certain licenses related to a discontinued product development. For 1996 other elements of these costs include: salaries and related expenses of $2,261,202 (45%); travel and related expenditures totaled $156,078 or 3%; amortization expense totaling $172,464 (3%) related to the goodwill realized from the Borta acquisition; and depreciation and amortization of computer and related expenses amounting to approximately $88,558 (2%), attributable to the design and development of hardware and software systems to support the Company's products. Also included in research and development costs is approximately $1,000,000 related to an abandoned business venture. Interest expense for the twelve months ended October 31, 1996 was $244,793, an increase of approximately $139,400 as compared to the same period in the prior year. This increase was primarily attributable to interest paid in connection with convertible notes. COMPARISON OF FISCAL YEAR ENDED OCTOBER 31, 1995 VS. OCTOBER 31, 1994 Consolidated revenues for 1995 were $157,627, an increase of $141,622 as compared to 1994. Revenues from the development of software represented 94% of revenues in 1995. Royalties on the Company's consumer products represented 6% of revenues in 1995 compared to 100% of revenues in 1994. Selling, general and administrative expenses for the period ended October 31, 1995 increased to $3,678,823 from $2,141,400 for the period ended October 31, 1994. Approximately 13%, or $194,339, of the increase in selling, general and administrative expense was due to an increase in travel and entertainment expenses. This increase was the result of visits to potential digital entertainment acquisition targets. An additional 43% of the increase was due to professional and consulting fees. Accounting expenses increased $131,644, primarily due to services relating to the Merger, including an audit for the three fiscal years ended October 31, 1994. Consulting expenses increased $365,505 primarily due to costs associated with designing and developing a strategic plan for the digital entertainment market. Legal fees increased $160,710 primarily due to services relating to the Merger as well as increased legal services relating to transactions in the digital entertainment marketplace. Selling, general and administrative expenses increased $99,325 and deferred compensation expense increased $117,857 as a result of the Acquisition. Salaries and benefits increased $219,238 as a result of hiring additional staff. Research and development expenses increased to $603,133 for the year ended October 31, 1995 from $47,205 for the year ended October 31, 1994. The increase is attributable to the development of networked game technology and design of multiplayer games. Interest and other income (expense)--net increased to $7,872 from ($56,044) in 1994 due to the gain on the settlement of a lawsuit recorded in 1995, in the amount of $76,466 offset by an increase in interest expense on convertible term loans. The gain on the lawsuit represents the judgment by the Supreme Court of the State of New York, County of New York on January 30, 1995 in favor of the Company and further provides that the Company be paid interest from February 6, 1992. Additionally, interest accrued through the date of the judgment of $21,425 has been recorded. 8 LIQUIDITY AND CAPITAL RESOURCES The Company has a revolving credit facility with The Merchants Bank of New York in an amount up to $500,000. The facility expires on May 15, 1997. As of October 31, 1996, $406,000 had been drawn upon, of which $250,000 is collateralized by a certificate of deposit. As of October 31, 1996, the Company had outstanding notes, issued between December 29, 1995 and July 31, 1996, in the aggregate principal amount of $1,590,000 of which $590,000 is due on February 28, 1997 and the balance is due on March 31, 1997. One promissory note, in the principal amount of $260,000, requires quarterly payments of interest each in the amount of $13,000 beginning on April 1, 1996; two promissory notes, each in the principal amount of $500,000, bear interest at a rate of 10% per annum and 12% per annum, respectively; and the remaining promissory note, in the principal amount of $330,000, bears interest at the prime rate. The holder of one promissory note is also entitled to receive a 12.5% participation in certain license royalties (but, to date, no amount has been paid or accrued with respect thereto), subject to the Company's right to terminate such participation and, in lieu thereof, issue warrants to purchase shares of Common Stock. The Company has agreed, if a holder of any of the forgoing notes so elects, to issue shares of Common Stock in full payment (in lieu of cash) of the principal amount of each of these notes (based on a price of $5.50 per share). Three of such holders have given notice to the Company of their intention to receive shares of Common Stock in payment of the entire principal amount of the promissory note held by it, although no such holder is legally obligated to do so by reason of such notice. The holders of two of the promissory notes were also granted options to purchase a total of 232,717 additional shares of Common Stock at a price of $5.50. In addition, the Company has borrowed $516,500 from certain lenders, each of whom has the right to receive shares of Common Stock in payment of the principal amount of the loan (based on a price of $6.50 per share or, as to $55,000 principal amount of one note, $5.50 per share). Accordingly, the Company expects to issue 370,091 shares of Common Stock with respect to such promissory notes and loans, although no such holders or lenders is legally obligated to receive such shares. Between August and October 1996, the Company sold in private placements 1,256,400 shares of Common Stock, of which 1,180,000 were sold at a price of $5.00 per share and 76,400 were sold at a price of $5.50 per share, from which the Company received aggregate net proceeds (after deduction of related selling expenses, including agency commissions) of approximately $5,880,645. Prospectively, as its primary means of financing capital needs, the Company intends to complete its public offering of 2,000,000 shares of its Common Stock which was initiated with the filing of a registration statement in October, 1996. For the interim period until such public offering can be completed, subsequent to the end of its last fiscal year, the Company entered into a bridge financing arrangement with Allen & Company Incorporated ("Allen") pursuant to which Allen will act as the Company's placement agent in the sale of senior secured notes and warrants for aggregate gross proceeds of up to $18,000,000, subject to the achievement of certain prescribed operating targets. Through February 12, 1997, based on its significant progress with respect to those operating targets to such date, the Company has received gross proceeds of $2,500,000 and Allen is obligated to use its best efforts to obtain a third party purchaser for an additional $750,000 in senior secured notes on or before the end of February, 1997. The Company believes that the net proceeds from the bridge financing and its public offering, together with available funds and cash flows expected to be generated by operations, will be sufficient to meet its anticipated cash needs for working capital and capital expenditures for at least 9 the next twelve months. In the event the Company's plans change, its assumptions change or prove to be inaccurate or if the proceeds of the bridge financing and the public offering or cash flows prove to be insufficient to fund operations, the Company may find it necessary or desirable to reallocate a portion of the proceeds within the above described categories, seek additional financing or curtail its activities. There can be no assurance that additional financing will be available on terms favorable to the Company, or at all. If adequate funds are not available or are not available on acceptable terms, the Company may not be able to take advantage of unanticipated opportunities, develop new products or otherwise respond to unanticipated competitive pressures. Such inability could have a material effect on the Company's business, financial condition and results of operations. ITEM 7 FINANCIAL STATEMENTS Page Report of Independent Accountants Consolidated Balance Sheets at October 31, 1996 and 1995..................... Consolidated Statements of Operations for the fiscal years ended October 31, 1996, 1995 and 1994 and the cumulative period from June 4, 1990 (inception) to October 31, 1996..................... Consolidated Statement of Stockholders' Equity for the fiscal years ended October 31, 1992, 1993, 1994, 1995, 1996 and the cumulative period from June 4, 1990 (inception) to October 31, 1996............................................................. Consolidated Statements of Cash Flows for the fiscal years ended October 31, 1996 and 1995 and the cumulative period from June 4, 1990 (inception) to October 31, 1996............................ Notes to the Consolidated Financial Statements............................... 10 REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders of PlayNet Technologies, Inc. and Subsidiaries: We have audited the accompanying consolidated balance sheets of PlayNet Technologies, Inc. and Subsidiaries, formerly Aristo International Corporation and Subsidiaries (a development stage enterprise) as of October 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three fiscal years in the period ended October 31, 1996 and the cumulative period from June 4, 1990 (inception) to October 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of PlayNet Technologies, Inc. and Subsidiaries as of October 31, 1995 and 1996, and the consolidated results of their operations and their consolidated cash flows for each of the three fiscal years in the period ended October 31, 1996 and the cumulative period from June 4, 1990 (inception) to October 31, 1996, in conformity with generally accepted accounting principles. New York, New York February 12, 1997 11 PlayNet Technologies, Inc. and Subsidiaries (Formerly Aristo International Corporation) (A Development Stage Enterprise) CONSOLIDATED BALANCE SHEETS October 31, 1996 and 1995
1996 1995 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 2,331,761 $ 540,297 Restricted cash 250,000 355,599 Marketable securities -- 1,500 Prepaid expenses and other current assets 15,200 236,319 ------------ ------------ Total current assets 2,596,961 1,133,715 Equipment, net 695,784 252,456 Patents, net -- 77,034 Capitalized software, net 4,940,528 7,907,937 Goodwill, net 991,697 1,164,161 Restricted cash - noncurrent 89,039 86,831 Other assets 355,672 426,195 ------------ ------------ Total assets $ 9,669,681 $ 11,048,329 ============ ============ LIABILITIES and STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 2,439,666 $ 661,045 Notes payable - bank 406,000 406,000 Convertible term loans - stockholders 776,500 375,000 Payable to stockholder 270,000 500,000 Capital leases - current 121,166 25,313 ------------ ------------ Total current liabilities 4,013,332 1,967,358 Convertible term loans - stockholders 1,330,000 565,000 Capital leases - long term 151,693 59,209 Deferred rent 145,076 158,891 ------------ ------------ Total liabilities 5,640,101 2,750,458 Commitments and contingencies -- -- Stockholders' equity: Preferred stock, $.001 par value; authorized 1,000,000 shares; issued and outstanding none in 1996 and 33,350 in 1995 -- 33 Common stock, $.001 par value; authorized 39,000,000 shares; issued and outstanding 14,966,755 and 13,199,945, respectively 14,967 13,200 Additional paid in-capital 31,736,496 21,871,438 Deferred compensation expense -- (1,846,429) Deficit accumulated during the development stage (27,721,883) (11,740,371) ------------ ------------ Total stockholders' equity 4,029,580 8,297,871 ------------ ------------ Total liabilities and stockholders' equity $ 9,669,681 $ 11,048,329 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 12 PlayNet Technologies, Inc. and Subsidiaries (Formerly Aristo International Corporation) (A Development Stage Enterprise) Consolidated Statements of Cash Flows For Fiscal Years ended October 31, 1996, 1995 and 1994 and for the June 4, 1990 @ 10/31/95 Cumulative period from June 4, 1990 (inception) to October 31, 1996 (inception) to Cumulative
Cumulative Since October 31, 1996 1996 1995 1994 (See Note 1(a)) ------------ ------------ ------------ ------------ Cash flows from operating activities: Net loss during development stage $(15,966,293) $ (4,116,457) $ (2,228,644) $(26,906,674) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,583,633 363,960 21,407 2,006,378 Expenses paid by issuance of common stock 699,790 185,873 70,000 1,925,663 Deferred compensation expense (117,857) 117,857 -- -- Deferred royalty income -- -- (8,333) -- Deferred rent (13,815) (13,814) 29,600 145,076 Loss on disposal of fixed asset -- -- -- 19,200 Net realized loss on sale of marketable securities -- 20,753 31,092 51,845 Net unrealized gain on marketable securities -- (1,000) (6,713) (7,713) Write down of capitalized software 1,925,417 -- -- 1,925,417 Charges related to issuance of warrants 1,405,590 -- -- -- Impairment of Patents 71,306 -- -- 71,306 Reserve for bad debt 132,538 -- -- 132,538 Changes in assets and liabilities: Increase in prepaid expenses and other current assets 46,187 (159,573) (16,408) (134,099) Increase in accounts payable and accrued expenses 1,785,927 232,427 (122,091) 2,302,881 ------------ ------------ ------------ ------------ Net cash used in operating activities (8,447,577) (3,369,974) (2,230,090) (18,468,182) ------------ ------------ ------------ ------------ Cash flows from investing activities: Investment in Borta, Inc., net of cash acquired -- (238,615) -- (238,615) Expenditures for equipment, leasehold improvements, patents and organization costs (492,831) (71,920) (41,203) (754,556) Purchase of marketable securities -- (1,103,085) (414,516) (1,517,601) Sales of marketable securities 1,500 1,147,832 324,137 1,473,469 Purchase of computer software -- (110,000) -- (110,000) Increase (decrease) in other assets -- 80,602 (232,119) (170,639) (Increase) decrease in restricted cash 103,391 (105,599) -- (339,039) ------------ ------------ ------------ ------------ Net cash used in investing activities (387,940) (400,785) (363,701) (1,656,981) ------------ ------------ ------------ ------------ Cash flows from financing activities: Net proceeds (repayments) from notes payable - bank -- (46,143) (39,500) 359,857 Proceeds from notes payable - stockholders -- -- -- 793,500 Repayments of notes payable - stockholders (230,000) -- (160,000) (573,500) Proceeds acquired in connection with the Astro-Stream merger 59,494 59,494 Proceeds from issuance of preferred stock 220,000 100,000 -- 320,050 Proceeds from issuance of common stock 9,305,700 2,759,247 1,580,000 16,860,237 Proceeds from convertible term loans 1,796,500 940,000 1,025,000 3,761,500 Repayments of convertible term loans (450,000) -- -- (450,000) Purchase of treasury stock -- -- -- (60,000) Dividends on preferred stock (15,219) (4,585) -- (19,804) ------------ ------------ ------------ ------------ Net cash provided by financing activities 10,626,981 3,808,063 2,405,500 21,051,334 ------------ ------------ ------------ ------------ Net (decrease) increase in cash and cash equivalents 1,791,464 37,304 (188,291) 926,171 Cash and cash equivalents, beginning of period 540,297 502,993 691,284 -- ------------ ------------ ------------ ------------ Cash and cash equivalents, end of period $ 2,331,761 $ 540,297 $ 502,993 $ 926,171 ============ ============ ============ ============ Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 244,793 $ 101,237 $ 63,629 $ 416,542 ============ ============ ============ ============ Taxes $ 33,215 $ 5,178 $ 6,031 $ 52,841 ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 13 PlayNet Technologies, Inc. and Subsidiaries (Formerly Aristo International Corporation) (A Development Stage Enterprise) CONSOLIDATED STATEMENTS OF OPERATIONS For the Fiscal Years ended October 31, 1996, 1995 and 1994 and for the Cumulative Period from June 4, 1990 (inception) to October 31, 1996
Cumulative Since June 4, 1990 (inception) to October 31, 1996 1996 1995 1994 (See Note 1(a)) ------------ ------------ ------------ ------------ Royalty revenue $ 8,428 $ 9,327 $ 16,005 $ 125,427 Production revenue 192,347 148,300 -- 340,647 ------------ ------------ ------------ ------------ Total revenue 200,775 157,627 16,005 466,074 Selling, general and administrative expense (7,852,019) (3,678,823) (2,141,400) (17,309,450) Research and development expenses (5,039,337) (314,320) (47,205) (6,373,377) Interest expense (245,144) (101,237) (46,525) (479,289) Amortization of capitalized software costs (including 1996 write down) (3,080,669) (288,813) -- (3,369,482) Interest and other income (expense) 50,101 109,109 (9,519) 158,850 ------------ ------------ ------------ ------------ Net loss (15,981,512) (4,116,457) (2,228,644) (26,906,674) Dividends on preferred stock (15,219) (4,585) -- (19,804) ------------ ------------ ------------ ------------ Net loss per common share $(15,981,512) $ (4,121,042) $ (2,228,644) $(26,926,478) ============ ============ ============ ============ Weighted average number of common shares outstanding 13,517,920 10,388,926 9,244,593 ============ ============ ============ Net loss per share $ (1.18) $ (0.40) $ (0.24) ============ ============ ============
14 ARISTO INTERNATIONAL CORPORATION and SUBSIDIARIES (a development stage enterprise) CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED Supplemental schedule of noncash investing and financing activities: The Company, on June 4, 1990, issued 3,334,780 shares of common stock in exchange for technical know-how and patents valued at $600,000. During October 1993, the Company issued 39,184 shares of common stock in exchange for the rights to a patent valued at $50,000. During 1994, notes payable of $250,000 and $12,064 of accrued interest thereon were converted into 171,741 shares of common stock. During 1994, a note payable of $200,000 was converted into 159,236 shares of commmon stock. During 1994, the Company retired 1,667,390 shares of treasury stock valued at $60,000. During 1995, convertible term loans of $1,025,000 were converted into 834,529 shares of common stock. During 1995, the Company issued 115,050 shares of common stock in exchange for original graphic illustrations valued at $255,555. In connection with the Merger with Astro-Stream, the Company assumed liabilities of $47,595 and acquired cash of $59,494. The Company purchased all of the capital stock of Borta, Inc. The details of the business acquired are as follows:
Fair value of current assets acquired $ 67,418 Fair value of fixed assets acquired 43,258 Intangible assets of business acquired: Capitalized software 8,086,750 Excess of cost over net assets acquired (goodwill) 5,008,049 Deferred tax liability (3,800,772) Liabilities assumed (104,703) Intercompany payable to the Company (50,000) ----------- Total purchase price consideration 9,250,000 Common stock issued 8,500,000 ----------- Total cash to be paid to sellers 750,000 Liabilities to former stockholder 500,000 ----------- Cash paid to sellers at closing of the acquisition 250,000 Less, cash acquired 11,385 ----------- Net cash payment at closing of the acquisition $ 238,615 ===========
In connection with the purchase of Borta, the Company issued 357,143 shares of restricted common stock valued at $1,964,286 to the President of Borta as deferred compensation. These shares are subject to forfeiture (see note 3). The accompanying notes are an integral part of these consolidated financial statements. 15 ARISTO INTERNATIONAL CORPORATION and SUBSIDIARIES (a development stage enterprise) CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED During 1995, the Company issued 25,000 shares of common stock in exchange for consulting services valued at $162,500. During 1995, the Company issued 4,082 shares of common stock in exchange for consulting services valued at $23,372. During December 1995, convertible term loans of $200,000 were converted into 66,667 shares of common stock. During 1996, the Company issued 14,921 shares of common stock in exchange for consulting services valued at $81,977. During 1996, the Company issued 58,191 shares of common stock in exchange for the 73,350 outstanding shares of preferred stock. During 1996, the Company issued 30,000 shares of common stock in exchange for product rights valued at $150,000. The accompanying notes are an integral part of these consolidated financial statements. 16 PlayNet Technologies, Inc. and Subsidiaries (Formerly Aristo International Corporation) (A Development Stage Enterprise) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Fiscal Years Ended October 31, 1992, 1993, 1994, 1995 and 1996 and for the period from June 4,1990 (inception) to October 31, 1996 [PART 1 OF 3]
Preferred Stock Common Stock Additional ------------------ ------------------ Paid in Shares Amount Shares Amount Capital --------------------------------------------------------- Issuance of common stock for initial capitalization ($0.18 per share) 3,334,780 $ 3,335 $ 596,665 Sale of common stock during November for cash ($0.12 per share) 1,764,099 1,764 218,526 Sale of common stock during October for cash ($1.29 per share) 155,067 155 199,845 Exchange of common stock during October for services at estimated value ($1.28 per share) 78,367 78 99,922 Net loss for the year ended October 31, 1991 --------------------------------------------------------- Balance, October 31, 1991 5,332,313 5,332 1,114,958 --------------------------------------------------------- Sale of common stock during the year for cash ($0.85 per share) 1,589,023 1,589 1,348,411 Sale of common stock during the year for cash ($1.17 per share) 235,102 235 274,765 Exchange of common stock during August for services at estimated value ($1.28 per share) 78,367 78 99,921 Net loss for the year ended October 31, 1992 --------------------------------------------------------- Balance, October 31, 1992 7,234,805 7,235 2,838,055 --------------------------------------------------------- Sale of common stock during the year for cash ($1.63 per share) 611,932 612 999,388 Sale of common stock during the year for cash ($1.28 per share) 195,085 195 249,805 Exchange of common stock during May for services at estimated value ($1.29 per share) 116,717 117 149,883 Exchange of common stock during October for services at estimated value ($1.33 per share) 15,006 15 19,985 Exchange of common stock during October for patent rights at estimated value ($1.28 per share) 39,184 39 49,961 Purchase of treasury stock for cash ($0.04 per share) Net loss for the year ended October 31, 1993 --------------------------------------------------------- Balance, October 31, 1993 8,212,729 8,213 4,307,077 --------------------------------------------------------- Sale of common stock during the year for cash ($1.46 per share) 1,030,447 1,030 1,498,970 Exchange of common stock during January for services at estimated value ($1.33 per share) 15,007 15 19,985 Exchange of common stock during January for services at estimated value ($1.46 per share) 34,181 34 49,966 Conversion of note payable and accrued interest into common stock ($1.53 per share) 171,741 172 261,892 Conversion of note payable into common stock ($1.26 per share) 159,236 159 199,841 Repayment of stock subscription receivable Retirement of treasury stock during October (1,667,390) (1,667) (58,333) Net loss for the year ended October 31, 1994 --------------------------------------------------------- Balance, October 31, 1994 7,955,951 7,956 6,279,398 --------------------------------------------------------- Conversion of notes payable into common stock ($1.23 per share) 834,529 835 1,024,165 Sale of common stock during November for cash ($1.53 per share) 235,936 236 359,764 Sale of common stock during March for cash ($2.22 per share) 450,195 450 999,550 Exchange of common stock in March for graphic illustrations ($2.22 per share) 115,050 115 255,440 Issuance of common stock per anti-dilution provision 38,350 38 (38) Sale of preferred stock in May for cash ($3.00 per share) 33,350 $ 33 100,017 -- 100,050 Equity acquired from the reverse acquisition with Astro-Stream 1,098,997 1,099 806,205 Issuance of common stock as a result of the acquisition of Borta, Inc. ($4.67 per share) 1,818,182 1,818 8,498,182 Grant of common stock ($5.50 per share) 357,143 357 1,963,929 Sale of common stock during August for cash ($4.50 per share) 66,666 67 299,933 Sale of common stock during August for cash ($5.50 per share) 93,500 94 514,156 Exchange of common stock in August for consulting services ($6.50 per share) 25,000 25 162,475 Exchange of common stock in August for consulting services ($5.75 per share) 3,687 4 21,196 Exchange of common stock in August for consulting services ($5.50 per share) 395 -- 2,172 Sale of common stock during September for cash ($5.50 per share) 96,364 96 529,904 Sale of common stock during October for cash ($5.50 per share) 10,000 10 54,990 Amortization of deferred compensation expense
[PART 2 OF 3]
Deficit Accumulated Common Stock Held During the Deferred in Treasury Development Compensation ------------------- Stage Expense Shares Amount --------------------------------------------------------- Issuance of common stock for initial capitalization ($0.18 per share) Sale of common stock during November for cash ($0.12 per share) Sale of common stock during October for cash ($1.29 per share) Exchange of common stock during October for services at estimated value ($1.28 per share) Net loss for the year ended October 31, 1991 $ (1,478,158) --------------------------------------------------------- Balance, October 31, 1991 (1,478,158) --------------------------------------------------------- Sale of common stock during the year for cash ($0.85 per share) Sale of common stock during the year for cash ($1.17 per share) Exchange of common stock during August for services at estimated value ($1.28 per share) Net loss for the year ended October 31, 1992 (1,480,812) --------------------------------------------------------- Balance, October 31, 1992 (2,958,970) --------------------------------------------------------- Sale of common stock during the year for cash ($1.63 per share) Sale of common stock during the year for cash ($1.28 per share) Exchange of common stock during May for services at estimated value ($1.29 per share) Exchange of common stock during October for services at estimated value ($1.33 per share) Exchange of common stock during October for patent rights at estimated value ($1.28 per share) Purchase of treasury stock for cash ($0.04 per share) (1,667,390) $ (60,000) Net loss for the year ended October 31, 1993 (1,636,310) --------------------------------------------------------- Balance, October 31, 1993 (4,595,280) (1,667,390) (60,000) --------------------------------------------------------- Sale of common stock during the year for cash ($1.46 per share) Exchange of common stock during January for services at estimated value ($1.33 per share) Exchange of common stock during January for services at estimated value ($1.46 per share) Conversion of note payable and accrued interest into common stock ($1.53 per share) Conversion of note payable into common stock ($1.26 per share) Repayment of stock subscription receivable Retirement of treasury stock during October 1,667,390 60,000 Net loss for the year ended October 31, 1994 (2,228,644) --------------------------------------------------------- Balance, October 31, 1994 (6,823,924) 0 0 --------------------------------------------------------- Conversion of notes payable into common stock ($1.23 per share) Sale of common stock during November for cash ($1.53 per share) Sale of common stock during March for cash ($2.22 per share) Exchange of common stock in March for graphic illustrations ($2.22 per share) Issuance of common stock per anti-dilution provision Sale of preferred stock in May for cash ($3.00 per share) Equity acquired from the reverse acquisition with Astro-Stream (795,405) Issuance of common stock as a result of the acquisition of Borta, Inc. ($4.67 per share) Grant of common stock ($5.50 per share) $ (1,964,286) Sale of common stock during August for cash ($4.50 per share) Sale of common stock during August for cash ($5.50 per share) Exchange of common stock in August for consulting services ($6.50 per share) Exchange of common stock in August for consulting services ($5.75 per share) Exchange of common stock in August for consulting services ($5.50 per share) Sale of common stock during September for cash ($5.50 per share) Sale of common stock during October for cash ($5.50 per share) Amortization of deferred compensation expense 117,857
[PART 3 OF 3]
Stock Subscription Receivable Total ---------------------------- Issuance of common stock for initial capitalization ($0.18 per share) $ 600,000 Sale of common stock during November for cash ($0.12 per share) 220,290 Sale of common stock during October for cash ($1.29 per share) 200,000 Exchange of common stock during October for services at estimated value ($1.28 per share) 100,000 Net loss for the year ended October 31, 1991 (1,478,158) ---------------------------- Balance, October 31, 1991 (357,868) ---------------------------- Sale of common stock during the year for cash ($0.85 per share) 1,350,000 Sale of common stock during the year for cash ($1.17 per share) 275,000 Exchange of common stock during August for services at estimated value ($1.28 per share) 99,999 Net loss for the year ended October 31, 1992 (1,480,812) ---------------------------- Balance, October 31, 1992 (113,680) ---------------------------- Sale of common stock during the year for cash ($1.63 per share) $ (80,000) 920,000 Sale of common stock during the year for cash ($1.28 per share) 250,000 Exchange of common stock during May for services at estimated value ($1.29 per share) 150,000 Exchange of common stock during October for services at estimated value ($1.33 per share) 20,000 Exchange of common stock during October for patent rights at estimated value ($1.28 per share) 50,000 Purchase of treasury stock for cash ($0.04 per share) (60,000) Net loss for the year ended October 31, 1993 (1,636,310) ---------------------------- Balance, October 31, 1993 (80,000) (419,990) ---------------------------- Sale of common stock during the year for cash ($1.46 per share) 1,500,000 Exchange of common stock during January for services at estimated value ($1.33 per share) 20,000 Exchange of common stock during January for services at estimated value ($1.46 per share) 50,000 Conversion of note payable and accrued interest into common stock ($1.53 per share) 262,064 Conversion of note payable into common stock ($1.26 per share) 200,000 Repayment of stock subscription receivable 80,000 80,000 Retirement of treasury stock during October -- Net loss for the year ended October 31, 1994 (2,228,644) ---------------------------- Balance, October 31, 1994 0 (536,570) ---------------------------- Conversion of notes payable into common stock ($1.23 per share) 1,025,000 Sale of common stock during November for cash ($1.53 per share) 360,000 Sale of common stock during March for cash ($2.22 per share) 1,000,000 Exchange of common stock in March for graphic illustrations ($2.22 per share) 255,555 Issuance of common stock per anti-dilution provision -- Sale of preferred stock in May for cash ($3.00 per share) Equity acquired from the reverse acquisition with Astro-Stream 11,899 Issuance of common stock as a result of the acquisition of Borta, Inc. ($4.67 per share) 8,500,000 Grant of common stock ($5.50 per share) -- Sale of common stock during August for cash ($4.50 per share) 300,000 Sale of common stock during August for cash ($5.50 per share) 514,250 Exchange of common stock in August for consulting services ($6.50 per share) 162,500 Exchange of common stock in August for consulting services ($5.75 per share) 21,200 Exchange of common stock in August for consulting services ($5.50 per share) 2,172 Sale of common stock during September for cash ($5.50 per share) 530,000 Sale of common stock during October for cash ($5.50 per share) 55,000 Amortization of deferred compensation expense 117,857
17 PlayNet Technologies, Inc. and Subsidiaries (Formerly Aristo International Corporation) (A Development Stage Enterprise) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Fiscal Years Ended October 31, 1992, 1993, 1994, 1995 and 1996 and for the period from June 4,1990 (inception) to October 31, 1996 [PART 1 OF 3]
Preferred Stock Common Stock Additional ------------------ ------------------ Paid in Shares Amount Shares Amount Capital --------------------------------------------------------- Dividend on preferred stock Net loss for the year ended October 31, 1995 - --------------------------------------------------------- Balance, October 31, 1995 33,350 33 13,199,945 13,200 21,871,43 --------------------------------------------------------- Sale of common stock during November for cash ($5.50 per share) 60,000 60 329,940 Sale of common stock during December for cash ($5.50 per share) 164,000 164 901,836 Conversion of notes payable into common stock in December ($3.00 per share) 66,667 67 199,933 Sale of preferred stock during January for cash ($5.50 per share) 40,000 40 219,960 Exchange of common stock in January for consulting services ($5.50 per share) 500 1 2,749 Sale of common stock during February for cash ($5.50 per share) 10,000 10 54,990 Sale of common stock during March for cash ($5.50 per share) 60,000 60 329,940 Sale of common stock during April for cash ($5.50 per share) 56,363 56 309,944 Reversal of prior year deferred compensation expense Write-off of deferred compensation expense (357,143) (357) (1,963,929) Sale of common stock during May for cash ($5.50 per share) 59,362 59 326,432 Exchange of common stock in May for consulting services ($5.76 per share) 421 -- 2,423 Exchange of common stock in May for consulting services ($4.82 per share) 1,100 1 5,302 Conversion of preferred stock into common stock in May (73,350) (73) 58,191 58 15 Sale of common stock during June for cash ($5.50 per share) 57,638 58 316,951 Exchange of common stock in June for consulting services ($5.50 per share) 1,000 1 5,499 Sale of common stock during July for cash ($5.50 per share) 152,000 152 835,848 Exchange of common stock in July for consulting services ($5.50 per share) 12,000 12 65,988 Exchange of common stock in August for product rights ($5.00 per share) 30,000 30 149,970 Sale of common stock in August for cash ($5.00 per share) 700,000 700 3,254,300 Sale of common stock in August for cash ($5.50 per share) 23,636 24 129,976 Sale of common stock in September for cash ($5.00 per share) 80,000 80 371,920 Sale of common stock in September for cash ($5.50 per share) 46,000 46 252,954 Exchange of common stock in September for consulting services ($5.50 per share) 15,625 16 85,921 Exchange of common stock in September for goods ($5.50 per share) 11,800 12 99,988 Grant of common stock as signing bonuses ($5.50 per share) 51,250 51 281,824 Sale of common stock in October for cash ($5.00 per share) 400,000 400 1,853,600 Sale of common stock in October for cash ($5.50 per share) 6,400 6 35,194 Issuance of warrants in exchange for consulting services ($8.25 per share) 1,183,942 Issuance of warrants in exchange for consulting services ($5.50 per share) 221,648 Dividend on preferred stock Net loss for the fiscal year ended October 31, 1996 --------------------------------------------------------- Balance, October 31, 1996 $ -- 14,966,755 $ 14,967 $31,736,496 =========================================================
[PART 2 OF 3]
Deficit Accumulated Common Stock Held During the Deferred in Treasury Development Compensation ------------------- Stage Expense Shares Amount ----------------------------------------------------------- Dividend on preferred stock (4,585) Net loss for the year ended October 31, 1995 (4,116,457) ----------------------------------------------------------- Balance, October 31, 1995 (11,740,371) (1,846,429) ----------------------------------------------------------- Sale of common stock during November for cash ($5.50 per share) Sale of common stock during December for cash ($5.50 per share) Conversion of notes payable into common stock in December ($3.00 per share) Sale of preferred stock during January for cash ($5.50 per share) Exchange of common stock in January for consulting services ($5.50 per share) Sale of common stock during February for cash ($5.50 per share) Sale of common stock during March for cash ($5.50 per share) Sale of common stock during April for cash ($5.50 per share) Reversal of prior year deferred compensation expense (117,857) Write-off of deferred compensation expense 1,964,286 Sale of common stock during May for cash ($5.50 per share) Exchange of common stock in May for consulting services ($5.76 per share) Exchange of common stock in May for consulting services ($4.82 per share) Conversion of preferred stock into common stock in May Sale of common stock during June for cash ($5.50 per share) Exchange of common stock in June for consulting services ($5.50 per share) Sale of common stock during July for cash ($5.50 per share) Exchange of common stock in July for consulting services ($5.50 per share) Exchange of common stock in August for product rights ($5.00 per share) Sale of common stock in August for cash ($5.00 per share) Sale of common stock in August for cash ($5.50 per share) Sale of common stock in September for cash ($5.00 per share) Sale of common stock in September for cash ($5.50 per share) Exchange of common stock in September for consulting services ($5.50 per share) Exchange of common stock in September for goods ($5.50 per share) Grant of common stock as signing bonuses ($5.50 per share) Sale of common stock in October for cash ($5.00 per share) Sale of common stock in October for cash ($5.50 per share) Issuance of warrants in exchange for consulting services ($8.25 per share) Issuance of warrants in exchange for consulting services ($5.50 per share) Dividend on preferred stock (15,219) Net loss for the fiscal year ended October 31, 1996 (15,966,292) ----------------------------------------------------------- Balance, October 31, 1996 $(27,721,883) $ $ $ ===========================================================
[PART 3 OF 3]
Stock Subscription Receivable Total --------------------------- Dividend on preferred stock (4,585) Net loss for the year ended October 31, 1995 (4,116,457) --------------------------- Balance, October 31, 1995 8,297,871 --------------------------- Sale of common stock during November for cash ($5.50 per share) 330,000 Sale of common stock during December for cash ($5.50 per share) 902,000 Conversion of notes payable into common stock in December ($3.00 per share) 200,000 Sale of preferred stock during January for cash ($5.50 per share) 220,000 Exchange of common stock in January for consulting services ($5.50 per share) 2,750 Sale of common stock during February for cash ($5.50 per share) 55,000 Sale of common stock during March for cash ($5.50 per share) 330,000 Sale of common stock during April for cash ($5.50 per share) 310,000 Reversal of prior year deferred compensation expense (117,857) Write-off of deferred compensation expense -- Sale of common stock during May for cash ($5.50 per share) 326,491 Exchange of common stock in May for consulting services ($5.76 per share) 2,423 Exchange of common stock in May for consulting services ($4.82 per share) 5,303 Conversion of preferred stock into common stock in May -- Sale of common stock during June for cash ($5.50 per share) 317,009 Exchange of common stock in June for consulting services ($5.50 per share) 5,500 Sale of common stock during July for cash ($5.50 per share) 836,000 Exchange of common stock in July for consulting services ($5.50 per share) 66,000 Exchange of common stock in August for product rights ($5.00 per share) 150,000 Sale of common stock in August for cash ($5.00 per share) 3,255,000 Sale of common stock in August for cash ($5.50 per share) 130,000 Sale of common stock in September for cash ($5.00 per share) 372,000 Sale of common stock in September for cash ($5.50 per share) 253,000 Exchange of common stock in September for consulting services ($5.50 per share) 85,937 Exchange of common stock in September for goods ($5.50 per share) 100,000 Grant of common stock as signing bonuses ($5.50 per share) 281,875 Sale of common stock in October for cash ($5.00 per share) 1,854,000 Sale of common stock in October for cash ($5.50 per share) 35,200 Issuance of warrants in exchange for consulting services ($8.25 per share) 1,183,942 Issuance of warrants in exchange for consulting services ($5.50 per share) 221,648 Dividend on preferred stock (15,219) Net loss for the fiscal year ended October 31, 1996 (15,966,292) --------------------------- Balance, October 31, 1996 $ $ 4,029,580 ===========================
Note 1. All common shares information has been restated since inception to reflect conversion of the outstanding shares of Aristo's common stock into 90% of the common stock of Astro-Stream pursuant to the Merger agreement. 18 NOTE 1. ORGANIZATION AND BUSINESS (a) Organization and Business - Pursuant to a resolution approved by the stockholders at its Annual Meeting held on October 29, 1996, Aristo International Corporation ("Aristo" or the "Company") amended its Certificate of Incorporation (i) to change the name of the Company to PlayNet Technologies, Inc. ("PlayNet"), which was effective on November 6, 1996, and (ii) to increase the number of shares of stock that the Company is authorized to issue to 40,000,000, consisting of 1,000,000 shares of Preferred Stock and 39,000,000 shares of Common Stock. Further, effective January 22, 1997, the names of Aristo Games, Inc. and Borta, Inc., both wholly owned subsidiaries of Aristo, were also changed to PlayNet Productions, Inc. and PlayNet Studios, Inc., respectively. Aristo International Corporation, incorporated in New York on June 4, 1990, was formed to invest in licensable and patentable consumer products for the mass market. On May 3, 1995, the Astro-Stream Corporation ("Astro-Stream") acquired all of the outstanding common stock of Aristo through the issuance of 9,889,477 shares of Astro-Stream's common stock, par value $.001, constituting 90% of Astro-Stream's issued and outstanding common stock immediately following the merger of Aristo into Astro-Stream (the "Merger"). Prior to the Merger, Astro-Stream was an inactive company engaged in seeking out a suitable business for acquisition or merger. Astro-Stream, a Delaware corporation, was the surviving corporation in the Merger. Pursuant to the Merger agreement, Astro-Stream changed its name to Aristo International Corporation. The New York corporation was dissolved. For accounting purposes, the Merger was treated as a recapitalization of Aristo with Aristo as the acquirer (reverse acquisition). All common stock of Aristo was retroactively restated to reflect the equivalent number of Astro-Stream shares that were deemed to be issued by Aristo in the transaction. The cumulative loss of Astro-Stream at the time of the merger amounted to $795,405 and is included in the deficit accumulated during the development stage of the Company. Pursuant to the Merger, the Company committed to obtain NASDAQ SmallCap listing for the surviving corporation. The SmallCap listing was obtained on September 29, 1995. (See Note 6(c).) These consolidated financial statements include the accounts of PlayNet and its wholly-owned subsidiaries (collectively, the "Company"). As a development stage enterprise, the Company has devoted all of its efforts through October 31, 1996 to research and development, raising capital, acquiring equipment, financial planning, opening new markets and finding strategic partners. Since late 1994 the Company has focused on the design and development of location-based, pay-per-play electronic entertainment products and music juke boxes which are networked through the Internet. In September 1996, the Company introduced prototypes of its products at a significant industry trade exposition, and since that time has moved towards a commercial launch. (b) Acquisition - On July 31, 1995, the Company, through its newly formed wholly owned subsidiary BAIC Acquisition Corp., purchased all of the outstanding stock of Borta, Inc. ("Borta"), an entertainment software engineering and development company, for consideration aggregating $9,250,000 (the "Acquisition"). The consideration consisted of $8,500,000 (1,818,182 shares) of newly issued common stock and $750,000 in cash. Of the $750,000 in cash payments, $480,000 had been paid 19 as of October 31, 1996 and the remaining $270,000 was paid on December 31, 1996 (see Note 9(a)). The Acquisition was accounted for using the purchase method of accounting and, accordingly, the results of operations of Borta are included in these financial statements from the date of the Acquisition. The Acquisition cost has been allocated to the assets acquired and liabilities assumed, based upon their fair value at the acquisition date, including $87,285 to net current liabilities, $43,258 to fixed assets, $8,086,750 to capitalized software and $1,207,277 to excess of cost over net assets acquired (goodwill). The value assigned to the capitalized software was determined based upon anticipated discounted after-tax cash flows for the period estimated to encompass the remaining life of the technology existing at the Acquisition date. (See Notes 2(e) and 3.) Following are the pro forma results of operations for the year ended October 31, 1995, as if the Acquisition had occurred as of the beginning of the fiscal year. The unaudited pro forma results of operations do not purport to represent what the Company's results of operations would have actually been if the Acquisition had, in fact, occurred on that date. The pro forma consolidated results of operations for the twelve months ended October 31, 1994 are not material to the financial statements and are, therefore, not presented. Year ended October 31, 1995 ---------------- Revenue .............................................. $ 352,391 Operating expenses ................................... 4,605,914 ----------- Net loss ............................................. $(4,253,523) =========== Loss per share ....................................... $ (0.41) =========== (c) Financing during the development stage- Since its inception, the Company has been engaged primarily in product development. As the Company's networked entertainment products are still being developed and have not yet been marketed by the Company, no significant revenues have been generated by the Company. The Company has incurred net losses since inception and, as of October 31, 1996, the Company had an accumulated deficit of $27,721,883 and a working capital deficit of $1,416,371. The Company's ability to meet its obligations in the ordinary course of business is dependent upon its ability to continue to obtain adequate financing and/or to complete and distribute new commercially successful entertainment software products. The Company intends to continue to fund its operations until the commercial launch of its products through equity and/or debt financing. From inception through October 31, 1995, the Company raised approximately $9,559,600 through the private placement of stock and convertible notes. From November 1, 1995 through October 31, 1996, the Company financed its operations through the private sale of stock and convertible notes for cash aggregating approximately $10,872,200 and in exchange for products and service totaling approximately $699,790. Prospectively, as its primary means of financing capital needs, the Company intends to complete its public offering of 2,000,000 shares of its Common Stock which was initiated with the filing of a registration statement in October 1996. For the interim period until such public offering can be completed, subsequent to the end of its last fiscal year, the Company entered into a bridge financing arrangement with Allen & Company Incorporated ("Allen") pursuant to which Allen will 20 act as the Company's placement agent in the sale of senior secured notes and warrants for aggregate gross proceeds of up to $18,000,000, subject to the achievement of certain prescribed operating targets. Through February 12, 1997, the Company has received gross proceeds of $2,500,000 and Allen is obligated to use its best efforts to obtain a third party purchaser for an additional $750,000 of senior secured notes on or before the end of February 1997. In the event that Allen is unsuccessful in completing the bridge financing or if the Company does not achieve its targets, the Company has received a commitment from a principal stockholder to fund a minimum of an additional $5,750,000 of capital and/or convertible term loans during 1997. