-----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, HYPmEd+AYG9Uf+EbSSUdGNrNd3YDBRsVz8tD7VopVuiip6HUxrk+/ttjIVkjBY2E x0LlYtLCzHeslChuXEqGQQ== 0000950168-99-000185.txt : 19990201 0000950168-99-000185.hdr.sgml : 19990201 ACCESSION NUMBER: 0000950168-99-000185 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990125 ITEM INFORMATION: ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19990129 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERACTIVE MAGIC INC /NC/ CENTRAL INDEX KEY: 0001061915 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 562092059 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 000-29750 FILM NUMBER: 99517078 BUSINESS ADDRESS: STREET 1: 215 SOUTHPORT DR STREET 2: STE 1000 CITY: MORRISVILLE STATE: NC ZIP: 27560 BUSINESS PHONE: 9194610722 MAIL ADDRESS: STREET 1: 215 SOUTHPORT DR STREET 2: STE 1000 CITY: MORRISVILLE STATE: NC ZIP: 27560 8-K 1 INTERACTIVE MAGIC, INC. 8-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report: January 25, 1999 INTERACTIVE MAGIC, INC. (Exact name of registrant as specified in charter) NORTH CAROLINA (State of other jurisdiction of incorporation) 0-29750 56-2092059 - ------------------------ --------------------------------- (Commission File Number) (IRS Employer Identification No.) 215 Southport Drive, Suite 1000, Morrisville, NC 27560 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone no. including area code: (919) 461-0722 -------------- Item 2. Acquisition or Disposition of Assets. ------------------------------------- On January 25, 1999, the Company entered into an agreement (the "MPG-Net Agreement") to acquire, pursuant to a merger transaction, MPG-Net, Inc. ("MPGN"). In consideration for the merger and certain related obligations of MPGN, the Company issued 750,000 shares of the Company's common stock, par value $.10 per share ("Common Stock"), which shares have been deposited into escrow pending the consummation of the merger and final determination of the merger consideration. The maximum merger consideration will be $4,000,000. In the event that at closing, the fair market value of the Common Stock deposited into escrow exceeds $4,000,000, the number of shares delivered upon consummation of the merger will be reduced accordingly. Upon the closing of the proposed transaction, the stockholders of MPGN will receive demand and piggyback registration rights. The consummation of the merger is subject to customary closing conditions. MPGN develops, publishes and distributes interactive, real-time entertainment for multi-user online play, as well as creates interactive entertainment platforms on the Internet, such as online game channels, game hubs and websites. Item 5. Other Events ------------ On January 26, 1999 the Company sold a $4 million convertible note due January 25, 2002 in a private placement to RGC International Investors, LDC (the "Purchaser") pursuant to a Securities Purchase Agreement dated as of January 25, 1999 by and between the Company and the Purchaser. The Note bears interest at six percent (6%) per annum, subject to increase in certain circumstances. The Note is convertible into shares of the Company's Common Stock at a conversion price (the "Conversion Price") initially equal to the lower of (i) $4.815 (the "Fixed Conversion Price") and (ii) 93% of the market price at the time of conversion. The Fixed Conversion Price equals 120% of the average closing bid prices of the Common Stock for the five trading days immediately preceding January 25, 1999. The market price at the time of conversion will be determined by averaging the lowest closing bid prices on any two trading days during the 22-day trading period immediately prior to the conversion date. The Conversion Price is subject to reduction in certain circumstances, including (i) if the Common Stock trading volume does not exceed specified amounts and (ii) commencing on June 26, 1999 and every 60 days thereafter (in this case up to a maximum reduction of sixteen percentage points). In certain circumstances upon conversion of the Note, the holder is entitled to warrants to purchase a number of shares of Common Stock equal to 50% of the shares issued upon conversion of the Note, exercisable at the then Conversion Price. The Conversion Price is also subject to adjustment in other circumstances. -2- Unless stockholder approval is obtained and other specified conditions are met, the total number of shares of Common Stock issuable upon conversion of or otherwise pursuant to the Note (the "Conversion Shares") and upon exercise of or otherwise pursuant to the warrants (the "Warrant Shares") shall not exceed 2,119,889, which represents 19.99% of the 10,604,748 shares of outstanding Common Stock as of the date the Note was issued (including the 750,000 shares of common stock issued and held in escrow in connection with the MPG-Net Agreement). Stockholders of the Company beneficially owning an aggregate of 5,396,266 shares of Common Stock (including shares issuable upon exercise of options and shares as to which such stockholders have the right to vote) agreed to vote their shares in favor of stockholder approval if the Company is required to obtain such approval. The net proceeds of the financing were approximately $3,670,000, net of a placement agent commission and expenses of the financing. The Company agreed to grant the placement agent warrants to purchase 200,000 shares of Common Stock at an exercise price equal to 110% of market price determined at the date of issuance. The Company intends to use the net proceeds of the private placement for working capital and business development activities including for potential acquisitions. Although the Company from time to time evaluates and engages in discussions with respect to potential acquisitions, with the exception of the MPG-Net Agreement, the Company has no agreements or commitments with respect to any particular acquisition. The Company granted the Purchaser demand and piggyback registration rights relating to the resale of the Conversion Shares and the Warrant Shares. The holder of the Note has the right to require the Company to redeem the Note at a specified value under certain conditions including if the Company (i) fails to have a registration statement relating to the resale of the Conversion Shares and the Warrant Shares declared effective by the Securities and Exchange Commission by June 25, 1999; (ii) declares bankruptcy or makes an assignment for the benefit of creditors; (iii) sells all or substantially all of its assets or merges into another corporation, except under certain conditions; (iv) fails to maintain a listing of its Common Stock on the Nasdaq National Market; or (v) breaches in any material respect certain covenants. In the event the Notes were redeemed, the Company's liquidity would be materially adversely affected. In the event the market price of the Common Stock declines, the issuance of Conversion Shares and/or Warrant Shares will be increasingly dilutive to the other stockholders of the Company. Item 7. Financial Statements, Pro Forma Financial Information and Exhibits ------------------------------------------------------------------ (a) Financial Statements of the Businesses Acquired To be filed by amendment within the time period specified by Item 7 of Form 8-K. (b) Pro Forma Financial Information To be filed by amendment within the time period specified by Item 7 of Form 8-K. (c) Exhibits -3- 10.27 Agreement and Plan of Merger by and among the Company, i Magic Online Corporation, MPG-Net, Inc. Multiplayer Games Network, Inc and Tantalus, Inc., James Hettinger and Donn A. Clendenon dated as of January 25, 1999 10.28 Securities Purchase Agreement dated as of January 25, 1999 between the Company and RGC International Investors LDC ("RGC") 10.29 Promissory Note dated January 26, 1999 issued by the Company to RGC ("Note") 10.30 Registration Rights Agreement dated as of January 25, 1999 between the Company and RGC 10.31 Form of Warrant issuable by the Company pursuant to the Note -4- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. INTERACTIVE MAGIC INC. By: /s/ Michael Oliver ------------------------ Michael Oliver Chief Financial Officer Dated: January 29 , 1999 EX-10 2 EXHIBIT 10.27 AGREEMENT AND PLAN OF MERGER DATED AS OF JANUARY 25, 1999 BY AND AMONG INTERACTIVE MAGIC, INC., IMAGICONLINE CORPORATION, MPG-NET, INC., MULTIPLAYER GAMES NETWORK, INC., TANTALUS, INC., DONN A. CLENDENON AND JAMES HETTINGER
TABLE OF CONTENTS PAGE ---- 1. CERTAIN DEFINITIONS.........................................................................................1 1.1 Defined Terms......................................................................................1 1.2 References to Dollars..............................................................................6 2. THE MERGER..................................................................................................6 2.1 The Merger.........................................................................................6 2.2 Consummation of the Merger and Effective Time......................................................6 2.3 Conversion or Cancellation of Shares...............................................................6 2.4 Merger Consideration...............................................................................7 2.5 Certificate of Incorporation and By-Laws...........................................................7 2.6 Directors and Officers.............................................................................7 3. THE CLOSING.................................................................................................7 3.1 Closing............................................................................................7 3.2 Issuance of Purchaser Common Stock.................................................................8 3.3 Pooling of Interests...............................................................................8 3.4 Withholding into Escrow............................................................................8 3.5 Registration Rights; and Resale Restrictions.......................................................8 4. REPRESENTATIONS AND WARRANTIES OF MPGN, HETTINGER, THE STOCKHOLDERS AND CLENDENON...........................9 4.1 Organization and Good Standing.....................................................................9 4.2 Capitalization of MPGN; Title to the MPGN Shares...................................................9 4.3 Authority Relative to Agreement....................................................................9 4.4 Absence of Conflict...............................................................................10 4.5 Consents and Approvals; Effect of Change in Control...............................................10 4.6 Financial Statements..............................................................................10 4.7 Title to Property; Sufficiency; Encumbrances......................................................11 4.8 Leased Property...................................................................................12 4.9 Intellectual Property Rights......................................................................12 4.10 Plant and Equipment...............................................................................12 4.11 Litigation........................................................................................12 4.12 Tax Matters.......................................................................................13 4.13 Absence of Certain Changes or Events..............................................................15 4.14 Employee Benefits; Executive Officers; Labor......................................................16 4.15 Insurance; Claims.................................................................................17 4.16 Contracts and Commitments.........................................................................17 4.17 Status of