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Principles of Consolidation- The consolidated financial statements include the financial statements of PlayNet and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. (b) Cash and Cash Equivalents - Cash and cash equivalents includes cash on hand, demand deposits and short-term investments with original maturities of three months or less. (c) Concentration of Credit Risk- The Company maintains its cash with high credit quality financial institutions, the amount of which may exceed federally insured limits. The amount on deposit in any one institution that exceeds federally insured limits is subject to credit risk. For the fiscal year ended October 31, 1996, the Company had $2,677,564, with a financial institution that was subject to credit risk beyond the federally insured amount. In fiscal year 1995, the Company did not maintain balances that were in excess of the federally insured limits. Management does not anticipate any losses in connection with its cash deposits. (d) Equipment and Depreciation and Amortization - Fixed assets are stated at cost net of accumulated depreciation and amortization. Depreciation is computed on the straight line method over the estimated useful lives of the depreciable assets. Estimated useful lives range from three to seven years. Assets acquired under capital leases are amortized using the straight line method over the shorter of the term of the lease or the estimated useful life. The cost of leasehold improvements considered significant are capitalized and then amortized using the straight line method over the shorter of the estimated useful life of the improvement or the remaining term of the lease. Maintenance and repairs are charged to expense as incurred. (See Note 5.) (e) Software Development Costs- The Company accounts for software development costs in accordance with Statement of Financial Accounting Standards No. 86, "Accounting for Costs of Computer Software to be Sold, Leased, or Marketed" ("FAS 86"). FAS 86 requires that certain software product development costs ("Capitalized Costs"), incurred after technological feasibility has been established, be capitalized and amortized over the economic life of the software product, commencing upon the general release of the software product to the Company's customers. Software development costs incurred prior to reaching technological feasibility are expensed as incurred. The Company recorded capitalized software in connection with its acquisition of Borta, Inc. and established an amortization policy by using the greater of (a) the straight line method over the remaining estimated economic life of the 21 product or (b) the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product. Management evaluates annually the recoverability of these assets based on projected future revenue streams and financial results for each of the products. In connection therewith, in the fourth quarter of 1996 the Company recorded a charge to write down the unamortized balance. Accumulated amortization amounted to $1,444,065 and $288,813 for the years ended October 31, 1996 and 1995, respectively. (See Note 3.) It is reasonably possible that the estimate of anticipated future gross revenues, and the remaining estimated economic life of the product or both will be reduced significantly in the near term. Consequently, amortization of the capitalized software costs may be accelerated materially in the near term. (f) Research and Development Costs- Research and development costs are charged to operations when incurred and amounted to $5,039,337, $314,320 and $47,205 for fiscal years 1996, 1995 and 1994, respectively. (g) Goodwill- Goodwill is the excess of the cost of net assets acquired in business combinations over their fair market value. The Company evaluates the recoverability of goodwill at least annually to determine whether later events or circumstances have resulted in an impairment of the asset. In completing this evaluation, the Company compares its best estimate of future undiscounted cash flows with the carrying value of goodwill. The Company recorded goodwill in connection with its acquisition of Borta, Inc. on July 31, 1995 (see Note 1(b)) and estimated a useful life of seven years. Accumulated amortization at October 31, 1996 and 1995 was $215,580 and $43,116, respectively. (h) Fair Value of Financial Instruments- The fair value of all financial instruments approximates their carrying values based on the interest rates for similar instruments. (i) Royalty Income- Royalty income is accrued on the basis of reported transactions of licensees or the minimum payment requirements pursuant to the license agreements. (j) Risks and Uncertainties- In the transition from development stage to the manufacturing stage, the Company may encounter unforeseen difficulties, some of which may be beyond the Company's ability to control, related to marketing, product development, manufacturing, regulation and proprietary technology (including Internet and network services). A significant delay in the Company's ability to manufacture and/or market its network entertainment products could have a material adverse effect on the Company's business, operating results and financial condition in the near term. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported in the consolidated financial statements and related notes to the financial statements. Changes in such estimates may affect amounts reported in future periods. The most significant estimates and assumptions are related to the recoverability of software costs, recoverability of goodwill and income taxes. Actual results could differ from those estimates. 22 (k) Income Taxes- Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities ("tax differences") using enacted tax rates in effect for the year in which the differences are expected to reverse. (See Note 18.) (l) Reclassifications- Certain reclassifications were made to prior period amounts to conform to current period presentation. (m) Impairment of Long-Lived Assets- The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("FAS 121"). FAS 121 requires that long-lived assets and certain identifiable intangibles held and used by a company be reviewed for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. FAS 121 also requires that assets and certain identifiable intangibles held for sale, other than those related to discontinued operations, be reported at the lower of the carrying amount or fair value less cost to sell. The Company believes that the adoption of FAS 121 in fiscal 1997 will not have a material impact on the Company's results of operations or financial position. (n) Impact of Future Adoption of Recently Issued Accounting Standards- The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"). This new accounting standard requires transactions in which goods or services are acquired from non-employees in exchange for stock options or other equity instruments to be accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, as calculated using certain option-pricing models, whichever is more reliably measured. It encourages, but does not require, companies to recognize compensation expense for grants of stock, stock options, and other equity instruments to employees also based on a fair-value method of accounting using option-pricing models. Companies that do not adopt the new expense recognition rules will be required to provide pro forma disclosures of the compensation expense as determined under the provisions of FAS 123, if material. The Company will be required to adopt the provisions of FAS 123 effective at the beginning of fiscal year 1997. Management has not fully evaluated the impact the adoption of FAS 123 will have on its financial position or results of operations at that time. NOTE 3. CAPITALIZED SOFTWARE In July 1995, the Company acquired Borta, Inc., a software development company, whose existing technology included various computer software products (e.g. games and tournament play software engines). The products, which have proven technological feasibility, are essential elements of the interactive entertainment products PlayNet has been developing. In conjunction with certain developments during the fourth quarter of fiscal year 1996, which include the recruitment of a number of key members of management with extensive industry background and the preparation for the launch of its products, management reviewed and revised its projected future revenues streams and financial results for each of its core products. This evaluation also included a review of the marketplace, competition and comparable products, product lifecycles, and discussions with potential customers and distributors, as well as sales 23 projections based upon the presentation of the products at various trade shows and industry events. As a result, the Company adjusted its assumptions regarding the recoverability of its capitalized software costs at October 31, 1996, and reduced the estimate of the asset's remaining useful economic life from seven years to three years. In connection therewith, the Company recorded a charge of $1,925,417 to the value of its Capitalized Software Costs asset. Since the acquisition of Borta, the Company has focused its efforts on the development of hardware and other software functionality that is essential to its core products, such as Internet browsing, operating systems, interfaces, Chat software, etc. Consequently, any additional costs related to the further development of the existing Borta technology has been minimal and not capitalized. NOTE 4. MARKETABLE SECURITIES The Company considers its marketable securities to be "available for sale" as defined by Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Accordingly, unrealized gains and losses are reported net of tax in a separate component of stockholders' equity until such gains or losses are realized. The cost of securities held at October 31, 1996 and 1995 approximated fair value. For the years ended October 31, 1996, 1995 and 1994, respectively, net realized losses were $38; $20,753; and $31,092. NOTE 5. EQUIPMENT As of October 31, 1996 and 1995, equipment consisted of: 1996 1995 --------- --------- Furniture and fixtures ............................. $ 43,015 $ 33,874 Office equipment and computers ..................... 594,337 172,421 Leasehold improvements ............................. 24,791 22,632 Equipment under capital lease, principally consisting of: Furniture ...................................... 49,014 49,014 Office equipment and computers ................. 180,422 37,978 --------- --------- 891,579 315,919 Less: Accumulated depreciation and amortization ... (195,795) (63,463) --------- --------- Property and Equipment - Net ....................... $ 695,784 $ 252,456 ========= ========= Depreciation expense for the years ended October 31, 1996, 1995 and 1994 was $86,246, $29,146, and $12,713, respectively. Amortization expense related to assets acquired through capital lease transactions totaled $46,086, $2,888, $-0- for the years ended October 31, 1996, 1995 and 1994, respectively. NOTE 6. RESTRICTED CASH (a) Current - A certificate of deposit in the amount of $250,000 collateralizes a line of credit expiring on May 20, 1997 with a commercial bank. (See Note 10(a).) 24 (b) Non-current- In lieu of a cash security deposit for the leased office space in New York, a certificate of deposit in the amount of $86,830 with a commercial bank collateralizes a letter of credit payable to the owner of the facility. This certificate of deposit is classified as non-current since its term is the same as the lease for the office space, which expires on March 31, 2002. The additional balance of $2,209 represents interest earned on the account. (See Note 8(b).) (c) Disposition of Certain Restricted Cash- Pursuant to the Merger, the Company committed to obtain NASDAQ SmallCap Listing for the surviving corporation. To secure that commitment, the Company deposited $100,000 in an escrow account which was to be distributed to former Astro-Stream stockholders if the listing was not obtained or released to the Company upon achieving the listing. Both parties contested as to whether the performance by the Company was timely and whether there was failure on the part of the former Astro-Stream stockholders in the effort to obtain the listing. In connection therewith, restricted cash in the amount of $100,000 was held in escrow at October 31, 1995. In August 1996 the parties entered into a Stipulation of Discontinuance pursuant to which the Company waived its rights to receive any of the escrow funds. A dividend of $.0932 was paid to stockholders of record on May 5, 1995, on which date a total of 1,072,958 shares were outstanding. Accordingly, the Company recorded a charge of $100,000 in the 1996 fiscal year. NOTE 7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES For the fiscal years ended October 31, 1996 and 1995 accounts payable and accrued expenses consisted of: 1996 1995 ---------- ---------- Accounts payable ..................... $2,037,075 $ 649,045 Accrued payroll ...................... 74,852 -- Accrued expenses ..................... 221,782 -- Interest payable ..................... 65,957 12,000 Deferred revenue ..................... 40,000 -- ---------- ---------- $2,439,666 $ 661,045 ========== ========== NOTE 8. LEASE OBLIGATIONS (a) Capital Leases - The Company has acquired computer equipment, office equipment and furniture under various capital lease agreements expiring at dates through 2000. The assets and liabilities under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the asset. The assets are amortized over the lower of their related lease terms or their estimated productive lives (see Notes 2(d) and 5). The following is a schedule of the minimum future lease payments related to the various capital leases as of October 31, 1996 for each of the next five years and in the aggregate. 25 Fiscal year ending October 31, 1997................................................ $ 160,347 1998................................................ 127,370 1999................................................ 52,687 2000................................................ 461 2001................................................ -- --------- Total minimum lease payments .................................. 340,865 Less: amount representing interest ............................ (68,006) Present value of net minimum lease payments ................... 272,859 Less: Capital Lease Obligations - current portion ............. (121,166) Capital Lease Obligations - net of current portion ............ $ 151,693 ========= (b) Operating Leases - The Company leases facilities under operating leases expiring in various years through 2002. The Company leases 4,683 square feet of office space for its corporate headquarters in New York under a lease agreement with an unaffiliated third party expiring March 31, 2002. The term of the lease is for ten years and provides for scheduled increases in base rent and escalations based on increases in direct operating expenses and real estate taxes. The total amount of the base rent over the ten year term of the lease aggregates $1,945,791. This amount is being charged to expense using the straight-line method over the term of the lease. Additionally, the Company has recorded a deferred credit to reflect the excess of accrued rent expense over total cash payments since inception of the lease. In addition, the Company has occupied additional 3,600 square feet of office space at its New York office under a sublet arrangement that expires October 31, 1997. The additional rent expense for this space amounts to $12,525 per month. Commencing September 1, 1995 in connection with the Borta acquisition, the Company entered into a lease agreement, expiring August 31, 1998 for a facility in Virginia. Minimum future rental payments under non-cancelable operating leases having remaining terms in excess of 1 year as of October 31, 1996 for each of the next five years and in the aggregate are: Fiscal year ending October 31, 1997 $ 319,437 1998 310,283 1999 222,443 2000 222,443 2001 222,443 Subsequent to 2001 92,685 ---------- Total minimum future rental payments $1,389,734 ========== Occupancy expense for the fiscal years ended October 31, 1996, 1995 and 1994 and the cumulative period from June 4, 1990 (inception) to October 31, 1996 was $404,762, $213,638, $198,450, and $1,458,733, respectively. 26 NOTE 9. COMMITMENTS (a) Employment Agreements - On May 16, 1996, the Company and Borta's president and Borta's chief operating officer ("COO") executed an agreement which provided for the resignation of both Borta's president and the COO as officers and directors of Borta, Inc. and the termination of their employment agreements (which were to expire on July 31, 1998). In connection therewith, Borta's president and COO surrendered all options to purchase common stock of the Company previously granted to them under those agreements. Further, Borta's president surrendered 357,143 of restricted shares of common stock previously granted, together with any options, incentive payments or rights related thereto. In connection with the severance benefits provided for in the May 16, 1996 agreement, the Company agreed to pay Borta's president and the COO $180,000 in additional compensation through January 15, 1997. The Company accrued this amount in the second quarter of the 1996 fiscal year. At October 31, 1996, the remaining balance was $58,258, which has been paid through January 15, 1997. (b) Amendment to Employment Agreement - On September 18, 1996, the Company and a key employee agreed to amend his employment agreement as follows. The term of the agreement was extended from June 30, 1997 to October 31, 1999. Additionally, the Company issued 50,000 shares of its restricted common stock with a fair market value of $5.50 per share as a signing bonus and recorded a compensation expense of $275,000, related thereto. The amendment further provided for the granting of the 1,000,000 stock options under the 1995 Stock Option Plan to this employee vesting at the rate of 100,000 options per year at the end of each fiscal year beginning October 31, 1997. The vesting schedule provides for acceleration upon attaining certain gross revenue targets. NOTE 10. NOTES AND LOANS PAYABLE (a) Line of Credit - The Company has borrowed $406,000 under two promissory notes with a commercial bank both of which are due on May 20, 1997. One note in the amount of $250,000 is collateralized by a certificate of deposit, which bears interest at the rate of 6.6% per annum. The second note in the amount of $156,000 bears interest at the rate of 1.5% in excess of the prime commercial rate of the bank per annum (9.75% and 8.75% at October 31, 1996 and 1995, respectively). (b) Convertible Term Loans - On December 29, 1994, the Company issued a convertible promissory note for cash, to a stockholder for $500,000, which bears interest at 10% per annum, payable on the last day of each month. The note is payable in one installment on March 31, 1997. The note holder shall have the option to convert the note into 90,909 shares of restricted common stock of the Company at an exercise price of $5.50 per share, in lieu of payment of the principal. On March 6, 1996 the holder of the note indicated its intent to convert the note into 90,909 shares of the Company's common stock. Accordingly, the Company has recorded this note as a non-current obligation on its balance sheet. On March 29, 1995, the Company issued a convertible promissory note for cash, due on April 30, 1996 to a stockholder for $200,000 collateralized by certain patents, bearing interest at 10% per annum payable quarterly. On December 29, 1995, the note holder exercised its right to convert the note into 66,667 shares of the Company's restricted common stock in lieu of payment of the note's principal. On July 31, 1995, the Company issued a $240,000 convertible note ("Original Note") maturing on December 31, 1995, with interest of $20,000 also payable at maturity. On December 29, 1995, the Company issued a new note ("New Note") in the amount of $260,000 (principal and interest of Original Note) that replaced and superseded the Original Note. Under the terms of the New Note, 27 the principle of $260,000 is due on February 28, 1997; and interest of $13,000 is payable quarterly. On February 12, 1996, the Company executed a $500,000 convertible promissory note, subsequently amended, bearing interest at 12% per annum, payable at maturity. The holder of the note has the right and option, until the maturity date, to convert the note into 90,909 shares of the Company's common stock. The holder also has a continuing contractual right to receive 12.5% of the earnings before interest and taxes from the licensing of music and video CD's. As of October 31, 1996, there were no amounts accrued with respect to this contractual right as the Company does not currently have nor anticipates having any projects related to these licenses. The note has been extended to mature on March 31, 1997. On June 12, 1996, the holder of the note indicated its intent to convert the note into 90,909 shares of common stock. Accordingly, the Company has recorded this note as a non-current obligation on its balance sheet. On April 12, 1996, the Company executed a $450,000 promissory note, as amended, bearing interest at 12% per annum, payable on August 15, 1996. The holder of the note had the right to convert the note into 81,818 shares of restricted common stock at any time after the date of the note and prior to December 31, 1996. However, on August 22, 1996 principal and accrued interest were paid in full. In connection therewith, the note holder still maintains the rights to options to purchase 81,818 shares of the Company's common stock at a price of $5.50 per share, which expire on March 31, 1997. On June 27, 1996, the Company issued a promissory note to a stockholder for $330,000 in cash, bearing interest at the prime interest rate as published in The Wall Street Journal (8.25% at October 31, 1996), and payable at maturity. The Company shall have the right to prepay the aggregate principal amount of the note, together with accrued interest through the date of the prepayment without penalty or premium. The stockholder shall have the option to acquire, until February 28, 1997, 120,000 shares of common stock of the Company for $660,000. On September 12, 1996, the note holder indicated its intent to convert the note into common shares. (c) Refundable Options to Purchase Stock - The following options to purchase stock contain provisions whereby the option holder may through February 28, 1997 call for the return of the consideration paid. Accordingly, these agreements are classified as "Convertible term loans - stockholders " in the current liabilities section of the Company's balance sheet. On May 16, 1996, the Company issued options to purchase an aggregate of 60,000 shares of restricted common stock at $6.50 per share to three separate parties in consideration of total cash payments of $390,000. The option exercise periods extended from the date of issuance through February 28, 1997. In the event the options are not exercised, the holder may call for the option consideration to be returned at anytime during the period beginning 10 days after the maturity date of February 28, 1997. On May 29, 1996, the Company issued options to purchase an aggregate of 21,000 shares of restricted common stock at prices between $5.50 and $6.50 per share to two parties in consideration for total cash payments of $126,500. The option exercise period extended from the date of issuance through February 28, 1997. In the event the options are not exercised, the holder may call for the option consideration to be returned at anytime during the period beginning 10 days after the maturity date of February 28, 1997. 28 NOTE 11. CAPITAL (a) Capital Transactions - At its inception (June 4, 1990), the Company issued 3,334,780 shares of common stock in exchange for technical know-how and patents related to certain consumer products which were to be developed further by the Company. These shares were assigned a value of $600,000, which represented the historical cost incurred by the Company's president and chief executive officer. During the year ended October 31, 1991, this amount was charged to operations as research and development. On April 20, 1994, the Company issued 171,741 shares of common stock to a stockholder as a result of a conversion of a note payable for $250,000 plus $12,064 in accrued interest. On September 30, 1994, the Company issued 159,236 shares of common stock to a corporate stockholder as a result of a conversion of a $200,000 note payable. In addition, at the effective date of the Merger (see Note 1(a)), the Company issued this stockholder an additional 38,350 shares of common stock pursuant to an anti-dilutive provision of the convertible note payable. On December 12, 1994, the Company issued 834,529 shares of common stock to stockholders as a result of the conversion of convertible term loans in the amount of $1,025,000. During March 1995, the Company issued 115,050 shares of common stock to its chief executive officer in exchange for original graphic illustrations valued at $255,555. These illustrations were to be used in a screen saver project that was previously being considered for development by the Company. During May 1995, the Company issued 33,350 shares of preferred stock for $100,050 in cash. The preferred stock provides for cumulative monthly dividends, in arrears, amounting to 10% per annum, starting on June 15, 1995. (See Note 14.) No dividends can be declared or paid on the common stock until any dividends accrued and unpaid on the preferred stock have been paid. The preferred shares were converted into 18,191 shares of the Company's restricted common stock on May 15, 1996. In connection with the Borta acquisition, the Company issued 1,818,182 shares of common stock to the former stockholders of Borta. Additionally, the Company issued 357,143 shares of restricted common stock, which were valued at $1,964,286 and subject to forfeiture, to the president of Borta as deferred compensation. On May 16,1996, these shares were canceled. (See Note 9(a).) In the third quarter of the 1996 fiscal year, the Company reversed the total deferred compensation, $117,857 of which had been charged to compensation expense in a prior period. The Company had recorded deferred compensation expense, representing the fair market value at the date of the grant, as a separate component of stockholders' equity for the non-vested portion of the stock granted. During August 1995, the Company issued 25,000 shares of its common stock valued at $162,000 as a commission on the Borta acquisition. Also during August 1995, the Company issued 4,082 shares of its common stock in exchange for consulting services valued at $23,372. 29 During the fiscal year ended October 31, 1996, the Company sold in private placements 1,875,400 shares of common stock, of which 1,180,000 were sold at a price of $5.00 per share and 695,400 were sold at prices of between $5.00 and $7.00 per share, from which the Company received net proceeds (after deduction of related selling expenses, including agency commissions) aggregating approximately $9,305,700. Additionally, during fiscal year 1996, the Company issued 72,446 shares of its common stock in exchange for goods and services with fair market values ranging from approximately $5.00 to $8.50 per share. In connection therewith, PlayNet recorded expenses aggregating $417,915. The Company canceled 357,143 shares of its restricted common stock pursuant to a termination agreement with two former executives of Borta, Inc. (See Note 9(a).) On December 29, 1995, the Company issued 66,667 shares of common stock to stockholders as a result of a conversion of a convertible term loan in the amount of $200,000. During May 1996, the holders of all issued and outstanding shares of the Company's preferred stock converted their shares of preferred stock into common stock at a conversion price of $5.50 per share. The 73,350 preferred shares have been converted into 58,191 shares of common stock. In September 1996, the Company issued 51,250 shares of its common stock with a fair market value of $5.50 per share to two executive employees as signing bonuses. Accordingly, compensation expense in the amount of $281,875 was recorded. The valuation of all common stock issued in exchange for services, products and intangibles approximates the value of the common stock sold to third parties for cash at the time of issuance. (b) Warrants - On March 29, 1996, the Company issued warrants to Allen & Company, Inc. to purchase 448,101 shares of the Company's common stock at an exercise price of $8.25 share in connection with a retainer agreement dated February 22, 1996 whereby Allen & Company agree to act as the Company's financial advisor. The warrants are exercisable, by the Holder, in whole or in part at any after the first anniversary of the date of the grant and prior to the fifth anniversary of the date of issuance. The Company has recorded a charge of $815,230 in connection with the agreement. On June 4, 1996, the Company entered into agreements with two parties to provide business development services to the Company. In consideration thereof, the Company granted warrants to purchase an aggregate of 200,000 shares of its common stock at an exercise price of $8.25. The warrants are exercisable, by the Holder, in whole or in part at any time and from time to time after the first anniversary of the date of the grant and prior to the fifth anniversary of the date of issuance. The Company has recorded a charge of $368,712 in connection with the agreement. At October 31, 1996, there were warrants outstanding to purchase a total of 648,101 shares of the Company's common stock. On January 20, 1997, warrants to purchase an aggregate of 100,000 shares at a price of $5.50 per share of the Company's common stock were issued to the same two parties as compensation for services rendered pursuant to the aforementioned consulting agreements. The warrants are exercisable by the holder at any time beginning one year from the date of grant through January 20, 2002. In connection therewith, the Company recorded a charge of $221,648 in fiscal year 1996. 30 NOTE 12. STOCK OPTIONS (a) 1994 Stock Option Plan - On December 9, 1994, the Board of Directors adopted the Company's 1994 Stock Option Plan (the "1994 Plan") which provides for the granting of options for the purchase of up to an aggregate of 500,000 shares of common stock to key employees and to consultants, advisors and directors who are not employees. Options may either be incentive stock options ("ISO") or non-qualified. Under the 1994 Plan, the option price shall be established by a compensation committee of the Board of Directors. The exercise price of the ISO's granted shall not be less than the fair market value of the shares on the effective date of the grant or not less than 110% of the fair market value of the shares on the effective date of the grant if the optionee owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company. Under the 1994 Plan, 428,333 options have been granted as of October 31, 1996, of which 120,000 options are exercisable at $2.44 per share. The remaining 348,333 options are exercisable at varying times through fiscal 1999 at prices ranging from $2.44 to $8.00 per share. All options expire 5 years from the date of grant. (b) 1995 Stock Option Plan - On July 28, 1995, the Board of Directors adopted the Company's 1995 Stock Option Plan (the "1995 Plan") which provides for the granting of options for the purchase of up to an aggregate of 1,000,000 shares of common stock to key employees and to consultants, advisors and directors who are not employees. Options may either be incentive stock options ("ISO") or non-qualified. Under the 1995 Plan, the option price shall be established by a compensation committee of the Board of Directors. The exercise price of the ISO's granted shall not be less than the fair market value of the shares on the effective date of the grant or not less than 110% of the fair market value of the shares on the effective date of the grant if the optionee owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company. Under the 1995 Plan 400,000 stock options were granted to the former shareholders of Borta exercisable on October 31, 2000 at a price of $5.50 per share. The exercise dates may be accelerated if certain earnings performance milestones (the "Milestones") are achieved for the 1996, 1997 and 1998 fiscal years, defined as earnings before interest and taxes. An additional 242,859 stock options at an exercise price of $1.00 per share were granted to the former shareholders of Borta, exercisable on January 31 following the fiscal years ending October 31, 1996, 1997, and 1998 provided that Borta achieves the Milestones for each fiscal year, as defined. As of October 31, 1996, none of the Milestones had been achieved nor was it probable that they would be. All of the options granted under the 1995 Plan were subsequently canceled. Options for 1,000,000 shares of common stock were then issued under the 1995 Plan to a key employee pursuant to an amended employment agreement. (See Note 9(b).) (c) 1996 Stock Option Plan - The 1996 Stock Option Plan (the "1996 Plan") was approved by the stockholders at the Company's Annual Meeting held on October 29, 1996. The 1996 Plan provides for a maximum of 1,500,000 shares of the Company's common stock to be issued in connection with stock option 31 grants to key employees and to consultants, advisors and directors who are not employees. Options may either be incentive stock options ("ISO") or non-qualified. With respect to ISO's, the exercise price of the ISO's granted shall not be less than the fair market value of the shares on the effective date of the grant or not less than 110% of the fair market value of the shares on the effective date of the grant if the optionee owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company. At October 31, 1996, 1,230,067 options had been granted under the 1996 Plan at prices ranging from $5.50 to $9.00 per share, of which, 67,000 are currently exercisable. Transactions involving stock option awards for the three fiscal years ended October 31, 1996 are summarized below. The total number of options exercisable at October 31, 1996 was 267,333. As of October 31, 1996, shares available for future grants under the 1996 Plan, 1995 Plan and 1994 Plan amounted to 269,933, none, and 71,666, respectively.
1996 1995 1994 Price Per Plan Plan Plan Share ---------- ---------- ---------- ---------- Options outstanding at January 1, 1994 -0- -0- -0- Options granted -- -- 200,000 $2.44 Options canceled -- -- -- ---------- ---------- ---------- Options outstanding at October 31, 1994 -0- -0- 200,000 Options granted -- -- 100,000 $8.00 Options granted -- 400,000 -- $5.50 Options granted -- 242,859 -- $1.00 Options canceled -- -- -- ---------- ---------- ---------- Options outstanding at October 31, 1995 -0- 642,859 300,000 Options granted 212,000 1,000,000 128,333 $5.50 Options granted 1,018,067 -- -- $8.00 - 9.00 Options canceled -- (642,859) -- $1.00 - 5.50 ---------- ---------- ---------- Options outstanding at October 31, 1996 1,230,067 1,000,000 428,333 ---------- ---------- ---------- ========== ========== ==========
NOTE 13. OTHER EMPLOYEE BENEFIT PLANS At the January 20,1997 meeting of the Board of Directors, PlayNet adopted a profit-sharing/savings plan pursuant to Section 401(k) of the Internal Revenue Code, whereby effective February 1, 1997, eligible employees may contribute on a tax-deferred basis a percentage of compensation, but not in excess of $9,500, the maximum allowable amount for 1997. The plan provides for a matching contribution by the Company up to a maximum level which cannot exceed 3% of the employees compensation. Company contributions vest over a three year period of continuous service and employee contributions are fully vested immediately. 32 NOTE 14. DIVIDENDS ON PREFERRED STOCK In fiscal year 1996, a total of $15,219 in cash dividends was paid to shareholders of the Company's 10% Cumulative Preferred Stock. On May 15, 1996 all preferred stock was converted into the Company's Common Stock. NOTE 15. LOSS PER COMMON SHARE Loss per common share amounts were computed by dividing the loss after deduction of preferred stock dividends by the weighted average number of common shares outstanding for the period. Shares issuable upon the exercise of outstanding stock options and warrants and the effect of any convertible securities are excluded from the computation because the effect on the net loss per common share would be anti-dilutive. NOTE 16. RELATED PARTY TRANSACTIONS The Company has entered into an agreement with a corporate stockholder and director to provide consulting services. In consideration for these services, the corporate stockholder has received fees totaling approximately $130,000; $75,000; $70,000; and $358,000 during the years ended October 31, 1996, 1995, 1994, and the cumulative period from June 4, 1990 (inception) through October 31, 1996, respectively. In addition, in 1996, this corporate stockholder also received a cash payment of $364,000 in connection with expenses incurred for presentations, commissions, tax advisory services and travel expenses related to securing investments in the Company through subscription agreements and promissory notes. This stockholder has also been issued a total of 273,451 shares of its common stock in exchange for $350,000 of services during the three fiscal years ended October 31, 1993. On January 15, 1997 the agreement between the Company and this corporate stockholder was extended for an additional period to expire on June 30, 1998 and was amended to provide for reimbursement to the stockholder for normal and customary "out-of-pocket" expenses incurred in the performance of its obligations under the agreement The Company obtained the services of its chief executive officer from another company of which PlayNet's CEO is the principle stockholder. Fees paid to that company during the years ended October 31, 1995, 1994, 1993, and the cumulative period from June 4, 1990 (inception) through October 31, 1995, total approximately $456,700; $626,000; $327,000; and $2,084,700, respectively. No such payments were made in the fiscal year ended October 31, 1996. On December 18, 1996 the Company executed a Promissory Note Receivable in the amount of $30,000 to a key employee, bearing an interest rate of 9% per annum to mature on March 18, 1997. The note provides for one extension up to and including June 18, 1997, at the sole option of the Company. NOTE 17. LEGAL PROCEEDINGS An action entitled Ohrbach, Inc. vs. Aristo International Corporation was commenced in the Supreme Court of the State of New York on October 10, 1996 against the Company by Ohrbach, Inc. seeking monetary damages of $232,500 based on the alleged breach of a finder's fee agreement. The Company intends to vigorously defend all aspects of such claim. It is not possible to ascertain at this time what the ultimate award or settlement will be. On December 24, 1996 the Company was served with a Demand for Arbitration in connection with a Development and License Agreement dated August 29, 1995 between Borta, Inc., a wholly 33 owned subsidiary of PlayNet, and an unaffiliated third party engaged in the marketing of computer sports games. The relief sought under the Demand is to be determined. The Company and the claimant have been engaged in settlement discussions and management believes that an agreement can be reached. However, no assurances can be given that a settlement will be completed. In the event a settlement cannot be reached and an adverse determination is made against the Company, payment of a material award could adversely affect the cash flow of the Company. NOTE 18. INCOME TAXES There is no provision for federal, state or local income taxes for all periods presented, since the Company has incurred operating losses since inception. The Company has paid the minimum state and local taxes during the years, as required. In addition, the Company has fully reserved for the potential future tax benefits resulting from the utilization of net operating loss carry-forwards and the realization of deferred rent. Deferred tax assets, as of October 31, 1996, consist of the following: Net operating loss carry-forwards $ 10,420,643 Capitalized software (2,322,048) Other 184,515 ------------ Total deferred tax assets 8,283,110 Less: valuation allowance (8,283,110) ------------ Net deferred tax assets $ -0- ============ As of October 31, 1996, the Company has available unused net operating loss carry-forwards of approximately $22,000,000 which may provide future tax benefits, expiring in various years from 2006 to 2011. 34 ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT The following table sets forth certain information concerning the present directors and executive officers of the Company: Name Age Position Shmuel Cohen 38 President, Chief Executive Officer and Chairman of the Board of Directors Paul C. Meyer 49 Chief Operating Officer Glenn P. Sblendorio 40 Chief Financial Officer Nolan K. Bushnell 54 Director of Strategic Planning Philip K. Yachmetz 39 Secretary and Director, Legal & Business Affairs Rita Zimmerer 41 Executive Vice President--Software Joseph Ettinger 57 Director Yael Cohen 36 Director All directors hold office until their respective successors are elected, or until death, resignation or removal. Officers hold office until the meeting of the Board of Directors following each annual meeting of stockholders and until their successors have been chosen and qualified. Shmuel Cohen, age 38, founded the Company in June 1990 and has been President, Chief Executive Officer and a Director of the Company since the Company's inception. Mr. Cohen has also been the President and Chief Executive Officer of each of the Company's subsidiaries since their respective formation in 1995 and 1996. From December 1987 to June 1990, Mr. Cohen served as Chief Executive Officer of Lamia Enterprises Ltd., a corporation that developed patented design application processes. From April 1984 to December 1987, Mr. Cohen served as Chief Executive Officer of Arts, Ltd., a company that researched, patented and produced Soft application technology. 35 Paul C. Meyer, age 49, joined the Company as Chief Operating Officer in October 1996 and has been an Executive Vice President and Chief Operating Officer of the Company and each of the Company's subsidiaries since November 26, 1996. From January 1994 to September 1996, Mr. Meyer served in various executive positions at Viacom New Media, a publisher and distributor of multimedia products and a division of Viacom International, Inc., and his last position was Executive Vice President and General Manager-New York. From October 1991 through October 1994, Mr. Meyer served as President of Paul C. Meyer & Associates, Inc., a financial consulting firm. Mr. Meyer has also served as a financial consultant to Automotive Industries, Inc. since September 1989. From February 1990 to September 1991, Mr. Meyer served as President of Superior Toy & Manufacturing Company. From December 1974 to August 1988, Mr. Meyer served in various executive positions with Coleco Industries, Inc., the toy company, his last position being Chief Financial Officer. Glenn P. Sblendorio, age 40, joined the Company in September 1996 as Senior Vice President and Chief Financial Officer and has been an Executive Vice President, Chief Financial Officer and Treasurer of the Company and each of its subsidiaries since November 26, 1996. From July 1993 to August 1996, Mr. Sblendorio served as Chief Financial Officer of Sony Interactive Entertainment, Inc., New York, an international, interactive hardware and software company. From October 1981 to July 1993, Mr. Sblendorio served in various positions with the international drug and bio-technology conglomerate, F. Hoffmann La Roche. From March 1992 to July 1993, Mr. Sblendorio served as Vice President of Finance of Roche Molecular Systems, Inc., New Jersey, a biotechnology subsidiary. From January 1990 to March 1992, Mr. Sblendorio served as Controller Europe for F. Hoffmann La Roche, Basel. From July 1988 to January 1990, Mr. Sblendorio served as Vice President of Finance and MIS for Medi+Physics, Inc., a radio pharmaceutical imaging product subsidiary of Hoffmann La Roche, Inc. Nolan K. Bushnell, age 54, joined the Company as Director of Strategic Planning in June 1996. Mr. Bushnell has served as a consultant to the Company since July 1995. From June, 1981, Mr. Bushnell has served as sole proprietor of Catalyst Technologies, a source of technical advice and venture capital for Silicon Valley entrepreneurial ventures. From July 1977 to January 1983, Mr. Bushnell served as Chief Executive Officer of Chuck E. Cheese, a restaurant chain featuring electronic entertainment. From November 1972 to February 1979, Mr. Bushnell served as Chief Executive Officer of Atari Corporation, a manufacturer of video games. Philip K. Yachmetz, age 39, joined the Company in October 1996 as Director, Legal & Corporate Affairs and became Secretary of the Company and each of its subsidiaries since November 26, 1996. From January 1989 to October 1996, Mr. Yachmetz served as Senior Counsel of Hoffmann-La Roche Inc. the U.S. subsidiary of the international pharmaceutical, diagnostics, chemical and bio-technology conglomerate F. Hoffmann-La Roche Ltd. From March 1985 to December 1988, Mr. Yachmetz served as Secretary and Counsel of Burmah LNG Shipping, Inc., and subsidiaries, the oil and liquefied natural gas shipping and transshipment subsidiary of Burmah Oil plc. From January 1981 to March 1985, Mr. Yachmetz was engaged in the private practice of law as an associate with two New York City law firms. Mr. Yachmetz is admitted to practice law in New York and New Jersey. Rita Zimmerer, age 41, joined the Company as Executive Vice President--Software in August 1996. From September 1995 to August 1996, Ms. Zimmerer served as Vice President and Senior Manager at Tiger Electronics, an interactive software company. From January 1994 to August 1995, Ms. Zimmerer served as Vice President of Sales, Marketing and Publishing at Terraglyph 36 Interactive Studios, a developer and publisher of interactive entertainment. From September 1989 to July 1992, Ms. Zimmerer served as Vice President of Sales and Marketing and from July 1992 to January 1994, Executive Vice President and General Manager of Sunsoft USA, a developer and publisher of interactive entertainment. From August 1988 to August 1989, Ms. Zimmerer served as Central Regional manager of Enesco Imports, a giftware design company. From July 1985 to August 1988, Ms. Zimmerer served as North Central Manager of Tonka Toys, Inc. As of January 1, 1997, Ms. Zimmerer's employment terminated and she was engaged as a consultant to the Company. Joseph Ettinger, age 57, joined the Company as a Director in October 1992. From August 1974 to June 1993, Mr. Ettinger served in various capacities for CLAL Industries Ltd., a non-U.S., industrial, multinational conglomerate, including Senior Vice President and General Manager (USA and Canada) from August 1986. Yael Cohen, age 36, who is the wife of Shmuel Cohen, has been a Director of the Company since May 1990 and served as Secretary of the Company from May 1990 until November, 1996. The Board of Directors is responsible for the management of the Company. During the fiscal year ended October 31, 1996, the Board of Directors held 8 meetings. Each incumbent director attended all meetings of the Board. Other than as described above, there are no family relationships among any of the directors or executive officers of the Company. The Company has obtained a key man life insurance policy covering Shmuel Cohen in the amount of $3,000,000. The Company is the sole beneficiary under this policy. COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's executive officers and directors, and any persons who own more than 10% of any class of the Company's equity securities, to file certain reports relating to their ownership of such securities and changes in such ownership with the Securities and Exchange Commission and to furnish the Company with copies of such reports. Based solely on a review of the copies of the reports furnished to the Company to date, or written representations that no reports were required, the Company believes that all reports required to be filed by such persons with respect to the Company's fiscal year ending October 31, 1996 were made on a timely basis. ITEM 10 EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE. The following table sets forth information concerning the annual and long term compensation paid during the Company's last two fiscal years to the Company's CEO and any other highly compensated executive officer serving at the end of the 1996 fiscal year. 37
Annual Compensation Long-Term Awards ---------------------------------------- --------------------------------------- Other Securities Year Annual Underlying Restricted All Other Name and Compensation Options Stock Compensation($) Principal Position Year Salary Bonus (1) (2) Awards (3) - - ------------------ ---- ------ ----- ---------- --------- --------- ------------ Shmuel Cohen, President and 1996 $344,000 -- $37,190 Chief Executive Officer 1995 $29,167 -- $456,700 200,000 -- Nolan Bushnell, Director of 1996 $100,000 Strategic Planning (4)
- - -------------------- (1) Represents amounts paid to Artmedia Ltd., a corporation controlled by Mr. Cohen, in consideration of the provision by Artmedia of the services of Mr. Cohen, the chief executive officer of Artmedia, as Chief Executive Officer of the Company. Mr. Cohen is currently under contract solely to the Company. See "Employment Agreements". (2) 120,000 of these options are currently exercisable. (3) On behalf of the CEO, the Company paid $20,680 for health and related benefits and $16,510 related to travel expenses. (4) Mr. Bushnell became a full time employee of the Company on July 1, 1996. Prior to that date he was engaged as a consultant by the Company and was remunerated approximately $240,000 in fiscal 1996 for those services. OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth the details of options granted to the individual listed in the Summary Compensation Table who received options during fiscal 1996.
% of Total Options Granted to Number of Employees in Exercise Price Name Options Garanted Fiscal Year Per Share Expiration Date ---- ---------------- ----------- --------- --------------- Nolan Bushnell 1,000,000 42% $5.50 July 28, 2005
38 OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUE No options were exercised by any named executive officers during fiscal 1996. The following table contains information at October 31, 1996, concerning the number and value of unexercised options held by Mr. Cohen. Value of Unexercised Number of Unexercised Options In-the-Money Options Held at Held at Fiscal Year-End Fiscal Year-End Name (Exercisable/Unexercisable) (Exercisable/Unexercisable)(1) ---- --------------------------- ------------------------------- Shmuel Cohen 120,000 / 80,000 $787,200 / $524,800 - - ---------------- (1) Based on the fair market value of the underlying securities (the closing bid price of Common Stock on the National Association of Securities Dealers Automated Quotation System - SmallCap Market) at fiscal year end (October 31, 1996), minus the exercise price. COMPENSATION OF DIRECTORS Directors of the Company do not receive fixed compensation for their services as directors; however, the Board of Directors may authorize the payment of a fixed sum to directors for their attendance at regular and special meetings of the Board as is customary for similar companies. Directors will be reimbursed for their reasonable out-of-pocket expenses incurred in connection with their duties to the Company. EMPLOYMENT AGREEMENTS Mr. Cohen and the Company have entered into an employment agreement that provides that Mr. Cohen will serve as Chief Executive Officer and President of the Company for a term beginning on May 3, 1995, and ending five years thereafter. Mr. Cohen's compensation under his employment agreement includes a salary of $350,000 per annum and options to purchase 200,000 shares of Common Stock. 120,000 of these options have vested on or before May 3, 1996 and are currently exercisable. The remaining 80,000 options vest on May 3, 1997. The exercise price of each option is $2.44. The employment agreement includes non-solicitation, non-compete and confidentiality provisions. Mr. Cohen and the Company have also entered into a separate agreement that provides contractual protections against changes in or loss of employment in case of a change of control (as such term is defined in such agreement) of the Company. Such agreement provides for a lump sum payment equal to 2.99 times Mr. Cohen's base amount (as such term is defined in such agreement) if a "change of control " occurs. Mr. Nolan Bushnell is employed as the Company's Director of Strategic Planning, pursuant to an employment agreement dated April 19, 1996, for a two year term ending on October 31, 1998. The agreement provides for Mr. Bushnell to be paid a salary at the rate of $300,000 per annum, and thereafter an annual salary determined by the Company's Board of Directors at a rate not less than the initial rate. The Company also granted to Mr. Bushnell options to purchase up to 1,000,000 shares of stock at an exercise price of $8.00 per share, which will vest at 100,000 39 options per annum over a period of 10 years. Such vesting options may be accelerated by an additional 400,000 options in each of the next two fiscal years, in the event the Company achieves gross revenues from the sale and operation of location based, PlayNet products of $35,000,000 in the fiscal year ended October 31, 1997 and $95,000,000 in the fiscal year ended October 31, 1998. Under the employment agreement, Mr. Bushnell also received a one-time bonus of $30,000 and was issued 50,000 shares of Common Stock as an additional sign-on bonus. No executive officer of the Company serves as a member of the Board of Directors or compensation committee of any entity which has one or more executive officers serving as a member of the Company's Board of Directors. 40 ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information with respect to the beneficial ownership of the outstanding shares of the Company's Common Stock as of October 31, 1996 by (i) each person known by the Company to own more than five percent (5%) of the outstanding shares of Common Stock, (ii) each director of the Company, (iii) each of the executive officers named in the Summary Compensation Table herein under "Executive Compensation", and (iv) all directors and executive officers of the Company as a group. Name and Address Amount and Nature Percent of Beneficial Owner of Beneficial Ownership of Class(1) - - ------------------- ----------------------- ----------- Shmuel Cohen(2) 2,342,631 (3) 15.53% 5 Cove Lane Kings Point, New York 11024 Castellon Ltd.(2) 2,271,421 (5) 15.13% 2, Clan William Terrace Dublin 2, Republic of Ireland N.Y. Holdings, Ltd.(2) 895,336 (6) 5.98% c/o Hertzog, Fox & Neeman 4 Weizman Street Tel Aviv 64239 Israel Joseph Ettinger (2) (5) 2,271,421 (5) 15.13% c/o Castellon Ltd. 2, Clan William Terrace Dublin 2, Republic of Ireland Yael Cohen 0 (4) 0.00% 5 Cove Lane Kings Point, New York 11024 Ron Borta 1,127,273 (7) 7.53% 14 Oak Lane Sterling, Virginia 20165 Directors and executive officers as a group (4 persons) 4,614,052 (8) 30.49% - - ---------------------------------------------- (1) Based on 14,966,755 shares outstanding. (2) Pursuant to a ten year proxy agreement dated June 30, 1992, Mr. Cohen, Castellon Limited and NY Holdings Ltd. have agreed that for so long as each party is a stockholder of the Company, each party will vote his or their shares of common stock, currently constituting approximately 36.04% of the Company's Common Stock, for the election of three directors to be designated by Mr. Cohen, two directors to be designated by Castellon Limited and one director to be designated by NY Holdings, Ltd. The sole beneficial owner of Castellon Limited is Mr. Joseph Ettinger. (3) Includes 120,000 shares issuable upon exercise of currently exercisable stock options. (4) Shmuel Cohen and Yael Cohen are husband and wife and each may be deemed to be the beneficial owner of the shares owned by Mr. Cohen. Mrs. Cohen disclaims beneficial ownership of such shares. (5) Mr. Ettinger is the President and sole beneficial owner of Castellon Limited and may therefore be deemed to be the beneficial owner of all of the shares of common stock of the Company owned by Castellon Ltd.. (6) Includes 47,273 shares issuable in payment, at the option of the holder, of a $260,000 convertible promissory note. (7) Includes 181,818 shares owned by Leslie Davis, Mr. Borta's wife. (8) Includes 167,273 shares issuable upon the exercise of currently exercisable stock options or in payment of a convertible promissory note held by a corporation controlled by a director. 41 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS On May 13, 1996, the Company, Ron Borta and Leslie Davis entered into a binding agreement which provides for, among other things, the resignation of Ron Borta and Leslie Davis as officers and/or directors of Borta, Inc., a company which was acquired by Aristo on July 31, 1995. In connection therewith, Mr. Borta and Ms. Davis surrendered all options to purchase Common Stock previously granted to either of them, and Mr. Borta surrendered 357,143 restricted shares of Common Stock previously granted to him, together with any other options, incentive payments or rights related thereto. In connection with their severance, the Company will pay them $180,000 in the aggregate over the period ending on January 15, 1997. In addition, of the $425,000 remaining to be paid to Ron Borta pursuant to his signing bonus with the Company, $5,000 was paid upon the execution of definitive agreements relating to the resignations, $150,000 was paid on August 30, 1996, and the balance is payable on December 31, 1996. On September 30, 1994, the Company issued 159,236 shares of Common Stock to Castellon Limited as a result of the conversion of a $200,000 promissory note. In addition, on May 3, 1995, as a result of the Merger, the Company issued to Castellon 38,350 shares of Common Stock pursuant to an anti-dilution provision of this promissory note. Mr. Joseph Ettinger, a director of the Company, is the President of Castellon Limited. On July 1, 1995, the Company entered into a consulting agreement with Castellon Limited, a stockholder of the Company which presently owns approximately 15.13% of the Company's Common Stock. Pursuant to this consulting agreement, Castellon Limited is paid a cash fee of $10,000 per month for consulting services rendered to the Company relating to joint ventures, strategic partnerships and investor relations outside the United States. Prior to July 1, 1995, Castellon Limited provided consulting services to the Company pursuant to other written agreements. During the years ended October 31, 1996, 1995 and 1994 and during the cumulative period from June 4, 1990 (inception) to October 31, 1995, the Company paid to Castellon Limited fees totaling approximately $130,000, $70,000, $75,000 and $358,000, respectively, in consideration of such consulting services. This stockholder has also been issued a total of 273,451 shares of the Company's common stock in exchange for $350,000 of services rendered during the three fiscal years ended October 31, 1993. In addition, in 1996, this corporate stockholder received a cash payment of $364,000 in connection with expenses incurred related to securing investments in the Company through subscription agreements and promissory notes. On January 15, 1997 the agreement between the Company and Castellon Limited was extended for a period of one year to expire on June 30, 1998 and was amended to provide for the reimbursement to Castellon of normal and customary "out-of-pocket" expenses incurred in the performance of its obligations under the agreement. On December 29, 1995, the Company issued to Castellon Limited a promissory note in the principal amount of $260,000, in exchange for, and in full payment of, the principal and accrued interest on a promissory note originally issued to Castellon Limited on August 1, 1995. Under the terms of this promissory note, the principal amount thereof is due on February 28, 1997, and interest is due and payable in quarterly installments, each in the amount of $13,000, beginning on April 1, 1996. The Company has agreed to issue, at the option of the holder of the promissory note, up to 47,273 shares of Common Stock, in lieu of cash, in payment of the principal amount of the note (at a price of $5.50 per share). Castellon has given written notice to the Company that it intends to receive payment of the entire principal amount in shares of Common Stock, although Castellon is not, by reason of this notice, legally obligated to do so. 42 In May 1995, the Company sold to Castellon Limited 33,350 shares of Preferred Stock in consideration of the payment by Castellon of $100,050 in cash. The terms of this Preferred Stock provided for cumulative monthly dividends at a rate per annum equal to 11% of the amount paid by Castellon Limited in consideration of such Preferred Stock, commencing June 15, 1995. So long as any shares of Preferred Stock were outstanding, the Company could not declare, pay, or set apart for payment any dividend or make any other payment on account of any of the shares of Common Stock, unless and until all accrued and unpaid dividends on the shares of Preferred Stock had been paid in full. The shares of Preferred Stock were redeemable at any time at the option of the Company. On May 15, 1996, all of such outstanding shares of Preferred Stock were converted to 18,191 shares of Common Stock at a conversion price of $5.50 per share. On June 27, 1996, the Company issued to N.Y. Holdings, Ltd., which presently owns 5.98% of the Company's common stock, a promissory note in the principal amount of $330,000, bearing interest at the prime rate, due on October 31, 1996. In connection therewith, the Company granted an option to N.Y. Holdings, Ltd. to purchase, at any time before February 28, 1997, 120,000 shares of Common Stock for an aggregate price of $660,000. N.Y. Holdings Ltd. has given written notice to the Company that it intends to exercise the option with respect to 60,000 shares of Common Stock by applying the principal amount of the note to the purchase price therefore (in lieu of any cash payment thereof by the Company), although N.Y. Holdings, Ltd. is not, by reason of this notice, legally obligated to do so. During March 1995, the Company issued 115,050 shares of Common Stock valued at $255,555 to Shmuel Cohen in exchange for original graphic images produced by contemporary artists beneficially owned by Mr. Cohen together with the rights for digital reproduction. From June 4, 1990 through September 30, 1995, the Company obtained the services of Shmuel Cohen, its President and Chief Executive Officer, from another company of which Mr. Cohen is the sole stockholder. Fees paid to this company for the services of Mr. Cohen during the fiscal years ended October 31, 1995 and 1994 and for the cumulative period from June 4, 1990 (inception) to October 31, 1995 were approximately $456,700, $626,000 and $2,084,700, respectively. On February 1, 1995, the Company entered into an employment agreement with Shmuel Cohen, its President and Chief Executive Officer. See "Executive Compensation--Employment Agreements." Commencing October 1995, the Company began compensating Mr. Cohen as President and Chief Executive Officer pursuant to this employment agreement, and since such date has not paid fees to any other person in connection with the services of Mr. Cohen, and does not intend to do so in the future. 43 ITEM 13. EXHIBIT LIST AND REPORTS ON FORM 8-K. (a) The following Exhibits are filed as part of this Report.
Number Description Method of Filing - - ------ ----------- ---------------- 2.1 Merger Agreement between the registrant Incorporated by reference to an Exhibit and Aristo International Corporation, to the Registrant's Current Report on dated October 28, 1994. Form 8-K, File No. 33-1260-NY, filed on November 16, 1994. dated October 28, 1994. 2.2 Agreement and Plan of Merger among the Incorporated by reference to an Exhibit registrant, BAIC Acquisition Corp., Borta, to the Registrant's Current Report on Inc. and the shareholders of Borta, Inc., Form 8-K, File No. 33-1260-NY, filed on dated July 28, 1995. August 15, 1995. 3.1 Restated and Amended Certificate of Incorporated by reference to Exhibit 3.1 Incorporation of the Registrant. to the Registrant's Annual Report on Form 10-KSB for the year ended October 31, 1995, filed on January 29, 1996. 3.1A A Certificate of Amendment to the Restated Filed herewith. and Amended Certificate of Incorporation of the Registrant, filed on November 6, 1996. 3.2 By-Laws of the Registrant. Incorporated by reference to Exhibit 3.2 to the Registrant's Annual Report on Form 10-KSB for the year ended October 31, 1995, filed on January 29, 1996. 10.1 1994 Stock Option Plan of the Registrant.* Incorporated by reference to Exhibit 10.1 to the Registrant's Annual Report on Form 10-KSB for the year ended October 31, 1995, filed on January 29, 1996. 10.2 1995 Stock Option Plan of the Registrant.* Incorporated by reference to Exhibit 10.2 to the Registrant's Annual Report on Form 10-KSB for the year ended October 31, 1995, filed on January 29, 1996. 10.3 1996 Stock Option Plan of the Registrant Incorporated by reference to Exhibit 10.3 and Form of Stock Option Contract.* to the Registrant's Registration Statement on Form S-1 (Reg. No. 333-14259), filed on October 16, 1996. 10.4 Employment Agreement between the Incorporated by reference to Exhibit 10.3 Registrant and Shmuel Cohen dated to the Registrant's Annual Report on Form February 1, 1995.* 10-KSB for the year ended October 31, 1995, filed on January 29, 1996. 44 Number Description Method of Filing - - ------ ----------- ---------------- 10.5 Change in Control Agreement, dated Incorporated by reference to Exhibit 10.6 February 1, 1995, between the registrant to the Registrant's Annual Report on Form and Shmuel Cohen.* 10-KSB for the year ended October 31, 1995, filed on January 29, 1996 10.6 Consulting Agreement, dated July 1, 1995, Incorporated by reference to Exhibit 10.7 between the registrant and Castellon to the Registrant's Annual Report on Form Limited.* 10-KSB for the year ended October 31, 1995, filed on January 29, 1996. 10.7 Warrant Certificate Incorporated by reference to Exhibit 10.3 to the Registrant's Registration Statement on Form S-1 (Reg. No. 333-14259), filed on October 16, 1996. 10.8 Form of Purchase Agreement Incorporated by reference to Exhibit 10.3 to the Registrant's Registration Statement on Form S-1 (Reg. No. 333-14259), filed on October 16, 1996. 10.9 Engagement Letter Agreement, dated Incorporated by reference to Exhibit 10.3 February 22, 1996, between the registrant to the Registrant's Registration and Allen & Company Incorporated. Statement on Form S-1 (Reg. No. 333-14259), filed on October 16, 1996. 10.10 Placement Agency Agreement, dated July 31, Incorporated by reference to Exhibit 10.3 1996, between the registrant and Allen & to the Registrant's Registration Company Incorporated. Statement on Form S-1 (Reg. No. 333-14259), filed on October 16, 1996. 10.11 Form of Subscription Agreement Incorporated by reference to Exhibit 10.3 to the Registrant's Registration Statement on Form S-1 (Reg. No. 333-14259), filed on October 16, 1996. 10.12 Form of Option Agreement/Convertible Note Incorporated by reference to Exhibit 10.3 to the Registrant's Registration Statement on Form S-1 (Reg. No. 333-14259), filed on October 16, 1996. 10.13 Employment Agreement, dated April 19, Incorporated by reference to Exhibit 10.3 1996, between the registrant and Nolan to the Registrant's Registration Bushnell, as amended on September 1996.* Statement on Form S-1 (Reg. No. 333-14259), filed on October 16, 1996. 10.14 Termination Agreement, dated May 13, 1996, Incorporated by reference to Exhibit 10.3 among Ron Borta and Leslie Davis and the to the Registrant's Registration registrant. Statement on Form S-1 (Reg. No. 333-14259), filed on October 16, 1996. 45 Number Description Method of Filing - - ------ ----------- ---------------- 10.15 Services Letter Agreement, dated August Incorporated by reference to Exhibit 10.3 17, 1995, between the registrant and to the Registrant's Registration Michael Katz. Statement on Form S-1 (Reg. No. 333-14259), filed on October 16, 1996. 10.16 Form of Financial Consulting Contract. Incorporated by reference to Exhibit 10.3 to the Registrant's Registration Statement on Form S-1 (Reg. No. 333-14259), filed on October 16, 1996. 10.17 Letter Agreement, dated June 10, 1996, Incorporated by reference to Exhibit 10.3 between the registrant and P.S.G.S. to the Registrant's Registration International Real Estate, Ltd. Statement on Form S-1 (Reg. No. 333-14259), filed on October 16, 1996. 10.18 Option Agreement, dated June 10, 1996, Incorporated by reference to Exhibit 10.3 between the registrant and P.S.G.S. to the Registrant's Registration International Real Estate, Ltd. Statement on Form S-1 (Reg. No. 333-14259), filed on October 16, 1996. 10.19 Services Agreement, dated August 1, 1996, Incorporated by reference to Exhibit 10.3 between the registrant and Owens & to the Registrant's Registration Associates, Inc. Statement on Form S-1 (Reg. No. 333-14259), filed on October 16, 1996. 10.20 Services Letter Agreement, dated August Incorporated by reference to Exhibit 10.3 20, 1996, between the registrant and to the Registrant's Registration Copyright Clearinghouse, Inc. Statement on Form S-1 (Reg. No. 333-14259), filed on October 16, 1996. 10.21 Amendment, dated June 28, 1996, to the Incorporated by reference to Exhibit 10.3 Consulting Agreement, dated July 1, 1995, to the Registrant's Registration between the registrant and Castellon Statement on Form S-1 (Reg. No. Limited. 333-14259), filed on October 16, 1996. 10.22 AFMA International Disc Distribution Incorporated by reference to Exhibit 10.3 Agreement, dated August 22, 1996, between to the Registrant's Registration Film Ventures International, Inc. and Statement on Form S-1 (Reg. No. Aristo entertainment, Inc. 333-14259), filed on October 16, 1996. 10.23 Senior Secured Notes Placement Agreement Filed herewith. dated December 30, 1996 (including exhibits and schedule of holders.) 10.24 Warrants to Purchase Common Stock issued Filed herewith. January 20, 1997 (with schedule of holders.) 10.25 Amendment, dated October 30, 1996, to Filed herewith. Common Stock Options (with schedule of holders.) 46 Number Description Method of Filing - - ------ ----------- ---------------- 10.26 Letter agreements, dated December 5, 1996, Filed herewith with Zeller Eblagon Financial Services, Ltd., extending options to purchase Common Stock. 10.27A First Amendment, dated October 31, 1996, Filed herewith. to $330,000 Promissory Note payable to NY Holdings, Limited. 10.27B Second Amendment, dated January 10, 1997, Filed herewith. to $330,000 Promissory Note payable to NY Holdings, Limited. 10.29 First Amendment, dated December 5, 1996, Filed herewith. to $500,000 Promissory Note payable to Zeller Eblagon Leasing, Ltd. 10.30A First Amendment, dated January 1, 1997, to Filed herewith. $260,000 Promissory Note payable to Castellon Limited. 10.30B Second Amendment, dated January 10, 1997, Filed herewith. payable to Castellon Limited. 21.1 Subsidiaries of the Registrant. Filed herewith.
- - -------------- * Management contract or compensatory plan or arrangement. (b) Reports on Form 8-K. None 47 SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PLAYNET TECHNOLOGIES, INC. By: /s/ Shmuel Cohen ---------------------- Shmuel Cohen President and Chief Executive Officer Dated: February 13, 1997 In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/Shmuel Cohen President and Chief February 13, 1997 - - ------------------------ Executive Officer Shmuel Cohen (Principal Executive Officer) and Director /s/Glenn P. Sblendorio Executive Vice February 13, 1997 - - ------------------------ President, Chief Glenn P. Sblendorio Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer) /s/ Joseph Ettinger Director February 13, 1997 - - ------------------------ Joseph Ettinger /s/ Yael Cohen Director February 13, 1997 - - ------------------------ Yael Cohen PLAYNET TECHNOLOGIES, INC. EXHIBIT INDEX Exhibit Number Description - - ------ ----------- 3.1A A Certificate of Amendment to the Restated and Amended Certificate of Incorporation of the Registrant, filed on November 6, 1996. 10.23 Senior Secured Notes Placement Agreement dated December 30, 1996 (including exhibits and schedule of holders.) 10.24 Warrants to Purchase Common Stock issued January 20, 1997 (with schedule of holders.) 10.25 Amendment, dated October 30, 1996, to Common Stock Options (with schedule of holders.) 10.26 Letter agreements, dated December 5, 1996, with Zeller Eblagon Financial Services, Ltd., extending options to purchase Common Stock. 10.27A First Amendment, dated October 31, 1996, to $330,000 Promissory Note payable to NY Holdings, Limited. 10.27B Second Amendment, dated January 10, 1997, to $330,000 Promissory Note payable to NY Holdings, Limited. 10.29 First Amendment, dated December 5, 1996, to $500,000 Promissory Note payable to Zeller Eblagon Leasing, Ltd. 10.30A First Amendment, dated January 1, 1997, to $260,000 Promissory Note payable to Castellon Limited. 10.30B Second Amendment, dated January 10, 1997, payable to Castellon Limited. 21.1 Subsidiaries of the Registrant. EX-3.(I) 2 CERT. OF AMENDMENT CERTIFICATE OF AMENDMENT TO THE RESTATED AND AMENDED CERTIFICATE OF INCORPORATION OF ARISTO INTERNATIONAL CORPORATION Under Section 242 of the General Corporation Law It is hereby certified that: FIRST: The name of the corporation (hereinafter called the "Corporation") is ARISTO INTERNATIONAL CORPORATION. SECOND: The original Certificate of Incorporation of the Corporation was filed with the Secretary of State of the State of Delaware on July 12, 1984. The Restated and Amended Certificate of Incorporation of the Corporation was filed with the Secretary of State of the State of Delaware on the May 3, 1995. THIRD: The Amendment to the Restated and Amended Certificate of Incorporation, as heretofore amended and restated, effected by this Certificate of Amendment is as follows: (i) to change the name of the Corporation; and (ii) to increase the number of shares of stock that the Corporation is authorized to issue to 40,000,000. FOURTH: To accomplish the change of name of the Corporation, Article FIRST of the Restated and Amended Certificate of Incorporation, relating to the name of the Corporation, is hereby amended to read as follows: "FIRST: The name of the corporation (hereinafter called the "Corporation") is PlayNet Technologies, Inc." FIFTH: To increase the number of shares of stock that the Corporation is authorized to issue to 40,000,000, consisting of 1,000,000 shares of preferred stock and 39,000,000 shares of common stock, the first paragraph of Article FOURTH of the Restated and Amended Certificate of Incorporation of the Corporation is amended to read as follows: "FOURTH: The total number of shares of all classes of stock which the Corporation shall have authority to issue is 40,000,000 of which (i) 1,000,000 shall be Preferred Stock, par value $.001 per share; and (ii) 39,000,000 shall be Common Stock, par value $.001 per share." SIXTH: The foregoing Amendment of the Restated and Amended Certificate of Incorporation of the Corporation has been duly authorized and adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to the Restated and Amended Certificate of Incorporation to be executed by its Senior Vice President as of this 1st day of November, 1996. /s/ GLENN P. SBLENDORIO -------------------------------- GLENN P. SBLENDORIO, Senior Vice President EX-10 3 10.23 - BRIDGE FINANCING LETTER AGREEMENT [On PlayNet Technologies, Inc. Letterhead] Shmuel Cohen President and Chief Executive Officer December 30, 1996 Confidential - - ------------ Ms. Nancy Peretsman Managing Director Allen & Company Incorporated 711 Fifth Avenue New York, New York 10022 And To All Other Investors Who Purchase Senior Secured Notes as Listed on Schedule 1 Ladies and Gentlemen: This letter shall confirm the terms and conditions which have been agreed between Allen & Company Incorporated ("Allen"), PlayNet Technologies, Inc. ("PlayNet") and other investors who purchase Senior Secured Notes (as defined herein) with respect to the purchase by Allen, Shmuel Cohen (who will purchase either directly or indirectly) ("Cohen") and the other investors listed on Schedule 1 hereto of certain senior secured notes in form and substance as provided in Exhibit 2 attached hereto (the "First Stage Notes"), which First Stage Notes are to be issued by PlayNet as part of a privately-placed bridge financing transaction or series of such transactions raising gross proceeds of at least $3 million to PlayNet (the "Initial Bridge Financing"). In the event that subsequent to the consummation of the Initial Bridge Financing, PlayNet requires additional financing to continue its operations, or fails to consummate a Qualified Public Offering or a Qualified Private Placement, as defined herein, or fails to acquire other permanent financing mutually agreeable to PlayNet and Allen, PlayNet agrees and covenants that it will conduct, pursuant to the terms and conditions of this Agreement, a second-stage bridge financing transaction or series of transactions (the "Second Stage Bridge Financing") under which PlayNet will offer certain senior secured notes in form and substance identical to the First Stage Notes and that the offer of such second stage senior secured notes (the "Second Stage Notes") will provide PlayNet with gross proceeds of at least $15 million. For purposes hereof, the Initial Bridge Financing and the Second Stage Bridge Financing collectively shall be referred to as the "Bridge Financing" and the First Stage Notes and the Second Stage Notes shall be collectively referred to as the "Senior Secured Notes". Bridge Financing Letter Agreement December 30, 1996 Page 2 PlayNet agrees and covenants that the Bridge Financing shall be made pursuant to one or more exemptions from registration under the Securities Act of 1933, as amended (the "Securities Act") and any and all applicable securities laws of any state or other jurisdiction (the "Blue Sky Laws"). 1. Initial Bridge Financing ------------------------ In order to complete the currently proposed public offering of common stock of PlayNet, par value $.001 per share ("Common Stock") raising gross proceeds of a minimum of $15 million, which public offering is described in that certain Registration Statement on Form S-1 filed with the U.S. Securities and Exchange Commission (the "SEC") on October 16, 1996, as may be amended and/or supplemented (the "Public Offering") certain operational hurdles, as set forth on Exhibit 1 attached hereto and as may be reasonably modified from time to time upon the agreement of PlayNet and Allen (the "Operational Hurdles") should be attained by PlayNet on or before January 31, 1997, or such other date as may be mutually agreed from time to time between PlayNet and the underwriter of the Public Offering (the "Hurdle Date"). PlayNet believes that it can meet the Operational Hurdles by the Hurdle Date. However, it is agreed by Allen and PlayNet that if the Operational Hurdles are not achieved in their entirety by the Hurdle Date, it will be the sole decision of PlayNet's management as to whether it should proceed with the Public Offering. It is currently the intention of PlayNet to consummate the Public Offering on or before March 31, 1997. In connection therewith, Allen hereby agrees that based upon its discussions with PlayNet of PlayNet's current and contemplated business and financial condition, and subject to (a) PlayNet's meeting its Operational Hurdles by the Hurdle Date, (b) the existence of market conditions favorable to a public offering of PlayNet Common Stock pursuant to the terms of the Public Offering, and (c) the receipt by PlayNet of all regulatory approvals required for consummation of the Public Offering (including, but not limited to, the receipt of the approval of the SEC), it is Allen's present intention to diligently proceed to assemble an underwriting group in order to effect the Public Offering. In order to meet the operational financing needs of PlayNet until the Hurdle Date, PlayNet will require a minimum of $3 million in temporary financing to be raised in the Initial Bridge Financing. PlayNet covenants to use the proceeds of the Initial Bridge Financing to finance normal business operations of PlayNet for the period up to and including January 31, 1997. The aggregate principal amount of First Stage Notes to be offered as part of the Initial Bridge Financing shall be a minimum of $3 million (the "Aggregate Principal Amount"), and of such Aggregate Principal Amount, PlayNet agrees to offer First Stage Notes (in the form and substance of the senior secured note provided in Exhibit 2 attached hereto) as follows: principal amount of $750,000 to Allen principal amount of $750,000 to Cohen principal amount of $750,000 to a Third Party Investor, as defined below principal amount of $750,000 to a PlayNet Third Party Investor, as defined below Each of Cohen and Allen hereby agree to purchase, subject to the terms and conditions hereof, First Stage Notes in the principal amounts set forth immediately above. Bridge Financing Letter Agreement December 30, 1996 Page 3 As used herein, "Third Party Investor" shall mean a third party investor identified by Allen; and "PlayNet Third Party Investor" shall mean a third party investor identified by PlayNet and/or Shmuel Cohen. By his signature hereto, Cohen agrees and covenants that in the event that PlayNet requires the temporary financing provided by the sale of $750,000 principal amount of First Stage Notes to a PlayNet Third Party Investor on or before January 31, 1997 and either a PlayNet Third Party Investor or another third party investor identified by Allen does not consummate the purchase of such First Stage Notes by such date, then Cohen shall purchase such fourth First Stage Notes on or prior to such date. Allen, Cohen and PlayNet agree and covenant that: (i) to the extent any Third Party Investor or any PlayNet Third Party Investor purchases more than an aggregate principal amount of $750,000 of First Stage Notes, then the amount which is in excess of such aggregate $750,000 up to a maximum prepayment amount of $250,000 (the "Maximum Prepayment Amount") shall be applied by PlayNet as a prepayment under any First Stage Note held by Allen; (ii) to the extent any Third Party Investor or any PlayNet Third Party Investor purchases more than an aggregate principal amount of $750,000 of First Stage Notes and any such amount in excess thereof has first been applied toward the repayment of the Allen First Stage Notes as referred to in (i) above, any residual excess principal amount thereof up to the Maximum Prepayment Amount may be applied by PlayNet toward the repayment of the Cohen First Stage Notes up to the Maximum Prepayment Amount; and (iii)in the event that any amount remains in excess of the aggregate $750,000 principal amount of First Stage Notes to be purchased by any Third Party Investor or any PlayNet Third Party Investor after prepayments have been made in accordance with (i) and (ii) above, or if PlayNet elects not to make the prepayment to Cohen permitted in accordance with (ii) above, then any such residual amount shall remain the property of PlayNet; provided, however, that in the event that any such Third Party Investor or PlayNet Third Party Investor is IBM, or IBM separately makes a strategic or other investment in PlayNet in any principal amount, any such excess or separate investment by IBM shall remain the property of PlayNet and there shall be no reduction in the Cohen or Allen First Stage Notes, unless PlayNet, in its sole discretion, elects to prepay any of the First Stage Notes pursuant to the terms of the Senior Secured Notes. In the event that PlayNet elects such prepayment, PlayNet agrees and acknowledges that such prepayment shall be made to each of Allen and Cohen in equal amounts and that such prepayment amount shall not be applied in its entirety solely to the prepayment of the First Stage Notes of either Allen or Cohen. As a material part of the consideration for the purchase of First Stage Notes by Allen, any Third Party Investor and any PlayNet Third Party Investor and in order to induce Allen, any Third Party Investor and any PlayNet Third Party Investor to purchase First Stage Notes, PlayNet shall issue at the closing of each such purchase to Allen, any Third Party Investor and any PlayNet Third Party Investor a warrant to purchase shares of Common Stock of PlayNet in form and substance identical to the warrant attached hereto as Exhibit 3. As a material part of the consideration for the purchase of First Stage Notes by Cohen and in order to induce Bridge Financing Letter Agreement December 30, 1996 Page 4 Cohen to purchase First Stage Notes, PlayNet shall issue at the closing of such purchase to Cohen a warrant to purchase shares of Common Stock of PlayNet in form and substance identical to the warrant attached hereto as Exhibit 4. In the event that in connection with Allen's role as an underwriter of the Public Offering, Allen is required by the National Association of Securities Dealers, Inc. ("NASD") to modify the number or exercise price of the warrants issued to Allen hereunder, Allen shall use its best efforts within a reasonable period of time mutually satisfactory to PlayNet and Allen to reach agreement with the NASD on such modification(s) so that they shall occur in such a manner as to not effect the Public Offering or Allen's ability to act as an underwriter of the Public Offering. Additionally, Allen shall use its best efforts in its negotiations with the NASD to ensure that any such modification(s) shall not have any effect on any warrant issued hereunder to Cohen, any Third Party Investor or any PlayNet Third Party Investor. It is agreed that Allen and Cohen will purchase their Senior Secured Notes contemporaneously with the execution of this Agreement, will close on the Third Party Investor Senior Secured Note, on a best efforts basis, no later than January 17, 1997, and will close on the PlayNet Third Party Investor Senior Secured Note, if required (as specified above), on or before January 31, 1997. It is further agreed that in the event that any terms or conditions of the First Stage Notes require adjustment in order to secure the purchase of a First Stage Note by either a Third Party Investor or a PlayNet Third Party Investor, then the terms and conditions of all Senior Secured Notes shall be so adjusted and modified pari passu. 2. Second-Stage Bridge Financing ----------------------------- In the event that subsequent to the consummation of the Initial Bridge Financing, PlayNet requires additional financing to continue its operations and none of a Qualified Public Offering or a Qualified Private Placement (each as defined below) or the acquisition of other permanent financing mutually agreeable to PlayNet and Allen have been consummated, PlayNet will conduct the Second Stage Bridge Financing, through which it will offer Second Stage Notes, and PlayNet and Allen agree to, on a best efforts basis, proceed with the Second Stage Bridge Financing. The Second Stage Bridge Financing will be conducted in three tranches, with each tranche raising gross proceeds of $5 million. The Second Stage Notes shall have terms and conditions identical to the First Stage Notes and shall be in the form and substance of the senior secured note attached hereto as Exhibit 2. As a material part of the consideration for the purchase of the first tranche of Second Stage Notes by any purchaser thereof and in order to induce the purchaser thereof to purchase such Second Stage Notes, PlayNet shall issue to such purchaser, at the closing of the purchase of the first tranche of Second Stage Notes, a warrant to purchase shares of Common Stock of PlayNet in form and substance identical to the warrant attached hereto as Exhibit 5. As a material part of the consideration for the purchase of the second tranche of Second Stage Notes by any purchaser thereof and in order to induce the purchaser thereof to purchase such Second Stage Notes, PlayNet shall issue to such purchaser, at the closing of the purchase of the second tranche of Second Stage Notes, a warrant to purchase shares of Common Stock Bridge Financing Letter Agreement December 30, 1996 Page 5 of PlayNet in form and substance identical to the warrant attached hereto as Exhibit 6. As a material part of the consideration for the purchase of the third tranche of Second Stage Notes by any purchaser thereof and in order to induce the purchaser thereof to purchase such Second Stage Notes, PlayNet shall issue to such purchaser, at the closing of the purchase of the third tranche of Second Stage Notes, a warrant to purchase shares of Common Stock of PlayNet in form and substance identical to the warrant attached hereto as Exhibit 7. PlayNet hereby covenants that, upon the closing of the first tranche of the Second Stage Bridge Financing, all First Stage Notes will be prepaid by PlayNet. Allen hereby agrees that upon the prepayment of its First Stage Note it will purchase an aggregate principal amount of Second Stage Notes in the first tranche of the Second Stage Bridge Financing equal to the aggregate principal amount of the First Stage Note prepaid by PlayNet hereunder. In addition, PlayNet agrees that (a) as a condition to the closing of the second tranche of the Second-Stage Bridge Financing, the membership of the Board of Directors of PlayNet shall consist of the current and existing directors plus two (2) outside independent directors (a total of 5 directors), and (b) as a condition to the closing of the third tranche of the Second-Stage Bridge Financing, Allen shall have the right to appoint one member of the Board of Directors, resulting in a total of 6 directors, provided, however, that the Allen appointee shall be either Ms. Nancy Peretsman, Managing Director of Allen, or such other outside individual selected by Allen, but reasonably satisfactory to PlayNet and Cohen. 3. Terms of the Senior Secured Notes --------------------------------- The Senior Secured Notes evidencing the Initial Bridge Financing and the Second Stage Bridge Financing shall bear interest at the rate of twelve percent (12%) per annum payable upon the Maturity Date. Each Senior Secured Note shall rank pari passu in respect of all other Senior Secured Notes and all shall collectively be senior to any and all future and to all pre-existing indebtedness of PlayNet. The Senior Secured Notes shall each mature and be due and payable on the earlier of (a) the closing of any Qualified Public Offering or Qualified Private Placement, each as defined below, or (b) one (1) year from the date hereof (the "Maturity Date"). As used herein, (i) a "Qualified Public Offering" shall mean the closing of any public offering of at least $15 million in Common Stock of PlayNet, and (ii) a "Qualified Private Placement" shall mean the closing of any privately arranged financing transaction or series of transactions raising aggregate proceeds of at least $15 million. 4. Representations, Warranties and Covenants of PlayNet ---------------------------------------------------- To induce Allen, all Third Party Investors and all PlayNet Third Party Investors and all other investors to purchase the Senior Secured Notes evidencing the Initial Bridge Financing and the Second-Stage Bridge Financing, PlayNet hereby makes the following representations, warranties, and covenants: Bridge Financing Letter Agreement December 30, 1996 Page 6 A. Payment and Performance of Obligations. PlayNet shall pay all amounts due under the Senior Secured Notes when due and shall promptly, punctually, and faithfully perform each and all of its obligations under the Senior Secured Notes and this Agreement. B. Due Organization and Corporate Authorization. PlayNet is a duly organized, validly existing corporation in good standing in the state of its incorporation and is, and shall hereafter remain, duly qualified and in good standing in every state in which, by reason of the nature or location of PlayNet's assets or operation of PlayNet's business, such qualification may be necessary and where the failure to so qualify would have a material adverse affect on (i) the financial condition of PlayNet, and/or (ii) PlayNet's ability to conduct its business. The execution and delivery of this Agreement and of any other documents, instruments, and agreements executed in connection herewith constitute representations by the individual signing this Agreement and said instruments and by PlayNet that such execution and delivery have received all such corporate authorization as may be necessary to permit such execution and delivery to, and that they do, bind PlayNet, except as such enforceability may be limited by (i) bankruptcy, insolvency, reorganization or other similar laws and legal and equitable principles limiting or affecting the rights of creditors generally and/or (ii) general principles of equity, regardless of whether considered in a proceeding in equity or at law. C. No Conflicting Agreements. There is no provision in the Articles of Incorporation or By-laws or other organizational documents of PlayNet, or in any document by which PlayNet may be bound which prohibits or adversely affects the execution and delivery of this Agreement, or of any other instrument, document or agreement executed in connection herewith, which prohibits or adversely affects PlayNet's carrying out of the terms hereof or thereof. D. Statutory Compliance. To the best of its knowledge and belief, PlayNet is in compliance with, and shall hereafter comply with and use its assets in compliance with, all statutes, regulations and orders of every federal, state, municipal, and other governmental authority which has or claims jurisdiction over PlayNet, PlayNet's assets, or any person in any capacity for which PlayNet would be responsible for the conduct of such person, which if PlayNet is not so in compliance would have a material adverse effect upon PlayNet's financial condition or its ability to conduct its business as such business is presently conducted. E. Pay Taxes. PlayNet has paid, and hereafter shall pay as they become due and payable, all taxes and unemployment contributions and other charges of any kind or nature levied, assessed or claimed against PlayNet by any person or entity whose claim could result in a lien upon the assets of PlayNet or by any governmental authority. PlayNet has, and hereafter shall, properly exercise any trust responsibilities imposed upon PlayNet by reason of withholding from employees' pay and has timely filed, and shall timely file, all tax and other returns and other reports with each governmental authority to whom PlayNet is obligated so to file. F. Litigation. Except as set forth in the Registration Statement relating to the Public Offering, or otherwise disclosed in writing to investors of Senior Secured Notes hereunder, there is not presently pending or, to PlayNet's best knowledge and belief after due inquiry, threatened by or against PlayNet any suit, action, proceeding or investigation which, if Bridge Financing Letter Agreement December 30, 1996 Page 7 determined adversely to PlayNet, would have a material adverse effect upon PlayNet's financial condition or ability to conduct its business as such business is presently conducted. G. Dividends or Investments. Until all amounts due under the Senior Secured Notes hereunder shall have been paid in full, PlayNet shall not, except as otherwise provided herein: 1. pay any dividend, other than a common stock dividend of PlayNet's own capital stock; 2. redeem, retire, purchase, or acquire any of PlayNet's capital stock; 3. except with the consent of Allen, invest in or purchase any stock or securities or rights to purchase any such stock or securities, of any corporation or other entity; 4. except with the consent of Allen, merge or consolidate or be merged or consolidated with or into any other corporation or other entity; or 5. except as contemplated by the Public Offering, a Qualified Public Offering, and the Qualified Private Placement, make any change in its capital structure, whether by issuance of securities or otherwise, which results in any adverse effect on PlayNet's ability to perform its obligations hereunder or under the Senior Secured Notes or the warrants related thereto. H. Corporate Loans; Capitalization. PlayNet shall not make any loans or advances to any individual, firm, corporation, or other entity including, without limitation, any affiliate, officer, employee, director, shareholder, or salesperson of any of PlayNet. I. Line of Business. PlayNet shall not engage in any business other than the business in which it is currently engaged. J. Adequacy of Disclosure. 1. All financial statements furnished by PlayNet to investors of Senior Secured Notes hereunder have been prepared in accordance with generally accepted accounting principles (except that interim financial statements exclude statements of cash flows and notes to financial statements) consistently applied and fairly present the condition of PlayNet at the date(s) thereof. Except for PlayNet's need for the additional working capital to be provided hereby, there has been no change in the financial condition of PlayNet since the date(s) of such financial statements, other than changes in the ordinary course of business, which changes have not had a material adverse effect on the business of PlayNet. 2. PlayNet does not have any material contingent liabilities pursuant to the execution of guaranties or otherwise not noted in PlayNet's financial statements furnished to the investors. Bridge Financing Letter Agreement December 30, 1996 Page 7 3. No document, instrument, agreement, or paper given to investors by or on behalf of PlayNet in connection with its execution of this Agreement, when taken together, contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements therein not misleading. There is no fact which has a material adverse effect on the financial condition of PlayNet which has not been disclosed in writing to investors. K. Use of Proceeds, Budget. PlayNet confirms and warrants that all proceeds from the purchase of Senior Secured Notes shall be used by it to finance PlayNet's ongoing business operations in the ordinary course. PlayNet further confirms and warrants that it will continue to update its budget forecast on a monthly basis and provide a copy thereof to Allen for informational purposes only. L. Senior Indebtedness. There is no indebtedness of PlayNet currently outstanding which would be senior to, or pari passu with, the obligation of PlayNet to repay any and all amounts due and owing under the Senior Secured Notes. PlayNet further covenants that for so long as any amounts are due thereunder, no indebtedness (other than ordinary course equipment financing) shall be incurred by PlayNet which indebtedness would be senior to, or pari passu with, the Senior Secured Notes. M. Other Covenants. 1. PlayNet shall not indirectly do or cause to be done any act which, if done directly by PlayNet, would breach any covenant contained in this Agreement. 2. The representations, warranties and covenants included herein shall be automatically reconfirmed by PlayNet at the time of the purchase of the First Stage Notes and Second Stage Notes unless otherwise noted in writing by PlayNet prior to such closing. 5. Concurrent Conditions --------------------- Concurrent with the consummation of the purchase of each of the First Stage Notes and Second Stage Notes, there shall be delivered to investors: a. this Agreement, duly executed and delivered by PlayNet and the purchasing investor; b. the Senior Secured Notes in the aggregate principal amount invested by each investor hereunder and the warrant relating to such Senior Secured Notes each duly executed and delivered by PlayNet; c. a favorable opinion of counsel for PlayNet addressed to the investors and dated the date of the Senior Secured Notes issued hereunder in the form of the opinion included as Exhibit 8 hereof; d. a certificate of an authorized officer of PlayNet as to such matters as the investors of the Senior Secured Notes may reasonably request. Bridge Financing Letter Agreement December 30, 1996 Page 9 6. Default ------- Upon the occurrence of any one or more of the Events of Default (as that term is defined in the Senior Secured Notes), any and all amounts due to investors under the Senior Secured Notes or otherwise hereunder shall become immediately due and payable, without notice or demand. 7. Subordination ------------- PlayNet hereby warrants and agrees that all obligations and indebtedness of PlayNet of every kind and description whether now or hereafter existing, (the "Subordinated Debt") shall, for so long as any amounts are due hereunder, be subordinated to the indebtedness of PlayNet due to investors under the Senior Secured Notes in such manner that no payment or security shall be paid by PlayNet for or on account of the Subordinated Debt, other than trade claims and equipment loans and leases payable in the ordinary course, until the indebtedness owed to investors has been paid in full and the Senior Secured Notes have been terminated or until PlayNet has obtained the specific written consent of each holder of Senior Secured Notes. 8. Grant of Security Interest -------------------------- To secure PlayNet's prompt, punctual, and faithful performance of all and each of PlayNet's obligations hereunder and under the Senior Secured Notes, PlayNet hereby grants to the holders of Senior Secured Notes a continuing first priority security interest in and to, whether now owned or now due, or in which PlayNet has an interest, or hereafter, at any time in the future, acquired, arising, or to become due, or in which PlayNet obtains an interest, and all products, proceeds, substitutions, and accessions of or to any of the following; all accounts and accounts receivable; all inventory; all contract rights including any of PlayNet's rights to receive any net proceeds arising out of or related to any equity offerings of PlayNet; all general intangibles including, but not limited to, all existing, pending and future intellectual property rights, including but not limited to trademarks, tradenames, service marks, copyrights and patents; all equipment; all goods; all fixtures; all chattel paper; and all instruments, documents of title, documents, policies and certificates of insurance, securities, deposits, deposit accounts, money, cash, or other property (all of which, together with any other property in which the holders of the Senior Secured Notes may in the future be granted a security interest, is referred to herein as the "Collateral"). 