Agreements..............................................................................19 4.18 Compliance with Law...............................................................................19 4.19 Transactions with Related Parties.................................................................20 4.20 Bank Accounts.....................................................................................20 -i- 4.21 Absence of Certain Business Practices.............................................................20 4.22 No Guaranties.....................................................................................20 4.23 Records...........................................................................................20 4.24 No Brokers or Finders.............................................................................20 4.25 Year 2000 Compliance..............................................................................21 4.26 Investment Representations........................................................................21 4.27 Hettinger Representations.........................................................................22 4.28. Clendenon Representations.........................................................................22 4.29 Disclosure........................................................................................23 4.30 Knowledge Defined.................................................................................23 5. REPRESENTATIONS AND WARRANTIES OF PURCHASER................................................................23 5.1 Organization and Good Standing....................................................................23 5.2 Capitalization of Purchaser.......................................................................24 5.3 Authority Relative to Agreement; Compliance with Other Instruments; Absence of Conflict...........24 5.4 Effect of Agreement...............................................................................24 5.5 Consents and Approvals of Governmental Authorities................................................25 5.6 No Brokers or Finders.............................................................................25 5.7 SEC Documents: I-Magic Financial Statements......................................................25 6. CONDITIONS TO THE OBLIGATIONS OF PURCHASER AND I-MAGIC.....................................................25 6.1 Legal Opinion.....................................................................................25 6.2 No Injunction.....................................................................................26 6.3 Representations, Warranties and Agreements........................................................26 6.4 Litigation........................................................................................26 6.5 Approvals.........................................................................................26 6.6 No Material Adverse Effect........................................................................26 6.7 Completion of Due Diligence.......................................................................26 6.8 Payment of Transaction Expenses...................................................................26 6.9 Resignations......................................................................................27 6.10 Registration Rights Agreement.....................................................................27 6.11 Indebtedness Agreements...........................................................................27 6.12 Proceedings Satisfactory..........................................................................27 6.13 Stockholder Approval..............................................................................27 6.14 Cancellation of Indebtedness......................................................................27 6.15 Escrow Agreement..................................................................................27 6.16 Pooling Letter....................................................................................27 6.17 Opinion of Accountants............................................................................28 6.18 Secretary of State Certificates...................................................................28 6.19 Secretary's Certificate of the Company............................................................28 6.20 Lease.............................................................................................28 -ii- 7. CONDITIONS TO THE OBLIGATIONS OF MPGN AND STOCKHOLDER......................................................28 7.1 No Injunction.....................................................................................28 7.2 Representations, Warranties and Agreements........................................................28 7.3 Litigation........................................................................................29 7.4 Approvals.........................................................................................29 7.5 Registration Rights Agreement.....................................................................29 7.6 Legal Opinion.....................................................................................29 8. FURTHER AGREEMENTS OF THE PARTIES..........................................................................29 8.1 Expenses..........................................................................................29 8.2 Access Prior to the Closing.......................................................................29 8.3 Publicity.........................................................................................30 8.4 Non-Competition; Confidentiality..................................................................30 8.5 Conduct of Business of MPGN.......................................................................32 8.6 Further Assurances................................................................................34 8.7 Tax Matters.......................................................................................34 8.8 Exclusivity.......................................................................................36 8.9 Retrieval of Confidential Information.............................................................36 8.10 Pooling of Interests..............................................................................36 8.11 Amending Schedules................................................................................36 8.12 Consents: Regulatory Approval....................................................................37 9. INDEMNIFICATION AND RELATED MATTERS 9.1 Indemnification by MPGN, Hettinger and the Stockholders...........................................37 9.2 Indemnification by Purchaser......................................................................37 9.3 Survival..........................................................................................37 9.4 Time Limitations..................................................................................38 9.5 Limitations as to Amount -- Stockholders..........................................................38 9.6 Procedure for Indemnificatio......................................................................38 10. TERMINATION................................................................................................39 10.1 Termination Procedures............................................................................39 10.2 Effect of Termination.............................................................................39 11. MISCELLANEOUS.............................................................................................39 11.1 Entire Agreement.................................................................................39 11.2 Governing Law....................................................................................40 11.3 Headings.........................................................................................40 11.4 Notices..........................................................................................40 11.5 Binding Effect; Assignment.......................................................................41 11.6 Counterparts.....................................................................................41 11.7 Amendment and Waiver.............................................................................41 11.8 Dispute Resolution...............................................................................41 11.9 Attorneys' Fees..................................................................................42
-iii- SCHEDULES Schedule 2.6 Schedule 4.1 Schedule 4.2 Schedule 4.5 Schedule 4.6 Schedule 4.7 Schedule 4.7(b) Schedule 4.7(c) Schedule 4.8 Schedule 4.9 Schedule 4.12(a) Schedule 4.12(b) Schedule 4.12(c) Schedule 4.12(d) Schedule 4.12(e) Schedule 4.12(g) Schedule 4.14 Schedule 4.15 Schedule 4.16 Schedule 4.17 Schedule 4.18(a) Schedule 4.18(b) Schedule 4.18(c) Schedule 4.19 Schedule 4.20 Schedule 4.24 Schedule 5.1 Schedule 5.5 Schedule 6.9 EXHIBITS Exhibit A Plan of Merger Exhibit B Escrow Agreement Exhibit C Registration Rights Agreement Exhibit 6.1 Legal Opinion of Counsel to MPGN, Hettinger and the Stockholders Exhibit 7.6 Legal Opinion of Counsel to Purchaser -iv- AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER dated as of January 25, 1999, by and among Interactive Magic, Inc., a North Carolina corporation ("Purchaser"), iMagic Online Corporation, a North Carolina corporation and a wholly-owned subsidiary of Purchaser ("I-Magic"), MPG-Net, Inc., a Delaware corporation ("MPGN"), Multiplayer Games Network, Inc. and Tantalus, Inc., the stockholders of MPGN (the "Stockholders"), James Hettinger, the sole stockholder of each of the Stockholders ("Hettinger"), and Donn A. Clendenon ("Clendenon"). W I T N E S S E T H: WHEREAS, the Boards of Directors of each of Purchaser, I-Magic and MPGN has determined that it is in the best interests of each such company and its respective stockholders for MPGN to merge with and into I-Magic upon the terms and subject to the conditions set forth herein; WHEREAS, the Board of Directors of I-Magic has adopted resolutions approving this Agreement pursuant to Article 11 of the North Carolina Business Corporation Act, as amended (the "NCBCA"); WHEREAS, the Board of Directors of MPGN has adopted a resolution approving this Agreement pursuant to Section 252 of the Delaware General Corporation Law (the "DGCL"); WHEREAS, the Stockholders and Clendenon have adopted this Agreement in accordance with Section 252 of the DGCL; WHEREAS, the Parties hereto intend that the merger contemplated herein shall qualify as a reorganization within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended (the "Code"); and WHEREAS, the Parties hereto intend for the merger contemplated herein to constitute a "pooling of interests" for Purchaser's accounting purposes; NOW, THEREFORE, in consideration of the premises and the mutual representations, warranties, covenants and agreements hereinafter set forth, the Parties hereto do hereby agree as follows: 1. CERTAIN DEFINITIONS. 