9. Miscellaneous ------------- Notices. All notices and other correspondence to PlayNet in connection with this Agreement shall be deemed effective upon mailing to PlayNet's address as set forth herein, which address may be changed on seven (7) days written notice given by PlayNet to holders of all Senior Secured Notes issued hereunder. All notices and other correspondence to the holders of Senior Secured Notes by PlayNet in connection with this Agreement shall be deemed effective upon receipt by such holder at such holder's address as set forth on the signature page of the Senior Secured Notes issued hereunder, or elsewhere as such holders may specify from time to time in writing to PlayNet, and shall be sent by certified mail, return receipt requested. Bridge Financing Letter Agreement December 30, 1996 Page 10 Severability. Any determination that any provision of this Agreement or any application thereof is invalid, illegal or unenforceable in any respect in any instance shall not affect the validity, legality or enforceability of such provision in any other instance, or the validity, legality or enforceability of any other provision of this Agreement. Amendments. No modification, amendment or waiver of any provision of this Agreement or of any provision of any other agreement between the parties hereto is effective unless executed in writing by Allen, PlayNet, Cohen and all other investors hereunder. No failure by the holders of the Senior Secured Notes to give notice to PlayNet of its having failed to observe and comply with any warranty or covenant included herein shall constitute a waiver of such warranty or covenant or the amendment of the within Agreement. Costs and Expenses of this Agreement. PlayNet shall pay all expenses (including reasonable fees and expenses for counsel to Allen) incurred by Allen in connection with the preparation, negotiation and consummation of the agreements contemplated by the Bridge Financing. Governing Law. This Agreement and all rights and obligations hereunder, including matters of construction, validity and performance, shall be governed by the laws of the State of New York. Each of the parties hereto submit themselves to the jurisdiction of the Courts of the State of New York for all purposes with respect to this Agreement. Indemnification. Except for claims brought or threatened against the holders of Senior Secured Notes by shareholders of such holders, PlayNet shall indemnify, defend, and hold such holders harmless of and from any claim brought or threatened against such holders by PlayNet, or any other person (as well as from attorneys' reasonable fees and expenses in connection therewith) on account of such holder's relationship with PlayNet (each of which may be defended, compromised, settled or pursued by such holders with counsel of such holder's selection, but at the expense of PlayNet). The within indemnification shall survive payment of the Senior Secured Notes issued under the Short Term Bridge Financing or the Second Stage Bridge Financing and/or any termination, release or discharge executed by such holders in favor of PlayNet. Other Investors. The terms and conditions of this Agreement, and all rights, privileges and obligations hereunder, shall apply to and bind any and all investors who purchase Senior Secured Notes hereunder and who execute a signature page in the form attached hereto as Schedule 2 and who receive a Senior Secured Note. Schedule 1, attached hereto, listing all investors who purchase Senior Secured Notes shall be automatically revised to include all such investors who execute a signature page in the form attached hereto as Schedule 2. Counterparts. This Agreement may be executed by the parties hereto in several counterparts and by different parties in separate counterparts, each of which shall be deemed to be an original and all of which shall constitute together but one and the same Agreement. Cooperation. PlayNet agrees to use its best efforts to co-operate with holders of the Senior Secured Notes to take such steps as are reasonably necessary to give effect to the transactions contemplated hereby, including without limitation, promptly duly executing Bridge Financing Letter Agreement December 30, 1996 Page 11 and delivering such financing statements as may be necessary to perfect the security interests contemplated hereby. Please confirm that the foregoing correctly sets forth our agreement by signing where indicated. Very truly yours, PlayNet Technologies, Inc. By: /s/ Shmuel Cohen --------------------------- Shmuel Cohen President and Chief Executive Officer Accepted and agreed to as of Accepted and agreed to as of the date first written above. the date first written above by Allen & Company Incorporated Shmuel Cohen as an individual with respect to personal undertakings contained By: /s/ James W. Quinn herein. ---------------------------- James W. Quinn Chief Financial Officer By: /s/ Shmuel Cohen ------------------------- Shmuel Cohen SCHEDULE 1 LIST OF INVESTORS Allen & Company Incorporated Cohen, indirectly through Zeller Eblagon Leasing Ltd. Cohen, indirectly through K. F. Chemical Co. Ltd. SCHEDULE 2 Senior Secured Note Purchaser Signature Page -------------------------------------------- By its execution and delivery of this signature page, the undersigned Purchaser hereby joins in and agrees to be bound by the terms and conditions, and is entitled to all rights and privileges, of the Letter Agreement, dated December 30, 1996, between Allen & Company Incorporated, PlayNet Technologies and the investors who purchase Senior Secured Notes as provided therein, as to the principal amount of [First Stage Notes] [Second Stage Notes] purchased by Purchaser as set forth below. Name of Purchaser --------------------------------------- (herein "Purchaser") By: ____________________________________ Name: _________________________________ Title: __________________________________ Record and Notice Address: ================================== ---------------------------------- Telephone: _________________________ Facsimile: __________________________ Principal Amount of Senior Secured Notes Purchased: ______________________________________ Agreed and Accepted this ____ day of ____________, 199__ PlayNet Technologies, Inc. By: _______________________________ Name: ____________________________ Title: _____________________________ EXHIBIT 1 OPERATIONAL HURDLES ------------------- 1. Executed agreements with a minimum of two of the following major music publishers: Sony, Warner Brothers, Polygram, BMG, EMI and MCA. 2. Demonstrate production capacity of a minimum of 25 PlayNet units per day, quality control tested. 3. Written orders for 5,000 PlayNet units. 4. Remote music download capability demonstrated at commercially acceptable speed rates and quality. 5. Executed agreement with primary ISP provider. It is PlayNet's objective to have terms generally reflective of those presented in financial projections to date or with adjustments to unit and services pricing that enable the maintenance of substantially similar revenue financial projections to date. 6. Accounting Server Functionality and the ability to account for and settle accounts demonstrated. 7. Reasonably satisfactory coin drop data results from the forty (40) PlayNet unit test. 8. Selection of two (2) outside independent directors. 9. PlayNet unit functionality reasonably stable with breadth of functions and robustness sufficient for commercial rollout. 10. Estimated PlayNet unit Bill of Materials for first calendar quarter 1997 at an average of approximately $2,200 per unit. 11. Viable financing plan in place to allow commercial sales. EXHIBIT 2 FORM OF SENIOR SECURED NOTE SENIOR SECURED NOTE $__________ New York, New York December ____, 1996 FOR VALUE RECEIVED, PlayNet Technologies, Inc. (the "Maker") hereby promises to pay to ___________________________ (the "Holder"), in lawful money of the United States of America, the principal sum of _______________________ and 00/100 Dollars ($_______) (the "Principal Amount") plus accrued interest thereon on the Maturity Date, as defined below, in accordance with the terms set forth herein. This Note shall bear interest payable on the Maturity Date (as defined below) at a rate of twelve percent (12%) per annum; shall be senior to any and all existing and future indebtedness of the Maker; and shall rank pari passu with any and all other Senior Secured Notes which Maker enters into between December 16, 1996 and January 31, 1997, each of which is issued as part of the Initial Bridge Financing or Second Stage Bridge Financing conducted by the Maker as described in that certain Letter Agreement dated December ___, 1996, by and between the Maker and Allen & Company Incorporated (the "Letter Agreement"). This Senior Secured Note shall mature on the earlier of (a) the closing of any Qualified Public Offering or Qualified Private Placement, each as defined below, or (b) one (1) year from the date hereof (the "Maturity Date"). As used herein, (i) a "Qualified Public Offering" shall mean the closing of any public offering of common stock of the Maker, having a par value of $.001 per share, raising aggregate gross proceeds of at least $15 million to the Maker, and (ii) a "Qualified Private Placement" shall mean the closing of any privately arranged financing transaction or series of transactions raising aggregate proceeds of at least $15 million to the Maker. The Maker shall have the right to prepay, in whole or in part, the Principal Amount together with interest accrued thereon through the date of prepayment, at any time without penalty or premium. Upon the occurrence of an Event of Default, the obligations of the Maker to the Holder arising under this Senior Secured Note, direct and indirect, absolute or contingent, shall immediately mature and become due and payable without demand or notice. The following shall be deemed an "Event of Default" under this Senior Secured Note: (a) a breach of the Maker of any promise, term, covenant, obligation, representation or warranty arising under this Senior Secured Note or the Letter Agreement, including the failure to make any payment of the Principal Amount or accrued interest when due; (b) the filing of a petition seeking relief, or the granting of relief, under the Bankruptcy Code or any similar Federal or State statute by or against the Maker, the making of a general assignment for the benefit of creditors by Maker, or any action by the Maker for the purpose of effecting the foregoing; (c) the appointment, or the filing of a petition seeking the appointment, of a custodian, receiver, trustee or liquidator for the Maker or any of its properties or the taking of possession of any part of the properties of the Maker at the instance of any governmental authority; (d) when Maker becomes insolvent or has suspended its transaction of its usual business; (e) the dissolution or merger, consolidation or reorganization of Maker in violation of the terms of the Letter Agreement; (f) the sale of substantially all of the common stock or assets of the Maker or (g) any change in the identity, authority or responsibilities of any person holding the management positions of President and Chief Executive Officer, Chief Financial Officer, Chief Operating Officer and Senior Vice President of Sales as of the date of this Agreement. The Maker agrees to pay all costs of collection, including, without limitation, reasonable attorney's fees, in the event enforcement of this Senior Secured Note or execution of any judgment upon this Senior Secured Note is required. No amendment, modification or waiver of any provision of this Senior Secured Note shall be effective unless the same shall be in writing and signed by the Holder and Maker. Presentment or other demand for payment, notice of dishonor and protest are hereby waived by Maker This Senior Secured Note is one of the Senior Secured Notes referred to in the Letter Agreement and is secured by the collateral described therein and is entitled to all the benefits of such Letter Agreement. This Senior Secured Note shall be governed by and construed in accordance with the laws of the State of New York and applicable Federal Law of the United States without regard to the conflict of laws provisions thereof. Holder and Maker hereby submit to the jurisdiction of the Courts of the State of New York for all purposes with respect hereto. IN ANY ACTION, SUIT OR PROCEEDING BROUGHT BY THE HOLDER AGAINST THE MAKER WITH RESPECT TO THIS SENIOR SECURED NOTE, OR VICE VERSA, THE MAKER AND HOLDER WAIVE A TRIAL BY JURY. IN WITNESS WHEREOF, the Maker has caused this Senior Secured Note to be executed by its duly authorized officer as of the day and year first written above. WITNESS: PLAYNET TECHNOLOGIES, INC. ______________________________ By: ____________________________________ Name: Shmuel Cohen President & Chief Executive Officer Address for Notice to the Holder: ______________________________________ ______________________________________ ______________________________________ ______________________________________ EXHIBITS 3 through 7 FORMS OF WARRANT ATTACHED HERETO EXHIBIT 3 - Form of Allen and Third Party Investors Warrants THIS WARRANT AND ANY SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND NEITHER THIS WARRANT NOR ANY SUCH SHARES MAY BE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT. PLAYNET TECHNOLOGIES, INC. WARRANT CERTIFICATE This warrant certificate ("Warrant Certificate") certifies that for value received Allen & Company Incorporated or registered assigns (the "Holder") is the owner of this warrant ("Warrant") which entitles the Holder hereof to purchase, at any time from the date which is either (i) one year from the date of the closing on or prior to the Five Month Date of a Qualified Public Offering or closing on or prior to the Five Month Date of a Qualified Private Placement (all as defined below) or (ii) if no such Qualified Public Offering or Qualified Private Placement closes on or prior to the Five Month Date, one year from the date of issuance hereof ((i) and (ii) singularly and collectively,the "Exercise Date") through and including the Expiration Date (hereinafter defined), such number of fully paid and non-assessable shares of Common Stock, $.01 par value ("Common Stock"), of PlayNet Technologies, Inc., a Delaware corporation (the "Company") calculated as follows: - in the event of the closing of a Qualified Public Offering on or prior to the date which is five months from the issuance of this Warrant (the "Five Month Date"): 100% X $750,000 ----------------------------------------------- the per share price of the common stock offered in such Qualified Public Offering -- in the event that such Qualified Public Offering is not closed on or prior to the Five Month Date but a Qualified Private Placement is closed on or prior to the Five Month Date: 100% X $750,000 ----------------------------------------------- the lowest per share price of the common stock offered in such Qualified Private Placement --- in the event that a Qualified Public Offering or Qualified Private Placement is not closed prior to or on the Five Month Date: $750,000 $5.00 (each formula subject to adjustment as hereinafter provided). For purposes of this Warrant, the term "Qualified Public Offering" shall mean the closing of any public offering of Common Stock of the Company raising gross proceeds of at least $15 million to the Company and the term "Qualified Private Placement" shall mean the closing of any privately arranged financing transaction or series of transactions raising in the aggregate gross proceeds of at least $15 million to the Company. 1. Warrant; Purchase Price This Warrant shall entitle the Holder initially to purchase shares of Common Stock of the Company as calculated above and the purchase price payable upon exercise of the Warrants shall be, (i) in the event of the closing of a Qualified Public Offering prior to or on the Five Month Date, the per share price of the Common Stock Offered in such Qualified Public Offering, (ii) in the event that such a Qualified Public Offering is not closed on or prior to the Five Month Date but a Qualified Private Placement is closed on or prior to the Five Month Date, the lowest per share price of the Common Stock offered in such Qualified Private Placement, or (iii) in the event that such Qualified Public Offering or Qualified Private Placement is not closed on or prior to the Five Month Date, $5.00 per share of Common Stock (each of (i), (ii) and (iii) the "Relevant Purchase Price" and together the "Relevant Purchase Prices"). The Relevant Purchase Price and number of shares of Common Stock issuable upon exercise of this Warrant are subject to adjustment as provided in Article 6. The shares of Common Stock issuable upon exercise of this Warrant (and/or other shares of common stock so issuable by reason of any adjustments pursuant to Article 6) are sometimes referred to herein as the "Warrant Shares." The aggregate purchase price for the shares of Common Stock of the Company to be received by the Holder hereof upon exercise of this Warrant shall be payable, at the option of the Holder, either (i) in cash in lawful money of the United States of America or by certified or cashier's check; or (ii) if such Holder is Allen & Company Incorporated, by cancellation, in whole or in part, of that certain $750,000 Senior Secured Note issued to Allen & Company Incorporated on December 30, 1996; or (iii) as otherwise provided herein. 2. Exercise; Expiration Date 2.1 This Warrant is exercisable, at the option of the Holder, in whole or in part at any time and from time to time from the Exercise Date through and including the Expiration Date (the "Exercise Period"), upon surrender of this Warrant Certificate to the Company together with a duly completed Notice of Exercise, in the form attached hereto as Exhibit A, and payment of an amount equal to the Relevant Purchase Price times 2 the number of shares of Common Stock to be received upon exercise of this Warrant. In the case the Holder hereof elects to exercise this Warrant for less than all the shares of Common Stock of the Company represented by this Warrant Certificate, the Company shall cancel this Warrant Certificate upon the surrender thereof and shall execute and deliver a new Warrant Certificate providing for the exercise of the balance of such shares of Common Stock. 2.2 The term "Expiration Date" shall mean 5:00 p.m. New York time on the date which is five years from the date of the issuance of this Warrant, or if such day shall in the State of New York be a holiday or a day on which banks are authorized to close, then 5:00 p.m. local time in the State of New York the next following day which in the State of New York is not a holiday or a day on which banks are authorized to close. 3. Registration and Transfer on Company Books 3.1 The Company shall maintain books for the registration and transfer of this Warrant and the registration and transfer of the Warrant Shares. 3.2 Prior to due presentment for registration of transfer of this Warrant Certificate, or the Warrant Shares, the Company may deem and treat the registered Holder as the absolute owner thereof. 3.3 The Company shall register upon its books any transfer of this Warrant Certificate, upon surrender of same to the Company with a written instrument of transfer duly executed by the registered Holder or by a duly authorized attorney. Upon any such registration of transfer, new Warrant Certificate(s) shall be issued to the transferee(s) and the surrendered Warrant Certificate shall be canceled by the Company. A Warrant Certificate may also be exchanged, at the option of the Holder, for new Warrant Certificates of different denominations representing an aggregate purchase price of $750,000. 4. Reservation of Shares The Company covenants that it will at all times reserve and keep available out of its authorized capital stock, solely for the purpose of issue upon exercise of this Warrant, such number of shares as shall then be issuable upon the exercise of this Warrant. The Company covenants that all shares of capital stock which shall be issuable upon exercise of this Warrant shall be duly and validly issued and fully paid and non-assessable and free from all taxes, liens and charges with respect to the issue thereof, and that upon issuance such shares shall be listed on each national securities exchange, if any, on which the other shares of such outstanding series of capital stock of the Company are then listed. 3 5. Loss or Mutilation Upon receipt by the Company of reasonable evidence of the ownership of and the loss, theft, destruction or mutilation of any Warrant Certificate and, in the case of loss, theft or destruction, of indemnity reasonably satisfactory to the Company, or, in the case of mutilation, upon surrender and cancellation of the mutilated Warrant Certificate, the Company shall execute and deliver in lieu thereof a new Warrant Certificate replacing such Warrant Certificate. 6. Adjustment of Relevant Purchase Price and Number of Shares Deliverable 6.1 The number of Warrant Shares purchasable upon the exercise of each Warrant and the Relevant Purchase Price with respect to the Warrant Shares shall be subject to adjustment as follows: (a) In case the Company shall (i) declare a dividend or make a distribution on its Common Stock payable in shares of its capital stock, (ii) subdivide its outstanding shares of Common Stock through stock split or otherwise, (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, or (iv) issue by reclassification of its Common Stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing corporation) other securities of the Company, or (v) in case of a consolidation or merger of the Company with or into another corporation or in case of the sale or transfer of all or substantially all of the assets of the Company (hereinafter, a "Reorganization Transaction"), the number and/or nature of Warrant Shares purchasable upon exercise of this Warrant immediately prior thereto shall be adjusted so that the Holder shall be entitled to receive the kind and number of Warrant Shares or other securities of the Company (or of any successor company) which he would have owned or have been entitled to receive after the happening of any of the events described above, had such Warrant been exercised immediately prior to the happening of such event or any record date with respect thereto. An adjustment made pursuant to this paragraph (a) shall become effective retroactively as of the record date of such event. (b) In case the Company shall distribute to all holders of its shares of Common Stock, or all holders of Common Stock shall otherwise become entitled to receive, shares of capital stock of the Company (other than dividends or distributions on its Common Stock referred to in paragraph (a) above), evidences of its indebtedness or rights, 4 options, warrants or convertible securities providing the right to subscribe for or purchase any shares of the Company's capital stock or evidences of its indebtedness, then in each case the number of Warrant Shares thereafter purchasable upon the exercise of this Warrant shall be determined by multiplying the number of Warrant Shares theretofore purchasable upon the exercise of this Warrant, by a fraction, of which the numerator shall be the then Market Price Per Share of the Warrant Shares (as determined pursuant to Section 9.2) on the record date mentioned below in this paragraph (b), and of which the denominator shall be the then Market Price Per Share of the Warrant Shares on such record date less the then fair value (as determined by the Board of Directors of the Company, in good faith) of the portion of the shares of the Company's capital stock other than Common Stock, evidences of indebtedness, or of such rights, options, warrants or convertible securities, distributable with respect to each Warrant Share. Such adjustment shall be made whenever any such distribution is made, and shall become effective retroactively as of the record date for the determination of shareholders entitled to receive such distribution. (c) Whenever the number of Warrant Shares purchasable upon the exercise of this Warrant is adjusted, as provided in this Section 6.1, the Relevant Purchase Prices with respect to the Warrant Shares shall be adjusted by multiplying such Relevant Purchase Prices immediately prior to such adjustment by a fraction, of which the numerator shall be the number of Warrant Shares purchasable upon the exercise of this Warrant immediately prior to such adjustment, and of which the denominator shall be the number of Warrant Shares so purchasable immediately thereafter. 6.2 No adjustment in the number of Warrant Shares purchasable under this Warrant, or in the Relevant Purchase Prices with respect to the Warrant Shares, shall be required unless such adjustment would require an increase or decrease of at least 1% in the number of Warrant Shares issuable upon the exercise of such Warrant, or in the Relevant Purchase Prices thereof; provided, however, that any adjustments which by reason of this Section 6.3 are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All final results of adjustments to the number of Warrant Shares and the Relevant Purchase Prices thereof shall be rounded to the nearest one thousandth of a share or the nearest cent, as the case may be. Anything in this Section 6 to the contrary notwithstanding, the Company shall be entitled, but shall not be required, to make such changes in the number of Warrant Shares purchasable upon the exercise of each Warrant, or in the Relevant Purchase Prices thereof, in addition to those required by such Section, as it in its 5 discretion shall determine to be advisable in order that any dividend or distribution in shares of Common Stock, subdivision, reclassification or combination of shares of Common Stock, issuance of rights, warrants or options to purchase Common Stock, or distribution of shares of stock other than Common Stock, evidences of indebtedness or assets (other than distributions of cash out of retained earnings) or convertible or exchangeable securities hereafter made by the Company to the holders of its Common Stock shall not result in any tax to the holders of its Common Stock or securities convertible into Common Stock. 6.3 Whenever the number of Warrant Shares purchasable upon the exercise of each Warrant or the Relevant Purchase Price of such Warrant Shares is adjusted, as herein provided, the Company shall mail to the Holder, at the address of the Holder shown on the books of the Company, a notice of such adjustment or adjustments, prepared and signed by the Chief Financial Officer or Secretary of the Company, which sets forth the number of Warrant Shares purchasable upon the exercise of this Warrant and each of the then Relevant Purchase Prices of such Warrant Shares after such adjustment, a brief statement of the facts requiring such adjustment and the computation by which such adjustment was made. 6.4 In the event that at any time prior to the expiration of this Warrant and prior to their exercise: (a) the Company shall declare any distribution (other than a cash dividend or a dividend payable in securities of the Company with respect to the Common Stock); or (b) the Company shall offer for subscription to all the holders of the Common Stock any additional shares of stock of any class or any other securities convertible into Common Stock or any rights to subscribe thereto; or (c) the Company shall declare any stock split, stock dividend, subdivision, combination, or similar distribution with respect to the Common Stock that shall affect the outstanding number of shares of Common Stock; or (d) the Company shall declare a dividend, other than a dividend payable in shares of the Company's own Common Stock; or (e) there shall be any capital change in the Company as set forth in Section 6.1(a)(v); or 6 (f) there shall be a voluntary or involuntary dissolution, liquidation, or winding up of the Company (other than in connection with a consolidation, merger, or sale of all or substantially all of its property, assets and business as an entity); (each such event hereinafter being referred to as a "Notification Event"), the Company shall cause to be mailed to the Holder, not less than 20 days prior to the record date, if any, in connection with such Notification Event (provided, however, that if there is no record date, 20 days prior to the effective date, or in either case if 20 days prior notice is impracticable, as soon as practicable) written notice specifying the nature of such event and the effective date of, or the date on which the books of the Company shall close or a record shall be taken with respect to, such event. Such notice shall also set forth facts indicating the effect of such action (to the extent such effect may be known at the date of such notice) on each of the Relevant Purchase Prices and the kind and amount of the shares of stock or other securities or property deliverable upon exercise of this Warrant. 6.5 The form of Warrant Certificate need not be changed because of any change in the Relevant Purchase Prices, the number of Warrant Shares issuable upon the exercise of a Warrant or the number of Warrants outstanding pursuant to this Section 6, and Warrant Certificates issued before or after such change may state the same Relevant Purchase Prices, the same number of Warrants, and the same number of Warrant Shares issuable upon exercise of Warrants as are stated in the Warrant Certificates theretofore issued pursuant to this Agreement. The Company may, however, at any time, in its sole discretion, make any change in the form of Warrant Certificate that it may deem appropriate and that does not affect the substance thereof, and any Warrant Certificates thereafter issued or countersigned, whether in exchange or substitution for an outstanding Warrant Certificate or otherwise, may be in the form as so changed. 7. Conversion Rights 7.1 After the occurrence of any Reorganization Transaction (as such term is defined in Section 6.1(a)(v)), in lieu of exercise of any portion of this Warrant as provided in Section 2.1 hereof, the Warrant Shares represented by this Warrant Certificate (or any portion thereof) may, at the election of the Holder, be converted into the nearest whole number of shares of Common Stock of the Company (or other securities of the Company or any successor Company underlying the Warrant) equal to: (1) the product of (a) the number of shares of Common Stock (or such other securities) then issuable upon the exercise of this Warrant to be so converted and (b) the excess, if any, of (i) the Market Price Per Share (as determined pursuant to Section 9.2) with respect 7 to the date of conversion over (ii) the Relevant Purchase Prices in effect on the business day next preceding the date of conversion, divided by (2) the Market Price Per Share with respect to the date of conversion. 7.2 The conversion rights provided under this Section 7 may be exercised in whole or in part and at any time and from time to time while this Warrant remain outstanding. In order to exercise the conversion privilege, the Holder shall surrender to the Company (or any successor company), at its offices, this Warrant Certificate accompanied by a duly completed Notice of Conversion in the form attached hereto as Exhibit B. The Warrants (or so much thereof as shall have been surrendered for conversion) shall be deemed to have been converted immediately prior to the close of business on the day of surrender of such Warrant Certificate for conversion in accordance with the foregoing provisions. As promptly as practicable on or after the conversion date, the Company (or the successor company) shall issue and shall deliver to the Holder (i) a certificate or certificates representing the number of shares of Common Stock (or such other securities) to which the Holder shall be entitled as a result of the conversion, and (ii) if the Warrant Certificate is being converted in part only, a new certificate of like tenor and date for the balance of the unconverted portion of the Warrant Certificate. 8. Voluntary Adjustment by the Company The Company may, at its option, at any time during the term of this Warrant, reduce the then current Relevant Purchase Prices to any amount deemed appropriate by the Board of Directors of the Company and/or extend the date of the expiration of the Warrants. 9. Fractional Shares and Warrants; Determination of Market Price Per Share 9.1 Anything contained herein to the contrary notwithstanding, the Company shall not be required to issue any fraction of a share of Common Stock in connection with the exercise of this Warrant. This Warrant may not be exercised in such number as would result (except for the provisions of this paragraph) in the issuance of a fraction of a share of Common Stock unless the Holder is exercising this Warrant for all shares of Common Stock to be received by the Holder hereunder. In such event, the Company shall, upon the exercise of the entirety of this Warrant, issue to the Holder the largest aggregate whole number of shares of Common Stock called for thereby upon receipt of the Relevant Purchase Price for all shares of Common Stock to be issued upon exercise hereof and pay a sum in cash equal to the remaining fraction of a share of Common Stock, multiplied by its Market Price Per Share (as determined pursuant to 8 Section 9.2 below) as of the last business day preceding the date on which this Warrant are presented for exercise. 9.2 As used herein, the "Market Price Per Share" with respect to any class or series of Common Stock of the Company (or any other securities of the Company or of any successor company) on any date shall mean the closing price per share of such class or series of securities for the trading day immediately preceding such date. The closing price for each such day shall be the last sale price regular way or, in case no such sale takes place on such day, the average of the closing bid and asked prices regular way, in either case on the principal securities exchange on which the shares of such Common Stock of the Company (or other securities of the Company or of such successor company) are listed or admitted to trading or, if applicable, the last sale price, or in case no sale takes place on such day, the average of the closing bid and asked prices of such securities on NASDAQ or any comparable system, or if such securities are not reported on NASDAQ, or a comparable system, the average of the closing bid and asked prices as furnished by two members of the National Association of Securities Dealers, Inc. selected from time to time by the Company for that purpose. If such bid and asked prices are not available, then "Market Price Per Share" shall be equal to the fair market value of the such securities as determined in good faith by the Board of Directors of the Company (or of such successor company). 10. Restrictions on Transfer; Registration Rights 10.1 No sale, transfer, assignment, hypothecation or other disposition of this Warrant or Warrant Shares shall be made unless any such transfer, assignment or other disposition will comply with the rules and statutes administered by the Securities and Exchange Commission and (i) a Registration Statement under the Securities Act of 1933, as amended (the "Act"), including such shares is currently in effect, or (ii) in the opinion of counsel a current Registration Statement is not required for such disposition of the shares. 10.2 In the event of a proposed sale or transfer of this Warrant or Warrant Shares in a transaction other than a sale pursuant to a public offering registered under the Act, a Holder shall deliver to the Company an opinion of counsel addressed to the Company (which shall be rendered by counsel reasonably acceptable to the Company) to the effect that the proposed transfer may be effected without registration or qualification under any Federal or state securities or blue sky law. Such counsel rendering the opinion shall, as promptly as practicable, notify the Company and the Holder of such opinion and of the terms and conditions, if any, to be observed in such transfer, whereupon the Holder shall be entitled to transfer this Warrant or the Warrant Shares (or a portion thereof). 9 10.3 The Company agrees that, at any time or times hereafter, until the second anniversary of the Expiration Date of this Warrant, as and when it intends to register any of its securities under the Act, whether for its own account and/or on behalf of selling stockholders (except in connection with an offering solely to its employees, an offering pursuant to an employee benefit plan, a dividend or interest reinvestment plan, or an offering solely related to an acquisition on a Form S-4 or any subsequent similar form) permitting a secondary offering or distribution the Company will notify the Holder of such intention and, upon request from the Holder, will use its best efforts to cause the Warrant Shares designated by the Holder to be registered under the Securities Act. The number of Warrant Shares to be included in such offering may be reduced if and to the extent that the underwriter of securities included in the registration statement and offered by the Company shall be of the opinion that such inclusion would adversely affect the marketing of the securities to be sold by the Company therein; provided, however, that the percentage of the reduction of such Warrant Shares shall be no greater than the percentage reduction of securities of other selling stockholders, as such percentage reductions are determined in the good faith judgment of the Company. The Company will use its best efforts to keep each such Registration Statement current for such period of time as is not otherwise burdensome to the Company. 10.4 Any registration statement referred to in subsection 10.3 hereof shall be prepared and processed in accordance with the following terms and conditions: (i) the Holder will cooperate in furnishing promptly to the Company in writing any information requested by the Company in connection with the preparation, filing and processing of such registration statement. (ii) to the extent requested by an underwriter of securities included in the registration statement and offered by the Company, the Holder will defer the sale of Warrant Shares for a period commencing twenty (20) days prior and terminating sixty (60) days after the effective date of the registration statement, provided that any principal shareholders of the Company who also have shares included in the registration statement will also defer their sales for a similar period, except for sales pursuant to registrations on Form S-8 or S-4 or any similar or successor forms thereto. (iii) The Company will furnish to the Holder such number of prospectuses or other documents incident to such registration as may from time to time be reasonably requested, and cause its shares to be qualified under the blue-sky laws of those states reasonably requested by the Holder. 10 (iv) The Company will indemnify the Holder (and any officer, director or controlling person of the Holder) and any underwriters acting on behalf of the Holder against all claims, losses, expenses, damages and liabilities (or actions in respect thereof) to which they may become subject under the Securities Act or otherwise, arising out of or based upon any untrue or alleged untrue statement of any material facts contained in any registration statement filed pursuant hereto, or any document relating thereto, including all amendments and supplements, or arising out of or based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein contained not misleading, and will reimburse the Holder (or such other aforementioned parties) or such underwriters for any legal and all other expenses reasonably incurred in accordance with investigating or defending any such claim, loss, damage, liability or action; provided, however, that the Company will not be liable where the untrue or alleged untrue statement or omission or alleged omission is based upon information furnished in writing to the Company by the Holder or any underwriter obtained by the Holder expressly for use therein, or as a result of the Holder's or any such underwriter's failure to furnish to the Company information duly requested in writing by counsel for the Company specifically for use therein; provided that with respect to any untrue statement or omission or alleged untrue statement or omission made in any preliminary prospectus, the indemnity agreement contained in this paragraph shall not inure to the benefit of any underwriter from whom the person asserting such losses, claims, damages or liability purchased the securities concerned, to the extent that any such loss, claim, damage or liability of such underwriter results from the fact that a copy of the prospectus was not sent or given to such person at or prior to the written confirmation of the sale of such securities to such person. This indemnity agreement shall be in addition to any other liability the Company may have. The indemnity agreement of the Company contained in this paragraph (iv) shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified party and shall survive the delivery of and payment for the Warrant Shares. (v) The Holder will indemnify the Company (and any officer, director or controlling person of the Company) and any underwriters acting on behalf of the Company against all claims, losses, expenses, damages and liabilities (or actions in respect thereof) to which they 11 may become subject under the Securities Act or otherwise, arising out of or based upon any untrue or alleged untrue statement filed pursuant hereto, or any document relating thereto, including all amendments, and supplements, or arising out of or based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein contained not misleading, and, will reimburse the Company (or such other aforementioned parties) or such underwriters for any legal and other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability, or action; provided, however, that the Holder will be liable as aforesaid only to the extent that such untrue or alleged untrue statement or omission or alleged omission is based upon information furnished in writing to the Company by the Holder or any underwriter obtained by the Holder expressly for use therein, or as a result of its or such underwriter's failure to furnish the Company with information duly requested in writing by counsel for the Company specifically for use therein. This indemnity agreement contained in this paragraph (v) shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified party and shall survive the delivery of and payment for the Warrant Shares. (vi) Promptly after receipt by an indemnified party under this subsection 10.4 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party, promptly notify the indemnifying party of the commencement thereof, but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under this subsection 10.4. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this subsection 10.4 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof, other than reasonable costs of investigation or out-of-pocket expenses or losses or cost incurred in collaborating in the defense. 12 (vii) Except as set forth in subsection 10.4(viii), the Company shall bear all costs and expenses incident to any registration pursuant to this Section 10. (viii) The Holder shall pay any and all underwriters' discounts, brokerage fees and transfer taxes incident to the sale of any securities sold by such Holder pursuant to this Section 10, and shall pay the fees and expenses of any special attorneys or accountants retained by it. (ix) If the filing of any registration statement pursuant to subsection 10.4 would require the Company to obtain audited financial statements other than its normal year end audit required for the filing of its reports required under the Securities Exchange Act of 1934 (the "Exchange Act"), the Company may defer the filing of such registration statement until the necessary audited financial statements are available, unless the Holder arranges for the payment of the expense of such audit to the extent that such expense would exceed the amount which the Company would otherwise be required to bear in connection with its normal audit schedule for reporting under the Exchange Act. 10.5 If the indemnification provided for in this Section is unavailable or insufficient to hold harmless an indemnified party in respect of any losses, claims, damages, liabilities, expenses or actions in respect thereof referred to herein, then each indemnifying party shall in lieu of indemnifying such indemnified party contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities, expenses or actions in such proportion as is appropriate to reflect the relative fault of the Company, on the one hand, and the seller of such Warrant Shares, on the other, in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities, expenses or actions as well as any other relevant equitable considerations, including the failure to give the notice required hereunder. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact relates to information supplied by the Company, on the one hand, or the sellers of such Warrant Shares, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the holder hereof agree that it would not be just and equitable if contribution pursuant to this Section were determined by pro rata allocation (even if all of the sellers of such Warrant Shares were treated as one entity for such purpose) or by any other method of allocation which did not take account of the equitable considerations referred to above. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities or actions in respect thereof referred to above shall be deemed to include any legal or other expenses which reasonably 13 incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the contribution provisions of this Section, in no event shall the amount contributed by any seller from the sale of Warrant Shares to which such contribution claim relates. No person guilty of fraudulent misrepresentations (within the meaning of section 11(f) of the Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. Each Holder of this Warrant and each Holder of Warrant Shares bearing the legend required by Section 10.6, by acceptance hereof or thereof, as the case may be, agrees to the indemnification and contribution provisions of this Section 10.5. 10.6 Legend. In case any shares are issued upon the exercise in whole or in part of this Warrant or are thereafter transferred, in either case under such circumstances that no registration under the Act is required or effective, each certificate representing such shares shall bear on the face thereof the following legend: "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, and any transfer thereof is subject to the conditions specified in the Warrant dated as of [Include Date] originally issued by PlayNet Technologies, Inc. (the "Company") to [Include Name of Holder] to purchase shares of Common Stock, $.001 par value, of the Company. A copy of the form of such Warrant is on file with the Secretary of the Company in New York, New York, and will be furnished without charge by the Company to the holder of this certificate upon written request to the Secretary of the Company at such address." 11. Miscellaneous 11.1 Governing Law. This Warrant Certificate shall be governed by and construed in accordance with the laws of the State of New York. 11.2 Holder Not a Stockholder. Prior to the exercise of this Warrant, the holder hereof shall not be entitled to any of the rights of a stockholder of the Company including, without limitation, the right as a stockholder to (a) vote on or consent to any proposed action of the Company or (b) receive (i) dividends or any distributions made to stockholders, (ii) notice of or attend any meetings of stockholders of the Company or (iii) notice of any other proceedings of the Company. 11.3 Notices. Any notice, demand or delivery to be made pursuant to the provisions of this Warrant shall be sufficiently given or made if sent by first class mail, postage 14 prepaid, addressed to (a) the holder of this Warrant or issued Warrant Shares at its last known address appearing on the books at the Company maintained for such purposes or (b) the Company at its principal offices at 152 West 57th Street, New York, New York 10019, Attention: General Counsel. The Holder of this Warrant and the Company may each designate a different address by notice to the other pursuant to this Section 11.3. 11.4 Investment Representation. The Holder represents that it is purchasing the Warrant and all shares issuable upon exercise of this Warrant for its own account and not as nominee or agent for any other person and not with a view to, or for offer or sale in connection with any distribution thereof (within the meaning of the Act) that would be in violation of the applicable securities laws; provided, however, that subject to the restrictions contained in Section 10, that the disposition of all or any part of such shares shall at all times be within the Holder's exclusive control. 11.5 Confidentiality of Information. The Holder of this Warrant (and any affiliates of the Holder) and any permitted transferee of this Warrant will treat all documents, financial statements, reports and other information delivered pursuant to this Warrant on a confidential basis with the same degree of care it treats similar information of other companies of which it holds securities and has investment banking relationships. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed by its officers thereunto duly authorized and its corporate seal to be affixed hereon, as of this 30th day of December, 1996. PLAYNET TECHNOLOGIES, INC. By: ___________________________ Name: Title: 15 EXHIBIT A NOTICE OF EXERCISE FORM (To be executed only upon partial or full exercise of the within Warrant) The undersigned registered Holder of the within Warrant irrevocably exercises the within Warrant for and purchases shares of Common Stock of PlayNet Technologies, Inc. (the "Company") and herewith makes payment therefor in the amount of $_________, all on the terms and conditions specified in the within Warrant, and requests that a certificate (or ______ certificates in denominations of ______ shares) for the shares of Common Stock of the Company hereby purchased be issued in the name of and delivered to (choose one) (a) the undersigned or (b) ________, whose address is _______________ and, if such shares of Common Stock shall not include all the shares of Common Stock issuable as provided in the within Warrant, that a new Warrant of like tenor for that portion of the Warrant not exercised hereby be issued in the name of and delivered to (choose one) (a) the undersigned or (b) ______________, whose address is _______________________. The undersigned represents that it is purchasing the securities described above for its own account and not as a nominee or agent for any other person and not with a view to, or for offer of sale in connection with, any distribution thereof (within the meaning of the Securities Act of 1933) that would be in violation of the applicable securities laws; provided, however, that subject to the restrictions contained in Section 10 of the Warrant that the disposition of all or any part of such shares shall at all times be within the undersigned's exclusive control. Dated: __________________ By:________________________________ (signature of Registered Holder) Signature Guaranteed: ___________________________ By:_____________________ Title: NOTICE: The signature to this Notice must correspond with the name as written upon the face of the within Warrant in every particular, without alteration or enlargement or any change whatever. The signature to this Notice must be guaranteed by a commercial bank or trust company in the United States or a member firm of the New York Stock Exchange. 16 EXHIBIT B NOTICE OF CONVERSION The undersigned hereby irrevocably elects to convert, pursuant to Section 7 of the Warrant Certificate accompanying this Notice of Conversion, that number of shares of Common Stock issuable upon exercise of the Warrant for an aggregate purchase price of $_______ into that number of shares of Common Stock of the Company to be received by the undersigned pursuant to the provisions of Section 7.1 of the accompanying Warrant Certificate. Dated: _______________ ___________________________ Name of Holder ___________________________ Signature Address: ___________________________ ___________________________ ___________________________ Signature Guaranteed: ___________________________ By:_____________________ Title: 17 ASSIGNMENT FORM (To be executed only upon the assignment of the within Warrant) FOR VALUE RECEIVED, the undersigned registered Holder of the within Warrant hereby sells, assigns and transfers unto _____________________, whose address is ________________________, all of the rights of the undersigned under the within Warrant, with respect to the receipt of shares of Common Stock of PlayNet Technologies, Inc. and, if such sale, assignment or transfer is for less than the right to the receipt of all shares of Common Stock to which the Holder is entitled upon exercise of such Warrant, that a new Warrant of like tenor for that portion of the Warrant not being transferred hereunder be issued in the name of and delivered to the undersigned, and does hereby irrevocably constitute and appoint ______________ Attorney to register such transfer on the books of the Company maintained for the purpose, with full power of substitution in the premises. Dated: _____________, 19__. By:________________________________ (Signature of Registered Holder) Signature Guaranteed: __________________________ By:_______________________ Title: NOTICE: The signature to this Assignment must correspond with the name as written upon the face of the within Warrant in every particular, without alteration or enlargement or any change whatever. The signature to this Assignment must be guaranteed by a commercial bank or trust company in the United States or a member firm of the New York Stock Exchange. EXHIBIT 4 - Form of "Cohen Investor" Warrants THIS WARRANT AND ANY SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND NEITHER THIS WARRANT NOR ANY SUCH SHARES MAY BE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT. PLAYNET TECHNOLOGIES, INC. WARRANT CERTIFICATE This warrant certificate ("Warrant Certificate") certifies that for value received Zeller Eblagon Financial Services Ltd. or registered assigns (the "Holder") is the owner of this warrant ("Warrant") which entitles the Holder hereof to purchase, at any time from the date which is either (i) one year from the date of the closing on or prior to the Five Month Date of a Qualified Public Offering or closing on or prior to the Five Month Date of a Qualified Private Placement (all as defined below) or (ii) if no such Qualified Public Offering or Qualified Private Placement closes on or prior to the Five Month Date, one year from the date of issuance hereof ((i) and (ii) singularly and collectively, the "Exercise Date") through and including the Expiration Date (hereinafter defined), such number of fully paid and non-assessable shares of Common Stock, $.01 par value ("Common Stock"), of PlayNet Technologies, Inc., a Delaware corporation (the "Company") calculated as follows: - in the event of the closing of a Qualified Public Offering on or prior to the date which is five months from the issuance of this Warrant (the "Five Month Date"): 50% X $500,000 ------------------------------------ the per share price of the common stock offered in such Qualified Public Offering -- in the event that such Qualified Public Offering is not closed on or prior to the Five Month Date but a Qualified Private Placement is closed on or prior to the Five Month Date: 50% X $500,000 ------------------------------------ the lowest per share price of the common stock offered in such Qualified Private Placement --- in the event that a Qualified Public Offering or Qualified Private Placement is not completed on or prior to the Five Month Date: 50% X $500,000 ------------------------------------ $5.00 (each formula subject to adjustment as hereinafter provided). For purposes of this Warrant, the term "Qualified Public Offering" shall mean the closing of any public offering of Common Stock of the Company raising gross proceeds of at least $15 million to the Company and the term "Qualified Private Placement" shall mean the closing of any privately arranged financing transaction or series of transactions raising in the aggregate gross proceeds of at least $15 million to the Company. 1. Warrant; Purchase Price This Warrant shall entitle the Holder initially to purchase shares of Common Stock of the Company as calculated above and the purchase price payable upon exercise of the Warrants shall be, (i) in the event of the closing of a Qualified Public Offering on or prior to the Five Month Date, the per share price of the Common Stock Offered in such Qualified Public Offering, (ii) in the event that such a Qualified Public Offering is not closed on or prior to the Five Month Date but a Qualified Private Placement is closed on or prior to the Five Month Date, the lowest per share price of the Common Stock offered in such Qualified Private Placement, or (iii) in the event that such Qualified Public Offering or Qualified Private Placement is not closed on or prior to the Five Month Date, $5.00 per share of Common Stock (each of (i), (ii) and (iii) the "Relevant Purchase Price" and together the "Relevant Purchase Prices"). The Relevant Purchase Price and number of shares of Common Stock issuable upon exercise of this Warrant are subject to adjustment as provided in Article 6. The shares of Common Stock issuable upon exercise of this Warrant (and/or other shares of common stock so issuable by reason of any adjustments pursuant to Article 6) are sometimes referred to herein as the "Warrant Shares." The aggregate purchase price for the shares of Common Stock of the Company to be received by the Holder hereof upon exercise of this Warrant shall be payable, at the option of the Holder, either (i) in cash in lawful money of the United States of America or by certified or cashier's check; or (ii) if such Holder is Zeller Eblagon Leasing Ltd., by cancellation, in whole or in part, of that certain $500,000 Senior Secured Note issued to Zeller Eblagon Leasing Ltd. on , 1996; or (iii) as otherwise provided herein. 2 2. Exercise; Expiration Date 2.1 This Warrant is exercisable, at the option of the Holder, in whole or in part at any time and from time to time from the Exercise Date through and including the Expiration Date (the "Exercise Period"), upon surrender of this Warrant Certificate to the Company together with a duly completed Notice of Exercise, in the form attached hereto as Exhibit A, and payment of an amount equal to the Relevant Purchase Price times the number of shares of Common Stock to be received upon exercise of this Warrant. In the case the Holder hereof elects to exercise this Warrant for less than all the shares of Common Stock of the Company represented by this Warrant Certificate, the Company shall cancel this Warrant Certificate upon the surrender thereof and shall execute and deliver a new Warrant Certificate providing for the exercise of the balance of such shares of Common Stock. 2.2 The term "Expiration Date" shall mean 5:00 p.m. New York time on the date which is five years from the date of the issuance of this Warrant, or if such day shall in the State of New York be a holiday or a day on which banks are authorized to close, then 5:00 p.m. local time in the State of New York the next following day which in the State of New York is not a holiday or a day on which banks are authorized to close. 3. Registration and Transfer on Company Books 3.1 The Company shall maintain books for the registration and transfer of this Warrant and the registration and transfer of the Warrant Shares. 3.2 Prior to due presentment for registration of transfer of this Warrant Certificate, or the Warrant Shares, the Company may deem and treat the registered Holder as the absolute owner thereof. 3.3 The Company shall register upon its books any transfer of this Warrant Certificate, upon surrender of same to the Company with a written instrument of transfer duly executed by the registered Holder or by a duly authorized attorney. Upon any such registration of transfer, new Warrant Certificate(s) shall be issued to the transferee(s) and the surrendered Warrant Certificate shall be canceled by the Company. A Warrant Certificate may also be exchanged, at the option of the Holder, for new Warrant Certificates of different denominations representing an aggregate purchase price of $500,000. 3 4. Reservation of Shares The Company covenants that it will at all times reserve and keep available out of its authorized capital stock, solely for the purpose of issue upon exercise of this Warrant, such number of shares as shall then be issuable upon the exercise of this Warrant. The Company covenants that all shares of capital stock which shall be issuable upon exercise of this Warrant shall be duly and validly issued and fully paid and non-assessable and free from all taxes, liens and charges with respect to the issue thereof, and that upon issuance such shares shall be listed on each national securities exchange, if any, on which the other shares of such outstanding series of capital stock of the Company are then listed. 5. Loss or Mutilation Upon receipt by the Company of reasonable evidence of the ownership of and the loss, theft, destruction or mutilation of any Warrant Certificate and, in the case of loss, theft or destruction, of indemnity reasonably satisfactory to the Company, or, in the case of mutilation, upon surrender and cancellation of the mutilated Warrant Certificate, the Company shall execute and deliver in lieu thereof a new Warrant Certificate replacing such Warrant Certificate. 6. Adjustment of Relevant Purchase Price and Number of Shares Deliverable 6.1 The number of Warrant Shares purchasable upon the exercise of each Warrant and the Relevant Purchase Price with respect to the Warrant Shares shall be subject to adjustment as follows: (a) In case the Company shall (i) declare a dividend or make a distribution on its Common Stock payable in shares of its capital stock, (ii) subdivide its outstanding shares of Common Stock through stock split or otherwise, (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, or (iv) issue by reclassification of its Common Stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing corporation) other securities of the Company, or (v) in case of a consolidation or merger of the Company with or into another corporation or in case of the sale or transfer of all or substantially all of the assets of the Company (hereinafter, a "Reorganization Transaction"), the number and/or nature of Warrant Shares purchasable upon exercise of this Warrant immediately prior thereto shall be adjusted so that the Holder shall be entitled to receive the kind and number of Warrant Shares or other securities of 4 the Company (or of any successor company) which he would have owned or have been entitled to receive after the happening of any of the events described above, had such Warrant been exercised immediately prior to the happening of such event or any record date with respect thereto. An adjustment made pursuant to this paragraph (a) shall become effective retroactively as of the record date of such event. (b) In case the Company shall distribute to all holders of its shares of Common Stock, or all holders of Common Stock shall otherwise become entitled to receive, shares of capital stock of the Company (other than dividends or distributions on its Common Stock referred to in paragraph (a) above), evidences of its indebtedness or rights, options, warrants or convertible securities providing the right to subscribe for or purchase any shares of the Company's capital stock or evidences of its indebtedness, then in each case the number of Warrant Shares thereafter purchasable upon the exercise of this Warrant shall be determined by multiplying the number of Warrant Shares theretofore purchasable upon the exercise of this Warrant, by a fraction, of which the numerator shall be the then Market Price Per Share of the Warrant Shares (as determined pursuant to Section 9.2) on the record date mentioned below in this paragraph (b), and of which the denominator shall be the then Market Price Per Share of the Warrant Shares on such record date less the then fair value (as determined by the Board of Directors of the Company, in good faith) of the portion of the shares of the Company's capital stock other than Common Stock, evidences of indebtedness, or of such rights, options, warrants or convertible securities, distributable with respect to each Warrant Share. Such adjustment shall be made whenever any such distribution is made, and shall become effective retroactively as of the record date for the determination of shareholders entitled to receive such distribution. (c) Whenever the number of Warrant Shares purchasable upon the exercise of this Warrant is adjusted, as provided in this Section 6.1, the Relevant Purchase Prices with respect to the Warrant Shares shall be adjusted by multiplying such Relevant Purchase Prices immediately prior to such adjustment by a fraction, of which the numerator shall be the number of Warrant Shares purchasable upon the exercise of this Warrant immediately prior to such adjustment, and of which the denominator shall be the number of Warrant Shares so purchasable immediately thereafter. 6.2 No adjustment in the number of Warrant Shares purchasable under this Warrant, or in the Relevant Purchase Prices with respect to the Warrant Shares, shall be required unless such adjustment would require an 5 increase or decrease of at least 1% in the number of Warrant Shares issuable upon the exercise of such Warrant, or in the Relevant Purchase Prices thereof; provided, however, that any adjustments which by reason of this Section 6.3 are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All final results of adjustments to the number of Warrant Shares and the Relevant Purchase Prices thereof shall be rounded to the nearest one thousandth of a share or the nearest cent, as the case may be. Anything in this Section 6 to the contrary notwithstanding, the Company shall be entitled, but shall not be required, to make such changes in the number of Warrant Shares purchasable upon the exercise of each Warrant, or in the Relevant Purchase Prices thereof, in addition to those required by such Section, as it in its discretion shall determine to be advisable in order that any dividend or distribution in shares of Common Stock, subdivision, reclassification or combination of shares of Common Stock, issuance of rights, warrants or options to purchase Common Stock, or distribution of shares of stock other than Common Stock, evidences of indebtedness or assets (other than distributions of cash out of retained earnings) or convertible or exchangeable securities hereafter made by the Company to the holders of its Common Stock shall not result in any tax to the holders of its Common Stock or securities convertible into Common Stock. 6.3 Whenever the number of Warrant Shares purchasable upon the exercise of each Warrant or the Relevant Purchase Price of such Warrant Shares is adjusted, as herein provided, the Company shall mail to the Holder, at the address of the Holder shown on the books of the Company, a notice of such adjustment or adjustments, prepared and signed by the Chief Financial Officer or Secretary of the Company, which sets forth the number of Warrant Shares purchasable upon the exercise of this Warrant and each of the then Relevant Purchase Prices of such Warrant Shares after such adjustment, a brief statement of the facts requiring such adjustment and the computation by which such adjustment was made. 6.4 In the event that at any time prior to the expiration of this Warrant and prior to their exercise: (a) the Company shall declare any distribution (other than a cash dividend or a dividend payable in securities of the Company with respect to the Common Stock); or (b) the Company shall offer for subscription to all the holders of the Common Stock any additional shares of stock of any class or any other securities convertible into Common Stock or any rights to subscribe thereto; or 6 (c) the Company shall declare any stock split, stock dividend, subdivision, combination, or similar distribution with respect to the Common Stock that shall affect the outstanding number of shares of Common Stock; or (d) the Company shall declare a dividend, other than a dividend payable in shares of the Company's own Common Stock; or (e) there shall be any capital change in the Company as set forth in Section 6.1(a)(v); or (f) there shall be a voluntary or involuntary dissolution, liquidation, or winding up of the Company (other than in connection with a consolidation, merger, or sale of all or substantially all of its property, assets and business as an entity); (each such event hereinafter being referred to as a "Notification Event"), the Company shall cause to be mailed to the Holder, not less than 20 days prior to the record date, if any, in connection with such Notification Event (provided, however, that if there is no record date, 20 days prior to the effective date, or in either case if 20 days prior notice is impracticable, as soon as practicable) written notice specifying the nature of such event and the effective date of, or the date on which the books of the Company shall close or a record shall be taken with respect to, such event. Such notice shall also set forth facts indicating the effect of such action (to the extent such effect may be known at the date of such notice) on each of the Relevant Purchase Prices and the kind and amount of the shares of stock or other securities or property deliverable upon exercise of this Warrant. 6.5 The form of Warrant Certificate need not be changed because of any change in the Relevant Purchase Prices, the number of Warrant Shares issuable upon the exercise of a Warrant or the number of Warrants outstanding pursuant to this Section 6, and Warrant Certificates issued before or after such change may state the same Relevant Purchase Prices, the same number of Warrants, and the same number of Warrant Shares issuable upon exercise of Warrants as are stated in the Warrant Certificates theretofore issued pursuant to this Agreement. The Company may, however, at any time, in its sole discretion, make any change in the form of Warrant Certificate that it may deem appropriate and that does not affect the substance thereof, and any Warrant Certificates thereafter issued or countersigned, whether in exchange or substitution for an outstanding Warrant Certificate or otherwise, may be in the form as so changed. 7 7. Conversion Rights 7.1 After the occurrence of any Reorganization Transaction (as such term is defined in Section 6.1(a)(v)), in lieu of exercise of any portion of this Warrant as provided in Section 2.1 hereof, the Warrant Shares represented by this Warrant Certificate (or any portion thereof) may, at the election of the Holder, be converted into the nearest whole number of shares of Common Stock of the Company (or other securities of the Company or any successor Company underlying the Warrant) equal to: (1) the product of (a) the number of shares of Common Stock (or such other securities) then issuable upon the exercise of this Warrant to be so converted and (b) the excess, if any, of (i) the Market Price Per Share (as determined pursuant to Section 9.2) with respect to the date of conversion over (ii) the Relevant Purchase Prices in effect on the business day next preceding the date of conversion, divided by (2) the Market Price Per Share with respect to the date of conversion. 7.2 The conversion rights provided under this Section 7 may be exercised in whole or in part and at any time and from time to time while this Warrant remain outstanding. In order to exercise the conversion privilege, the Holder shall surrender to the Company (or any successor company), at its offices, this Warrant Certificate accompanied by a duly completed Notice of Conversion in the form attached hereto as Exhibit B. The Warrants (or so much thereof as shall have been surrendered for conversion) shall be deemed to have been converted immediately prior to the close of business on the day of surrender of such Warrant Certificate for conversion in accordance with the foregoing provisions. As promptly as practicable on or after the conversion date, the Company (or the successor company) shall issue and shall deliver to the Holder (i) a certificate or certificates representing the number of shares of Common Stock (or such other securities) to which the Holder shall be entitled as a result of the conversion, and (ii) if the Warrant Certificate is being converted in part only, a new certificate of like tenor and date for the balance of the unconverted portion of the Warrant Certificate. 8. Voluntary Adjustment by the Company The Company may, at its option, at any time during the term of this Warrant, reduce the then current Relevant Purchase Prices to any amount deemed appropriate by the Board of Directors of the Company and/or extend the date of the expiration of the Warrants. 8 9. Fractional Shares and Warrants; Determination of Market Price Per Share 9.1 Anything contained herein to the contrary notwithstanding, the Company shall not be required to issue any fraction of a share of Common Stock in connection with the exercise of this Warrant. This Warrant may not be exercised in such number as would result (except for the provisions of this paragraph) in the issuance of a fraction of a share of Common Stock unless the Holder is exercising this Warrant for all shares of Common Stock to be received by the Holder hereunder. In such event, the Company shall, upon the exercise of the entirety of this Warrant, issue to the Holder the largest aggregate whole number of shares of Common Stock called for thereby upon receipt of the Relevant Purchase Price for all shares of Common Stock to be issued upon exercise hereof and pay a sum in cash equal to the remaining fraction of a share of Common Stock, multiplied by its Market Price Per Share (as determined pursuant to Section 9.2 below) as of the last business day preceding the date on which this Warrant are presented for exercise. 9.2 As used herein, the "Market Price Per Share" with respect to any class or series of Common Stock of the Company (or any other securities of the Company or of any successor company) on any date shall mean the closing price per share of such class or series of securities for the trading day immediately preceding such date. The closing price for each such day shall be the last sale price regular way or, in case no such sale takes place on such day, the average of the closing bid and asked prices regular way, in either case on the principal securities exchange on which the shares of such Common Stock of the Company (or other securities of the Company or of such successor company) are listed or admitted to trading or, if applicable, the last sale price, or in case no sale takes place on such day, the average of the closing bid and asked prices of such securities on NASDAQ or any comparable system, or if such securities are not reported on NASDAQ, or a comparable system, the average of the closing bid and asked prices as furnished by two members of the National Association of Securities Dealers, Inc. selected from time to time by the Company for that purpose. If such bid and asked prices are not available, then "Market Price Per Share" shall be equal to the fair market value of the such securities as determined in good faith by the Board of Directors of the Company (or of such successor company). 10. Restrictions on Transfer; Registration Rights 10.1 No sale, transfer, assignment, hypothecation or other disposition of this Warrant or Warrant Shares shall be made unless any such transfer, assignment or other disposition will comply with the rules and statutes administered by the Securities and Exchange Commission and (i) a 9 Registration Statement under the Securities Act of 1933, as amended (the "Act"), including such shares is currently in effect, or (ii) in the opinion of counsel a current Registration Statement is not required for such disposition of the shares. 10.2 In the event of a proposed sale or transfer of this Warrant or Warrant Shares in a transaction other than a sale pursuant to a public offering registered under the Act, a Holder shall deliver to the Company an opinion of counsel addressed to the Company (which shall be rendered by counsel reasonably acceptable to the Company) to the effect that the proposed transfer may be effected without registration or qualification under any Federal or state securities or blue sky law. Such counsel rendering the opinion shall, as promptly as practicable, notify the Company and the Holder of such opinion and of the terms and conditions, if any, to be observed in such transfer, whereupon the Holder shall be entitled to transfer this Warrant or the Warrant Shares (or a portion thereof). 10.3 The Company agrees that, at any time or times hereafter, until the second anniversary of the Expiration Date of this Warrant, as and when it intends to register any of its securities under the Act, whether for its own account and/or on behalf of selling stockholders (except in connection with an offering solely to its employees, an offering pursuant to an employee benefit plan, a dividend or interest reinvestment plan, or an offering solely related to an acquisition on a Form S-4 or any subsequent similar form) permitting a secondary offering or distribution the Company will notify the Holder of such intention and, upon request from the Holder, will use its best efforts to cause the Warrant Shares designated by the Holder to be registered under the Securities Act. The number of Warrant Shares to be included in such offering may be reduced if and to the extent that the underwriter of securities included in the registration statement and offered by the Company shall be of the opinion that such inclusion would adversely affect the marketing of the securities to be sold by the Company therein; provided, however, that the percentage of the reduction of such Warrant Shares shall be no greater than the percentage reduction of securities of other selling stockholders, as such percentage reductions are determined in the good faith judgment of the Company. The Company will use its best efforts to keep each such Registration Statement current for such period of time as is not otherwise burdensome to the Company. 10.4 Any registration statement referred to in subsection 10.3 hereof shall be prepared and processed in accordance with the following terms and conditions: (i) the Holder will cooperate in furnishing promptly to the Company in writing any information requested by the Company in 10 connection with the preparation, filing and processing of such registration statement. (ii) to the extent requested by an underwriter of securities included in the registration statement and offered by the Company, the Holder will defer the sale of Warrant Shares for a period commencing twenty (20) days prior and terminating sixty (60) days after the effective date of the registration statement, provided that any principal shareholders of the Company who also have shares included in the registration statement will also defer their sales for a similar period, except for sales pursuant to registrations on Form S-8 or S-4 or any similar or successor forms thereto. (iii) The Company will furnish to the Holder such number of prospectuses or other documents incident to such registration as may from time to time be reasonably requested, and cause its shares to be qualified under the blue-sky laws of those states reasonably requested by the Holder. (iv) The Company will indemnify the Holder (and any officer, director or controlling person of the Holder) and any underwriters acting on behalf of the Holder against all claims, losses, expenses, damages and liabilities (or actions in respect thereof) to which they may become subject under the Securities Act or otherwise, arising out of or based upon any untrue or alleged untrue statement of any material facts contained in any registration statement filed pursuant hereto, or any document relating thereto, including all amendments and supplements, or arising out of or based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein contained not misleading, and will reimburse the Holder (or such other aforementioned parties) or such underwriters for any legal and all other expenses reasonably incurred in accordance with investigating or defending any such claim, loss, damage, liability or action; provided, however, that the Company will not be liable where the untrue or alleged untrue statement or omission or alleged omission is based upon information furnished in writing to the Company by the Holder or any underwriter obtained by the Holder expressly for use therein, or as a result of the Holder's or any such underwriter's failure to furnish to the Company information duly requested in writing by counsel for the Company specifically for use therein; provided that with respect to any untrue statement or omission or alleged untrue statement or omission made in any preliminary prospectus, the indemnity agreement contained in this paragraph shall not inure to the benefit of any underwriter from whom the person asserting such losses, claims, damages or liability purchased the securities concerned, to the extent that any such loss, claim, damage or liability of such underwriter results from the fact that a copy of the prospectus was not sent or given to such person at or prior to the 11 written confirmation of the sale of such securities to such person. This indemnity agreement shall be in addition to any other liability the Company may have. The indemnity agreement of the Company contained in this paragraph (iv) shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified party and shall survive the delivery of and payment for the Warrant Shares. (v) The Holder will indemnify the Company (and any officer, director or controlling person of the Company) and any underwriters acting on behalf of the Company against all claims, losses, expenses, damages and liabilities (or actions in respect thereof) to which they may become subject under the Securities Act or otherwise, arising out of or based upon any untrue or alleged untrue statement filed pursuant hereto, or any document relating thereto, including all amendments, and supplements, or arising out of or based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein contained not misleading, and, will reimburse the Company (or such other aforementioned parties) or such underwriters for any legal and other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability, or action; provided, however, that the Holder will be liable as aforesaid only to the extent that such untrue or alleged untrue statement or omission or alleged omission is based upon information furnished in writing to the Company by the Holder or any underwriter obtained by the Holder expressly for use therein, or as a result of its or such underwriter's failure to furnish the Company with information duly requested in writing by counsel for the Company specifically for use therein. This indemnity agreement contained in this paragraph (v) shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified party and shall survive the delivery of and payment for the Warrant Shares. (vi) Promptly after receipt by an indemnified party under this subsection 10.4 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party, promptly notify the indemnifying party of the commencement thereof, but the omission so to notify the indemnifying party will not relieve it from any liability which it may 12 have to any indemnified party otherwise than under this subsection 10.4. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this subsection 10.4 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof, other than reasonable costs of investigation or out-of-pocket expenses or losses or cost incurred in collaborating in the defense. (vii) Except as set forth in subsection 10.4(viii), the Company shall bear all costs and expenses incident to any registration pursuant to this Section 10. (viii) The Holder shall pay any and all underwriters' discounts, brokerage fees and transfer taxes incident to the sale of any securities sold by such Holder pursuant to this Section 10, and shall pay the fees and expenses of any special attorneys or accountants retained by it. (ix) If the filing of any registration statement pursuant to subsection 10.4 would require the Company to obtain audited financial statements other than its normal year end audit required for the filing of its reports required under the Securities Exchange Act of 1934 (the "Exchange Act"), the Company may defer the filing of such registration statement until the necessary audited financial statements are available, unless the Holder arranges for the payment of the expense of such audit to the extent that such expense would exceed the amount which the Company would otherwise be required to bear in connection with its normal audit schedule for reporting under the Exchange Act. 10.5 If the indemnification provided for in this Section is unavailable or insufficient to hold harmless an indemnified party in respect of any losses, claims, damages, liabilities, expenses or actions in respect thereof referred to herein, then each indemnifying party shall in lieu of indemnifying such indemnified party contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities, expenses or actions in such proportion as is appropriate to reflect the relative fault of the Company, on the one hand, and the seller of such Warrant Shares, on 13 the other, in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities, expenses or actions as well as any other relevant equitable considerations, including the failure to give the notice required hereunder. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact relates to information supplied by the Company, on the one hand, or the sellers of such Warrant Shares, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the holder hereof agree that it would not be just and equitable if contribution pursuant to this Section were determined by pro rata allocation (even if all of the sellers of such Warrant Shares were treated as one entity for such purpose) or by any other method of allocation which did not take account of the equitable considerations referred to above. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities or actions in respect thereof referred to above shall be deemed to include any legal or other expenses which reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the contribution provisions of this Section, in no event shall the amount contributed by any seller from the sale of Warrant Shares to which such contribution claim relates. No person guilty of fraudulent misrepresentations (within the meaning of section 11(f) of the Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. Each Holder of this Warrant and each Holder of Warrant Shares bearing the legend required by Section 10.6, by acceptance hereof or thereof, as the case may be, agrees to the indemnification and contribution provisions of this Section 10.5. 10.6 Legend. In case any shares are issued upon the exercise in whole or in part of this Warrant or are thereafter transferred, in either case under such circumstances that no registration under the Act is required or effective, each certificate representing such shares shall bear on the face thereof the following legend: "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, and any transfer thereof is subject to the conditions specified in the Warrant dated as of _______________, 1996 originally issued by PlayNet Technologies, Inc. (the "Company") to Zeller Eblagon Leasing Ltd. to purchase shares of Common Stock, $.001 par value, of the Company. A copy of the form of such Warrant is on file with the Secretary of the Company in New York, New York, and will be furnished without charge by the Company to the holder of this certificate upon written request to the Secretary of the Company at such address." 14 11. Miscellaneous 11.1 Governing Law. This Warrant Certificate shall be governed by and construed in accordance with the laws of the State of New York. 11.2 Holder Not a Stockholder. Prior to the exercise of this Warrant, the holder hereof shall not be entitled to any of the rights of a stockholder of the Company including, without limitation, the right as a stockholder to (a) vote on or consent to any proposed action of the Company or (b) receive (i) dividends or any distributions made to stockholders, (ii) notice of or attend any meetings of stockholders of the Company or (iii) notice of any other proceedings of the Company. 11.3 Notices. Any notice, demand or delivery to be made pursuant to the provisions of this Warrant shall be sufficiently given or made if sent by first class mail, postage prepaid, addressed to (a) the holder of this Warrant or issued Warrant Shares at its last known address appearing on the books at the Company maintained for such purposes or (b) the Company at its principal offices at 152 West 57th Street, New York, New York 10019, Attention: General Counsel. The Holder of this Warrant and the Company may each designate a different address by notice to the other pursuant to this Section 11.3. 11.4 Investment Representation. The Holder represents that it is purchasing the Warrant and all shares issuable upon exercise of this Warrant for its own account and not as nominee or agent for any other person and not with a view to, or for offer or sale in connection with any distribution thereof (within the meaning of the Act) that would be in violation of the applicable securities laws; provided, however, that subject to the restrictions contained in Section 10, that the disposition of all or any part of such shares shall at all times be within the Holder's exclusive control. 11.5 Confidentiality of Information. The Holder of this Warrant (and any affiliates of the Holder) and any permitted transferee of this Warrant will treat all documents, financial statements, reports and other information delivered pursuant to this Warrant on a confidential basis with the same degree of care it treats similar information of other companies of which it holds securities and has investment banking relationships. 15 IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed by its officers thereunto duly authorized and its corporate seal to be affixed hereon, as of this ____ day of _________, 1996. PLAYNET TECHNOLOGIES, INC. By:________________________ Name: Title: 16 EXHIBIT A NOTICE OF EXERCISE FORM ----------------------- (To be executed only upon partial or full exercise of the within Warrant) The undersigned registered Holder of the within Warrant irrevocably exercises the within Warrant for and purchases shares of Common Stock of PlayNet Technologies, Inc. (the "Company") and herewith makes payment therefor in the amount of $_________, all on the terms and conditions specified in the within Warrant, and requests that a certificate (or ______ certificates in denominations of ______ shares) for the shares of Common Stock of the Company hereby purchased be issued in the name of and delivered to (choose one) (a) the undersigned or (b) ________, whose address is _______________ and, if such shares of Common Stock shall not include all the shares of Common Stock issuable as provided in the within Warrant, that a new Warrant of like tenor for that portion of the Warrant not exercised hereby be issued in the name of and delivered to (choose one) (a) the undersigned or (b) ______________, whose address is _______________________. The undersigned represents that it is purchasing the securities described above for its own account and not as a nominee or agent for any other person and not with a view to, or for offer of sale in connection with, any distribution thereof (within the meaning of the Securities Act of 1933) that would be in violation of the applicable securities laws; provided, however, that subject to the restrictions contained in Section 10 of the Warrant that the disposition of all or any part of such shares shall at all times be within the undersigned's exclusive control. Dated: __________________ By:________________________________ (signature of Registered Holder) Signature Guaranteed: ________________________ By:_____________________ Title: NOTICE: The signature to this Notice must correspond with the name as written upon the face of the within Warrant in every particular, without alteration or enlargement or any change whatever. The signature to this Notice must be guaranteed by a commercial bank or trust company in the United States or a member firm of the New York Stock Exchange. 17 EXHIBIT B NOTICE OF CONVERSION The undersigned hereby irrevocably elects to convert, pursuant to Section 7 of the Warrant Certificate accompanying this Notice of Conversion, that number of shares of Common Stock issuable upon exercise of the Warrant for an aggregate purchase price of $_______ into that number of shares of Common Stock of the Company to be received by the undersigned pursuant to the provisions of Section 7.1 of the accompanying Warrant Certificate. Dated: _______________ ____________________________ Name of Holder ____________________________ Signature Address: ____________________________ ____________________________ ____________________________ Signature Guaranteed: ________________________ By:_____________________ Title: 18 ASSIGNMENT FORM --------------- (To be executed only upon the assignment of the within Warrant) FOR VALUE RECEIVED, the undersigned registered Holder of the within Warrant hereby sells, assigns and transfers unto _____________________, whose address is ________________________, all of the rights of the undersigned under the within Warrant, with respect to the receipt of shares of Common Stock of PlayNet Technologies, Inc. and, if such sale, assignment or transfer is for less than the right to the receipt of all shares of Common Stock to which the Holder is entitled upon exercise of such Warrant, that a new Warrant of like tenor for that portion of the Warrant not being transferred hereunder be issued in the name of and delivered to the undersigned, and does hereby irrevocably constitute and appoint ______________ Attorney to register such transfer on the books of the Company maintained for the purpose, with full power of substitution in the premises. Dated: _____________, 19__. By:________________________________ (Signature of Registered Holder) Signature Guaranteed: __________________________ By:_______________________ Title: NOTICE: The signature to this Assignment must correspond with the name as written upon the face of the within Warrant in every particular, without alteration or enlargement or any change whatever. The signature to this Assignment must be guaranteed by a commercial bank or trust company in the United States or a member firm of the New York Stock Exchange. 19 EXHIBIT 5 - Form of Tranche 1 Warrant THIS WARRANT AND ANY SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND NEITHER THIS WARRANT NOR ANY SUCH SHARES MAY BE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT. PLAYNET TECHNOLOGIES, INC. WARRANT CERTIFICATE This warrant certificate ("Warrant Certificate") certifies that for value received ____________________ or registered assigns (the "Holder") is the owner of this warrant ("Warrant") which entitles the Holder hereof to purchase, at any time from the date which is either (i) one year from the date of the closing on or prior to the Five Month Date of a Qualified Public Offering or closing on or prior to the Five Month Date of a Qualified Private Placement (all as defined below) or (ii) if no such Qualified Public Offering or Qualified Private Placement closes on or prior to the Five Month Date, one year from the date of issuance hereof ((i) and (ii) singularly and collectively,the "Exercise Date") through and including the Expiration Date (hereinafter defined), such number of fully paid and non-assessable shares of Common Stock, $.01 par value ("Common Stock"), of PlayNet Technologies, Inc., a Delaware corporation (the "Company") calculated as follows: - in the event of the closing of a Qualified Public Offering on or prior to the date which is five months from the issuance of this Warrant (the "Five Month Date"): $[fill in principal amount of Senior Note] 75% X -------------------------------------------- the per share price of the common stock offered in such Qualified Public Offering -- in the event that such Qualified Public Offering is not closed on or prior to the Five Month Date but a Qualified Private Placement is closed on or prior to the Five Month Date: $[fill in principal amount of Senior Note] 75% X -------------------------------------------- the lowest per share price of the common stock offered in such Qualified Private Placement --- in the event that a Qualified Public Offering or Qualified Private Placement is not closed on or prior to the Five Month Date: $[fill in principal amount of Senior Note] 75% X -------------------------------------------- $5.00 (each formula subject to adjustment as hereinafter provided). For purposes of this Warrant, the term "Qualified Public Offering" shall mean the closing of any public offering of Common Stock of the Company raising gross proceeds of at least $15 million to the Company and the term "Qualified Private Placement" shall mean the closing of any privately arranged financing transaction or series of transactions raising in the aggregate gross proceeds of at least $15 million to the Company. 1. Warrant; Purchase Price This Warrant shall entitle the Holder initially to purchase shares of Common Stock of the Company as calculated above and the purchase price payable upon exercise of the Warrants shall be, (i) in the event of the closing of a Qualified Public Offering on or prior to the Five Month Date, the per share price of the Common Stock Offered in such Qualified Public Offering, (ii) in the event that such a Qualified Public Offering is not closed on or prior to the Five Month Date but a Qualified Private Placement is closed on or prior to the Five Month Date, the lowest per share price of the Common Stock offered in such Qualified Private Placement, or (iii) in the event that such Qualified Public Offering or Qualified Private Placement is not closed on or prior to the Five Month Date, $5.00 per share of Common Stock (each of (i), (ii) and (iii) the "Relevant Purchase Price" and together the "Relevant Purchase Prices"). The Relevant Purchase Price and number of shares of Common Stock issuable upon exercise of this Warrant are subject to adjustment as provided in Article 6. The shares of Common Stock issuable upon exercise of this Warrant (and/or other shares of common stock so issuable by reason of any adjustments pursuant to Article 6) are sometimes referred to herein as the "Warrant Shares." The aggregate purchase price for the shares of Common Stock of the Company to be received by the Holder hereof upon exercise of this Warrant shall be payable, at the option of the Holder, either (i) in cash in lawful money of the United States of America or by certified or cashier's check; or (ii) if such Holder is [Name of Holder], by cancellation, in whole or in part, of that certain $[Principal Amount of Note] Senior Secured Note issued to [Name of Holder] on [Month, Day] , 199_; or (iii) as otherwise provided herein. 2 2. Exercise; Expiration Date 2.1 This Warrant is exercisable, at the option of the Holder, in whole or in part at any time and from time to time from the Exercise Date through and including the Expiration Date (the "Exercise Period"), upon surrender of this Warrant Certificate to the Company together with a duly completed Notice of Exercise, in the form attached hereto as Exhibit A, and payment of an amount equal to the Relevant Purchase Price times the number of shares of Common Stock to be received upon exercise of this Warrant. In the case the Holder hereof elects to exercise this Warrant for less than all the shares of Common Stock of the Company represented by this Warrant Certificate, the Company shall cancel this Warrant Certificate upon the surrender thereof and shall execute and deliver a new Warrant Certificate providing for the exercise of the balance of such shares of Common Stock. 2.2 The term "Expiration Date" shall mean 5:00 p.m. New York time on the date which is five years from the date of the issuance of this Warrant, or if such day shall in the State of New York be a holiday or a day on which banks are authorized to close, then 5:00 p.m. local time in the State of New York the next following day which in the State of New York is not a holiday or a day on which banks are authorized to close. 3. Registration and Transfer on Company Books 3.1 The Company shall maintain books for the registration and transfer of this Warrant and the registration and transfer of the Warrant Shares. 3.2 Prior to due presentment for registration of transfer of this Warrant Certificate, or the Warrant Shares, the Company may deem and treat the registered Holder as the absolute owner thereof. 3.3 The Company shall register upon its books any transfer of this Warrant Certificate, upon surrender of same to the Company with a written instrument of transfer duly executed by the registered Holder or by a duly authorized attorney. Upon any such registration of transfer, new Warrant Certificate(s) shall be issued to the transferee(s) and the surrendered Warrant Certificate shall be canceled by the Company. A Warrant Certificate may also be exchanged, at the option of the Holder, for new Warrant Certificates of different denominations representing an aggregate purchase price of $ . 4. Reservation of Shares The Company covenants that it will at all times reserve and keep available out of its authorized capital stock, solely for the purpose of issue upon exercise of this Warrant, such number of shares as shall then be issuable upon the exercise of this Warrant. The Company covenants that all shares of capital stock which shall be issuable upon exercise of this Warrant 3 shall be duly and validly issued and fully paid and non-assessable and free from all taxes, liens and charges with respect to the issue thereof, and that upon issuance such shares shall be listed on each national securities exchange, if any, on which the other shares of such outstanding series of capital stock of the Company are then listed. 5. Loss or Mutilation Upon receipt by the Company of reasonable evidence of the ownership of and the loss, theft, destruction or mutilation of any Warrant Certificate and, in the case of loss, theft or destruction, of indemnity reasonably satisfactory to the Company, or, in the case of mutilation, upon surrender and cancellation of the mutilated Warrant Certificate, the Company shall execute and deliver in lieu thereof a new Warrant Certificate replacing such Warrant Certificate. 6. Adjustment of Relevant Purchase Price and Number of Shares Deliverable 6.1 The number of Warrant Shares purchasable upon the exercise of each Warrant and the Relevant Purchase Price with respect to the Warrant Shares shall be subject to adjustment as follows: (a) In case the Company shall (i) declare a dividend or make a distribution on its Common Stock payable in shares of its capital stock, (ii) subdivide its outstanding shares of Common Stock through stock split or otherwise, (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, or (iv) issue by reclassification of its Common Stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing corporation) other securities of the Company, or (v) in case of a consolidation or merger of the Company with or into another corporation or in case of the sale or transfer of all or substantially all of the assets of the Company (hereinafter, a "Reorganization Transaction"), the number and/or nature of Warrant Shares purchasable upon exercise of this Warrant immediately prior thereto shall be adjusted so that the Holder shall be entitled to receive the kind and number of Warrant Shares or other securities of the Company (or of any successor company) which he would have owned or have been entitled to receive after the happening of any of the events described above, had such Warrant been exercised immediately prior to the happening of such event or any record date with respect thereto. An 4 adjustment made pursuant to this paragraph (a) shall become effective retroactively as of the record date of such event. (b) In case the Company shall distribute to all holders of its shares of Common Stock, or all holders of Common Stock shall otherwise become entitled to receive, shares of capital stock of the Company (other than dividends or distributions on its Common Stock referred to in paragraph (a) above), evidences of its indebtedness or rights, options, warrants or convertible securities providing the right to subscribe for or purchase any shares of the Company's capital stock or evidences of its indebtedness, then in each case the number of Warrant Shares thereafter purchasable upon the exercise of this Warrant shall be determined by multiplying the number of Warrant Shares theretofore purchasable upon the exercise of this Warrant, by a fraction, of which the numerator shall be the then Market Price Per Share of the Warrant Shares (as determined pursuant to Section 9.2) on the record date mentioned below in this paragraph (b), and of which the denominator shall be the then Market Price Per Share of the Warrant Shares on such record date less the then fair value (as determined by the Board of Directors of the Company, in good faith) of the portion of the shares of the Company's capital stock other than Common Stock, evidences of indebtedness, or of such rights, options, warrants or convertible securities, distributable with respect to each Warrant Share. Such adjustment shall be made whenever any such distribution is made, and shall become effective retroactively as of the record date for the determination of shareholders entitled to receive such distribution. (c) Whenever the number of Warrant Shares purchasable upon the exercise of this Warrant is adjusted, as provided in this Section 6.1, the Relevant Purchase Prices with respect to the Warrant Shares shall be adjusted by multiplying such Relevant Purchase Prices immediately prior to such adjustment by a fraction, of which the numerator shall be the number of Warrant Shares purchasable upon the exercise of this Warrant immediately prior to such adjustment, and of which the denominator shall be the number of Warrant Shares so purchasable immediately thereafter. 6.2 No adjustment in the number of Warrant Shares purchasable under this Warrant, or in the Relevant Purchase Prices with respect to the Warrant Shares, shall be required unless such adjustment would require an increase or decrease of at least 1% in the number of Warrant Shares issuable upon the exercise of such Warrant, or in the Relevant Purchase Prices thereof; provided, however, that any adjustments which by reason of this Section 6.3 are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All final results of adjustments to the number of Warrant Shares and the Relevant Purchase Prices thereof shall be rounded to the nearest one thousandth of a share or the nearest cent, as the case may be. Anything in 5 this Section 6 to the contrary notwithstanding, the Company shall be entitled, but shall not be required, to make such changes in the number of Warrant Shares purchasable upon the exercise of each Warrant, or in the Relevant Purchase Prices thereof, in addition to those required by such Section, as it in its discretion shall determine to be advisable in order that any dividend or distribution in shares of Common Stock, subdivision, reclassification or combination of shares of Common Stock, issuance of rights, warrants or options to purchase Common Stock, or distribution of shares of stock other than Common Stock, evidences of indebtedness or assets (other than distributions of cash out of retained earnings) or convertible or exchangeable securities hereafter made by the Company to the holders of its Common Stock shall not result in any tax to the holders of its Common Stock or securities convertible into Common Stock. 6.3 Whenever the number of Warrant Shares purchasable upon the exercise of each Warrant or the Relevant Purchase Price of such Warrant Shares is adjusted, as herein provided, the Company shall mail to the Holder, at the address of the Holder shown on the books of the Company, a notice of such adjustment or adjustments, prepared and signed by the Chief Financial Officer or Secretary of the Company, which sets forth the number of Warrant Shares purchasable upon the exercise of this Warrant and each of the then Relevant Purchase Prices of such Warrant Shares after such adjustment, a brief statement of the facts requiring such adjustment and the computation by which such adjustment was made. 6.4 In the event that at any time prior to the expiration of this Warrant and prior to their exercise: (a) the Company shall declare any distribution (other than a cash dividend or a dividend payable in securities of the Company with respect to the Common Stock); or (b) the Company shall offer for subscription to all the holders of the Common Stock any additional shares of stock of any class or any other securities convertible into Common Stock or any rights to subscribe thereto; or (c) the Company shall declare any stock split, stock dividend, subdivision, combination, or similar distribution with respect to the Common Stock that shall affect the outstanding number of shares of Common Stock; or 6 (d) the Company shall declare a dividend, other than a dividend payable in shares of the Company's own Common Stock; or (e) there shall be any capital change in the Company as set forth in Section 6.1(a)(v); or (f) there shall be a voluntary or involuntary dissolution, liquidation, or winding up of the Company (other than in connection with a consolidation, merger, or sale of all or substantially all of its property, assets and business as an entity); (each such event hereinafter being referred to as a "Notification Event"), the Company shall cause to be mailed to the Holder, not less than 20 days prior to the record date, if any, in connection with such Notification Event (provided, however, that if there is no record date, 20 days prior to the effective date, or in either case if 20 days prior notice is impracticable, as soon as practicable) written notice specifying the nature of such event and the effective date of, or the date on which the books of the Company shall close or a record shall be taken with respect to, such event. Such notice shall also set forth facts indicating the effect of such action (to the extent such effect may be known at the date of such notice) on each of the Relevant Purchase Prices and the kind and amount of the shares of stock or other securities or property deliverable upon exercise of this Warrant. 6.5 The form of Warrant Certificate need not be changed because of any change in the Relevant Purchase Prices, the number of Warrant Shares issuable upon the exercise of a Warrant or the number of Warrants outstanding pursuant to this Section 6, and Warrant Certificates issued before or after such change may state the same Relevant Purchase Prices, the same number of Warrants, and the same number of Warrant Shares issuable upon exercise of Warrants as are stated in the Warrant Certificates theretofore issued pursuant to this Agreement. The Company may, however, at any time, in its sole discretion, make any change in the form of Warrant Certificate that it may deem appropriate and that does not affect the substance thereof, and any Warrant Certificates thereafter issued or countersigned, whether in exchange or substitution for an outstanding Warrant Certificate or otherwise, may be in the form as so changed. 7. Conversion Rights 7.1 After the occurrence of any Reorganization Transaction (as such term is defined in Section 6.1(a)(v)), in lieu of exercise of any portion of this Warrant as provided in Section 2.1 hereof, the Warrant Shares represented by this Warrant Certificate (or any portion thereof) may, at the election of the Holder, be converted into the nearest whole number of shares of Common Stock of the Company (or other securities of the Company or any successor 7 Company underlying the Warrant) equal to: (1) the product of (a) the number of shares of Common Stock (or such other securities) then issuable upon the exercise of this Warrant to be so converted and (b) the excess, if any, of (i) the Market Price Per Share (as determined pursuant to Section 9.2) with respect to the date of conversion over (ii) the Relevant Purchase Prices in effect on the business day next preceding the date of conversion, divided by (2) the Market Price Per Share with respect to the date of conversion. 