1.1 Defined Terms. As used in this Agreement, the following terms shall have the meanings specified or referred to below (terms defined in the singular to have the correlative meaning in the plural and vice versa): "AFFILIATE" of any Person shall mean any entity which, directly or indirectly, controls or is controlled by that Person, or is under common control with that Person. For the purposes of this definition, "control" (including, with correlative meaning, the terms "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such person, whether through the ownership of voting securities or by contract or otherwise. "APPROVALS" shall have the meaning set forth in SECTION 4.5. "BUSINESS DAY" shall mean any day that is not a Saturday or a Sunday or a day on which banks located in New York City are authorized or required to be closed. "CLOSING" shall have the meaning set forth in SECTION 3.1. "CODE" shall mean the Internal Revenue Code of 1986, as amended. "COMPETING ENTERPRISE" shall mean any person, corporation, firm or entity engaged in the same or a competitive business as MPGN, Purchaser or any of its Affiliates, as conducted as of the date of this Agreement or during any period of employment of Hettinger with Purchaser or any of its Affiliates, including, without limitation, any activities related to online gaming. "CONTEMPLATED TRANSACTIONS" shall mean the merger of MPGN with and into I-Magic and the execution, delivery and performance of and compliance with this Agreement and all other agreements to be executed and delivered pursuant to this Agreement. "CONTRACT" shall have the meaning set forth in SECTION 4.16. "DAMAGES" shall have the meaning set forth in SECTION 9.1. "DGCL" shall have the meaning set forth in the third recital to the Agreement. "EFFECTIVE TIME" shall mean the date and time of consummation of the Merger, as evidenced by the filing of articles of merger with the Secretary of State of the State of North Carolina and a certificate of merger with the Secretary of State of the State of Delaware, whichever is later. -2- "ENCUMBRANCE" shall mean any security interest, mortgage, lien, charge, license, easement, right-of-way, cloud on title, adverse claim or restriction of any kind, including, but not limited to, any restriction on the use, voting, transfer, receipt of income or other exercise of any attributes of ownership. "ENVIRONMENTAL LAWS" shall mean all federal, state, local and foreign laws and regulations in effect as of the Effective Time relating to pollution or protection of the environment (including, without limitation, ambient air, surface water, ground water, wetland, land surface and subsurface strata), including, without limitation, laws and regulations relating to the importation, manufacture, processing, formulation, testing, distribution, use, treatment, storage, disposal, transport, handling or release of any "hazardous waste" (as defined in the Resource Conservation and Recovery Act of 1976, as amended, and regulations promulgated thereunder), "hazardous substance" or "pollutant or contaminant" (as defined in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, and regulations promulgated thereunder), radioactive materials, genetically modified organisms, asbestos, and petroleum, its derivatives, by-products and other petroleum-related hydrocarbons. "ESCROW AGREEMENT" shall have the meaning set forth in SECTION 3.4. "FAIR MARKET VALUE" shall mean the average of the last sales price, regular way, for a share of Purchaser Common Stock on the Nasdaq National Market for the five consecutive trading days ending on the Business Day immediately preceding the date for calculation. "FINANCIAL STATEMENTS" shall have the meaning set forth in SECTION 4.6. "GAAP" shall mean generally accepted accounting principles in the United States. "GOVERNMENTAL BODY" shall mean any domestic or foreign national, state, multi-state or municipal or other local government, any subdivision, agency, commission or authority thereof, or any quasi-governmental or private body exercising any regulatory or taxing authority thereunder. "HAZARDOUS MATERIALS" shall mean any substance which as of the date of this Agreement shall be identified as "hazardous" or "toxic" or otherwise regulated under the Comprehensive Environmental Response, Compensation and Liability Act or Resource Conservation and Recovery Act of 1976, as amended or which has been determined by any agency or court to be a hazardous or toxic substance under Environmental Laws. The term "Hazardous Material" shall also include, with limitation, raw materials, building components, the products of any manufacturing or other activities on the properties, wastes, petroleum, and source, special nuclear or by-product material as defined by the Atomic Energy Act of 1954, as amended. "INDEBTEDNESS" shall mean any and all obligations of MPGN to Bill Hettinger, in the amount of $1,200,000. -3- "INTELLECTUAL PROPERTY" shall mean any and all United States and foreign: (a) patents (including, without limitation, design patents, industrial designs and utility models) and patent applications (including certificates of invention, applications for certificates of invention, docketed patent disclosures awaiting filing, reissues, renewals, divisions, continuations, continuations-in-part, extensions and supplementary protection certificates or the like), patent disclosures awaiting filing determination, inventions and improvements thereto; (b) trademarks, service marks, trade names, trade dress, logos, business and product names, slogans, and registrations and applications for registration thereof; (c) copyrights and registrations thereof; and (d) inventions, processes, designs, formulae, computer programs and databases, trade secrets, know-how, industrial models, confidential and technical information, manufacturing, engineering and technical drawings, product specifications and confidential business information. "LAW" shall have the meaning set forth in SECTION 4.18. "LEASES" shall have the meaning set forth in SECTION 4.8 "MATERIAL ADVERSE EFFECT" shall mean any act, occurrence, fact, event, omission or circumstance which in the reasonable judgment of an experienced, prudent business person would (a) reduce the value of the business of MPGN, or (b) result in a decision not to consummate the Contemplated Transactions on the terms and conditions set forth in this Agreement. "MERGER" shall mean the merger of MPGN with and into I-Magic, as contemplated by ARTICLE 2 of this Agreement. "MERGER CONSIDERATION" shall have the meaning set forth in SECTION 2.4. "MPGN SHARES" shall have the meaning set forth in SECTION 2.3.1. "NORTH CAROLINA BUSINESS CORPORATION ACT" shall have the meaning set forth in the second recital to this Agreement. "PARTY" shall mean any of Purchaser, I-Magic, MPGN, the Stockholders, Hettinger and Clendenon. "PERMITTED ENCUMBRANCES" shall have the meaning set forth in SECTION 4.7. "PERSON" shall mean any individual, corporation, limited liability company, partnership, joint venture, trust, association, unincorporated organization, other entity or Governmental Body. "PLANS" shall have the meaning set forth in SECTION 4.14. "PURCHASE PRICE" shall have the meaing set forth in SECTION 2.4. -4- "PURCHASER COMMON STOCK" shall mean the Common Stock, $.10 par value per share, of Purchaser. "PURCHASER DOCUMENTS" shall have the meaning set forth in SECTION 5.3. "RECENT BALANCE SHEET" shall have the meaning set forth in SECTION 4.6. "REGISTRATION RIGHTS AGREEMENT" shall mean the Registration Rights Agreement entered into on the date of this Agreement by and among Purchaser, the Stockholders and Clendenon, a copy of which is attached hereto as EXHIBIT C. "SECURITIES ACT" shall mean the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder by the Securities and Exchange Commission. "STOCKHOLDERS DOCUMENTS" shall have the meaning set forth in SECTION 4.3. "STOCKHOLDER REPRESENTATIVE" shall mean Hettinger, in his capacity as representative of the Stockholders for the receipt or giving of notices and the giving of consents, waivers and approvals. "SUBSIDIARY" shall mean with respect to any specified Person, any other Person (a) whose board of directors or similar governing body, or a majority thereof, may presently be directly or indirectly elected or appointed by such specified Person, (b) whose management decisions and corporate actions are directly or indirectly subject to the present control of such specified Person, or (c) whose voting securities or equity securities are more than fifty percent (50%) owned, directly or indirectly, by such specified Person. "SURVIVING CORPORATION" shall have the meaning set forth in SECTION 2.1. "TAXES" means (a) any federal, state, local, foreign and other income, alternative or add-on minimum, accumulated earnings, personal holding company, franchise, capital stock, profits, windfall profits, gross receipts, value added, sales, use, excise (including the golden parachute excise tax imposed by Section 4999 of the Code and the green mail excise tax imposed by Section 5881 of the Code), customs duties, transfer, conveyance, registration, stamp, documentation, recording, premium, severance, environmental (including taxes under Section 59A of the Code), real property, personal property, ad valorem, intangibles, rent, occupancy, firearm, ammunition, license, occupation, employment, unemployment insurance, social security, disability, workers' compensation, payroll, withholding, estimated or any other tax, duty, levy, governmental fee or other like assessment or charge of any kind whatsoever (including all interest and penalties thereon and additions thereto whether disputed or not) imposed by any Governmental Body, and (b) any obligations under any agreements or arrangements (whether or not with a Governmental Body) with respect to Taxes described in clause (a) above, together with any cost, charge or liability -5- incurred in contesting or prosecuting any assessment, refund claim or other proceeding in connection with the determination or collection of any Tax. "TAX RETURNS" means any federal, state, local or foreign return, report, information return or other document (including any related or supporting information) filed or required to be filed with any Governmental Body in connection with the determination, assessment or collection of any Taxes or the administration of any laws, regulations or administrative requirements relating to any Taxes. "TERRITORY" shall mean any area in the United States, its commonwealths, territories and protectorates, Mexico and Canada and any other geographical area in which Purchaser, the Surviving Corporation or any of their respective Affiliates transacts any business. "THIRD PARTY" shall mean a Person who or which is neither a Party nor an Affiliate of a Party. 1.2 References to Dollars. References to dollars or "$" in this Agreement shall mean United States dollars. 2. THE MERGER 2.1 The Merger. Upon the terms and subject to the conditions hereof, and in accordance with the provisions of the NCBCA and DGCL, MPGN shall be merged with and into I-Magic as soon as practicable following the satisfaction or waiver of the conditions set forth in ARTICLES 6 AND 7 hereof. Following the Merger, I-Magic shall continue as the surviving corporation (the "Surviving Corporation") under the name iMagicOnline Corporation and shall continue its existence under the laws of the State of North Carolina and the separate existence of MPGN shall thereupon cease. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, all properties, rights, privileges, powers and franchises of MPGN shall vest in the Surviving Corporation, and all debts, liabilities and duties of MPGN shall become the debts, liabilities and duties of the Surviving Corporation. All terms and provisions of the Merger shall be in accordance with the Plan of Merger, attached as Exhibit A hereto. 2.2 Consummation of the Merger and Effective Time. The Merger shall be effected by the filing of articles of merger with the Secretary of State of the State of North Carolina in accordance with the provisions of Article 11 of the NCBCA and the filing of a certificate of merger with the Secretary of State of the State of Delaware pursuant to Section 252 of the DGCL. The Parties hereto shall take all such other and further actions as may be required by law to make the Merger effective. 