7.2 The conversion rights provided under this Section 7 may be exercised in whole or in part and at any time and from time to time while this Warrant remain outstanding. In order to exercise the conversion privilege, the Holder shall surrender to the Company (or any successor company), at its offices, this Warrant Certificate accompanied by a duly completed Notice of Conversion in the form attached hereto as Exhibit B. The Warrants (or so much thereof as shall have been surrendered for conversion) shall be deemed to have been converted immediately prior to the close of business on the day of surrender of such Warrant Certificate for conversion in accordance with the foregoing provisions. As promptly as practicable on or after the conversion date, the Company (or the successor company) shall issue and shall deliver to the Holder (i) a certificate or certificates representing the number of shares of Common Stock (or such other securities) to which the Holder shall be entitled as a result of the conversion, and (ii) if the Warrant Certificate is being converted in part only, a new certificate of like tenor and date for the balance of the unconverted portion of the Warrant Certificate. 8. Voluntary Adjustment by the Company The Company may, at its option, at any time during the term of this Warrant, reduce the then current Relevant Purchase Prices to any amount deemed appropriate by the Board of Directors of the Company and/or extend the date of the expiration of the Warrants. 9. Fractional Shares and Warrants; Determination of Market Price Per Share 9.1 Anything contained herein to the contrary notwithstanding, the Company shall not be required to issue any fraction of a share of Common Stock in connection with the exercise of this Warrant. This Warrant may not be exercised in such number as would result (except for the provisions of this paragraph) in the issuance of a fraction of a share of Common Stock unless the Holder is exercising this Warrant for all shares of Common Stock to be received by the Holder hereunder. In such event, the Company shall, upon the exercise of the entirety of this Warrant, issue to the Holder the largest aggregate whole 8 number of shares of Common Stock called for thereby upon receipt of the Relevant Purchase Price for all shares of Common Stock to be issued upon exercise hereof and pay a sum in cash equal to the remaining fraction of a share of Common Stock, multiplied by its Market Price Per Share (as determined pursuant to Section 9.2 below) as of the last business day preceding the date on which this Warrant are presented for exercise. 9.2 As used herein, the "Market Price Per Share" with respect to any class or series of Common Stock of the Company (or any other securities of the Company or of any successor company) on any date shall mean the closing price per share of such class or series of securities for the trading day immediately preceding such date. The closing price for each such day shall be the last sale price regular way or, in case no such sale takes place on such day, the average of the closing bid and asked prices regular way, in either case on the principal securities exchange on which the shares of such Common Stock of the Company (or other securities of the Company or of such successor company) are listed or admitted to trading or, if applicable, the last sale price, or in case no sale takes place on such day, the average of the closing bid and asked prices of such securities on NASDAQ or any comparable system, or if such securities are not reported on NASDAQ, or a comparable system, the average of the closing bid and asked prices as furnished by two members of the National Association of Securities Dealers, Inc. selected from time to time by the Company for that purpose. If such bid and asked prices are not available, then "Market Price Per Share" shall be equal to the fair market value of the such securities as determined in good faith by the Board of Directors of the Company (or of such successor company). 10. Restrictions on Transfer; Registration Rights 10.1 No sale, transfer, assignment, hypothecation or other disposition of this Warrant or Warrant Shares shall be made unless any such transfer, assignment or other disposition will comply with the rules and statutes administered by the Securities and Exchange Commission and (i) a Registration Statement under the Securities Act of 1933, as amended (the "Act"), including such shares is currently in effect, or (ii) in the opinion of counsel a current Registration Statement is not required for such disposition of the shares. 10.2 In the event of a proposed sale or transfer of this Warrant or Warrant Shares in a transaction other than a sale pursuant to a public offering registered under the Act, a Holder shall deliver to the Company an opinion of counsel addressed to the Company (which shall be rendered by counsel reasonably acceptable to the Company) to the effect that the proposed transfer may be effected without registration or qualification under any Federal 9 or state securities or blue sky law. Such counsel rendering the opinion shall, as promptly as practicable, notify the Company and the Holder of such opinion and of the terms and conditions, if any, to be observed in such transfer, whereupon the Holder shall be entitled to transfer this Warrant or the Warrant Shares (or a portion thereof). 10.3 The Company agrees that, at any time or times hereafter, until the second anniversary of the Expiration Date of this Warrant, as and when it intends to register any of its securities under the Act, whether for its own account and/or on behalf of selling stockholders (except in connection with an offering solely to its employees, an offering pursuant to an employee benefit plan, a dividend or interest reinvestment plan, or an offering solely related to an acquisition on a Form S-4 or any subsequent similar form) permitting a secondary offering or distribution the Company will notify the Holder of such intention and, upon request from the Holder, will use its best efforts to cause the Warrant Shares designated by the Holder to be registered under the Securities Act. The number of Warrant Shares to be included in such offering may be reduced if and to the extent that the underwriter of securities included in the registration statement and offered by the Company shall be of the opinion that such inclusion would adversely affect the marketing of the securities to be sold by the Company therein; provided, however, that the percentage of the reduction of such Warrant Shares shall be no greater than the percentage reduction of securities of other selling stockholders, as such percentage reductions are determined in the good faith judgment of the Company. The Company will use its best efforts to keep each such Registration Statement current for such period of time as is not otherwise burdensome to the Company. 10.4 Any registration statement referred to in subsection 10.3 hereof shall be prepared and processed in accordance with the following terms and conditions: (i) the Holder will cooperate in furnishing promptly to the Company in writing any information requested by the Company in connection with the preparation, filing and processing of such registration statement. (ii) to the extent requested by an underwriter of securities included in the registration statement and offered by the Company, the Holder will defer the sale of Warrant Shares for a period commencing twenty (20) days prior and terminating sixty (60) days after the effective date of the registration statement, provided that any principal shareholders of the Company who also have shares included in the registration statement will also defer their sales for a similar 10 period, except for sales pursuant to registrations on Form S-8 or S-4 or any similar or successor forms thereto. (iii) The Company will furnish to the Holder such number of prospectuses or other documents incident to such registration as may from time to time be reasonably requested, and cause its shares to be qualified under the blue-sky laws of those states reasonably requested by the Holder. (iv) The Company will indemnify the Holder (and any officer, director or controlling person of the Holder) and any underwriters acting on behalf of the Holder against all claims, losses, expenses, damages and liabilities (or actions in respect thereof) to which they may become subject under the Securities Act or otherwise, arising out of or based upon any untrue or alleged untrue statement of any material facts contained in any registration statement filed pursuant hereto, or any document relating thereto, including all amendments and supplements, or arising out of or based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein contained not misleading, and will reimburse the Holder (or such other aforementioned parties) or such underwriters for any legal and all other expenses reasonably incurred in accordance with investigating or defending any such claim, loss, damage, liability or action; provided, however, that the Company will not be liable where the untrue or alleged untrue statement or omission or alleged omission is based upon information furnished in writing to the Company by the Holder or any underwriter obtained by the Holder expressly for use therein, or as a result of the Holder's or any such underwriter's failure to furnish to the Company information duly requested in writing by counsel for the Company specifically for use therein; provided that with respect to any untrue statement or omission or alleged untrue statement or omission made in any preliminary prospectus, the indemnity agreement contained in this paragraph shall not inure to the benefit of any underwriter from whom the person asserting such losses, claims, damages or liability purchased the securities concerned, to the extent that any such loss, claim, damage or liability of such underwriter results from the fact that a copy of the prospectus was not sent or given to such person at or prior to the written confirmation of the sale of such securities to such person. This indemnity agreement shall be in addition to any other liability the Company may have. The indemnity agreement of the Company contained in this paragraph (iv) shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any 11 indemnified party and shall survive the delivery of and payment for the Warrant Shares. (v) The Holder will indemnify the Company (and any officer, director or controlling person of the Company) and any underwriters acting on behalf of the Company against all claims, losses, expenses, damages and liabilities (or actions in respect thereof) to which they may become subject under the Securities Act or otherwise, arising out of or based upon any untrue or alleged untrue statement filed pursuant hereto, or any document relating thereto, including all amendments, and supplements, or arising out of or based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein contained not misleading, and, will reimburse the Company (or such other aforementioned parties) or such underwriters for any legal and other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability, or action; provided, however, that the Holder will be liable as aforesaid only to the extent that such untrue or alleged untrue statement or omission or alleged omission is based upon information furnished in writing to the Company by the Holder or any underwriter obtained by the Holder expressly for use therein, or as a result of its or such underwriter's failure to furnish the Company with information duly requested in writing by counsel for the Company specifically for use therein. This indemnity agreement contained in this paragraph (v) shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified party and shall survive the delivery of and payment for the Warrant Shares. (vi) Promptly after receipt by an indemnified party under this subsection 10.4 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party, promptly notify the indemnifying party of the commencement thereof, but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under this subsection 10.4. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this subsection 10.4 for any legal or other expenses 12 subsequently incurred by such indemnified party in connection with the defense thereof, other than reasonable costs of investigation or out-of-pocket expenses or losses or cost incurred in collaborating in the defense. (vii) Except as set forth in subsection 10.4(viii), the Company shall bear all costs and expenses incident to any registration pursuant to this Section 10. (viii) The Holder shall pay any and all underwriters' discounts, brokerage fees and transfer taxes incident to the sale of any securities sold by such Holder pursuant to this Section 10, and shall pay the fees and expenses of any special attorneys or accountants retained by it. (ix) If the filing of any registration statement pursuant to subsection 10.4 would require the Company to obtain audited financial statements other than its normal year end audit required for the filing of its reports required under the Securities Exchange Act of 1934 (the "Exchange Act"), the Company may defer the filing of such registration statement until the necessary audited financial statements are available, unless the Holder arranges for the payment of the expense of such audit to the extent that such expense would exceed the amount which the Company would otherwise be required to bear in connection with its normal audit schedule for reporting under the Exchange Act. 10.5 If the indemnification provided for in this Section is unavailable or insufficient to hold harmless an indemnified party in respect of any losses, claims, damages, liabilities, expenses or actions in respect thereof referred to herein, then each indemnifying party shall in lieu of indemnifying such indemnified party contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities, expenses or actions in such proportion as is appropriate to reflect the relative fault of the Company, on the one hand, and the seller of such Warrant Shares, on the other, in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities, expenses or actions as well as any other relevant equitable considerations, including the failure to give the notice required hereunder. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact relates to information supplied by the Company, on the one hand, or the sellers of such Warrant Shares, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the holder hereof agree that it would not be just and equitable if contribution pursuant to this Section were determined by pro rata allocation (even if all of the sellers of such Warrant Shares were treated as one entity for such purpose) or by any other method of allocation which did not take account of the equitable considerations referred 13 to above. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities or actions in respect thereof referred to above shall be deemed to include any legal or other expenses which reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the contribution provisions of this Section, in no event shall the amount contributed by any seller from the sale of Warrant Shares to which such contribution claim relates. No person guilty of fraudulent misrepresentations (within the meaning of section 11(f) of the Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. Each Holder of this Warrant and each Holder of Warrant Shares bearing the legend required by Section 10.6, by acceptance hereof or thereof, as the case may be, agrees to the indemnification and contribution provisions of this Section 10.5. 10.6 Legend. In case any shares are issued upon the exercise in whole or in part of this Warrant or are thereafter transferred, in either case under such circumstances that no registration under the Act is required or effective, each certificate representing such shares shall bear on the face thereof the following legend: "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, and any transfer thereof is subject to the conditions specified in the Warrant dated as of [Include Date] originally issued by PlayNet Technologies, Inc. (the "Company") to [Include Name of Holder] to purchase shares of Common Stock, $.001 par value, of the Company. A copy of the form of such Warrant is on file with the Secretary of the Company in New York, New York, and will be furnished without charge by the Company to the holder of this certificate upon written request to the Secretary of the Company at such address." 11. Miscellaneous 11.1 Governing Law. This Warrant Certificate shall be governed by and construed in accordance with the laws of the State of New York. 11.2 Holder Not a Stockholder. Prior to the exercise of this Warrant, the holder hereof shall not be entitled to any of the rights of a stockholder of the Company including, without limitation, the right as a stockholder to (a) vote on or consent to any proposed action of the Company or (b) receive (i) dividends or any distributions made to stockholders, (ii) notice 14 of or attend any meetings of stockholders of the Company or (iii) notice of any other proceedings of the Company. 11.3 Notices. Any notice, demand or delivery to be made pursuant to the provisions of this Warrant shall be sufficiently given or made if sent by first class mail, postage prepaid, addressed to (a) the holder of this Warrant or issued Warrant Shares at its last known address appearing on the books at the Company maintained for such purposes or (b) the Company at its principal offices at 152 West 57th Street, New York, New York 10019, Attention: General Counsel. The Holder of this Warrant and the Company may each designate a different address by notice to the other pursuant to this Section 11.3. 11.4 Investment Representation. The Holder represents that it is purchasing the Warrant and all shares issuable upon exercise of this Warrant for its own account and not as nominee or agent for any other person and not with a view to, or for offer or sale in connection with any distribution thereof (within the meaning of the Act) that would be in violation of the applicable securities laws; provided, however, that subject to the restrictions contained in Section 10, that the disposition of all or any part of such shares shall at all times be within the Holder's exclusive control. 11.5 Confidentiality of Information. The Holder of this Warrant (and any affiliates of the Holder) and any permitted transferee of this Warrant will treat all documents, financial statements, reports and other information delivered pursuant to this Warrant on a confidential basis with the same degree of care it treats similar information of other companies of which it holds securities and has investment banking relationships. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed by its officers thereunto duly authorized and its corporate seal to be affixed hereon, as of this ____ day of _________, 199_. PLAYNET TECHNOLOGIES, INC. By:_____________________ Name: Title: 15 EXHIBIT A NOTICE OF EXERCISE FORM ----------------------- (To be executed only upon partial or full exercise of the within Warrant) The undersigned registered Holder of the within Warrant irrevocably exercises the within Warrant for and purchases shares of Common Stock of PlayNet Technologies, Inc. (the "Company") and herewith makes payment therefor in the amount of $_________, all on the terms and conditions specified in the within Warrant, and requests that a certificate (or ______ certificates in denominations of ______ shares) for the shares of Common Stock of the Company hereby purchased be issued in the name of and delivered to (choose one) (a) the undersigned or (b) ________, whose address is _______________ and, if such shares of Common Stock shall not include all the shares of Common Stock issuable as provided in the within Warrant, that a new Warrant of like tenor for that portion of the Warrant not exercised hereby be issued in the name of and delivered to (choose one) (a) the undersigned or (b) ______________, whose address is _______________________. The undersigned represents that it is purchasing the securities described above for its own account and not as a nominee or agent for any other person and not with a view to, or for offer of sale in connection with, any distribution thereof (within the meaning of the Securities Act of 1933) that would be in violation of the applicable securities laws; provided, however, that subject to the restrictions contained in Section 10 of the Warrant that the disposition of all or any part of such shares shall at all times be within the undersigned's exclusive control. Dated: __________________ By:________________________________ (signature of Registered Holder) Signature Guaranteed: ________________________ By:_____________________ Title: NOTICE: The signature to this Notice must correspond with the name as written upon the face of the within Warrant in every particular, without alteration or enlargement or any change whatever. The signature to this Notice must be guaranteed by a commercial bank or trust company in the United States or a member firm of the New York Stock Exchange. 16 EXHIBIT B NOTICE OF CONVERSION The undersigned hereby irrevocably elects to convert, pursuant to Section 7 of the Warrant Certificate accompanying this Notice of Conversion, that number of shares of Common Stock issuable upon exercise of the Warrant for an aggregate purchase price of $_______ into that number of shares of Common Stock of the Company to be received by the undersigned pursuant to the provisions of Section 7.1 of the accompanying Warrant Certificate. Dated: _______________ ____________________________ Name of Holder ____________________________ Signature Address: ____________________________ ____________________________ ____________________________ Signature Guaranteed: ________________________ By:_____________________ Title: 17 ASSIGNMENT FORM --------------- (To be executed only upon the assignment of the within Warrant) FOR VALUE RECEIVED, the undersigned registered Holder of the within Warrant hereby sells, assigns and transfers unto _____________________, whose address is ________________________, all of the rights of the undersigned under the within Warrant, with respect to the receipt of shares of Common Stock of PlayNet Technologies, Inc. and, if such sale, assignment or transfer is for less than the right to the receipt of all shares of Common Stock to which the Holder is entitled upon exercise of such Warrant, that a new Warrant of like tenor for that portion of the Warrant not being transferred hereunder be issued in the name of and delivered to the undersigned, and does hereby irrevocably constitute and appoint ______________ Attorney to register such transfer on the books of the Company maintained for the purpose, with full power of substitution in the premises. Dated: _____________, 19__. By:________________________________ (Signature of Registered Holder) Signature Guaranteed: ___________________________ By:_______________________ Title: NOTICE: The signature to this Assignment must correspond with the name as written upon the face of the within Warrant in every particular, without alteration or enlargement or any change whatever. The signature to this Assignment must be guaranteed by a commercial bank or trust company in the United States or a member firm of the New York Stock Exchange. 18 EXHIBIT 6 - Form of Tranche 2 Warrant THIS WARRANT AND ANY SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND NEITHER THIS WARRANT NOR ANY SUCH SHARES MAY BE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT. PLAYNET TECHNOLOGIES, INC. WARRANT CERTIFICATE This warrant certificate ("Warrant Certificate") certifies that for value received _____________________or registered assigns (the "Holder") is the owner of this warrant ("Warrant") which entitles the Holder hereof to purchase, at any time from the date which is either (i) one year from the date of the closing on or prior to the Five Month Date of a Qualified Public Offering or closing on or prior to the Five Month Date of a Qualified Private Placement (all as defined below) or (ii) if no such Qualified Public Offering or Qualified Private Placement closes on or prior to the Five Month Date, one year from the date of issuance hereof ((i) and (ii) singularly and collectively,the "Exercise Date") through and including the Expiration Date (hereinafter defined), such number of fully paid and non-assessable shares of Common Stock, $.01 par value ("Common Stock"), of PlayNet Technologies, Inc., a Delaware corporation (the "Company") calculated as follows: - in the event of the closing of a Qualified Public Offering on or prior to the date which is five months from the issuance of this Warrant (the "Five Month Date"): $[fill in principal amount of Senior Note] 100% X---------------------------------------------- the per share price of the common stock offered in such Qualified Public Offering -- in the event that such Qualified Public Offering is not closed on or prior to the Five Month Date but a Qualified Private Placement is closed on or prior to the Five Month Date: $[fill in principal amount of Senior Note] 100% X---------------------------------------------- the lowest per share price of the common stock offered in such Qualified Private Placement --- in the event that a Qualified Public Offering or Qualified Private Placement is not closed on or prior to the Five Month Date: $[fill in principal amount of Senior Note] 100% X---------------------------------------------- $3.50 (each formula subject to adjustment as hereinafter provided). For purposes of this Warrant, the term "Qualified Public Offering" shall mean the closing of any public offering of Common Stock of the Company raising gross proceeds of at least $15 million to the Company and the term "Qualified Private Placement" shall mean the closing of any privately arranged financing transaction or series of transactions raising in the aggregate gross proceeds of at least $15 million to the Company. 1. Warrant; Purchase Price This Warrant shall entitle the Holder initially to purchase shares of Common Stock of the Company as calculated above and the purchase price payable upon exercise of the Warrants shall be, (i) in the event of the closing of a Qualified Public Offering on or prior to the Five Month Date, the per share price of the Common Stock Offered in such Qualified Public Offering, (ii) in the event that such a Qualified Public Offering is not closed on or prior to the Five Month Date but a Qualified Private Placement is closed on or prior to the Five Month Date, the lowest per share price of the Common Stock offered in such Qualified Private Placement, or (iii) in the event that such Qualified Public Offering or Qualified Private Placement is not closed on or prior to the Five Month Date, $3.50 per share of Common Stock (each of (i), (ii) and (iii) the "Relevant Purchase Price" and together the "Relevant Purchase Prices"). The Relevant Purchase Price and number of shares of Common Stock issuable upon exercise of this Warrant are subject to adjustment as provided in Article 6. The shares of Common Stock issuable upon exercise of this Warrant (and/or other shares of common stock so issuable by reason of any adjustments pursuant to Article 6) are sometimes referred to herein as the "Warrant Shares." The aggregate purchase price for the shares of Common Stock of the Company to be received by the Holder hereof upon exercise of this Warrant shall be payable, at the option of the Holder, either (i) in cash in lawful money of the United States of America or by certified or cashier's check; or (ii) if such Holder is [Name of Holder], by cancellation, in whole or in part, of that certain $[Principal Amount of Note] Senior Secured Note issued to [Name of Holder] on [Month, Day], 199_; or (iii) as otherwise provided herein. 2 2. Exercise; Expiration Date 2.1 This Warrant is exercisable, at the option of the Holder, in whole or in part at any time and from time to time from the Exercise Date through and including the Expiration Date (the "Exercise Period"), upon surrender of this Warrant Certificate to the Company together with a duly completed Notice of Exercise, in the form attached hereto as Exhibit A, and payment of an amount equal to the Relevant Purchase Price times the number of shares of Common Stock to be received upon exercise of this Warrant. In the case the Holder hereof elects to exercise this Warrant for less than all the shares of Common Stock of the Company represented by this Warrant Certificate, the Company shall cancel this Warrant Certificate upon the surrender thereof and shall execute and deliver a new Warrant Certificate providing for the exercise of the balance of such shares of Common Stock. 2.2 The term "Expiration Date" shall mean 5:00 p.m. New York time on the date which is five years from the date of the issuance of this Warrant, or if such day shall in the State of New York be a holiday or a day on which banks are authorized to close, then 5:00 p.m. local time in the State of New York the next following day which in the State of New York is not a holiday or a day on which banks are authorized to close. 3. Registration and Transfer on Company Books 3.1 The Company shall maintain books for the registration and transfer of this Warrant and the registration and transfer of the Warrant Shares. 3.2 Prior to due presentment for registration of transfer of this Warrant Certificate, or the Warrant Shares, the Company may deem and treat the registered Holder as the absolute owner thereof. 3.3 The Company shall register upon its books any transfer of this Warrant Certificate, upon surrender of same to the Company with a written instrument of transfer duly executed by the registered Holder or by a duly authorized attorney. Upon any such registration of transfer, new Warrant Certificate(s) shall be issued to the transferee(s) and the surrendered Warrant Certificate shall be canceled by the Company. A Warrant Certificate may also be exchanged, at the option of the Holder, for new Warrant Certificates of different denominations representing an aggregate purchase price of $ . 4. Reservation of Shares The Company covenants that it will at all times reserve and keep available out of its authorized capital stock, solely for the purpose of issue upon exercise of this Warrant, such number of shares as shall then be 3 issuable upon the exercise of this Warrant. The Company covenants that all shares of capital stock which shall be issuable upon exercise of this Warrant shall be duly and validly issued and fully paid and non-assessable and free from all taxes, liens and charges with respect to the issue thereof, and that upon issuance such shares shall be listed on each national securities exchange, if any, on which the other shares of such outstanding series of capital stock of the Company are then listed. 5. Loss or Mutilation Upon receipt by the Company of reasonable evidence of the ownership of and the loss, theft, destruction or mutilation of any Warrant Certificate and, in the case of loss, theft or destruction, of indemnity reasonably satisfactory to the Company, or, in the case of mutilation, upon surrender and cancellation of the mutilated Warrant Certificate, the Company shall execute and deliver in lieu thereof a new Warrant Certificate replacing such Warrant Certificate. 6. Adjustment of Relevant Purchase Price and Number of Shares Deliverable 6.1 The number of Warrant Shares purchasable upon the exercise of each Warrant and the Relevant Purchase Price with respect to the Warrant Shares shall be subject to adjustment as follows: (a) In case the Company shall (i) declare a dividend or make a distribution on its Common Stock payable in shares of its capital stock, (ii) subdivide its outstanding shares of Common Stock through stock split or otherwise, (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, or (iv) issue by reclassification of its Common Stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing corporation) other securities of the Company, or (v) in case of a consolidation or merger of the Company with or into another corporation or in case of the sale or transfer of all or substantially all of the assets of the Company (hereinafter, a "Reorganization Transaction"), the number and/or nature of Warrant Shares purchasable upon exercise of this Warrant immediately prior thereto shall be adjusted so that the Holder shall be entitled to receive the kind and number of Warrant Shares or other securities of the Company (or of any successor company) which he would have owned or have been entitled to receive after the happening of any of the events described above, had such Warrant been exercised immediately prior to 4 the happening of such event or any record date with respect thereto. An adjustment made pursuant to this paragraph (a) shall become effective retroactively as of the record date of such event. (b) In case the Company shall distribute to all holders of its shares of Common Stock, or all holders of Common Stock shall otherwise become entitled to receive, shares of capital stock of the Company (other than dividends or distributions on its Common Stock referred to in paragraph (a) above), evidences of its indebtedness or rights, options, warrants or convertible securities providing the right to subscribe for or purchase any shares of the Company's capital stock or evidences of its indebtedness, then in each case the number of Warrant Shares thereafter purchasable upon the exercise of this Warrant shall be determined by multiplying the number of Warrant Shares theretofore purchasable upon the exercise of this Warrant, by a fraction, of which the numerator shall be the then Market Price Per Share of the Warrant Shares (as determined pursuant to Section 9.2) on the record date mentioned below in this paragraph (b), and of which the denominator shall be the then Market Price Per Share of the Warrant Shares on such record date less the then fair value (as determined by the Board of Directors of the Company, in good faith) of the portion of the shares of the Company's capital stock other than Common Stock, evidences of indebtedness, or of such rights, options, warrants or convertible securities, distributable with respect to each Warrant Share. Such adjustment shall be made whenever any such distribution is made, and shall become effective retroactively as of the record date for the determination of shareholders entitled to receive such distribution. (c) Whenever the number of Warrant Shares purchasable upon the exercise of this Warrant is adjusted, as provided in this Section 6.1, the Relevant Purchase Prices with respect to the Warrant Shares shall be adjusted by multiplying such Relevant Purchase Prices immediately prior to such adjustment by a fraction, of which the numerator shall be the number of Warrant Shares purchasable upon the exercise of this Warrant immediately prior to such adjustment, and of which the denominator shall be the number of Warrant Shares so purchasable immediately thereafter. 6.2 No adjustment in the number of Warrant Shares purchasable under this Warrant, or in the Relevant Purchase Prices with respect to the Warrant Shares, shall be required unless such adjustment would require an increase or decrease of at least 1% in the number of Warrant Shares issuable upon the exercise of such Warrant, or in the Relevant Purchase Prices thereof; provided, however, that any adjustments which by reason of this Section 6.3 are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All final results of adjustments to the number of Warrant Shares and the Relevant Purchase Prices thereof shall be rounded to the nearest one thousandth of a share or the nearest cent, as the case may be. Anything in this Section 6 to the contrary notwithstanding, the Company shall be entitled, 5 but shall not be required, to make such changes in the number of Warrant Shares purchasable upon the exercise of each Warrant, or in the Relevant Purchase Prices thereof, in addition to those required by such Section, as it in its discretion shall determine to be advisable in order that any dividend or distribution in shares of Common Stock, subdivision, reclassification or combination of shares of Common Stock, issuance of rights, warrants or options to purchase Common Stock, or distribution of shares of stock other than Common Stock, evidences of indebtedness or assets (other than distributions of cash out of retained earnings) or convertible or exchangeable securities hereafter made by the Company to the holders of its Common Stock shall not result in any tax to the holders of its Common Stock or securities convertible into Common Stock. 6.3 Whenever the number of Warrant Shares purchasable upon the exercise of each Warrant or the Relevant Purchase Price of such Warrant Shares is adjusted, as herein provided, the Company shall mail to the Holder, at the address of the Holder shown on the books of the Company, a notice of such adjustment or adjustments, prepared and signed by the Chief Financial Officer or Secretary of the Company, which sets forth the number of Warrant Shares purchasable upon the exercise of this Warrant and each of the then Relevant Purchase Prices of such Warrant Shares after such adjustment, a brief statement of the facts requiring such adjustment and the computation by which such adjustment was made. 6.4 In the event that at any time prior to the expiration of this Warrant and prior to their exercise: (a) the Company shall declare any distribution (other than a cash dividend or a dividend payable in securities of the Company with respect to the Common Stock); or (b) the Company shall offer for subscription to all the holders of the Common Stock any additional shares of stock of any class or any other securities convertible into Common Stock or any rights to subscribe thereto; or (c) the Company shall declare any stock split, stock dividend, subdivision, combination, or similar distribution with respect to the Common Stock that shall affect the outstanding number of shares of Common Stock; or 6 (d) the Company shall declare a dividend, other than a dividend payable in shares of the Company's own Common Stock; or (e) there shall be any capital change in the Company as set forth in Section 6.1(a)(v); or (f) there shall be a voluntary or involuntary dissolution, liquidation, or winding up of the Company (other than in connection with a consolidation, merger, or sale of all or substantially all of its property, assets and business as an entity); (each such event hereinafter being referred to as a "Notification Event"), the Company shall cause to be mailed to the Holder, not less than 20 days prior to the record date, if any, in connection with such Notification Event (provided, however, that if there is no record date, 20 days prior to the effective date, or in either case if 20 days prior notice is impracticable, as soon as practicable) written notice specifying the nature of such event and the effective date of, or the date on which the books of the Company shall close or a record shall be taken with respect to, such event. Such notice shall also set forth facts indicating the effect of such action (to the extent such effect may be known at the date of such notice) on each of the Relevant Purchase Prices and the kind and amount of the shares of stock or other securities or property deliverable upon exercise of this Warrant. 6.5 The form of Warrant Certificate need not be changed because of any change in the Relevant Purchase Prices, the number of Warrant Shares issuable upon the exercise of a Warrant or the number of Warrants outstanding pursuant to this Section 6, and Warrant Certificates issued before or after such change may state the same Relevant Purchase Prices, the same number of Warrants, and the same number of Warrant Shares issuable upon exercise of Warrants as are stated in the Warrant Certificates theretofore issued pursuant to this Agreement. The Company may, however, at any time, in its sole discretion, make any change in the form of Warrant Certificate that it may deem appropriate and that does not affect the substance thereof, and any Warrant Certificates thereafter issued or countersigned, whether in exchange or substitution for an outstanding Warrant Certificate or otherwise, may be in the form as so changed. 7. Conversion Rights 7.1 After the occurrence of any Reorganization Transaction (as such term is defined in Section 6.1(a)(v)), in lieu of exercise of any portion of this Warrant as provided in Section 2.1 hereof, the Warrant Shares represented by this Warrant Certificate (or any portion thereof) may, at the election of the Holder, be converted into the nearest whole number of shares of Common Stock of the Company (or other securities of the Company or any successor Company underlying the Warrant) equal to: (1) the product of (a) the number of 7 shares of Common Stock (or such other securities) then issuable upon the exercise of this Warrant to be so converted and (b) the excess, if any, of (i) the Market Price Per Share (as determined pursuant to Section 9.2) with respect to the date of conversion over (ii) the Relevant Purchase Prices in effect on the business day next preceding the date of conversion, divided by (2) the Market Price Per Share with respect to the date of conversion. 7.2 The conversion rights provided under this Section 7 may be exercised in whole or in part and at any time and from time to time while this Warrant remain outstanding. In order to exercise the conversion privilege, the Holder shall surrender to the Company (or any successor company), at its offices, this Warrant Certificate accompanied by a duly completed Notice of Conversion in the form attached hereto as Exhibit B. The Warrants (or so much thereof as shall have been surrendered for conversion) shall be deemed to have been converted immediately prior to the close of business on the day of surrender of such Warrant Certificate for conversion in accordance with the foregoing provisions. As promptly as practicable on or after the conversion date, the Company (or the successor company) shall issue and shall deliver to the Holder (i) a certificate or certificates representing the number of shares of Common Stock (or such other securities) to which the Holder shall be entitled as a result of the conversion, and (ii) if the Warrant Certificate is being converted in part only, a new certificate of like tenor and date for the balance of the unconverted portion of the Warrant Certificate. 8. Voluntary Adjustment by the Company The Company may, at its option, at any time during the term of this Warrant, reduce the then current Relevant Purchase Prices to any amount deemed appropriate by the Board of Directors of the Company and/or extend the date of the expiration of the Warrants. 9. Fractional Shares and Warrants; Determination of Market Price Per Share 9.1 Anything contained herein to the contrary notwithstanding, the Company shall not be required to issue any fraction of a share of Common Stock in connection with the exercise of this Warrant. This Warrant may not be exercised in such number as would result (except for the provisions of this paragraph) in the issuance of a fraction of a share of Common Stock unless the Holder is exercising this Warrant for all shares of Common Stock to be received by the Holder hereunder. In such event, the Company shall, upon the exercise of 8 the entirety of this Warrant, issue to the Holder the largest aggregate whole number of shares of Common Stock called for thereby upon receipt of the Relevant Purchase Price for all shares of Common Stock to be issued upon exercise hereof and pay a sum in cash equal to the remaining fraction of a share of Common Stock, multiplied by its Market Price Per Share (as determined pursuant to Section 9.2 below) as of the last business day preceding the date on which this Warrant are presented for exercise. 9.2 As used herein, the "Market Price Per Share" with respect to any class or series of Common Stock of the Company (or any other securities of the Company or of any successor company) on any date shall mean the closing price per share of such class or series of securities for the trading day immediately preceding such date. The closing price for each such day shall be the last sale price regular way or, in case no such sale takes place on such day, the average of the closing bid and asked prices regular way, in either case on the principal securities exchange on which the shares of such Common Stock of the Company (or other securities of the Company or of such successor company) are listed or admitted to trading or, if applicable, the last sale price, or in case no sale takes place on such day, the average of the closing bid and asked prices of such securities on NASDAQ or any comparable system, or if such securities are not reported on NASDAQ, or a comparable system, the average of the closing bid and asked prices as furnished by two members of the National Association of Securities Dealers, Inc. selected from time to time by the Company for that purpose. If such bid and asked prices are not available, then "Market Price Per Share" shall be equal to the fair market value of the such securities as determined in good faith by the Board of Directors of the Company (or of such successor company). 10. Restrictions on Transfer; Registration Rights 10.1 No sale, transfer, assignment, hypothecation or other disposition of this Warrant or Warrant Shares shall be made unless any such transfer, assignment or other disposition will comply with the rules and statutes administered by the Securities and Exchange Commission and (i) a Registration Statement under the Securities Act of 1933, as amended (the "Act"), including such shares is currently in effect, or (ii) in the opinion of counsel a current Registration Statement is not required for such disposition of the shares. 10.2 In the event of a proposed sale or transfer of this Warrant or Warrant Shares in a transaction other than a sale pursuant to a public offering registered under the Act, a Holder shall deliver to the Company an opinion of counsel addressed to the Company (which shall be rendered by counsel reasonably acceptable to the Company) to the effect that the proposed transfer may be effected without registration or qualification under any Federal 9 or state securities or blue sky law. Such counsel rendering the opinion shall, as promptly as practicable, notify the Company and the Holder of such opinion and of the terms and conditions, if any, to be observed in such transfer, whereupon the Holder shall be entitled to transfer this Warrant or the Warrant Shares (or a portion thereof). 10.3 The Company agrees that, at any time or times hereafter, until the second anniversary of the Expiration Date of this Warrant, as and when it intends to register any of its securities under the Act, whether for its own account and/or on behalf of selling stockholders (except in connection with an offering solely to its employees, an offering pursuant to an employee benefit plan, a dividend or interest reinvestment plan, or an offering solely related to an acquisition on a Form S-4 or any subsequent similar form) permitting a secondary offering or distribution the Company will notify the Holder of such intention and, upon request from the Holder, will use its best efforts to cause the Warrant Shares designated by the Holder to be registered under the Securities Act. The number of Warrant Shares to be included in such offering may be reduced if and to the extent that the underwriter of securities included in the registration statement and offered by the Company shall be of the opinion that such inclusion would adversely affect the marketing of the securities to be sold by the Company therein; provided, however, that the percentage of the reduction of such Warrant Shares shall be no greater than the percentage reduction of securities of other selling stockholders, as such percentage reductions are determined in the good faith judgment of the Company. The Company will use its best efforts to keep each such Registration Statement current for such period of time as is not otherwise burdensome to the Company. 10.4 Any registration statement referred to in subsection 10.3 hereof shall be prepared and processed in accordance with the following terms and conditions: (i) the Holder will cooperate in furnishing promptly to the Company in writing any information requested by the Company in connection with the preparation, filing and processing of such registration statement. (ii) to the extent requested by an underwriter of securities included in the registration statement and offered by the Company, the Holder will defer the sale of Warrant Shares for a period commencing twenty (20) days prior and terminating sixty (60) days after the effective date of the registration statement, provided that any principal shareholders of the Company who also have shares included in the registration statement will also defer their sales for a similar 10 period, except for sales pursuant to registrations on Form S-8 or S-4 or any similar or successor forms thereto. (iii) The Company will furnish to the Holder such number of prospectuses or other documents incident to such registration as may from time to time be reasonably requested, and cause its shares to be qualified under the blue-sky laws of those states reasonably requested by the Holder. (iv) The Company will indemnify the Holder (and any officer, director or controlling person of the Holder) and any underwriters acting on behalf of the Holder against all claims, losses, expenses, damages and liabilities (or actions in respect thereof) to which they may become subject under the Securities Act or otherwise, arising out of or based upon any untrue or alleged untrue statement of any material facts contained in any registration statement filed pursuant hereto, or any document relating thereto, including all amendments and supplements, or arising out of or based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein contained not misleading, and will reimburse the Holder (or such other aforementioned parties) or such underwriters for any legal and all other expenses reasonably incurred in accordance with investigating or defending any such claim, loss, damage, liability or action; provided, however, that the Company will not be liable where the untrue or alleged untrue statement or omission or alleged omission is based upon information furnished in writing to the Company by the Holder or any underwriter obtained by the Holder expressly for use therein, or as a result of the Holder's or any such underwriter's failure to furnish to the Company information duly requested in writing by counsel for the Company specifically for use therein; provided that with respect to any untrue statement or omission or alleged untrue statement or omission made in any preliminary prospectus, the indemnity agreement contained in this paragraph shall not inure to the benefit of any underwriter from whom the person asserting such losses, claims, damages or liability purchased the securities concerned, to the extent that any such loss, claim, damage or liability of such underwriter results from the fact that a copy of the prospectus was not sent or given to such person at or prior to the written confirmation of the sale of such securities to such person. This indemnity agreement shall be in addition to any other liability the Company may have. The indemnity agreement of the Company contained in this paragraph (iv) shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any 11 indemnified party and shall survive the delivery of and payment for the Warrant Shares. (v) The Holder will indemnify the Company (and any officer, director or controlling person of the Company) and any underwriters acting on behalf of the Company against all claims, losses, expenses, damages and liabilities (or actions in respect thereof) to which they may become subject under the Securities Act or otherwise, arising out of or based upon any untrue or alleged untrue statement filed pursuant hereto, or any document relating thereto, including all amendments, and supplements, or arising out of or based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein contained not misleading, and, will reimburse the Company (or such other aforementioned parties) or such underwriters for any legal and other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability, or action; provided, however, that the Holder will be liable as aforesaid only to the extent that such untrue or alleged untrue statement or omission or alleged omission is based upon information furnished in writing to the Company by the Holder or any underwriter obtained by the Holder expressly for use therein, or as a result of its or such underwriter's failure to furnish the Company with information duly requested in writing by counsel for the Company specifically for use therein. This indemnity agreement contained in this paragraph (v) shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified party and shall survive the delivery of and payment for the Warrant Shares. (vi) Promptly after receipt by an indemnified party under this subsection 10.4 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party, promptly notify the indemnifying party of the commencement thereof, but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under this subsection 10.4. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this subsection 10.4 for any legal or other expenses subsequently incurred by such indemnified party in connection with the 12 defense thereof, other than reasonable costs of investigation or out-of-pocket expenses or losses or cost incurred in collaborating in the defense. (vii) Except as set forth in subsection 10.4(viii), the Company shall bear all costs and expenses incident to any registration pursuant to this Section 10. (viii) The Holder shall pay any and all underwriters' discounts, brokerage fees and transfer taxes incident to the sale of any securities sold by such Holder pursuant to this Section 10, and shall pay the fees and expenses of any special attorneys or accountants retained by it. (ix) If the filing of any registration statement pursuant to subsection 10.4 would require the Company to obtain audited financial statements other than its normal year end audit required for the filing of its reports required under the Securities Exchange Act of 1934 (the "Exchange Act"), the Company may defer the filing of such registration statement until the necessary audited financial statements are available, unless the Holder arranges for the payment of the expense of such audit to the extent that such expense would exceed the amount which the Company would otherwise be required to bear in connection with its normal audit schedule for reporting under the Exchange Act. 10.5 If the indemnification provided for in this Section is unavailable or insufficient to hold harmless an indemnified party in respect of any losses, claims, damages, liabilities, expenses or actions in respect thereof referred to herein, then each indemnifying party shall in lieu of indemnifying such indemnified party contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities, expenses or actions in such proportion as is appropriate to reflect the relative fault of the Company, on the one hand, and the seller of such Warrant Shares, on the other, in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities, expenses or actions as well as any other relevant equitable considerations, including the failure to give the notice required hereunder. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact relates to information supplied by the Company, on the one hand, or the sellers of such Warrant Shares, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the holder hereof agree that it would not be just and equitable if contribution pursuant to this Section were determined by pro rata allocation (even if all of the sellers of such Warrant Shares were treated as one entity for such purpose) or by any other method of allocation which did not take account of the equitable considerations referred to above. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities or actions in respect thereof referred to above shall be deemed to include any legal or other expenses which reasonably 13 incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the contribution provisions of this Section, in no event shall the amount contributed by any seller from the sale of Warrant Shares to which such contribution claim relates. No person guilty of fraudulent misrepresentations (within the meaning of section 11(f) of the Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. Each Holder of this Warrant and each Holder of Warrant Shares bearing the legend required by Section 10.6, by acceptance hereof or thereof, as the case may be, agrees to the indemnification and contribution provisions of this Section 10.5. 10.6 Legend. In case any shares are issued upon the exercise in whole or in part of this Warrant or are thereafter transferred, in either case under such circumstances that no registration under the Act is required or effective, each certificate representing such shares shall bear on the face thereof the following legend: "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, and any transfer thereof is subject to the conditions specified in the Warrant dated as of [Include Date] originally issued by PlayNet Technologies, Inc. (the "Company") to [Include Name of Holder] to purchase shares of Common Stock, $.001 par value, of the Company. A copy of the form of such Warrant is on file with the Secretary of the Company in New York, New York, and will be furnished without charge by the Company to the holder of this certificate upon written request to the Secretary of the Company at such address." 11. Miscellaneous 11.1 Governing Law. This Warrant Certificate shall be governed by and construed in accordance with the laws of the State of New York. 11.2 Holder Not a Stockholder. Prior to the exercise of this Warrant, the holder hereof shall not be entitled to any of the rights of a stockholder of the Company including, without limitation, the right as a stockholder to (a) vote on or consent to any proposed action of the Company or (b) receive (i) dividends or any distributions made to stockholders, (ii) notice 14 of or attend any meetings of stockholders of the Company or (iii) notice of any other proceedings of the Company. 11.3 Notices. Any notice, demand or delivery to be made pursuant to the provisions of this Warrant shall be sufficiently given or made if sent by first class mail, postage prepaid, addressed to (a) the holder of this Warrant or issued Warrant Shares at its last known address appearing on the books at the Company maintained for such purposes or (b) the Company at its principal offices at 152 West 57th Street, New York, New York 10019, Attention: General Counsel. The Holder of this Warrant and the Company may each designate a different address by notice to the other pursuant to this Section 11.3. 11.4 Investment Representation. The Holder represents that it is purchasing the Warrant and all shares issuable upon exercise of this Warrant for its own account and not as nominee or agent for any other person and not with a view to, or for offer or sale in connection with any distribution thereof (within the meaning of the Act) that would be in violation of the applicable securities laws; provided, however, that subject to the restrictions contained in Section 10, that the disposition of all or any part of such shares shall at all times be within the Holder's exclusive control. 11.5 Confidentiality of Information. The Holder of this Warrant (and any affiliates of the Holder) and any permitted transferee of this Warrant will treat all documents, financial statements, reports and other information delivered pursuant to this Warrant on a confidential basis with the same degree of care it treats similar information of other companies of which it holds securities and has investment banking relationships. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed by its officers thereunto duly authorized and its corporate seal to be affixed hereon, as of this ____ day of _________, 199_. PLAYNET TECHNOLOGIES, INC. By: _________________________ Name: Title: 15 EXHIBIT A NOTICE OF EXERCISE FORM ----------------------- (To be executed only upon partial or full exercise of the within Warrant) The undersigned registered Holder of the within Warrant irrevocably exercises the within Warrant for and purchases shares of Common Stock of PlayNet Technologies, Inc. (the "Company") and herewith makes payment therefor in the amount of $_________, all on the terms and conditions specified in the within Warrant, and requests that a certificate (or ______ certificates in denominations of ______ shares) for the shares of Common Stock of the Company hereby purchased be issued in the name of and delivered to (choose one) (a) the undersigned or (b) ________, whose address is _______________ and, if such shares of Common Stock shall not include all the shares of Common Stock issuable as provided in the within Warrant, that a new Warrant of like tenor for that portion of the Warrant not exercised hereby be issued in the name of and delivered to (choose one) (a) the undersigned or (b) ______________, whose address is _______________________. The undersigned represents that it is purchasing the securities described above for its own account and not as a nominee or agent for any other person and not with a view to, or for offer of sale in connection with, any distribution thereof (within the meaning of the Securities Act of 1933) that would be in violation of the applicable securities laws; provided, however, that subject to the restrictions contained in Section 10 of the Warrant that the disposition of all or any part of such shares shall at all times be within the undersigned's exclusive control. Dated: __________________ By:________________________________ (signature of Registered Holder) Signature Guaranteed: ________________________ By:_____________________ Title: NOTICE: The signature to this Notice must correspond with the name as written upon the face of the within Warrant in every particular, without alteration or enlargement or any change whatever. The signature to this Notice must be guaranteed by a commercial bank or trust company in the United States or a member firm of the New York Stock Exchange. 16 EXHIBIT B NOTICE OF CONVERSION The undersigned hereby irrevocably elects to convert, pursuant to Section 7 of the Warrant Certificate accompanying this Notice of Conversion, that number of shares of Common Stock issuable upon exercise of the Warrant for an aggregate purchase price of $_______ into that number of shares of Common Stock of the Company to be received by the undersigned pursuant to the provisions of Section 7.1 of the accompanying Warrant Certificate. Dated: _______________ ____________________________ Name of Holder ____________________________ Signature Address: ____________________________ ____________________________ ____________________________ Signature Guaranteed: ________________________ By:_____________________ Title: 17 ASSIGNMENT FORM --------------- (To be executed only upon the assignment of the within Warrant) FOR VALUE RECEIVED, the undersigned registered Holder of the within Warrant hereby sells, assigns and transfers unto _____________________, whose address is ________________________, all of the rights of the undersigned under the within Warrant, with respect to the receipt of shares of Common Stock of PlayNet Technologies, Inc. and, if such sale, assignment or transfer is for less than the right to the receipt of all shares of Common Stock to which the Holder is entitled upon exercise of such Warrant, that a new Warrant of like tenor for that portion of the Warrant not being transferred hereunder be issued in the name of and delivered to the undersigned, and does hereby irrevocably constitute and appoint ______________ Attorney to register such transfer on the books of the Company maintained for the purpose, with full power of substitution in the premises. Dated: _____________, 19__. By:________________________________ (Signature of Registered Holder) Signature Guaranteed: ___________________________ By:_______________________ Title: NOTICE: The signature to this Assignment must correspond with the name as written upon the face of the within Warrant in every particular, without alteration or enlargement or any change whatever. The signature to this Assignment must be guaranteed by a commercial bank or trust company in the United States or a member firm of the New York Stock Exchange. 18 EXHIBIT 7 - Form of Tranche 3 Warrant THIS WARRANT AND ANY SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND NEITHER THIS WARRANT NOR ANY SUCH SHARES MAY BE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT. PLAYNET TECHNOLOGIES, INC. WARRANT CERTIFICATE This warrant certificate ("Warrant Certificate") certifies that for value received _____________________ or registered assigns (the "Holder") is the owner of this warrant ("Warrant") which entitles the Holder hereof to purchase, at any time from the date which is either (i) one year from the date of the closing on or prior to the Five Month Date of a Qualified Public Offering or closing on or prior to the Five Month Date of a Qualified Private Placement (all as defined below) and (ii) if no such Qualified Public Offering or Qualified Private Placement closes on or prior to the Five Month Date, one year from the date of issuance hereof ((i) and (ii) singularly and collectively,the "Exercise Date") through and including the Expiration Date (hereinafter defined), such number of fully paid and non-assessable shares of Common Stock, $.01 par value ("Common Stock"), of PlayNet Technologies, Inc., a Delaware corporation (the "Company") calculated as follows: - in the event of the closing of a Qualified Public Offering on or prior to the date which is five months from the issuance of this Warrant (the "Five Month Date"): $[fill in principal amount of Senior Note] 125% X-------------------------------------------- the per share price of the common stock offered in such Qualified Public Offering -- in the event that such Qualified Public Offering is not closed on or prior to the Five Month Date but a Qualified Private Placement is closed on or prior to the Five Month Date: $[fill in principal amount of Senior Note] 125% X-------------------------------------------- the lowest per share price of the common stock offered in such Qualified Private Placement --- in the event that a Qualified Public Offering or Qualified Private Placement is not closed on or prior to the Five Month Date: $[fill in principal amount of Senior Note] 125% X-------------------------------------------- $3.00 (each formula subject to adjustment as hereinafter provided). For purposes of this Warrant, the term "Qualified Public Offering" shall mean the closing of any public offering of Common Stock of the Company raising gross proceeds of at least $15 million to the Company and the term "Qualified Private Placement" shall mean the closing of any privately arranged financing transaction or series of transactions raising in the aggregate gross proceeds of at least $15 million to the Company. 1. Warrant; Purchase Price This Warrant shall entitle the Holder initially to purchase shares of Common Stock of the Company as calculated above and the purchase price payable upon exercise of the Warrants shall be, (i) in the event of the closing of a Qualified Public Offering on or prior to the Five Month Date, the per share price of the Common Stock Offered in such Qualified Public Offering, (ii) in the event that such a Qualified Public Offering is not closed on or prior to the Five Month Date but a Qualified Private Placement is closed on or prior to the Five Month Date, the lowest per share price of the Common Stock offered in such Qualified Private Placement, or (iii) in the event that such Qualified Public Offering or Qualified Private Placement is not closed on or prior to the Five Month Date, $3.00 per share of Common Stock (each of (i), (ii) and (iii) the "Relevant Purchase Price" and together the "Relevant Purchase Prices"). The Relevant Purchase Price and number of shares of Common Stock issuable upon exercise of this Warrant are subject to adjustment as provided in Article 6. The shares of Common Stock issuable upon exercise of this Warrant (and/or other shares of common stock so issuable by reason of any adjustments pursuant to Article 6) are sometimes referred to herein as the "Warrant Shares." The aggregate purchase price for the shares of Common Stock of the Company to be received by the Holder hereof upon exercise of this Warrant shall be payable, at the option of the Holder, either (i) in cash in lawful money of the United States of America or by certified or cashier's check; or (ii) if such Holder is [Name of Holder], by cancellation, in whole or in part, of that certain $[Principal Amount of Note] Senior Secured Note issued to [Name of Holder] on [Month, Day], 199_; or (iii) as otherwise provided herein. 2 2. Exercise; Expiration Date 2.1 This Warrant is exercisable, at the option of the Holder, in whole or in part at any time and from time to time from the Exercise Date through and including the Expiration Date (the "Exercise Period"), upon surrender of this Warrant Certificate to the Company together with a duly completed Notice of Exercise, in the form attached hereto as Exhibit A, and payment of an amount equal to the Relevant Purchase Price times the number of shares of Common Stock to be received upon exercise of this Warrant. In the case the Holder hereof elects to exercise this Warrant for less than all the shares of Common Stock of the Company represented by this Warrant Certificate, the Company shall cancel this Warrant Certificate upon the surrender thereof and shall execute and deliver a new Warrant Certificate providing for the exercise of the balance of such shares of Common Stock. 2.2 The term "Expiration Date" shall mean 5:00 p.m. New York time on the date which is five years from the date of the issuance of this Warrant, or if such day shall in the State of New York be a holiday or a day on which banks are authorized to close, then 5:00 p.m. local time in the State of New York the next following day which in the State of New York is not a holiday or a day on which banks are authorized to close. 3. Registration and Transfer on Company Books 3.1 The Company shall maintain books for the registration and transfer of this Warrant and the registration and transfer of the Warrant Shares. 3.2 Prior to due presentment for registration of transfer of this Warrant Certificate, or the Warrant Shares, the Company may deem and treat the registered Holder as the absolute owner thereof. 3.3 The Company shall register upon its books any transfer of this Warrant Certificate, upon surrender of same to the Company with a written instrument of transfer duly executed by the registered Holder or by a duly authorized attorney. Upon any such registration of transfer, new Warrant Certificate(s) shall be issued to the transferee(s) and the surrendered Warrant Certificate shall be canceled by the Company. A Warrant Certificate may also be exchanged, at the option of the Holder, for new Warrant Certificates of different denominations representing an aggregate purchase price of $ . 4. Reservation of Shares The Company covenants that it will at all times reserve and keep available out of its authorized capital stock, solely for the purpose of 3 issue upon exercise of this Warrant, such number of shares as shall then be issuable upon the exercise of this Warrant. The Company covenants that all shares of capital stock which shall be issuable upon exercise of this Warrant shall be duly and validly issued and fully paid and non-assessable and free from all taxes, liens and charges with respect to the issue thereof, and that upon issuance such shares shall be listed on each national securities exchange, if any, on which the other shares of such outstanding series of capital stock of the Company are then listed. 5. Loss or Mutilation Upon receipt by the Company of reasonable evidence of the ownership of and the loss, theft, destruction or mutilation of any Warrant Certificate and, in the case of loss, theft or destruction, of indemnity reasonably satisfactory to the Company, or, in the case of mutilation, upon surrender and cancellation of the mutilated Warrant Certificate, the Company shall execute and deliver in lieu thereof a new Warrant Certificate replacing such Warrant Certificate. 6. Adjustment of Relevant Purchase Price and Number of Shares Deliverable 6.1 The number of Warrant Shares purchasable upon the exercise of each Warrant and the Relevant Purchase Price with respect to the Warrant Shares shall be subject to adjustment as follows: (a) In case the Company shall (i) declare a dividend or make a distribution on its Common Stock payable in shares of its capital stock, (ii) subdivide its outstanding shares of Common Stock through stock split or otherwise, (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, or (iv) issue by reclassification of its Common Stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing corporation) other securities of the Company, or (v) in case of a consolidation or merger of the Company with or into another corporation or in case of the sale or transfer of all or substantially all of the assets of the Company (hereinafter, a "Reorganization Transaction"), the number and/or nature of Warrant Shares purchasable upon exercise of this Warrant immediately prior thereto shall be adjusted so that the Holder shall be entitled to receive the kind and number of Warrant Shares or other securities of the Company (or of any successor company) which he would have owned or have been entitled to receive after the happening of any of the events 4 described above, had such Warrant been exercised immediately prior to the happening of such event or any record date with respect thereto. An adjustment made pursuant to this paragraph (a) shall become effective retroactively as of the record date of such event. (b) In case the Company shall distribute to all holders of its shares of Common Stock, or all holders of Common Stock shall otherwise become entitled to receive, shares of capital stock of the Company (other than dividends or distributions on its Common Stock referred to in paragraph (a) above), evidences of its indebtedness or rights, options, warrants or convertible securities providing the right to subscribe for or purchase any shares of the Company's capital stock or evidences of its indebtedness, then in each case the number of Warrant Shares thereafter purchasable upon the exercise of this Warrant shall be determined by multiplying the number of Warrant Shares theretofore purchasable upon the exercise of this Warrant, by a fraction, of which the numerator shall be the then Market Price Per Share of the Warrant Shares (as determined pursuant to Section 9.2) on the record date mentioned below in this paragraph (b), and of which the denominator shall be the then Market Price Per Share of the Warrant Shares on such record date less the then fair value (as determined by the Board of Directors of the Company, in good faith) of the portion of the shares of the Company's capital stock other than Common Stock, evidences of indebtedness, or of such rights, options, warrants or convertible securities, distributable with respect to each Warrant Share. Such adjustment shall be made whenever any such distribution is made, and shall become effective retroactively as of the record date for the determination of shareholders entitled to receive such distribution. (c) Whenever the number of Warrant Shares purchasable upon the exercise of this Warrant is adjusted, as provided in this Section 6.1, the Relevant Purchase Prices with respect to the Warrant Shares shall be adjusted by multiplying such Relevant Purchase Prices immediately prior to such adjustment by a fraction, of which the numerator shall be the number of Warrant Shares purchasable upon the exercise of this Warrant immediately prior to such adjustment, and of which the denominator shall be the number of Warrant Shares so purchasable immediately thereafter. 6.2 No adjustment in the number of Warrant Shares purchasable under this Warrant, or in the Relevant Purchase Prices with respect to the Warrant Shares, shall be required unless such adjustment would require an increase or decrease of at least 1% in the number of Warrant Shares issuable upon the exercise of such Warrant, or in the Relevant Purchase Prices thereof; provided, however, that any adjustments which by reason of this Section 6.3 are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All final results of adjustments to the number of Warrant Shares and the Relevant Purchase Prices thereof shall be rounded to the nearest one thousandth of a share or the nearest cent, as the case may be. Anything in this Section 6 to the contrary notwithstanding, the Company shall be entitled, but shall not be required, to make such changes in the number of Warrant Shares 5 purchasable upon the exercise of each Warrant, or in the Relevant Purchase Prices thereof, in addition to those required by such Section, as it in its discretion shall determine to be advisable in order that any dividend or distribution in shares of Common Stock, subdivision, reclassification or combination of shares of Common Stock, issuance of rights, warrants or options to purchase Common Stock, or distribution of shares of stock other than Common Stock, evidences of indebtedness or assets (other than distributions of cash out of retained earnings) or convertible or exchangeable securities hereafter made by the Company to the holders of its Common Stock shall not result in any tax to the holders of its Common Stock or securities convertible into Common Stock. 6.3 Whenever the number of Warrant Shares purchasable upon the exercise of each Warrant or the Relevant Purchase Price of such Warrant Shares is adjusted, as herein provided, the Company shall mail to the Holder, at the address of the Holder shown on the books of the Company, a notice of such adjustment or adjustments, prepared and signed by the Chief Financial Officer or Secretary of the Company, which sets forth the number of Warrant Shares purchasable upon the exercise of this Warrant and each of the then Relevant Purchase Prices of such Warrant Shares after such adjustment, a brief statement of the facts requiring such adjustment and the computation by which such adjustment was made. 6.4 In the event that at any time prior to the expiration of this Warrant and prior to their exercise: (a) the Company shall declare any distribution (other than a cash dividend or a dividend payable in securities of the Company with respect to the Common Stock); or (b) the Company shall offer for subscription to all the holders of the Common Stock any additional shares of stock of any class or any other securities convertible into Common Stock or any rights to subscribe thereto; or (c) the Company shall declare any stock split, stock dividend, subdivision, combination, or similar distribution with respect to the Common Stock that shall affect the outstanding number of shares of Common Stock; or 6 (d) the Company shall declare a dividend, other than a dividend payable in shares of the Company's own Common Stock; or (e) there shall be any capital change in the Company as set forth in Section 6.1(a)(v); or (f) there shall be a voluntary or involuntary dissolution, liquidation, or winding up of the Company (other than in connection with a consolidation, merger, or sale of all or substantially all of its property, assets and business as an entity); (each such event hereinafter being referred to as a "Notification Event"), the Company shall cause to be mailed to the Holder, not less than 20 days prior to the record date, if any, in connection with such Notification Event (provided, however, that if there is no record date, 20 days prior to the effective date, or in either case if 20 days prior notice is impracticable, as soon as practicable) written notice specifying the nature of such event and the effective date of, or the date on which the books of the Company shall close or a record shall be taken with respect to, such event. Such notice shall also set forth facts indicating the effect of such action (to the extent such effect may be known at the date of such notice) on each of the Relevant Purchase Prices and the kind and amount of the shares of stock or other securities or property deliverable upon exercise of this Warrant. 6.5 The form of Warrant Certificate need not be changed because of any change in the Relevant Purchase Prices, the number of Warrant Shares issuable upon the exercise of a Warrant or the number of Warrants outstanding pursuant to this Section 6, and Warrant Certificates issued before or after such change may state the same Relevant Purchase Prices, the same number of Warrants, and the same number of Warrant Shares issuable upon exercise of Warrants as are stated in the Warrant Certificates theretofore issued pursuant to this Agreement. The Company may, however, at any time, in its sole discretion, make any change in the form of Warrant Certificate that it may deem appropriate and that does not affect the substance thereof, and any Warrant Certificates thereafter issued or countersigned, whether in exchange or substitution for an outstanding Warrant Certificate or otherwise, may be in the form as so changed. 7. Conversion Rights 7.1 After the occurrence of any Reorganization Transaction (as such term is defined in Section 6.1(a)(v)), in lieu of exercise of any portion of this Warrant as provided in Section 2.1 hereof, the Warrant Shares represented by this Warrant Certificate (or any portion thereof) may, at the election of the Holder, be converted into the nearest whole number of shares of Common Stock of the Company (or other securities of the Company or any successor 7 Company underlying the Warrant) equal to: (1) the product of (a) the number of shares of Common Stock (or such other securities) then issuable upon the exercise of this Warrant to be so converted and (b) the excess, if any, of (i) the Market Price Per Share (as determined pursuant to Section 9.2) with respect to the date of conversion over (ii) the Relevant Purchase Prices in effect on the business day next preceding the date of conversion, divided by (2) the Market Price Per Share with respect to the date of conversion. 7.2 The conversion rights provided under this Section 7 may be exercised in whole or in part and at any time and from time to time while this Warrant remain outstanding. In order to exercise the conversion privilege, the Holder shall surrender to the Company (or any successor company), at its offices, this Warrant Certificate accompanied by a duly completed Notice of Conversion in the form attached hereto as Exhibit B. The Warrants (or so much thereof as shall have been surrendered for conversion) shall be deemed to have been converted immediately prior to the close of business on the day of surrender of such Warrant Certificate for conversion in accordance with the foregoing provisions. As promptly as practicable on or after the conversion date, the Company (or the successor company) shall issue and shall deliver to the Holder (i) a certificate or certificates representing the number of shares of Common Stock (or such other securities) to which the Holder shall be entitled as a result of the conversion, and (ii) if the Warrant Certificate is being converted in part only, a new certificate of like tenor and date for the balance of the unconverted portion of the Warrant Certificate. 8. Voluntary Adjustment by the Company The Company may, at its option, at any time during the term of this Warrant, reduce the then current Relevant Purchase Prices to any amount deemed appropriate by the Board of Directors of the Company and/or extend the date of the expiration of the Warrants. 9. Fractional Shares and Warrants; Determination of Market Price Per Share 9.1 Anything contained herein to the contrary notwithstanding, the Company shall not be required to issue any fraction of a share of Common Stock in connection with the exercise of this Warrant. This Warrant may not be exercised in such number as would result (except for the provisions of this paragraph) in the issuance of a fraction of a share of Common Stock unless the Holder is exercising this Warrant for all shares of Common Stock to be received by the Holder hereunder. In such event, the Company shall, upon the exercise of 8 the entirety of this Warrant, issue to the Holder the largest aggregate whole number of shares of Common Stock called for thereby upon receipt of the Relevant Purchase Price for all shares of Common Stock to be issued upon exercise hereof and pay a sum in cash equal to the remaining fraction of a share of Common Stock, multiplied by its Market Price Per Share (as determined pursuant to Section 9.2 below) as of the last business day preceding the date on which this Warrant are presented for exercise. 9.2 As used herein, the "Market Price Per Share" with respect to any class or series of Common Stock of the Company (or any other securities of the Company or of any successor company) on any date shall mean the closing price per share of such class or series of securities for the trading day immediately preceding such date. The closing price for each such day shall be the last sale price regular way or, in case no such sale takes place on such day, the average of the closing bid and asked prices regular way, in either case on the principal securities exchange on which the shares of such Common Stock of the Company (or other securities of the Company or of such successor company) are listed or admitted to trading or, if applicable, the last sale price, or in case no sale takes place on such day, the average of the closing bid and asked prices of such securities on NASDAQ or any comparable system, or if such securities are not reported on NASDAQ, or a comparable system, the average of the closing bid and asked prices as furnished by two members of the National Association of Securities Dealers, Inc. selected from time to time by the Company for that purpose. If such bid and asked prices are not available, then "Market Price Per Share" shall be equal to the fair market value of the such securities as determined in good faith by the Board of Directors of the Company (or of such successor company). 10. Restrictions on Transfer; Registration Rights 10.1 No sale, transfer, assignment, hypothecation or other disposition of this Warrant or Warrant Shares shall be made unless any such transfer, assignment or other disposition will comply with the rules and statutes administered by the Securities and Exchange Commission and (i) a Registration Statement under the Securities Act of 1933, as amended (the "Act"), including such shares is currently in effect, or (ii) in the opinion of counsel a current Registration Statement is not required for such disposition of the shares. 10.2 In the event of a proposed sale or transfer of this Warrant or Warrant Shares in a transaction other than a sale pursuant to a public offering registered under the Act, a Holder shall deliver to the Company an opinion of counsel addressed to the Company (which shall be rendered by counsel reasonably acceptable to the Company) to the effect that the proposed transfer may be effected without registration or qualification under any Federal 9 or state securities or blue sky law. Such counsel rendering the opinion shall, as promptly as practicable, notify the Company and the Holder of such opinion and of the terms and conditions, if any, to be observed in such transfer, whereupon the Holder shall be entitled to transfer this Warrant or the Warrant Shares (or a portion thereof). 10.3 The Company agrees that, at any time or times hereafter, until the second anniversary of the Expiration Date of this Warrant, as and when it intends to register any of its securities under the Act, whether for its own account and/or on behalf of selling stockholders (except in connection with an offering solely to its employees, an offering pursuant to an employee benefit plan, a dividend or interest reinvestment plan, or an offering solely related to an acquisition on a Form S-4 or any subsequent similar form) permitting a secondary offering or distribution the Company will notify the Holder of such intention and, upon request from the Holder, will use its best efforts to cause the Warrant Shares designated by the Holder to be registered under the Securities Act. The number of Warrant Shares to be included in such offering may be reduced if and to the extent that the underwriter of securities included in the registration statement and offered by the Company shall be of the opinion that such inclusion would adversely affect the marketing of the securities to be sold by the Company therein; provided, however, that the percentage of the reduction of such Warrant Shares shall be no greater than the percentage reduction of securities of other selling stockholders, as such percentage reductions are determined in the good faith judgment of the Company. The Company will use its best efforts to keep each such Registration Statement current for such period of time as is not otherwise burdensome to the Company. 10.4 Any registration statement referred to in subsection 10.3 hereof shall be prepared and processed in accordance with the following terms and conditions: (i) the Holder will cooperate in furnishing promptly to the Company in writing any information requested by the Company in connection with the preparation, filing and processing of such registration statement. (ii) to the extent requested by an underwriter of securities included in the registration statement and offered by the Company, the Holder will defer the sale of Warrant Shares for a period commencing twenty (20) days prior and terminating sixty (60) days after the effective date of the registration statement, provided that any principal shareholders of the Company who also have shares included in the registration statement will also defer their sales for a similar 10 period, except for sales pursuant to registrations on Form S-8 or S-4 or any similar or successor forms thereto. (iii) The Company will furnish to the Holder such number of prospectuses or other documents incident to such registration as may from time to time be reasonably requested, and cause its shares to be qualified under the blue-sky laws of those states reasonably requested by the Holder. (iv) The Company will indemnify the Holder (and any officer, director or controlling person of the Holder) and any underwriters acting on behalf of the Holder against all claims, losses, expenses, damages and liabilities (or actions in respect thereof) to which they may become subject under the Securities Act or otherwise, arising out of or based upon any untrue or alleged untrue statement of any material facts contained in any registration statement filed pursuant hereto, or any document relating thereto, including all amendments and supplements, or arising out of or based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein contained not misleading, and will reimburse the Holder (or such other aforementioned parties) or such underwriters for any legal and all other expenses reasonably incurred in accordance with investigating or defending any such claim, loss, damage, liability or action; provided, however, that the Company will not be liable where the untrue or alleged untrue statement or omission or alleged omission is based upon information furnished in writing to the Company by the Holder or any underwriter obtained by the Holder expressly for use therein, or as a result of the Holder's or any such underwriter's failure to furnish to the Company information duly requested in writing by counsel for the Company specifically for use therein; provided that with respect to any untrue statement or omission or alleged untrue statement or omission made in any preliminary prospectus, the indemnity agreement contained in this paragraph shall not inure to the benefit of any underwriter from whom the person asserting such losses, claims, damages or liability purchased the securities concerned, to the extent that any such loss, claim, damage or liability of such underwriter results from the fact that a copy of the prospectus was not sent or given to such person at or prior to the written confirmation of the sale of such securities to such person. This indemnity agreement shall be in addition to any other liability the Company may have. The indemnity agreement of the Company contained in this paragraph (iv) shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any 11 indemnified party and shall survive the delivery of and payment for the Warrant Shares. (v) The Holder will indemnify the Company (and any officer, director or controlling person of the Company) and any underwriters acting on behalf of the Company against all claims, losses, expenses, damages and liabilities (or actions in respect thereof) to which they may become subject under the Securities Act or otherwise, arising out of or based upon any untrue or alleged untrue statement filed pursuant hereto, or any document relating thereto, including all amendments, and supplements, or arising out of or based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein contained not misleading, and, will reimburse the Company (or such other aforementioned parties) or such underwriters for any legal and other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability, or action; provided, however, that the Holder will be liable as aforesaid only to the extent that such untrue or alleged untrue statement or omission or alleged omission is based upon information furnished in writing to the Company by the Holder or any underwriter obtained by the Holder expressly for use therein, or as a result of its or such underwriter's failure to furnish the Company with information duly requested in writing by counsel for the Company specifically for use therein. This indemnity agreement contained in this paragraph (v) shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified party and shall survive the delivery of and payment for the Warrant Shares. (vi) Promptly after receipt by an indemnified party under this subsection 10.4 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party, promptly notify the indemnifying party of the commencement thereof, but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under this subsection 10.4. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this subsection 10.4 for any legal or other expenses 12 subsequently incurred by such indemnified party in connection with the defense thereof, other than reasonable costs of investigation or out-of-pocket expenses or losses or cost incurred in collaborating in the defense. (vii) Except as set forth in subsection 10.4(viii), the Company shall bear all costs and expenses incident to any registration pursuant to this Section 10. (viii) The Holder shall pay any and all underwriters' discounts, brokerage fees and transfer taxes incident to the sale of any securities sold by such Holder pursuant to this Section 10, and shall pay the fees and expenses of any special attorneys or accountants retained by it. (ix) If the filing of any registration statement pursuant to subsection 10.4 would require the Company to obtain audited financial statements other than its normal year end audit required for the filing of its reports required under the Securities Exchange Act of 1934 (the "Exchange Act"), the Company may defer the filing of such registration statement until the necessary audited financial statements are available, unless the Holder arranges for the payment of the expense of such audit to the extent that such expense would exceed the amount which the Company would otherwise be required to bear in connection with its normal audit schedule for reporting under the Exchange Act. 10.5 If the indemnification provided for in this Section is unavailable or insufficient to hold harmless an indemnified party in respect of any losses, claims, damages, liabilities, expenses or actions in respect thereof referred to herein, then each indemnifying party shall in lieu of indemnifying such indemnified party contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities, expenses or actions in such proportion as is appropriate to reflect the relative fault of the Company, on the one hand, and the seller of such Warrant Shares, on the other, in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities, expenses or actions as well as any other relevant equitable considerations, including the failure to give the notice required hereunder. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact relates to information supplied by the Company, on the one hand, or the sellers of such Warrant Shares, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the holder hereof agree that it would not be just and equitable if contribution pursuant to this Section were determined by pro rata allocation (even if all of the sellers of such Warrant Shares were treated as one entity for such purpose) or by any other method of allocation which did not take account of the equitable considerations referred 13 to above. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities or actions in respect thereof referred to above shall be deemed to include any legal or other expenses which reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the contribution provisions of this Section, in no event shall the amount contributed by any seller from the sale of Warrant Shares to which such contribution claim relates. No person guilty of fraudulent misrepresentations (within the meaning of section 11(f) of the Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. Each Holder of this Warrant and each Holder of Warrant Shares bearing the legend required by Section 10.6, by acceptance hereof or thereof, as the case may be, agrees to the indemnification and contribution provisions of this Section 10.5. 10.6 Legend. In case any shares are issued upon the exercise in whole or in part of this Warrant or are thereafter transferred, in either case under such circumstances that no registration under the Act is required or effective, each certificate representing such shares shall bear on the face thereof the following legend: "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, and any transfer thereof is subject to the conditions specified in the Warrant dated as of [Include Date] originally issued by PlayNet Technologies, Inc. (the "Company") to [Include Name of Holder] to purchase shares of Common Stock, $.001 par value, of the Company. A copy of the form of such Warrant is on file with the Secretary of the Company in New York, New York, and will be furnished without charge by the Company to the holder of this certificate upon written request to the Secretary of the Company at such address." 11. Miscellaneous 11.1 Governing Law. This Warrant Certificate shall be governed by and construed in accordance with the laws of the State of New York. 11.2 Holder Not a Stockholder. Prior to the exercise of this Warrant, the holder hereof shall not be entitled to any of the rights of a stockholder of the Company including, without limitation, the right as a stockholder to (a) vote on or consent to any proposed action of the Company or (b) receive (i) dividends or any distributions made to stockholders, (ii) notice 14 of or attend any meetings of stockholders of the Company or (iii) notice of any other proceedings of the Company. 11.3 Notices. Any notice, demand or delivery to be made pursuant to the provisions of this Warrant shall be sufficiently given or made if sent by first class mail, postage prepaid, addressed to (a) the holder of this Warrant or issued Warrant Shares at its last known address appearing on the books at the Company maintained for such purposes or (b) the Company at its principal offices at 152 West 57th Street, New York, New York 10019, Attention: General Counsel. The Holder of this Warrant and the Company may each designate a different address by notice to the other pursuant to this Section 11.3. 11.4 Investment Representation. The Holder represents that it is purchasing the Warrant and all shares issuable upon exercise of this Warrant for its own account and not as nominee or agent for any other person and not with a view to, or for offer or sale in connection with any distribution thereof (within the meaning of the Act) that would be in violation of the applicable securities laws; provided, however, that subject to the restrictions contained in Section 10, that the disposition of all or any part of such shares shall at all times be within the Holder's exclusive control. 11.5 Confidentiality of Information. The Holder of this Warrant (and any affiliates of the Holder) and any permitted transferee of this Warrant will treat all documents, financial statements, reports and other information delivered pursuant to this Warrant on a confidential basis with the same degree of care it treats similar information of other companies of which it holds securities and has investment banking relationships. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed by its officers thereunto duly authorized and its corporate seal to be affixed hereon, as of this ____ day of _________, 199_. PLAYNET TECHNOLOGIES, INC. By:__________________________ Name: Title: 15 EXHIBIT A NOTICE OF EXERCISE FORM ----------------------- (To be executed only upon partial or full exercise of the within Warrant) The undersigned registered Holder of the within Warrant irrevocably exercises the within Warrant for and purchases shares of Common Stock of PlayNet Technologies, Inc. (the "Company") and herewith makes payment therefor in the amount of $_________, all on the terms and conditions specified in the within Warrant, and requests that a certificate (or ______ certificates in denominations of ______ shares) for the shares of Common Stock of the Company hereby purchased be issued in the name of and delivered to (choose one) (a) the undersigned or (b) ________, whose address is _______________ and, if such shares of Common Stock shall not include all the shares of Common Stock issuable as provided in the within Warrant, that a new Warrant of like tenor for that portion of the Warrant not exercised hereby be issued in the name of and delivered to (choose one) (a) the undersigned or (b) ______________, whose address is _______________________. The undersigned represents that it is purchasing the securities described above for its own account and not as a nominee or agent for any other person and not with a view to, or for offer of sale in connection with, any distribution thereof (within the meaning of the Securities Act of 1933) that would be in violation of the applicable securities laws; provided, however, that subject to the restrictions contained in Section 10 of the Warrant that the disposition of all or any part of such shares shall at all times be within the undersigned's exclusive control. Dated: __________________ By:________________________________ (signature of Registered Holder) Signature Guaranteed: ________________________ By:_____________________ Title: NOTICE: The signature to this Notice must correspond with the name as written upon the face of the within Warrant in every particular, without alteration or enlargement or any change whatever. The signature to this Notice must be guaranteed by a commercial bank or trust company in the United States or a member firm of the New York Stock Exchange. 16 EXHIBIT B NOTICE OF CONVERSION The undersigned hereby irrevocably elects to convert, pursuant to Section 7 of the Warrant Certificate accompanying this Notice of Conversion, that number of shares of Common Stock issuable upon exercise of the Warrant for an aggregate purchase price of $_______ into that number of shares of Common Stock of the Company to be received by the undersigned pursuant to the provisions of Section 7.1 of the accompanying Warrant Certificate. Dated: _______________ _____________________________ Name of Holder _____________________________ Signature Address: _____________________________ _____________________________ _____________________________ ___________________________ Signature Guaranteed: ________________________ By:_____________________ Title: 17 ASSIGNMENT FORM --------------- (To be executed only upon the assignment of the within Warrant) FOR VALUE RECEIVED, the undersigned registered Holder of the within Warrant hereby sells, assigns and transfers unto _____________________, whose address is ________________________, all of the rights of the undersigned under the within Warrant, with respect to the receipt of shares of Common Stock of PlayNet Technologies, Inc. and, if such sale, assignment or transfer is for less than the right to the receipt of all shares of Common Stock to which the Holder is entitled upon exercise of such Warrant, that a new Warrant of like tenor for that portion of the Warrant not being transferred hereunder be issued in the name of and delivered to the undersigned, and does hereby irrevocably constitute and appoint ______________ Attorney to register such transfer on the books of the Company maintained for the purpose, with full power of substitution in the premises. Dated: _____________, 19__. By:________________________________ (Signature of Registered Holder) Signature Guaranteed: ___________________________ By:_______________________ Title: NOTICE: The signature to this Assignment must correspond with the name as written upon the face of the within Warrant in every particular, without alteration or enlargement or any change whatever. The signature to this Assignment must be guaranteed by a commercial bank or trust company in the United States or a member firm of the New York Stock Exchange. 18 EXHIBIT 8 FORM OF OPINION OF COUNSEL Dated: Date of Closing Name Address 1 Address 2 Re: Senior Secured Notes Ladies and Gentlemen: 1. PlayNet is duly organized, validly existing and in good standing under the laws of the State of its incorporation and has the requisite corporate power and corporate authority to own, lease and operate its properties and to carry on its business. 2. PlayNet is duly qualified and in good standing in every state in which, by reason of the nature or location of PlayNet's assets or operation of PlayNet's business, such qualification may be necessary and where the failure to so qualify would have a material adverse affect on (i) the financial condition of PlayNet, and/or (ii) PlayNet's ability to conduct its business. 3. PlayNet has the requisite corporate power and corporate authority to execute and deliver, and to perform its obligations under the Agreement dated December __, 1996 by and between PlayNet and the investors identified therein and all agreements, documents or instruments executed in connection therewith, including, but not limited to the [First Stage Notes] [Second Stage Notes] and the warrants related thereto (the "Agreement"). The execution and delivery of the Agreement and the performance by PlayNet of its obligations thereunder, has been duly authorized by all necessary corporate action of PlayNet, and the Agreement has been duly executed and delivered by an authorized officer of PlayNet and constitutes the valid and binding obligation of PlayNet enforceable against PlayNet in accordance with its terms, except to the extent that enforceability of PlayNet's obligations under the Agreement is subject to and affected by applicable bankruptcy, insolvency, reorganization, arrangement or other laws affecting the enforcement of creditors' rights and general principles of equity (whether enforcement is considered in a proceeding in equity or at law). 4. The execution, delivery, performance and compliance by PlayNet with the terms of the Agreement do not violate (i) to the best knowledge of counsel after due inquiry, any provision of any judgment, writ, decree or order binding upon PlayNet, the violation of which would have a material adverse effect on PlayNet, or (ii) any provision of PlayNet's Articles of Incorporation, or By-Laws. The execution, delivery, performance and compliance by PlayNet with the terms of the Agreement do not conflict with or constitute a default under the provisions of any material agreement, document or instrument to which PlayNet is a party or by which PlayNet is bound and the violation of which would have a material adverse effect on PlayNet. 5. No action, proceeding or investigation is pending or, to the best of knowledge of counsel after due inquiry, threatened against PlayNet which questions the validity of the Agreement, or which might result, either individually or in the aggregate, in any material adverse change in the assets, condition, affairs or prospects of PlayNet. 6. To the best knowledge of counsel after due inquiry, PlayNet is not in violation of any provision of its Articles of Incorporation or Bylaws. 7. The offer, sale and issuance of the [First Stage Notes] [Second Stage Notes] constitute transactions exempt from registration requirements of Section 5 of the Securities Act of 1933, as amended. PlayNet Technologies, Inc. By: _____________________________ Philip K. Yachmetz Secretary and Director, Legal & Corporate Affairs ================================================================================ Bridge Financing Senior Secured Note Holders - Initial Financing - - -------------------------------------------------------------------------------- Name Amount Warrant Ex. Date of Closing ================================================================================ Allen & Company Incorporated $750,000 Exhibit 3 December 30, 1996 - - -------------------------------------------------------------------------------- Zeller Eblagon Financial Services Ltd. $500,000 Exhibit 4 December 19, 1996 - - -------------------------------------------------------------------------------- K.F. Chemical Ltd. $250,000 Exhibit 4 December 19, 1996 - - -------------------------------------------------------------------------------- Ceres Advisors Ltd. $500,000 Exhibit 3 January 30, 1997 - - -------------------------------------------------------------------------------- Ehud Guth $250,000 Exhibit 3 January 30, 1997 - - -------------------------------------------------------------------------------- Ceres Advisors Ltd. $250,000 Exhibit 3 February 10, 1997 ================================================================================ EX-10 4 10.24 - WARRANT CERTIFICATE THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR THE LAWS OF ANY STATE. THEY MAY NOT BE SOLD OR OTHERWISE TRANSFERRED UNLESS THEY ARE REGISTERED UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR AN EXEMPTION FROM REGISTRATION IS AVAILABLE. [2] Warrants PLAYNET TECHNOLOGIES, INC. WARRANT CERTIFICATE This warrant certificate ("Warrant Certificate") certifies that for value received [1] or registered assigns (the "Holder") is the owner of the number of warrants ("Warrants") specified above, each of which entitles the Holder thereof to purchase, at any time after one year from the date hereof through and including the Expiration Date (hereinafter defined), one fully paid and non-assessable share of Common Stock, $.01 par value ("Common Stock"), of PlayNet technologies, Inc., a Delaware corporation (the "Company"), at a purchase price of $[3] per share of Common Stock in lawful money of the United States of America in cash or by certified or cashier's check or a combination of cash and certified or cashier's check (subject to adjustment as hereinafter provided). 