2.3 Conversion or Cancellation of Shares. The manner of converting or cancelling shares of MPGN in the Merger shall be as follows. At the Effective Time, -6- 2.3.1 subject to the escrow arrangement referred to in SECTION 3.4 below, the shares of Common Stock, par value $.001 per share (the "MPGN Shares"), of MPGN issued and outstanding immediately prior to the Effective Time, other than MPGN Shares held in the treasury of MPGN shall, by virtue of the Merger and without any action on the part of the holders thereof, be converted into the right to receive the Merger Consideration. All MPGN Shares, by virtue of the Merger and without any action on the part of the holders thereof, shall no longer be outstanding and shall be cancelled and retired and shall cease to exist, and the holders of certificates representing MPGN Shares shall thereafter cease to have any rights with respect to such MPGN Shares, except, in the case of MPGN Shares other than MPGN Shares held in the treasury of MPGN, the right to receive the Merger Consideration for such MPGN Shares upon the surrender of such certificates. 2.3.2 each MPGN Share issued and held at such time in MPGN's treasury shall, by virtue of the Merger and without any action on the part of the holder thereof, cease to be outstanding, shall be cancelled and retired without payment of any consideration therefor and shall cease to exist. 2.3.3 each share of Common Stock, par value $.10 per share, of I-Magic issued and outstanding immediately prior to the Effective Time shall continue to be issued and outstanding, fully paid and nonassessable shares of the Surviving Corporation's Common Stock, par value $.10 per share and owned by Purchaser. Each certificate of I-Magic evidencing ownership of such shares shall continue to evidence ownership of the same number of shares of Common Stock of the Surviving Corporation. 2.4 Merger Consideration. The "Merger Consideration" shall mean (a) that number of shares of Purchaser Common Stock equal to the lesser of (i) $4,000,000 divided by the Fair Market Value of Purchaser Common Stock as of the Effective Time and (ii) 750,000, reduced by (b) any shares of Common Stock issued by Purchaser (i) to Carolina Securities, Inc. or its designees in connection with the Contemplated Transactions, and (ii) in order to discharge the Indebtedness. The shares of Purchaser Common Stock which constitute the Merger Consideration are hereinafter referred to as the "Purchaser Shares." Each Stockholder and Clendenon shall be entitled to receive its PRO RATA share of the Merger Consideration based on the proportion that the number of MPGN Shares owned by such Stockholder and Clendenon immediately prior to the Effective Time bears to the total number of issued and outstanding MPGN Shares at such time. 2.5 Certificate of Incorporation and By-Laws. The Certificate of Incorporation and the By-Laws of I-Magic shall be and remain the Certificate of Incorporation and By-Laws of the Surviving Corporation. 2.6 Directors and Officers. Except as set forth on SCHEDULE 2.6, those persons who immediately prior to the Effective Time are (a) directors of I-Magic, shall be the directors of the Surviving Corporation and (b) officers of I-Magic, shall be the officers of the Surviving Corporation, in each case until their respective successors are duly elected and qualified. -7- 3. THE CLOSING. 3.1 Closing. (a) Unless this Agreement shall have been terminated pursuant to SECTION 10, a closing of the Merger (the "Closing") will be held at the offices of Bachner, Tally, Polevoy & Misher LLP, 380 Madison Avenue, New York, New York 10017, on the date on which the conditions set forth in SECTIONS 6 and 7 shall be satisfied or duly waived (or such other place and date as Purchaser and the Stockholder Representative may agree in writing). (b) At the Closing: (1) MPGN, the Stockholders, Hettinger or Clendenon as applicable, shall deliver to I-Magic or Purchaser, as applicable, all documents contemplated by ARTICLE 6, to the extent not theretofore delivered. (2) I-Magic or Purchaser, as applicable, shall deliver to MPGN all documents contemplated by ARTICLE 7, to the extent not theretofore delivered. (3) Purchaser shall deliver to the Stockholders and Clendenon certificates representing the Purchaser Shares, other than the Escrowed Shares. 3.2 Issuance of Purchaser Common Stock. 3.2.1 Subject to the escrow arrangement referred to in SECTION 3.4 below, upon surrender by the Stockholders and Clendenon of certificates evidencing the MPGN Shares, the Purchaser shall issue certificates to each Stockholder and Clendenon, registered in the name of such Stockholder and Clendenon and bearing the legends set forth in SECTION 4.25, representing the number of Purchaser Shares to which each Stockholder and Clendenon is entitled pursuant to SECTION 2.4 and such certificates evidencing the MPGN Shares shall forthwith be cancelled. 3.2.2 No fractional Purchaser Shares shall be issued pursuant to the Merger. In lieu of the issuance of any such fractional shares, cash adjustments will be paid to the holders in respect of any fractional share that would otherwise be issuable. The amount of such adjustment shall be the product of such fraction of a share of Purchaser Common Stock multiplied by the Fair Market Value thereof. 3.3 Pooling of Interests. Purchaser, MPGN, Hettinger, the Stockholders and Clendenon intend for the transactions contemplated by this Agreement to qualify for "pooling of interests" treatment for purposes of Purchaser's accounting. 3.4 Withholding into Escrow. Notwithstanding anything to the contrary set forth in SECTION 3.2.1, Purchaser shall withhold from the Stockholders and deliver to the Escrow Agent (as defined in the Escrow Agreement referred to below) certificates representing ten percent (10%) of the total number of Purchaser Shares (the "Escrowed Shares"), PRO RATA from each Stockholder -8- based on the proportion that the number of MPGN Shares owned by such Stockholder immediately prior to the Effective Time bears to the total number of issued and outstanding MPGN Shares owned in the aggregate by the Stockholders at such time, to be held and distributed by the Escrow Agent pursuant to the terms of this Agreement and the Escrow Agreement attached as EXHIBIT B hereto (the "Escrow Agreement"). All such certificates representing Purchaser Shares shall be issued in the names of the respective Stockholders and shall be accompanied by corresponding stock powers, duly executed, undated and in blank, which each Stockholder shall provide to facilitate distribution by the Escrow Agent pursuant to the Escrow Agreement. 3.5 Registration Rights; and Resale Restrictions. The Stockholders and Clendenon shall be entitled to the registration rights contained in the Registration Rights Agreement, attached as EXHIBIT C hereto, with respect to the Purchaser Shares received in payment of the Merger Consideration. 4 REPRESENTATIONS AND WARRANTIES OF MPGN, HETTINGER, THE STOCKHOLDERS AND CLENDENON. MPGN, Hettinger and the Stockholders, jointly and severally, and Clendenon, with respect to SECTIONS 4.26 AND 4.28, represent and warrant to Purchaser and I-Magic that, except as otherwise disclosed on a Schedule corresponding in number to the applicable Section of this ARTICLE 4 (which Schedule shall be deemed to modify and limit only the representations and warranties contained in the Section to which it corresponds in number): 4.1 Organization and Good Standing. (a) Each of MPGN and each Stockholder is a corporation duly organized, validly existing and in good standing under the laws of the State of its incorporation. Each of MPGN and each Stockholder (i) has all requisite corporate power to own, operate and lease its properties and carry on its business as the same is now being conducted and (ii) is duly qualified and in good standing as a foreign corporation under the laws of each jurisdiction where the properties owned, leased or operated, or the business conducted by it require such qualification. SCHEDULE 4.1 sets forth the jurisdictions in which MPGN and each Stockholder, as applicable, is authorized to do business. (b) Complete and correct copies of the certificate of incorporation and by-laws of MPGN and each Stockholder as currently in effect have been delivered to Purchaser. MPGN has no Subsidiaries nor does it own any equity interest in, or control directly or indirectly, any other entity. MPGN is not a party to any joint venture or partnership arrangement. MPGN has not assumed by merger, contract, assignment or assumption any liabilities of any other Person. 4.2 Capitalization of MPGN; Title to the MPGN Shares. (a) The authorized capital stock of MPGN consists of 30,000,000 shares of Common Stock, par value $.001 per share, of which 5,263,158 shares (constituting the MPGN Shares) are issued and outstanding and are owned beneficially and of record by the Stockholders and Clendenon as set forth on SCHEDULE 4.2. All of the MPGN Shares have been duly authorized and validly issued and are fully paid and nonassessable. Except as set forth on SCHEDULE 4.2, there are no outstanding subscriptions, options, -9- rights, warrants, convertible securities or other agreements (other than this Agreement) or calls, demands or commitments of any kind relating to the issuance, sale or transfer of any capital stock or other equity securities of MPGN, whether directly or upon the exercise or conversion of other securities. (b) The Stockholders and Clendenon own the MPGN Shares of record and beneficially, free and clear of all Encumbrances. The delivery of the certificates representing the MPGN Shares in accordance with SECTION 3.2 in consideration of the payment of the Merger Consideration therefor will transfer record and beneficial ownership of and good and valid title to the MPGN Shares free and clear of all Encumbrances. 4.3 Authority Relative to Agreement. Each of MPGN and each Stockholder has all requisite power and authority, corporate or otherwise, to execute, deliver and perform their obligations, as applicable, under this Agreement and the Plan of Merger, the Registration Rights Agreement and the Escrow Agreement (such agreements, together with the stock certificates and powers referred to in SECTION 2.3, collectively, the "Stockholders Documents") and has taken all action necessary, corporate or otherwise, in order to execute and deliver this Agreement and to consummate the Contemplated Transactions. This Agreement has been duly executed and delivered by MPGN and each Stockholder. Each of this Agreement and the other Stockholders Documents constitute valid and binding obligations of MPGN and each Stockholder which is a Party thereto, enforceable against MPGN and each Stockholder in accordance with their respective terms. 4.4 Absence of Conflict. Neither the execution and delivery of this Agreement and the other Stockholder Documents, nor the consummation of the Contemplated Transactions will (a) violate, conflict with or result in a breach or termination of or constitute a default or give rise to a right to terminate or accelerate (or an event which, with notice or lapse of time or both, would constitute a default or give rise to such right) (i) any agreement, commitment, mortgage, corporate or otherwise, deed of trust, indenture, lease or other instrument to which any Stockholder or MPGN is a party or by which any of their respective properties or assets is bound, (ii) the certificate of incorporation or by-laws of MPGN or any Stockholder or (iii) any Law or any other restriction of any kind or character applicable to any Stockholder or MPGN or any of their respective properties or assets, or (b) result in the creation or imposition of any Encumbrance upon any properties or assets of any Stockholder or MPGN under any agreement or commitment to which any Stockholder or MPGN is a party or by which any Stockholder or MPGN or any of their respective properties or assets may be bound. 4.5 Consents and Approvals; Effect of Change in Control. Except as set forth in SCHEDULE 4.5, no consent, waiver, registrations, certificates, approval, grant, franchise, concession, permit, license, exception or authorization of, or declaration or filing with, or notice or report to, (a) any Governmental Body and (b) any other Person (including, but not limited to, any party to a lease or other agreement or commitment of MPGN) (collectively, the "Approvals"), is required, and has not been obtained, in connection with the execution, delivery and performance of this Agreement, the Stockholders Documents or the consummation of the Contemplated Transactions. All such required Approvals have been obtained and are in full force and effect, and MPGN is in full -10- compliance with each of such Approvals. Except as set forth in SCHEDULE 4.5, there are no Contracts, Leases or Approvals by which any Stockholder or MPGN or any of their respective assets or properties may be bound, that contain any change in control provisions or other terms or conditions that will become applicable or inapplicable as a result of the consummation of the Contemplated Transactions. 4.6 Financial Statements. (a) MPGN has (i) delivered to Purchaser the unaudited balance sheets of each of the Stockholders as at December 31, 1997 and the related unaudited statements of income and retained earnings of each of the Stockholders for the year then ended, compiled by Bruce Oberfest & Associates, and (ii) reviewed the unaudited combined balance sheets of MPGN and the Stockholders as at October 31, 1998 (the "Recent Balance Sheet") (collectively, the "Financial Statements"), as indicated on SCHEDULE 4.6. The Financial Statements were prepared from the respective books and records of the Stockholders and MPGN, have been prepared in accordance with GAAP consistently applied throughout the periods indicated, and fairly present the financial position, results of operations and cash flows of the Stockholders and MPGN as at the respective dates thereof and for the periods therein referred to, subject in the case of the interim financial statements, to the absence of footnotes and for normal, year-end adjustments. (b) MPGN does not have any liabilities or obligations (whether known or unknown, absolute, accrued, contingent or otherwise and whether due or to become due) that were not fully reflected or reserved against in the Recent Balance Sheet, except for non-material liabilities and obligations incurred in the ordinary course of business and consistent with past practice (in nature and scope) since the date thereof. The reserves reflected in the Recent Balance Sheet are adequate, appropriate and reasonable and the reserves reflected in the Recent Balance Sheet are in accordance with GAAP consistently applied. (c) Since the date of the Recent Balance Sheet, there has been no material adverse change in the business, operations or financial condition of MPGN or any event, condition or contingency that could reasonably be expected to result in such a material adverse change. (d) The accounts receivable of MPGN reflected in the Recent Balance Sheet constitute valid and enforceable claims arising from bona fide transactions in the ordinary course of business. MPGN has not received written notice of any counterclaims or setoffs against such accounts receivable for which reserves have not been established in accordance with GAAP. There has been no material adverse change since the date of the Recent Balance Sheet in the amount of accounts receivable or other debts due MPGN or the allowances with respect thereto, or accounts payable of MPGN, from that reflected in the Recent Balance Sheet. 4.7 Title to Property; Sufficiency; Encumbrances. (a) MPGN has never owned any real property or any interest in real property. (b) SCHEDULE 4.7(b) describes all personal property or interests therein owned by MPGN. MPGN has good and valid title to all such properties used in the operation of its business (personal and mixed, tangible and intangible) which it purports to own, including without limitation -11- the property reflected as being so owned on the Recent Balance Sheet (except for immaterial personal property sold or otherwise disposed of since the date of the Recent Balance Sheet in the ordinary course of business and all the properties and assets purchased or otherwise acquired since the date of the Recent Balance Sheet), free and clear of all Encumbrances other than Permitted Encumbrances. As used herein, "Permitted Encumbrances" means (i) those Encumbrances disclosed in the Financial Statements or the notes thereto; (ii) statutory liens for current taxes or assessments not yet due or delinquent or the validity of which are being contested in good faith by appropriate Proceedings (a list of all such Proceedings as of the date of this Agreement being included on SCHEDULE 4.7); (iii) mechanics', carriers', workers', repairmen's and other similar liens arising or incurred in the ordinary course of business with respect to charges not yet due and payable; and (iv) those Encumbrances disclosed on SCHEDULE 4.7. (c) All of the assets and properties (real and personal, tangible and intangible) necessary for the conduct of the business of MPGN as conducted by MPGN prior to the date of this Agreement, including, without limitation, any agreement or contract necessary for MPGN to operate the AT&T WorldNet Game Website, are owned by MPGN or held by MPGN under a valid lease and, except as set forth on SCHEDULE 4.7(c), will continue in effect following the Closing, in each case free and clear of all Encumbrances except Permitted Encumbrances. 4.8 Leased Property. SCHEDULE 4.8 sets forth a true and complete list of each lease under which MPGN is a lessee or lessor (each, a "Lease"). MPGN has delivered to Purchaser complete and correct copies of each such Lease. Each such Lease is a valid and binding obligation of MPGN, enforceable in accordance with its terms, and is in full force and effect, and except as set forth on SCHEDULE 4.8, upon consummation of the Contemplated Transactions, will continue to entitle the Surviving Corporation to the use and possession of the property specified in such lease and for the purposes for which such property is now being used by MPGN. There is not, with respect to any such Lease, any existing breach or event of default, or event which with notice or lapse of time or both would constitute a breach or event of default, on the part of MPGN, or on the part of any other person thereto. 4.9 Intellectual Property Rights. MPGN owns, or is licensed or otherwise has the rights to use, all Intellectual Property used in or necessary for the conduct of its business as heretofore conducted, and as presently contemplated to be conducted. SCHEDULE 4.9 contains an accurate and complete description of (a) all Intellectual Property owned, used or proposed to be used by MPGN, and all applications therefor, and (b) a summary of the terms of all agreements relating to Intellectual Property which MPGN is licensed or authorized to use by others. Except as set forth in SCHEDULE 4.9, MPGN has the sole and exclusive right to use the Intellectual Property referred to therein, and the consummation of the Contemplated Transactions will not alter or impair any such rights; no claims have been asserted by any Person to the use of any such Intellectual Property or challenging or questioning the validity or effectiveness of any such licenses or agreements and there is no valid basis for any such claim; and the use of such Intellectual Property by MPGN does not violate or infringe the rights of any Person. Neither MPGN nor any other Person is in default under any license or other agreement relating to such Intellectual Property, and all such licenses and agreements are valid, in full force and effect and enforceable. MPGN has taken reasonable steps to -12- safeguard and maintain the secrecy and confidentiality of, and its proprietary rights in, its Intellectual Property. 4.10 Plant and Equipment. The personal property, including without limitation machinery, equipment and other fixed assets, owned or leased by MPGN is in a condition sufficient to conduct the business of MPGN in all respects in the same manner as it is conducted on or has been conducted prior to the date of this Agreement, and all of such property is in good repair and operating condition. MPGN is not in violation of any applicable building, zoning or other Law in respect of its buildings, plants or structures or their operation. 4.11 Litigation. There is no action, suit, inquiry, proceeding or investigation by or before any court or Governmental Body pending or threatened against or involving MPGN or which questions or challenges the validity of this Agreement or any action taken or to be taken by MPGN pursuant to this Agreement or in connection with the Contemplated Transactions and MPGN has not received any notice of any event or occurrence which could result in any such action, suit, inquiry, proceeding or investigation nor is there any valid basis for any such action, suit, inquiry, proceeding or investigation. MPGN is not subject to any judgment, order or decree. 4.12 Tax Matters. (a) MPGN and each of the Stockholders have filed or caused to be filed on a timely basis all Tax Returns that are or were required to be filed by or with respect to it through the Effective Time, either separately or as a member of a group of affiliated corporations pursuant to the laws, regulations or administrative requirements of each Governmental Body with taxing power over it or its assets. The Stockholders and MPGN have delivered to Purchaser true, complete and correct copies of, and SCHEDULE 4.12(A) lists, all federal, state, local or foreign income Tax Returns filed by any of them since formation. SCHEDULE 4.12(A) lists all state, local and foreign jurisdictions in which MPGN or either of the Stockholders has previously filed or currently files Tax Returns, which are all of the state, local or foreign taxing jurisdictions in which MPGN or either of the Stockholders has been or is required to file Tax Returns; (b) MPGN (and to the extent MPGN may be liable therefor, the Stockholders) has paid, or made provision in the Financial Statements for the payment of all income, sales, withholding and other Taxes that have or may have become due for all periods through the Effective Time, whether pursuant to those Tax Returns, any assessment received by any Stockholder or MPGN, or otherwise, except such Taxes, if any, as are set forth in SCHEDULE 4.12(B) and are being contested in good faith and as to which adequate reserves (determined in accordance with GAAP consistently applied) have been provided in the Financial Statements. All Tax Returns filed by MPGN (and to the extent MPGN may be liable therefor, the Stockholders) have been or will be prepared in accordance with applicable law, are true, correct and complete in all material respects and reflect all Taxes required to be paid thereunder; (c) Except as set forth on SCHEDULE 4.12(C), the United States federal, foreign, state and local Tax Returns of MPGN and the Stockholders have been audited by the Internal -13- Revenue Service or relevant state, foreign or local tax authorities or are closed by the applicable statute of limitations for all taxable years through December 31, 1998. All deficiencies proposed as a result of such audits have been paid, reserved against on the Financial Statements, settled, or, as described in SCHEDULE 4.12(C) are being contested in good faith by appropriate proceedings; (d) SCHEDULE 4.12(D) describes all proposed adjustments to the United States federal, state, foreign or local Tax Returns filed by MPGN or the Stockholders or any Tax Return including any group of corporations including MPGN or the Stockholders for all taxable years since December 31, 1995, and the resulting deficiencies proposed by the Internal Revenue Service or other Governmental Body; (e) Except as set forth in SCHEDULE 4.12(E), neither any Stockholder, Hettinger, nor MPGN has given or been requested to give waivers or extensions (or is or would be subject to a waiver or extension given by any other entity) of any statute of limitations relating to the payment of Taxes by any of them or for which MPGN may be liable; (f) The charges, accruals and reserves with respect to Taxes on the respective books of MPGN and the Stockholders are adequate (determined in