1. Warrant; Purchase Price Each Warrant shall entitle the Holder initially to purchase one share of Common Stock of the Company and the purchase price payable upon exercise of the Warrants (the "Purchase Price") shall initially be $ [3] per share of Common Stock payable in cash. The Purchase Price and number of shares of Common Stock issuable upon exercise of each Warrant are subject to adjustment as provided in Article 6. The shares of Common Stock issuable upon exercise of the Warrants (and/or other shares of common stock so issuable by reason of any adjustments pursuant to Article 6) are sometimes referred to herein as the "Warrant Shares." 2. Exercise; Expiration Date 2.1 The Warrants are exercisable, at the option of the Holder, in whole or in part at any time and from time to time after the date which is one year from the date hereof through and including the Expiration Date (the "Exercise Period"), upon surrender of this Warrant Certificate to the Company together with a duly completed Notice of Exercise, in the form attached hereto as Exhibit A, and payment of an amount equal to the Purchase Price times the number of Warrants to be exercised. In the case of exercise of less than all the Warrants represented by this Warrant Certificate, the Company shall cancel the Warrant Certificate upon the surrender thereof and shall execute and deliver a new Warrant Certificate for the balance of such Warrants. 2.2 The term "Expiration Date" shall mean 5:00 p.m. New York time on January 20, 2002, or if such day shall in the State of New York be a holiday or a day on which banks are authorized to close, then 5:00 p.m. local time in the State of New York the next following day which in the State of New York is not a holiday or a day on which banks are authorized to close. 3. Registration and Transfer on Company Books 3.1 The Company shall maintain books for the registration and transfer of the Warrants and the registration and transfer of the Warrant Shares. 3.2 Prior to due presentment for registration of transfer of this Warrant Certificate, or the Warrant Shares, the Company may deem and treat the registered Holder as the absolute owner thereof. 3.3 The Company shall register upon its books any transfer of a Warrant Certificate, upon surrender of same to the Company with a written instrument of transfer duly executed by the registered Holder or by a duly authorized attorney. Upon any such registration of transfer, new Warrant Certificate(s) shall be issued to the transferee(s) and the surrendered Warrant Certificate shall be canceled by the Company. A Warrant Certificate may also be exchanged, at the option of the Holder, for new Warrant Certificates of different denominations representing in the aggregate the number of Warrants evidenced by the Warrant Certificate surrendered. 4. Reservation of Shares The Company covenants that it will at all times reserve and keep available out of its authorized capital stock, solely for the purpose of issue upon exercise of the Warrants, such number of shares as shall then be issuable upon the exercise of all outstanding Warrants. The Company covenants that all shares of capital stock which shall be issuable upon exercise of the Warrants shall be duly and validly issued and fully paid and non-assessable and free from all taxes, liens and charges with respect to the issue thereof, and that upon issuance such shares shall be listed on each national securities exchange, if any, on which the other shares of such outstanding series of capital stock of the Company are then listed. 5. Loss or Mutilation Upon receipt by the Company of reasonable evidence of the ownership of and the loss, theft, destruction or mutilation of any Warrant Certificate and, in the case of loss, theft or destruction, of indemnity reasonably satisfactory to the Company, or, in the case of mutilation, upon surrender and cancellation of the mutilated Warrant Certificate, the Company shall execute and deliver in lieu thereof a new Warrant Certificate representing an equal number of Warrants. 2 6. Adjustment of Purchase Price and Number of Shares Deliverable 6.1 The number of Warrant Shares purchasable upon the exercise of each Warrant and the Purchase Price with respect to the Warrant Shares shall be subject to adjustment as follows: (a) In case the Company shall (i) declare a dividend or make a distribution on its Common Stock payable in shares of its capital stock, (ii) subdivide its outstanding shares of Common Stock through stock split or otherwise, (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, or (iv) issue by reclassification of its Common Stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing corporation) other securities of the Company, or (v) in case of a consolidation or merger of the Company with or into another corporation or in case of the sale or transfer of all or substantially all of the assets of the Company (hereinafter, a "Reorganization Transaction"), the number and/or nature of Warrant Shares purchasable upon exercise of each Warrant immediately prior thereto shall be adjusted so that the Holder shall be entitled to receive the kind and number of Warrant Shares or other securities of the Company (or of any successor company) which he would have owned or have been entitled to receive after the happening of any of the events described above, had such Warrant been exercised immediately prior to the happening of such event or any record date with respect thereto. An adjustment made pursuant to this paragraph (a) shall become effective retroactively as of the record date of such event. (b) In case the Company shall distribute to all holders of its shares of Common Stock, or all holders of Common Stock shall otherwise become entitled to receive, shares of capital stock of the Company (other than dividends or distributions on its Common Stock referred to in paragraph (a) above), evidences of its indebtedness or rights, options, warrants or convertible securities providing the right to subscribe for or purchase any shares of the Company's capital stock or evidences of its indebtedness, then in each case the number of Warrant Shares thereafter purchasable upon the exercise of each Warrant shall be determined by multiplying the number of Warrant Shares theretofore purchasable upon the exercise of each Warrant, by a fraction, of which the numerator shall be the then Market Price Per Share of the Warrant Shares (as determined pursuant to Section 9.2) on the record date mentioned below in this paragraph (b), and of which the denominator shall be the then Market Price Per Share of the Warrant Shares on such record date, less the then fair value (as determined by the Board of Directors of the Company, in good faith) of the portion of the shares of the Company's capital stock other than Common Stock, evidences of indebtedness, or of such rights, options, warrants or convertible securities, distributable with respect to each Warrant Share. Such adjustment shall be made whenever any such distribution is made, and shall become effective retroactively as of the record date for the determination of shareholders entitled to receive such distribution. 3 (c) Whenever the number of Warrant Shares purchasable upon the exercise of each Warrant is adjusted, as provided in this Section 6.1, the Purchase Price with respect to the Warrant Shares shall be adjusted by multiplying such Purchase Price immediately prior to such adjustment by a fraction, of which the numerator shall be the number of Warrant Shares purchasable upon the exercise of each Warrant immediately prior to such adjustment, and of which the denominator shall be the number of Warrant Shares so purchasable immediately thereafter. 6.2 No adjustment in the number of Warrant Shares purchasable under the Warrants, or in the Purchase Price with respect to the Warrant Shares, shall be required unless such adjustment would require an increase or decrease of at least 1% in the number of Warrant Shares issuable upon the exercise of such Warrant, or in the Purchase Price thereof; provided, however, that any adjustments which by reason of this Section 6.3 are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All final results of adjustments to the number of Warrant Shares and the Purchase Price thereof shall be rounded to the nearest one thousandth of a share or the nearest cent, as the case may be. Anything in this Section 6 to the contrary notwithstanding, the Company shall be entitled, but shall not be required, to make such changes in the number of Warrant Shares purchasable upon the exercise of each Warrant, or in the Purchase Price thereof, in addition to those required by such Section, as it in its discretion shall determine to be advisable in order that any dividend or distribution in shares of Common Stock, subdivision, reclassification or combination of shares of Common Stock, issuance of rights, warrants or options to purchase Common Stock, or distribution of shares of stock other than Common Stock, evidences of indebtedness or assets (other than distributions of cash out of retained earnings) or convertible or exchangeable securities hereafter made by the Company to the holders of its Common Stock shall not result in any tax to the holders of its Common Stock or securities convertible into Common Stock. 6.3 Whenever the number of Warrant Shares purchasable upon the exercise of each Warrant or the Purchase Price of such Warrant Shares is adjusted, as herein provided, the Company shall mail to the Holder, at the address of the Holder shown on the books of the Company, a notice of such adjustment or adjustments, prepared and signed by the Chief Financial Officer or Secretary of the Company, which sets forth the number of Warrant Shares purchasable upon the exercise of each Warrant and the Purchase Price of such Warrant Shares after such adjustment, a brief statement of the facts requiring such adjustment and the computation by which such adjustment was made. 6.4 In the event that at any time prior to the expiration of the Warrants and prior to their exercise: (a) the Company shall declare any distribution (other than a cash dividend or a dividend payable in securities of the Company with respect to the Common Stock); or (b) the Company shall offer for subscription to all the holders of the Common Stock any additional shares of stock of any class or any other securities convertible into Common Stock or any rights to 4 subscribe thereto; or (c) the Company shall declare any stock split, stock dividend, subdivision, combination, or similar distribution with respect to the Common Stock that shall affect the outstanding number of shares of Common Stock; or (d) the Company shall declare a dividend, other than a dividend payable in shares of the Company's own Common Stock; or (e) there shall be any capital change in the Company as set forth in Section 6.1(a)(v); or (f) there shall be a voluntary or involuntary dissolution, liquidation, or winding up of the Company (other than in connection with a consolidation, merger, or sale of all or substantially all of its property, assets and business as an entity); (each such event hereinafter being referred to as a "Notification Event"), the Company shall cause to be mailed to the Holder, not less than 20 days prior to the record date, if any, in connection with such Notification Event (provided, however, that if there is no record date, 20 days prior to the effective date, or in either case if 20 days prior notice is impracticable, as soon as practicable) written notice specifying the nature of such event and the effective date of, or the date on which the books of the Company shall close or a record shall be taken with respect to, such event. Such notice shall also set forth facts indicating the effect of such action (to the extent such effect may be known at the date of such notice) on the Purchase Price and the kind and amount of the shares of stock or other securities or property deliverable upon exercise of the Warrants. 6.5 The form of Warrant Certificate need not be changed because of any change in the Purchase Price, the number of Warrant Shares issuable upon the exercise of a Warrant or the number of Warrants outstanding pursuant to this Section 6, and Warrant Certificates issued before or after such change may state the same Purchase Price, the same number of Warrants, and the same number of Warrant Shares issuable upon exercise of Warrants as are stated in the Warrant Certificates theretofore issued pursuant to this Agreement. The Company may, however, at any time, in its sole discretion, make any change in the form of Warrant Certificate that it may deem appropriate and that does not affect the substance thereof, and any Warrant Certificates thereafter issued or countersigned, whether in exchange or substitution for an outstanding Warrant Certificate or otherwise, may be in the form as so changed. 7. Conversion Rights 7.1 After the occurrence of any Reorganization Transaction (as such term is defined in Section 6.1(a)(v)), in lieu of exercise of any portion of the Warrants as provided in Section 2.1 hereof, the Warrants represented by this Warrant Certificate (or any portion thereof) may, at the election of the Holder, be converted into the nearest whole number of shares of Common Stock of the Company (or other securities of the Company or any successor Company underlying the Warrants) equal to: (1) the product of (a) the number of shares 5 of Common Stock (or such other securities) then issuable upon the exercise of each Warrant to be so converted and (b) the excess, if any, of (i) the Market Price Per Share (as determined pursuant to Section 9.2) with respect to the date of conversion over (ii) the Purchase Price in effect on the business day next preceding the date of conversion, divided by (2) the Market Price Per Share with respect to the date of conversion. 7.2 The conversion rights provided under this Section 7 may be exercised in whole or in part and at any time and from time to time while any Warrants remain outstanding. In order to exercise the conversion privilege, the Holder shall surrender to the Company (or any successor company), at its offices, this Warrant Certificate accompanied by a duly completed Notice of Conversion in the form attached hereto as Exhibit B. The Warrants (or so much thereof as shall have been surrendered for conversion) shall be deemed to have been converted immediately prior to the close of business on the day of surrender of such Warrant Certificate for conversion in accordance with the foregoing provisions. As promptly as practicable on or after the conversion date, the Company (or the successor company) shall issue and shall deliver to the Holder (i) a certificate or certificates representing the number of shares of Common Stock (or such other securities) to which the Holder shall be entitled as a result of the conversion, and (ii) if the Warrant Certificate is being converted in part only, a new certificate of like tenor and date for the balance of the unconverted portion of the Warrant Certificate. 8. Voluntary Adjustment by the Company The Company may, at its option, at any time during the term of the Warrants, reduce the then current Purchase Price to any amount deemed appropriate by the Board of Directors of the Company and/or extend the date of the expiration of the Warrants. 9. Fractional Shares and Warrants; Determination of Market Price Per Share 9.1 Anything contained herein to the contrary notwithstanding, the Company shall not be required to issue any fraction of a share of Common Stock in connection with the exercise of Warrants. Warrants may not be exercised in such number as would result (except for the provisions of this paragraph) in the issuance of a fraction of a share of Common Stock unless the Holder is exercising all Warrants then owned by the Holder. In such event, the Company shall, upon the exercise of all of such Warrants, issue to the Holder the largest aggregate whole number of shares of Common Stock called for thereby upon receipt of the Purchase Price for all of such Warrants and pay a sum in cash equal to the remaining fraction of a share of Common Stock, multiplied by its Market Price Per Share (as determined pursuant to Section 9.2 below) as of the last business day preceding the date on which the Warrants are presented for exercise. 9.2 As used herein, the "Market Price Per Share" with respect to any class or series of Common Stock of the Company (or any other securities of the Company or of any successor company) on any date shall mean the closing 6 price per share of such class or series of securities for the trading day immediately preceding such date. The closing price for each such day shall be the last sale price regular way or, in case no such sale takes place on such day, the average of the closing bid and asked prices regular way, in either case on the principal securities exchange on which the shares of such Common Stock of the Company (or other securities of the Company or of such successor company) are listed or admitted to trading or, if applicable, the last sale price, or in case no sale takes place on such day, the average of the closing bid and asked prices of such securities on NASDAQ or any comparable system, or if such securities are not reported on NASDAQ, or a comparable system, the average of the closing bid and asked prices as furnished by two members of the National Association of Securities Dealers, Inc. selected from time to time by the Company for that purpose. If such bid and asked prices are not available, then "Market Price Per Share" shall be equal to the fair market value of the such securities as determined in good faith by the Board of Directors of the Company (or of such successor company). 10. Restrictions on Transfer; Registration Rights 10.1 No sale, transfer, assignment, hypothecation or other disposition of the Warrant or Warrant Shares shall be made unless any such transfer, assignment or other disposition will comply with the rules and statutes administered by the Securities and Exchange Commission and (i) a Registration Statement under the Securities Act of 1933, as amended (the "Act"), including such shares is currently in effect, or (ii) in the opinion of counsel a current Registration Statement is not required for such disposition of the shares. 10.2 In the event of a proposed sale or transfer of the Warrant or Warrant Shares in a transaction other than a sale pursuant to a public offering registered under the Act, a Holder shall deliver to the Company an opinion of counsel addressed to the Company (which shall be rendered by counsel reasonably acceptable to the Company) to the effect that the proposed transfer may be effected without registration or qualification under any Federal or state securities or blue sky law. Such counsel rendering the opinion shall, as promptly as practicable, notify the Company and the Holder of such opinion and of the terms and conditions, if any, to be observed in such transfer, whereupon the Holder shall be entitled to transfer this Warrant or the Warrant shares (or a portion thereof). 10.3 The Company agrees that, at any time or times hereafter, until the second anniversary of the Expiration Date of the Warrants, as and when it intends to register any of its securities under the Act, whether for its own account and/or on behalf of selling stockholders (except in connection with an offering solely to its employees, an offering pursuant to an employee benefit plan, a dividend or interest reinvestment plan, or an offering solely related to an acquisition on a Form S-4 or any subsequent similar form) permitting a secondary offering or distribution the Company will notify the Holder of such intention and, upon request from the Holder, will use its best efforts to cause the Warrant Shares designated by the Holder to be registered under the Securities Act. The number of Warrant Shares to be included in such offering may be reduced if and to the extent that the underwriter of securities included in the registration statement and offered by the Company shall be of the opinion 7 that such inclusion would adversely affect the marketing of the securities to be sold by the Company therein; provided, however, that the percentage of the reduction of such Warrant Shares shall be no greater than the percentage reduction of securities of other selling stockholders, as such percentage reductions are determined in the good faith judgment of the Company. The Company will use its best efforts to keep each such Registration Statement current for such period of time as is not otherwise burdensome to the Company. 10.4 Any registration statement referred to in subsection 10.3 hereof shall be prepared and processed in accordance with the following terms and conditions: (i) the Holder will cooperate in furnishing promptly to the Company in writing any information requested by the Company in connection with the preparation, filing and processing of such registration statement. (ii) To the extent requested by an underwriter of securities included in the registration statement and offered by the Company, the Holder will defer the sale of Warrant Shares for a period commencing twenty (20) days prior and terminating sixty (60) days after the effective date of the registration statement, provided that any principal shareholders of the Company who also have shares included in the registration statement will also defer their sales for a similar period, except for sales pursuant to registrations on Form S-8 or S-4 or any similar or successor forms thereto. (iii) The Company will furnish to the Holder such number of prospectuses or other documents incident to such registration as may from time to time be reasonably requested, and cause its shares to be qualified under the blue-sky laws of those states reasonably requested by the Holder. (iv) The Company will indemnify the Holder (and any officer, director or controlling person of the Holder) and any underwriters acting on behalf of the Holder against all claims, losses, expenses, damages and liabilities (or actions in respect thereof) to which they may become subject under the Securities Act or otherwise, arising out of or based upon any untrue or alleged untrue statement of any material facts contained in any registration statement filed pursuant hereto, or any document relating thereto, including all amendments and supplements, or arising out of or based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein contained not misleading, and will reimburse the Holder (or such other aforementioned parties) or 8 such underwriters for any legal and all other expenses reasonably incurred in accordance with investigating or defending any such claim, loss, damage, liability or action; provided, however, that the Company will not be liable where the untrue or alleged untrue statement or omission or alleged omission is based upon information furnished in writing to the Company by the Holder or any underwriter obtained by the Holder expressly for use therein, or as a result of the Holder's or any such underwriter's failure to furnish to the Company information duly requested in writing by counsel for the Company specifically for use therein; provided that with respect to any untrue statement or omission or alleged untrue statement or omission made in any preliminary prospectus, the indemnity agreement contained in this paragraph shall not inure to the benefit of any underwriter from whom the person asserting such losses, claims, damages or liability purchased the securities concerned, to the extent that any such loss, claim, damage or liability of such underwriter results from the fact that a copy of the prospectus was not sent or given to such person at or prior to the written confirmation of the sale of such securities to such person. This indemnity agreement shall be in addition to any other liability the Company may have. The indemnity agreement of the Company contained in this paragraph (iv) shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified party and shall survive the delivery of and payment for the Warrant Shares. (v) The Holder will indemnify the Company (and any officer, director or controlling person of the Company) and any underwriters acting on behalf of the Company against all claims, losses, expenses, damages and liabilities (or actions in respect thereof) to which they may become subject under the Securities Act or otherwise, arising out of or based upon any untrue or alleged untrue statement filed pursuant hereto, or any document relating thereto, including all amendments, and supplements, or arising out of or based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein contained not misleading, and, will reimburse the Company (or such other aforementioned parties) or such underwriters for any legal and other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability, or action; provided, however, that the Holder will be liable as aforesaid only to the extent that such untrue or alleged untrue statement or omission or alleged omission is based upon information furnished in writing to the Company by the Holder or any underwriter obtained by the Holder expressly for use therein, or as a result of its or such underwriter's failure to furnish the Company with information duly requested in writing by counsel for the Company specifically for use therein. This indemnity agreement contained in this paragraph (v) shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified party and shall survive the delivery of and payment for the Warrant Shares. (vi) Promptly after receipt by an indemnified party under this subsection 10.4 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party, promptly notify the indemnifying party of the commencement thereof, but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under this subsection 10.4. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this subsection 10.4 for any legal or other expenses 9 subsequently incurred by such indemnified party in connection with the defense thereof, other than reasonable costs of investigation or out-of-pocket expenses or losses or cost incurred in collaborating in the defense. (vii) Except as set forth in subsection 10.4(viii), the Company shall bear all costs and expenses incident to any registration pursuant to this Section 10. (viii) The Holder shall pay any and all underwriters' discounts, brokerage fees and transfer taxes incident to the sale of any securities sold by such Holder pursuant to this Section 10, and shall pay the fees and expenses of any special attorneys or accountants retained by it. (ix) If the filing of any registration statement pursuant to subsection 10.4 would require the Company to obtain audited financial statements other than its normal year end audit required for the filing of its reports required under the Securities Exchange Act of 1934 (the "Exchange Act"), the Company may defer the filing of such registration statement until the necessary audited financial statements are available, unless the Holder arranges for the payment of the expense of such audit to the extent that such expense would exceed the amount which the Company would otherwise be required to bear in connection with its normal audit schedule for reporting under the Exchange Act. 10.5 If the indemnification provided for in this Section is unavailable or insufficient to hold harmless an indemnified party in respect of any losses, claims, damages, liabilities, expenses or actions in respect thereof referred to herein, then each indemnifying party shall in lieu of indemnifying such indemnified party contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities, expenses or actions in such proportion as is appropriate to reflect the relative fault of the Company, on the one hand, and the seller of such Warrant Shares, on the other, in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities, expenses or actions as well as any other relevant equitable considerations, including the failure to give the notice required hereunder. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact relates to information supplied by the Company, on the one hand, or the sellers of such Warrant Shares, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the holder hereof agree that it would not be just and equitable if contribution pursuant to this Section were determined by pro rata allocation (even if all of the sellers of such Warrant Shares were treated as one entity for such purpose) or by any other method of allocation which did not take account of the equitable considerations referred to above. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities or actions in respect thereof referred to above shall be deemed to include any legal or other expenses which reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the contribution provisions of this Section, in no event shall the amount contributed by any seller from the sale of 10 Warrant Shares to which such contribution claim relates. No person guilty of fraudulent misrepresentations (within the meaning of section 11(f) of the Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. Each Holder of this Warrant and each Holder of Warrant Shares bearing the legend required by Section 10.6, by acceptance hereof or thereof, as the case may be, agrees to the indemnification and contribution provisions of this Section 10.5. 10.6 Legend on Warrants and Certificates. Each Warrant shall bear a legend in substantially the following form: "This Warrant and any shares of Common Stock issuable upon the exercise of this Warrant have not been registered under the Securities Act of 1933, as amended, and neither this Warrant nor any such shares may be transferred in the absence of such registration or an exemption therefrom under such Act." In case any shares are issued upon the exercise in whole or in part of this Warrant or are thereafter transferred, in either case under such circumstances that no registration under the Act is required or effective, each certificate representing such shares shall bear on the face thereof the following legend: "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, and any transfer thereof is subject to the conditions specified in the Warrant dated as of January 20, 1997 originally issued by Aristo International Corporation (the "Company") to [1] to purchase shares of Common Stock, $.001 par value, of the Company. A copy of the form of such Warrant is on file with the Secretary of the Company in New York, New York, and will be furnished without charge by the Company to the holder of this certificate upon written request to the Secretary of the Company at such address." 11. Miscellaneous 11.1 Governing Law. This Warrant Certificate shall be governed by and construed in accordance with the laws of the State of New York. 11.2 Holder Not a Stockholder. Prior to the exercise of this Warrant, the holder hereof shall not be entitled to any of the rights of a stockholder of the Company including, without limitation, the right as a stockholder to (a) vote on or consent to any proposed action of the Company or (b) receive (i) dividends or any distributions made to stockholders, (ii) notice of or attend any meetings of stockholders of the Company or (iii) notice of any other proceedings of the Company. 11.3 Notices. Any notice, demand or delivery to be made pursuant to the provisions of this Warrant shall be sufficiently given or made if sent by first class mail, postage prepaid, addressed to (a) the holder of this Warrant or issued Warrant Shares at its last known address appearing on the books at the Company maintained for such purposes or (b) the Company at its 11 principal offices at 152 West 57th Street, New York, New York 10019, Attention: General Counsel. The Holder of this Warrant and the Company may each designate a different address by notice to the other pursuant to this Section 11.3. 11.4 Investment Representation. The Holder represents that it is purchasing the Warrant and all shares issuable upon exercise of this Warrant for its own account and not as nominee or agent for any other person and not with a view to, or for offer or sale in connection with any distribution thereof (within the meaning of the Act) that would be in violation of the applicable securities laws; provided, however, that subject to the restrictions contained in Section 10, that the disposition of all or any part of such shares shall at all times be within the Holder's exclusive control. 11.5 Confidentiality of Information. The Holder of this Warrant (and any affiliates of the Holder) and any permitted transferee of this Warrant will treat all documents, financial statements, reports and other information delivered pursuant to this Warrant and that certain Consulting Agreement between the Company and [1] dated June 4, 1996 on a confidential basis with the same degree of care it treats similar confidential information of its own. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed by its officers thereunto duly authorized and its corporate seal to be affixed hereon, as of this 20th day of January, 1997. PLAYNET TECHNOLOGIES, INC. By: _____________________________ Shmuel Cohen President & Chief Executive Officer 12 EXHIBIT A NOTICE OF EXERCISE FORM ----------------------- (To be executed only upon partial or full exercise of the within Warrant) The undersigned registered Holder of the within Warrant irrevocably exercises the within Warrant for and purchases shares of Common Stock of Aristo International Corporation (the "Company") and herewith makes payment therefor in the amount of $_________, all at the price and on the terms and conditions specified in the within Warrant, and requests that a certificate (or ______ certificates in denominations of ______ shares) for the shares of Common Stock of Aristo International Corporation hereby purchased be issued in the name of and delivered to (choose one) (a) the undersigned or (b) ________, whose address is _______________ and, if such shares of Common Stock shall not include all the shares of Common Stock issuable as provided in the within Warrant, that a new Warrant of like tenor for the number of shares of Common Stock of the Company not being purchased hereunder be issued in the name of and delivered to (choose one) (a) the undersigned or (b) ______________, whose address is _______________________. The undersigned represents that it is purchasing the securities described above for its own account and not as a nominee or agent for any other person and not with a view to, or for offer of sale in connection with, any distribution thereof (within the meaning of the Securities Act of 1933) that would be in violation of the applicable securities laws; provided, however, that subject to the restrictions contained in Section 10 of the Warrant that the disposition of all or any part of such shares shall at all times be within the undersigned's exclusive control. Dated: __________________ By:________________________________ (signature of Registered Holder) Signature Guaranteed: _________________________ By:_____________________ Title: NOTICE: The signature to this Notice must correspond with the name as written upon the face of the within Warrant in every particular, without alteration or enlargement or any change whatever. The signature to this Notice must be guaranteed by a commercial bank or trust company in the United States or a member firm of the New York Stock Exchange. 13 EXHIBIT B NOTICE OF CONVERSION The undersigned hereby irrevocably elects to convert, pursuant to Section 7 of the Warrant Certificate accompanying this Notice of Conversion, _______ Warrants of the total number of Warrants owned by the undersigned pursuant to the accompanying Warrant Certificate into shares of the Common Stock of the Company (the "Shares"). The number of Shares to be received by the undersigned shall be calculated in accordance with the provisions of Section 7.1 of the accompanying Warrant Certificate. Dated: _______________ ___________________________ Name of Holder ___________________________ Signature Address: ___________________________ ___________________________ ___________________________ Signature Guaranteed: _______________________________ By:___________________________ Name: Title: 14 ASSIGNMENT FORM --------------- (To be executed only upon the assignment of the within Warrant) FOR VALUE RECEIVED, the undersigned registered Holder of the within Warrant hereby sells, assigns and transfers unto _____________________, whose address is ________________________, all of the rights of the undersigned under the within Warrant, with respect to _______________ shares of Common Stock of Aristo International Corporation (the "Company") and, if such shares of Common stock shall not include all the shares of Common Stock issuable as provided in the within Warrant, that a new Warrant of like tenor for the number of shares of Common Stock of the Company not being transferred hereunder be issued in the name of and delivered to the undersigned, and does hereby irrevocably constitute and appoint ______________ Attorney to register such transfer on the books of the Company maintained for the purpose, with full power of substitution in the premises. Dated: _____________, 19__. By:________________________________ (Signature of Registered Holder) Signature Guaranteed: ___________________________ By:_______________________ Title: NOTICE: The signature to this Assignment must correspond with the name as written upon the face of the within Warrant in every particular, without alteration or enlargement or any change whatever. The signature to this Assignment must be guaranteed by a commercial bank or trust company in the United States or a member firm of the New York Stock Exchange. ================================================================================ Warrant Certificates Issued To: - - -------------------------------------------------------------------------------- Name [1] Number of Warrants [2] Price Per Share [3] Date Issued ================================================================================ Richard Friedman 50,000 $5.50 January 20, 1997 - - -------------------------------------------------------------------------------- Jeffrey Markowitz 50,000 $5.50 January 20, 1997 ================================================================================ EX-10 5 10.25 - October 30, 1996 [1] Re: Option to Purchase Common Stock in Aristo International Corporation ("Aristo"), dated May 16, 1996 Dear [2]: This letter will confirm that the exercise period for the option to purchase [3] shares of Aristo common stock, $.001 par value per share, at an exercise price of $[4] per share, originally granted May [5], 1996, has been extended from December 31, 1996 to February 28, 1997 (the "Extension Date") and that such option shall be automatically exercised upon the completion of a public offering of shares of common stock of Aristo which occurs on or before the January 31, 1997, provided, however, that the offering price of such public offering is no less than $9.00 per share. Upon exercise, the share certificate will be forwarded to you at the address set forth below. In the event a public offering of common stock of Aristo with an offering price of no less than $9.00 per share does not occur on or before January 31, 1997, you may still exercise the option up through and including the Extension Date, or call for the option consideration to be returned at anytime during the period beginning ten (10) business days after the Exercise Date. If the foregoing conforms to your understanding of our agreement, please sign one copy of this letter and return it to the undersigned, retaining the other copy for your records. Very truly yours, ARISTO INTERNATIONAL CORPORATION Shmuel Cohen President & Chief Executive Officer Accepted and Agreed: By: _________________________________ [6] Address to which certificate should be sent: _________________________________ _________________________________ ================================================================================ Options to Purchase Extension Letters in the Form Attached - - -------------------------------------------------------------------------------- Name Number of Shares Exercise Price Date of Original Grant [1], [2] and [6] [3] [4] [5] ================================================================================ Nadav Henefeld 20,000 $6.50 May 16, 1996 - - -------------------------------------------------------------------------------- Mickey Berkowitz 20,000 $6.50 May 16, 1996 - - -------------------------------------------------------------------------------- Joseph Herman 20,000 $6.50 May 16, 1996 - - -------------------------------------------------------------------------------- Adi Fitterman 11,000 $6.50 May 29, 1996 - - -------------------------------------------------------------------------------- Arie & Ita Shapira 10,000 $5.50 May 29, 1996 ================================================================================ EX-10 6 10.26 - [On PlayNet Technologies, Inc. Letterhead] December 5, 1996 Zeller Eblagon Financial Services, Ltd. Re: Option to Purchase Common Stock in PlayNet Technologies, Inc. (formerly Aristo International Corporation) ("PlayNet"), dated July 31, 1996 Gentlemen: This letter will confirm that the exercise period for the option to purchase 90,909 shares of PlayNet common stock, $.001 par value per share, at an exercise price of $5.50 per share, originally granted July 31, 1996 (replacing and superseding the earlier option granted on April 30, 1996), has been extended from December 31, 1996 to March 31, 1997 (the "Exercise Date"). If the foregoing conforms to your understanding of our agreement, please sign this letter agreement where indicated and return it to the undersigned, retaining a copy for your records. Very truly yours, PlayNet Technologies, Inc. Shmuel Cohen President & Chief Executive Officer Accepted and Agreed: Zeller Eblagon Financial Services, Ltd. By: _________________________________ Name: ____________________________ Title: _____________________________ [On PlayNet Technologies, Inc. Letterhead] December 5, 1996 Zeller Eblagon Financial Services, Ltd. Re: Option to Purchase Common Stock in PlayNet Technologies, Inc. (formerly Aristo International Corporation) ("PlayNet"), dated April 12, 1996 Gentlemen: This letter will confirm that the exercise period for the option to purchase 81,818 shares of PlayNet common stock, $.001 par value per share, at an exercise price of $5.50 per share, originally granted April 12, 1996, has been extended from December 31, 1996 to March 31, 1997 (the "Exercise Date"). This option was granted as a material part of the consideration for a Promissory Note between PlayNet and Zeller Eblagon Financial Services, Ltd. affiliate, Zeller Eblagon Leasing Ltd., dated April 12, 1996, which Promissory Note was paid in full on August 22, 1996. If the foregoing conforms to your understanding of our agreement, please sign this letter agreement where indicated and return it to the undersigned, retaining a copy for your records. Very truly yours, PlayNet Technologies, Inc. Shmuel Cohen President & Chief Executive Officer Accepted and Agreed: Zeller Eblagon Financial Services, Ltd. By: _________________________________ Name: ____________________________ Title: _____________________________ EX-10 7 10.27A ARISTO INTERNATIONAL CORPORATION 152 West 57th Street New York, New York 10019 FIRST AMENDMENT TO ------------------ PROMISSORY NOTE --------------- $330,000 New York, New York October 31, 1996 Aristo International Corporation (the "Maker") entered into a Promissory Note, dated June 27, 1996 (the "Promissory Note"), a copy of which is attached hereto, evidencing its promise to pay to NY Holdings, Limited (the "Holder"), in lawful money of the United States of America, the principal sum of Three Hundred Thirty Thousand and 00/100 Dollars ($330,000) (the "Principal Amount") on October 31, 1996 (the "Maturity Date"). The Holder has agreed, and, by the execution and delivery of this First Amendment to Promissory Note, does hereby evidence its agreement to extend the Maturity Date of the Promissory Note to January 31, 1997. As a material part of the consideration for this First Amendment to Promissory Note, Maker hereby extends the option of Holder to acquire 120,000 shares of common stock of the Maker for the cash payment of $660,000 up to and including June 30, 1997. In the event the Holder converts the Principal Amount to equity of the Maker, in accordance with its letter notice to Maker dated September 12, 1996, by the partial exercise of its option on or before January 31, 1997, thereby converting the Principal Amount to 60,000 shares of common stock of the Maker, then the remaining portion of the option of Holder to acquire an the remaining additional 60,000 shares of common stock of the Maker for the additional cash payment of $330,000 shall be extended up to and including December 31, 1997. The Holder and the Maker hereby ratify and confirm all other terms and conditions of the Promissory Note not specifically modified herein, all of which are incorporated herein by this reference as if stated fully herein. ================================================================================ REMAINDER OF PAGE INTENTIONALLY LEFT BLANK ================================================================================ Page 1 of 2 IN WITNESS WHEREOF, the Holder and the Maker have caused this First Amendment to Promissory Note to be executed by its duly authorized officer as of the day and year first written above. WITNESS: ARISTO INTERNATIONAL CORPORATION ______________________________ By: ______________________________________ Name: Shmuel Cohen President & Chief Executive Officer NY HOLDINGS, LIMITED ______________________________ By: ______________________________________ Name: Name: Title: ================================================================================ REMAINDER OF PAGE INTENTIONALLY LEFT BLANK ================================================================================ Page 2 of 2 EX-10 8 10.27B [On PlayNet Technologies, Inc. Letterhead] Page 1 of 2 SECOND AMENDMENT TO ------------------- PROMISSORY NOTE --------------- $330,000 New York, New York January 10, 1997 PlayNet Technologies, Inc. (formerly Aristo International Corporation) (the "Maker") entered into a Promissory Note, dated June 27, 1996, as amended on October 31, 1996 (the "Promissory Note") evidencing its promise to pay to NY Holdings, Limited (the "Holder"), in lawful money of the United States of America, the principal sum of Three Hundred Thirty Thousand and 00/100 Dollars ($330,000) (the "Principal Amount") on January 31, 1997 (the "Maturity Date"). The Holder has agreed, and, by the execution and delivery of this First Amendment to Promissory Note, does hereby evidence its agreement to extend the Maturity Date of the Promissory Note to February 28, 1997. As a material part of the consideration for this Second Amendment to Promissory Note, Maker hereby reaffirms the extension of the option of Holder to acquire 120,000 shares of common stock of the Maker for the cash payment of $660,000 up to and including June 30, 1997, subject further to the terms set forth below. In the event the Holder converts the Principal Amount to equity of the Maker, in accordance with its letter notice to Maker dated September 12, 1996, by the partial exercise of its option on or before February 28, 1997, thereby converting the Principal Amount to 60,000 shares of common stock of the Maker, then the remaining portion of the option of Holder to acquire an the remaining additional 60,000 shares of common stock of the Maker for the additional cash payment of $330,000 shall be extended up to and including December 31, 1997. The Holder and the Maker hereby ratify and confirm all other terms and conditions of the Promissory Note not specifically modified herein, all of which are incorporated herein by this reference as if stated fully herein. ================================================================================ REMAINDER OF PAGE INTENTIONALLY LEFT BLANK ================================================================================ Page 1 of 2 IN WITNESS WHEREOF, the Holder and the Maker have caused this First Amendment to Promissory Note to be executed by its duly authorized officer as of the day and year first written above. WITNESS: ARISTO INTERNATIONAL CORPORATION ______________________________ By: ______________________________________ Name: Shmuel Cohen President & Chief Executive Officer NY HOLDINGS, LIMITED ______________________________ By: ______________________________________ Name: M. Fox Director ================================================================================ REMAINDER OF PAGE INTENTIONALLY LEFT BLANK ================================================================================ Page 2 of 2 EX-10 9 10.28 [On PlayNet Technologies, Inc. Letterhead] SIXTH AMENDMENT TO ------------------ PROMISSORY NOTE --------------- $500,000 New York, New York December 5, 1996 PlayNet Technologies, Inc. (formerly Aristo International Corporation) (the "Maker") entered into a Promissory Note, dated February 12, 1996, a copy of which is attached hereto (the "Promissory Note"), evidencing its promise to pay to CERES ADVISORS, LTD. (the "Holder"), in lawful money of the United States of America, the principal sum of Five Hundred Thousand and no/100 Dollars. The Promissory Note's maturity has been extended, by a series of amendments, to December 12, 1996. The Holder notified the Maker on June 12, 1996 of its intention to convert the principal sum of the Promissory Note into equity of the Maker in the form of shares of common stock, par value $.001 per share, at a price of $5.50 per share. The Holder has agreed, and, by the execution and delivery of this Sixth Amendment to Promissory Note, does hereby evidence its agreement to extend the maturity of the Promissory Note to March 31, 1997 (the "Maturity Date"). The Holder and the Maker hereby ratify and confirm all other terms and conditions of the Promissory Note, as amended by the series of amendments to this date, all of which are incorporated herein by this reference. IN WITNESS WHEREOF, the Holder and Maker have caused this Sixth Amendment to be executed by its duly authorized representatives as of the day and year first above written. CERES ADVISORS, LTD. PLAYNET TECHNOLOGIES, INC. By: ________________________ By: _________________________ Harry Sapir Shmuel Cohen Director President & Chief Executive Officer EX-10 10 10.29 [On PlayNet Technologies, Inc. Letterhead] FIRST AMENDMENT TO ------------------ PROMISSORY NOTE --------------- $500,000 New York, New York December 5, 1996 PlayNet Technologies, Inc. (formerly Aristo International Corporation) (the "Maker") entered into a Promissory Note, dated July 31, 1996, which superseded and replaced entirely and earlier Promissory Note dated April 30, 1996, a copy of which is attached hereto (the "Promissory Note"), evidencing its promise to pay to ZELLER EBLAGON LEASING LTD. (the "Holder"), in lawful money of the United States of America, the principal sum of Five Hundred Thousand and no/100 Dollars. The Holder has agreed, and, by the execution and delivery of this First Amendment to Promissory Note, does hereby evidence its agreement to extend the maturity of the Promissory Note from December 31, 1996 to March 31, 1997 (the "Maturity Date"). The Holder and the Maker hereby ratify and confirm all other terms and conditions of the Promissory Note, all of which are incorporated herein by this reference. IN WITNESS WHEREOF, the Holder and Maker have caused this First Amendment to be executed by its duly authorized representatives as of the day and year first above written. ZELLER EBLAGON LEASING LTD. PLAYNET TECHNOLOGIES, INC. By: ________________________ By: _________________________ Shmuel Cohen President & Chief Executive Officer EX-10 11 10.30A [On PlayNet Technologies, Inc. Letterhead] FIRST AMENDMENT TO ------------------ PROMISSORY NOTE --------------- $260,000 New York, New York January 1, 1997 PlayNet Technologies, Inc. (formerly Aristo International Corporation) (the "Maker") entered into a Promissory Note, dated December 29, 1995, a copy of which is attached hereto (the "Promissory Note"), evidencing its promise to pay to CASTELLON LIMITED (the "Holder"), in lawful money of the United States of America, the principal sum of Two Hundred Sixty Thousand and no/100 Dollars ($260,000) (the Principal Amount") on January 1, 1997 (the "Maturity Date") along with quarterly interest payments of $13,000 payable on April 1, 1996, July 1, 1996, October 1, 1996 and January 1, 1997. In addition, the Holder has the right to convert on or before January 1, 1997 (the "Conversion Date") all or a portion of the Principal Amount into shares of common stock of the Maker at a conversion price of $5.50 per share. The Holder and Maker have agreed, and, by the execution and delivery of this First Amendment to Promissory Note, do hereby evidence their agreement to extend the Maturity Date and the Conversion Date to January 31, 1997. The Holder and the Maker hereby ratify and confirm all other terms and conditions of the Promissory Note not specifically amended or modified by this First Amendment, all of which are incorporated herein by this reference. IN WITNESS WHEREOF, the Holder and Maker have caused this First Amendment to be executed by its duly authorized representatives as of the day and year first above written. CASTELLON LIMITED PLAYNET TECHNOLOGIES, INC. By: ________________________ By: _________________________ Joseph Ettinger Shmuel Cohen resident President & Chief Executive Officer EX-10 12 10.30B [On PlayNet Technologies, Inc. Letterhead] SECOND AMENDMENT TO ------------------- PROMISSORY NOTE --------------- $260,000 New York, New York January 10, 1997 PlayNet Technologies, Inc. (formerly Aristo International Corporation) (the "Maker") entered into a Promissory Note, dated December 29, 1995, as amended on January 1, 1997 (the "Promissory Note"), evidencing its promise to pay to CASTELLON LIMITED (the "Holder"), in lawful money of the United States of America, the principal sum of Two Hundred Sixty Thousand and no/100 Dollars ($260,000) (the Principal Amount") on January 31, 1997 (the "Maturity Date"). A final quarterly interest payment in the amount of $13,000 was due on January 1, 1997. In addition, the Holder has the right to convert on or before January 1, 1997 (the "Conversion Date") all or a portion of the Principal Amount into shares of common stock of the Maker at a conversion price of $5.50 per share. The Holder and Maker have agreed, and, by the execution and delivery of this First Amendment to Promissory Note, do hereby evidence their agreement to extend the Maturity Date and the Conversion Date to February 28, 1997. The Holder and the Maker hereby ratify and confirm all other terms and conditions of the Promissory Note not specifically amended or modified by this First Amendment, all of which are incorporated herein by this reference. IN WITNESS WHEREOF, the Holder and Maker have caused this First Amendment to be executed by its duly authorized representatives as of the day and year first above written. CASTELLON LIMITED PLAYNET TECHNOLOGIES, INC. By: ________________________ By: _________________________ Joseph Ettinger Shmuel Cohen President President & Chief Executive Officer EX-21 13 LIST OF SUBSIDIARIES SUBSIDIARIES OF THE REGISTRANT ------------------------------ Subsidiary* State of Incorporation PlayNet Studios, Inc. (formerly Borta, Inc.) Delaware PlayNet Productions, Inc. (formerly Aristo Games, Inc.) Delaware PlayNet, Inc. Delaware - - ------------------------- * All subsidiaries are direct wholly-owned subsidiaries. -----END PRIVACY-ENHANCED MESSAGE-----