accordance with GAAP consistently applied) and are at least equal to MPGN's liability for Taxes through the Effective Time; (g) There exists no proposed tax assessment against MPGN (or, to the extent MPGN may be liable therefor, against the Stockholders) nor any lien for Taxes against any property of MPGN except as disclosed in the Financial Statements or on SCHEDULE 4.12(G); (h) No consent to the application of Section 341(f)(2) of the Code has been filed with respect to any property or assets held or acquired or to be acquired by MPGN, no property of MPGN is "tax-exempt use property" under Code Section 168(h)(1) and neither MPGN nor either of the Stockholders have agreed to, been required to make or applied for any adjustment by reason of any change in accounting method under Code Section 481 nor has any Governmental Body proposed any such change in accounting method with respect to MPGN or either Stockholder; (i) All Taxes that MPGN is or was required by law to withhold or collect have been duly withheld or collected and, to the extent required, have been paid to the proper Governmental Body or other Person; (j) There is no tax sharing agreement that will require any payment by MPGN after the date of this Agreement; (k) Neither MPGN nor either Stockholder has ever filed or been included in a combined, consolidated or unitary Tax Return; (l) No Code Section 338 election has ever been made by or with respect to MPGN or either Stockholder and no sales are being reported by any of them under the installment -14- method of reporting pursuant to Code Section 453 with respect to which less than all the gain has been recognized; (m) There is no claim, audit, action, suit, proceeding, or investigation with respect to Taxes due or claimed to be due from MPGN (or, to the extent MPGN may be liable therefore, from any Stockholder) or of any Tax Return filed or required to be filed by MPGN or any Stockholder pending or threatened against or with respect to MPGN or any Stockholder; (n) There are no closing agreements, requests for rulings, or technical advice, in respect of any Tax currently in effect or pending between MPGN, either Stockholder or any affiliate thereof and any Governmental Body; (o) Since the date of its formation in August 1998, MPGN has been a C Corporation under the Code, and each Stockholder has since its respective date of formation continuously qualified as an "S" corporation under Section 1361 ET. SEQ. of the Code, will continue to so qualify through the Effective Time and no Governmental Body has asserted or notified either Stockholder or Hettinger that it did not so qualify; (p) MPGN does not own any interest in any foreign corporation, nor has it ever held any such interest; (q) Neither MPGN nor either Stockholder is or has been a United States real property holding corporation (as defined in Section 897(c)(2) of the Code) during the applicable period specified in Section 897(c)(1)(ii) of the Code; (r) Neither MPGN nor either Stockholder has in effect any tax elections for federal income tax purposes under Sections 108, 168, 441, 471, 1017, 1033, or 4977 of the Code; (s) During the two year period ending on the date of this Agreement, neither MPGN nor either Stockholder has engaged in any exchange under which the gain realized on such exchange was not recognized due to Section 1031 of the Code. (t) MPGN has not made, and is not party to any agreement requiring it to make, any payment which would not be deductible under Code Section 280G or which would be subject to the excise tax imposed by Code Section 4999. 4.13 Absence of Certain Changes or Events. Since the date of the Recent Balance Sheet, MPGN has conducted its business only in the ordinary course and has not: (a) declared or paid any dividend or made any other payment or distribution in respect of its capital stock; (b) purchased, redeemed, issued, sold or otherwise acquired or disposed of, either directly or indirectly, any of its capital stock or reclassified, split or otherwise changed any of its capital stock or granted or entered into any options, warrants, puts or calls or other rights to purchase, sell or convert any obligation into any of, its capital stock; -15- (c) paid, discharged or satisfied any Encumbrance (other than an Encumbrance then required to be paid, discharged or satisfied), claim, liability or obligation (whether fixed, accrued, contingent or otherwise, whether due or to become due), other than a claim, liability or obligation that is a current liability shown on the Recent Balance Sheet or incurred since the date of the Recent Balance Sheet in the ordinary course of business consistent with prior practice; (d) canceled or compromised any debt or claim, or waived or released any material right, other than adjustments in the ordinary course of business for goods sold and received which, in the aggregate, are not material; (e) sold, assigned, transferred, conveyed, leased, pledged, encumbered or otherwise disposed of any of its rights, assets or properties (real or personal, tangible or intangible) except for sales of inventory in the ordinary course of business consistent with past practice. (f) transferred or granted any right under, or entered into any settlement regarding the breach or infringement of, any Intellectual Property right, or modified any existing right with respect thereto; (g) made or granted any general increase in the compensation (whether salary, commission, bonus, benefits (retirement, severance or other) or other direct or indirect remuneration) of any of MPGN=s employees (other than individual increases which coincided with year-end reviews and were generally consistent in amount with MPGN=s historical practices), or made or granted any increase in the compensation of the officers of MPGN, or entered into any employment, severance, bonus or similar agreement with any employee of MPGN; (h) written off or been required by GAAP to write off or write down any assets of MPGN; (i) received any notice of termination of any Contract or Lease or suffered any damage, destruction or loss (whether or not covered by insurance) adversely affecting MPGN's business, assets or properties; (j) incurred any Tax liability other than in the ordinary course of business; (k) purchased any properties or assets, other than in the ordinary course of business and consistent with past practice; (l) made any capital expenditures or additions to property, plant or equipment or acquired of any other property or assets (other than raw materials and supplies) at a cost in excess of $10,000 in the aggregate. (m) incurred or assumed any indebtedness for money borrowed or guarantied any indebtedness or other obligation; or -16- (n) agreed or otherwise committed, whether in writing or otherwise, to do, or taken any action or omitted to take any action that would result in, any of the foregoing. 4.14 Employee Benefits; Executive Officers; Labor. (a) No employees of MPGN are covered by collective bargaining agreements. SCHEDULE 4.14 sets forth a true and complete list of (i) all written employment and consulting agreements to which MPGN is a party, indicating which will terminate at the Effective Time; and (ii) all written executive compensation plans, bonus plans, incentive compensation plans, deferred compensation plans or agreements, employee pension plans or retirement plans, employee profit sharing plans, employee stock purchase plans, group life insurance, hospitalization insurance, severance or other employee benefit plans (as defined in Section 3(3) of ERISA) of MPGN (the "Plans") providing for benefits for any employees of MPGN. True and correct copies of all of the foregoing have been provided to Purchaser and, since the date the documents were so provided, there has not been any material change to the assets or liabilities of any Plan. There are no other binding plans or commitments of the type referred to in this SECTION 4.14(A) which are not reduced to writing, and MPGN has no agreement or commitment to create any additional such Plan. (b) SCHEDULE 4.14 includes a true and complete list of all officers or other employees of MPGN receiving compensation (including bonuses, incentives and similar compensation) at a rate in excess of Fifty Thousand Dollars ($50,000) per annum. To the best knowledge of each Stockholder and MPGN, no past or present officer or other executive employee of MPGN has ever been indicted, tried or convicted of a criminal felony. To the best knowledge of each Stockholder and MPGN, no officer or other executive employee of MPGN is in violation of (a) any material term of any employment agreement, non-disclosure agreement, noncompete agreement or other similar agreement with any previous employer (and the employment of such employee by I-Magic or any of its Affiliates will not result in a violation of any such agreement) or (b) any obligation binding on such employee which would prohibit the use of information obtained from such employee which MPGN has used or the Surviving Corporation proposes to use. (c) Neither the execution and delivery of this Agreement nor the consummation of any of the Contemplated Transactions under this Agreement will entitle any current or former employee of MPGN to severance pay or other similar payment, or accelerate the time of payment or increase the amount of compensation due to any such employee or former employee. 4.15 Insurance; Claims. (a) SCHEDULE 4.15 sets forth a true, correct and complete list of all insurance policies of any kind or nature maintained as of the date of this Agreement by or on behalf of MPGN and relating to its business and/or assets, indicating the type of coverage, name of insured, name of insurance carrier or underwriter, premium thereon, policy limits and expiration date of each policy. All such insurance policies are in full force and effect, and MPGN is not in default with respect to its obligations under any such insurance policy and no notice of cancellation or termination has been received with respect to any such policy. MPGN has delivered to Purchaser complete and correct copies of all insurance policies (together with all riders and amendments thereto) set forth on SCHEDULE 4.15. MPGN has never had any insurance coverage canceled by any carrier. -17- (b) SCHEDULE 4.15 sets forth all claims made by MPGN under any insurance policy (regardless of whether such policy is set forth on such Schedule) since the date of its formation, setting forth as to each claim the date, nature and amount thereof and its disposition (indicating the date and amount as applicable) or current status. No insurance carrier or underwriter has ever denied coverage on any claim by MPGN. 4.16 Contracts and Commitments. SCHEDULE 4.16 contains a true and complete and accurate list of each of the following contracts, agreements, understandings or other obligations (whether written or oral) to which MPGN is a party or by which any of its assets or properties are bound (each, a "Contract"): (a) any contracts, agreements, commitments or other obligations with officers, employees, agents, consultants, advisors, or salesmen that (i) are not cancelable by it on notice of not longer than 30 days without penalty or premium or other liabilities, or (ii) provide for the payment of any bonus or commission based on sales or earnings; (b) all leases, subleases or rental or use agreements, contracts, covenants or obligations; (c) indentures, notes, loans, letters of credit or credit agreements or other contract, agreement, commitment or other obligation with respect to indebtedness for borrowed money; any guarantee of, or contract, agreement, commitment or obligation to acquire any such indebtedness of others; and any other contract, agreement, commitment or other obligation under which MPGN has any obligations or liabilities (whether absolute, accrued, contingent or otherwise) as guarantor, surety, co-signer, endorser, co-maker or indemnitor in respect of the obligation of any Person; (d) security agreement, mortgage or other contract, agreement, commitment or obligation that creates or may create any Encumbrance on any of its properties or assets; (e) any outstanding agreement, contract, commitment or obligation as to loans or advances made, or to be made, by MPGN to any Person; (f) any contract, agreement, commitment or obligation to make any capital expenditures; (g) contracts, agreements, commitments or other obligations with any Person containing any provision or covenant limiting the ability of MPGN to engage in any line of business or to compete with or to obtain products or services from any Person or limiting the ability of any Person to compete with or to provide products or services to, or obtain products or services from, MPGN; (h) any partnership, joint venture, profit-sharing or similar contract, agreement, understanding or obligation with any Person; -18- (i) outstanding proxies, powers of attorney, or similar delegations of authority of MPGN, except for powers of attorney for the service of process on Governmental Bodies pursuant to applicable insurance or securities laws; (j) contracts, agreements, commitments or other obligations with respect to the purchase or sale by or to MPGN of any product, equipment, facility, or similar item that by their respective terms do not expire or terminate or are not terminable by MPGN, without penalty, premium or other liability within 30 days or may involve the payment by or to MPGN of more than $5,000; (k) license, royalty, franchise, distributorship, dealer, service, sales agency, public relations or advertising contracts, agreements, commitments or other obligations; (l) contracts, agreements, commitments or other obligations to provide services or facilities by or to MPGN or to or by another Person which is not terminable by MPGN within 30 days without penalty, premium or other liability or involving payment by MPGN or the other Person of more than $5,000; and (m) all other contracts, agreements, commitments, or other obligations whether or not made in the ordinary course of business which either (i) may involve the expenditure by MPGN of funds in excess of $5,000 per commitment (or under a group of similar commitments), or (ii) are not terminable within 30 days from the date hereof without penalty, premium or other liability, or are otherwise material to MPGN. 4.17 Status of Agreements. All Contracts to which MPGN is a party are in full force and effect and constitute valid and binding obligations of MPGN and are binding on the other parties thereto; there are no existing defaults (or events which, with notice or lapse of time or both, would constitute a default) by MPGN or any other party thereunder. Except as disclosed in SCHEDULE 4.17, MPGN is not a party to any Contract that was not entered into in the ordinary course of business and consistent with past practice or that, whether or not entered into in the ordinary course of business, has or may reasonably be expected to have individually or in the aggregate with any other Contracts a material adverse effect on the business, operations, properties or financial condition of MPGN . 4.18 Compliance with Law. (a) SCHEDULE 4.18(A) is a true and complete list of each license, permit, order or approval of Governmental Bodies held or obtained by MPGN or any employee of MPGN which is required in connection with the business conducted by MPGN immediately prior to the Effective Time. The operations of MPGN have been conducted in all material respects in accordance with all applicable laws, regulations and other requirements of all Governmental Bodies having jurisdiction over MPGN, including, without limitation, all such laws, regulations and requirements relating to antitrust, consumer protection, currency exchange, equal opportunity, health, occupational safety, pension and securities matters (each, a "Law"). MPGN has not received any notification of any asserted present or past failure to comply with any such Laws. MPGN and each employee of MPGN have all licenses, permits, orders or approvals from Governmental Bodies required for the conduct of MPGN's business and are not in violation of any -19- such license, permit, order or approval. All such licenses, permits, orders and approvals are in full force and effect and no suspension or cancellation thereof has been threatened. (b) MPGN has obtained all permits, licenses and other authorizations which are required with respect to MPGN under all Environmental Laws. MPGN is in compliance in all material respects with all terms and conditions of the required permits, licenses and authorizations, and is also in compliance in all material respects with all other limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in any Environmental Laws, plan, order, decree, judgment, notice or demand letter issued, entered, promulgated or approved thereunder. Except as set forth in SCHEDULE 4.18(B), there does not exist as a result of any action or inaction of MPGN or, to the knowledge of any Stockholder or MPGN, as a result of any action or inaction of any other person, nor has MPGN received notice of, any events, conditions, circumstances, activities, practices, incidents, actions or plans which may interfere with or prevent continued compliance, or which may give rise to any common law or legal liability, or otherwise form the basis of any claim, action, suit, proceedings, hearing or investigation, based on or related to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling, or the emission, discharge, release or threatened release into the environment, of any Hazardous Material (c) Except as set forth in SCHEDULE 4.18(C), no Hazardous Material has been incorporated in, used on, stored on or under, released from, treated on, transported to or from, or disposed of by MPGN on or from any property owned or leased by MPGN or by any other Person such that, under Environmental Laws (i) any such Hazardous Material would be required to be removed, cleaned-up or remediated before the property owned or leased by MPGN could be altered, renovated, demolished or transferred, or (ii) the owner or lessee of the property (as applicable to MPGN) could be subjected to liability for the removal, clean-up or remediation of such Hazardous Material; and neither any Stockholder nor MPGN has received notification from any Governmental Bodies or other third parties relating to Hazardous Material on or affecting any property owned or leased by MPGN or relating to any potential or known liability under Environmental Laws arising from the ownership or leasing of any property. 4.19 Transactions with Related Parties. MPGN is not a party to any contract, lease, commitment or arrangement, written or oral, which, were MPGN a "Registrant" under the Securities Exchange Act of 1934, would be required to be disclosed pursuant to Item 404(a) or (c) of Regulation S-K as promulgated by the Securities Exchange Commission, and except as disclosed in SCHEDULE 4.19 hereto, there are no loans outstanding to or from any Person specified in Item 404(a) from or to MPGN. 4.20 Bank Accounts. SCHEDULE 4.20 hereto sets forth a true, correct and complete list of the names and addresses of all banks and other financial institutions in which MPGN maintains an account, deposit or safe-deposit box, together with the names of all Persons authorized to draw on these accounts or deposits or to have access to these boxes. 4.21 Absence of Certain Business Practices. None of (a) MPGN, any officer or any of MPGN's 3 highest paid employees, acting on its behalf, or (b) to the best knowledge of MPGN or any Stockholder, any other employee or agent of MPGN acting on its behalf, has, directly or -20- indirectly, given or agreed to give any improper or illegal gift or similar benefit to any customer, supplier, governmental employee or other person who is or may be in a position to help or hinder the business of MPGN (or assist MPGN in connection with any actual or proposed transaction relating to the business of MPGN) (i) which subjected or might have subjected MPGN to any damage or penalty in any Proceeding, (ii) which if not given in the past, might have had a Material Adverse Effect, (iii) which if not continued in the future, would have a Material Adverse Effect or subject MPGN to suit or penalty in any Proceeding, (iv) for any of the purposes described in Section 162(c) of the Code or (v) for the purpose of establishing or maintaining any concealed fund or concealed bank account. 4.22 No Guaranties. None of the obligations or liabilities of MPGN incurred in connection with the operation of its business is guaranteed by or subject to a similar contingent obligation of any other Person. MPGN has not guaranteed or become subject to a similar contingent obligation in respect of the obligations or liabilities of any other Person. There are no outstanding letters of credit, surety bonds or similar instruments of MPGN or any of its Affiliates. 4.23 Records. The books of account and minute books of MPGN are complete and correct in all respects. 4.24 No Brokers or Finders. Except as set forth in SCHEDULE 4.24, the Stockholders and MPGN have not, and their respective Affiliates, officers, directors or employees have not, employed any broker or finder or incurred any liability for any brokerage or finder's fee or commissions or similar payment in connection with any of the Contemplated Transactions. 4.25 Year 2000 Compliance. All computer and telecommunications hardware, software and firmware, whether in computer systems, equipment, facilities, embedded microcopies or otherwise (the "Information Technology") used in the business of MPGN is Year 2000 Compliant. "Year 2000 Compliant" means that such Information Technology (a) accurately processes date/time data (including, but not limited to, calculating, comparing and sequencing) from, into and between the twentieth and twenty-first centuries and the years 1999 and 2000; (b) accurately performs leap-year calculations and (c) will not cause any other Information Technology to fail or generate errors related to any such dates. 4.26 Investment Representations. (a) Acquisition for Investment. The Purchaser Shares to be received by the Stockholders and Clendenon pursuant to the terms hereof will be acquired for investment for their own account, without any view to the unregistered public distribution or resale thereof, all without prejudice, however, to the right of either Stockholder or Clendenon at any time lawfully to sell or otherwise to dispose of all or any part of the such shares pursuant to registration or any exemption therefrom under the Securities Act and applicable state securities laws, subject to the restrictions on resale contained in the Registration Rights Agreement. Each Stockholder and Clendenon acknowledge and understand that except as provided in and subject to the terms and conditions contained in the Registration Rights Agreement, neither Stockholder nor Clendenon has any independent right to require Purchaser to register the Purchaser Shares and each Stockholder and Clendenon represent and warrant that such Stockholder and Clendenon will sell the Purchaser -21- Shares only in compliance with the restrictions, terms and conditions contained in the Registration Rights Agreement. (b) Restricted Securities. Each Stockholder and Clendenon understand that the Purchaser Shares to be received by it or him pursuant to the terms hereof are characterized as "restricted securities" under the Securities Act inasmuch as they are being acquired from Purchaser in a transaction not involving a public offering and that under such laws and applicable regulations such securities may be resold without registration under the Securities Act only in certain limited circumstances. (c) Investor Suitability. Each Stockholder and Clendenon is an "accredited investor" within the meaning of Rule 501 of Regulation D under the Securities Act. Each Stockholder and Clendenon has the capacity to evaluate the merits and high risks of an investment in the Purchaser Shares and is able to bear the economic risk of this investment. Each Stockholder and Clendenon understand that an investment in the Purchaser Shares is highly speculative and involves a high degree of risk. Each Stockholder and Clendenon has been provided access to all information requested by it in order to evaluate the merits and risks of an investment in the Purchaser Shares. (d) Legends. Each Stockholder and Clendenon acknowledge that the certificates evidencing the Purchaser Shares shall bear the following legend (in addition to any legend required by the Registration Rights Agreement): "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT." The foregoing legend shall be removed by Purchaser from any certificate at such time as the holder of the Purchaser Shares represented by the certificate delivers an opinion of counsel reasonably satisfactory to Purchaser to the effect that such legend is not required in order to establish compliance with any provisions of the Securities Act, or at such time as the holder of such Purchaser Shares satisfies the requirements of Rule 144(k) under the Securities Act (provided that Rule 144(k) as then in effect does not differ substantially from Rule 144(k) as in effect as of the date of this Agreement), and provided further that Purchaser has received from the holder a written representation that such holder satisfies the requirements of Rule 144(k) as then in effect with respect to such Purchaser Shares. 4.27 Hettinger Representations. (a) Authorization. Hettinger is of full age and has full right, power, legal capacity and authority to execute and deliver this Agreement and to perform his obligations hereunder. The execution, delivery and performance of this Agreement and the performance of Hettinger's obligations hereunder constitute valid and binding obligations of Hettinger, enforceable against him in accordance with its terms. -22- (b) Ownership of Shares. Hettinger owns all of the issued and outstanding shares of each Stockholder of record and beneficially, free and clear of all Encumbrances. (c) No Conflict as to Hettinger. Neither the execution and delivery of this Agreement nor the consummation of any or all of the Contemplated Transactions will (a) violate, or be in conflict with, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or excuse performance by any Person of any of its obligations under, or cause the acceleration of the maturity of any debt or obligation pursuant to, or result in the creation or imposition of any Encumbrance upon any property or assets of Hettinger under, any agreement or commitment to which Hettinger a party or by which any of his respective property or assets is bound, or to which any of the property or assets of Hettinger is subject, or (b) violate any statute or law or any judgment, decree, order, regulation or rule of any court or other Governmental Body applicable to Hettinger. 4.28. Clendenon Representations. (a) Authorization. Clendenon is of full age and has full right, power, legal capacity and authority to execute and deliver this Agreement and to perform his obligations hereunder. The execution, delivery and performance of this Agreement and the performance of Clendenon's obligations hereunder constitute valid and binding obligations of Clendenon, enforceable against him in accordance with its terms. (b) Ownership of Shares. Clendenon owns all of the issued and outstanding shares of MPGN set forth opposite his name on SCHEDULE 4.2 of record and beneficially, free and clear of all Encumbrances. (c) No Conflict as to Clendenon. Neither the execution and delivery of this Agreement nor the consummation of any or all of the Contemplated Transactions will (a) violate, or be in conflict with, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or excuse performance by any Person of any of its obligations under, or cause the acceleration of the maturity of any debt or obligation pursuant to, or result in the creation or imposition of any Encumbrance upon any property or assets of Clendenon under, any agreement or commitment to which Clendenon a party or by which any of his respective property or assets is bound, or to which any of the property or assets of Clendenon is subject, or (b) violate any statute or law or any judgment, decree, order, regulation or rule of any court or other Governmental Body applicable to Clendenon. 4.29 Disclosure. No representations or warranties by any Stockholder, Hettinger, MPGN or Clendenon in this Agreement and no statement contained in any schedules, exhibits or certificates furnished or to be furnished to Purchaser or I-Magic or any of their representatives pursuant to the provisions hereof, contains or will contain any untrue statement of material fact or -23- omits or will omit to state any material fact necessary, in light of the circumstances under which it was made, in order to make the statements herein or therein not misleading. Documents delivered or to be delivered to Purchaser or I-Magic pursuant to this Agreement are or will be true and complete copies of what they purport to be. 4.30 Knowledge Defined. As used in this SECTION 4, "knowledge of the Stockholders and MPGN" or "best knowledge of the Stockholders and MPGN" shall include the actual knowledge of Hettinger, after review of his own files and inquiry of those employees and advisors to MPGN and the Stockholders who would reasonably be expected to have knowledge of the specific matter at issue. 5 REPRESENTATIONS AND WARRANTIES OF PURCHASER AND I-MAGIC Purchaser and I-Magic hereby represent and warrant to each Stockholder and MPGN that, except as otherwise disclosed on a Schedule corresponding in number to the applicable Section of this ARTICLE 5 (which Schedule shall be deemed to modify and limit only the representations and warranties contained in the Section to which it corresponds in number): 5.1 Organization and Good Standing. Each of Purchaser and I-Magic is a corporation duly organized, validly existing and in good standing under the laws of the State of North Carolina. Each of Purchaser and I-Magic (a) has all requisite corporate power to own, operate and lease its properties and carry on its business as the same is now being conducted and (b) is qualified to do business as a foreign corporation in each jurisdiction set forth on SCHEDULE 5.1. Complete and correct copies of the certificate of incorporation and by-laws of Purchaser and I-Magic as currently in effect have been delivered to MPGN and the Stockholders. SCHEDULE 5.1 sets forth the Subsidiaries of Purchaser. 5.2 Capitalization of Purchaser. Purchaser has the authority to issue 75,000,000 shares of capital stock, consisting of (i) 50,000,000 Purchaser Shares, par value $0.10 per share of which as of January 18, 1999, 9,854,748 shares are outstanding, and (iii) 25,000,000 shares of Preferred Stock, par value $0.10 per share, none of which shares are outstanding. In addition, Purchaser has reserved for issuance (i) 2,875,000 Purchaser Shares upon exercise of options granted under Purchaser's 1995 Stock Option Plans; (ii) 800,000 Purchaser Shares upon exercise of options granted under Purchaser's 1998 Stock Plan, as amended; and (iii) 500,000 Purchaser Shares pursuant to Purchaser's 1998 Employee Stock Purchase Plan, as amended. As of January 18, 1999, Purchaser has options to purchase 2,047,400 shares of Common Stock outstanding and warrants to purchase 327,496 shares of Common Stock outstanding. All of the Purchaser Shares to be issued to the Stockholders will, as of the Effective Time, be duly authorized and validly issued, fully paid and nonassessable. 5.3 Authority Relative to Agreement; Compliance with Other Instruments; Absence of Conflict. Each of Purchaser and I-Magic, as applicable, has all requisite corporate power and authority to execute, deliver and perform its obligations, as applicable, under this Agreement and -24- the Plan of Merger, the Registration Rights Agreement and the Escrow Agreement (such agreements, being collectively, the "Purchaser Documents"). The execution, delivery and performance by Purchaser and I-Magic of each of this Agreement and the other Purchaser Documents, and the consummation by Purchaser and I-Magic of the Contemplated Transactions have been duly authorized by all necessary corporate action on the part of Purchaser and I-Magic and, (a) do not require the Approval of any Person or other Governmental Body, (b) do not violate, with or without the giving of notice or the passage of time or both, any provision of Law, and (c) do not conflict with or result in a breach or termination of, or constitute a default or give rise to a right of termination or acceleration under (or an event which, with notice or lapse of time or both, would constitute a default or give rise to such right), or result in the creation of any Encumbrance upon any of the respective properties or assets of Purchaser or I-Magic pursuant to any corporate charter, by-law, mortgage, deed of trust, indenture, commitment or other agreement or instrument or any Law or any other restriction of any kind or character to which Purchaser or I-Magic is a party or by which any of their respective assets or properties may be bound, the consequence of which violation, conflict, breach, termination or default referred to in clauses (b) and (c) would be reasonably expected to materially adversely affect the ability of Purchaser or I-Magic to perform their respective obligations hereunder or consummate the Contemplated Transactions in accordance with the terms hereof. 5.4 Effect of Agreement. This Agreement has been duly executed and delivered by Purchaser and I-Magic. This Agreement and each such other Purchaser Document constitute legal and valid obligations of Purchaser and I-Magic, if a party thereto, enforceable against Purchaser and I-Magic in accordance with their terms, subject to laws relating to bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium, marshalling or other laws and rules of law affecting the enforcement generally of creditors' rights and remedies (including such as may deny giving effect to waivers of debtors' or guarantors' rights). 5.5 Consents and Approvals of Governmental Authorities. Except as set forth in SCHEDULE 5.5, no notice to, consent, approval or authorization of, or declaration, filing or registration with, any Governmental Body is required in connection with the execution, delivery and performance of this Agreement by Purchaser or the consummation of the Contemplated Transactions by Purchaser. 5.6 No Brokers or Finders. Purchaser and I-Magic have not, nor have any of their officers, directors or employees, employed any broker or finder or incurred any liability for any brokerage or finder's fee or commissions or similar payment in connection with any of the Contemplated Transactions. 5.7 SEC Documents: I-Magic Financial Statements. As of their respective filing dates (i) each quarterly and other report and registration statement (without exhibits), including any prospectus or prospectus supplement filed by Purchaser with the SEC since August 1, 1998 ("Purchaser SEC Documents") complied in all material respects with the applicable requirements of the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, as the case may be, and (ii) none of Purchaser SEC Documents contained any untrue statement of a -25- material fact or omitted to state a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances in which they were made, not misleading. The financial statements of Purchaser included in Purchaser SEC Documents (the "Purchaser Financial Statements") comply as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto, have been prepared in conformity with generally accepted accounting principles consistently applied (except as may be indicated in the notes thereto or, in the case of unaudited statements, as permitted by the rules and regulations of the SEC) and present fairly, in all material respects, the financial position of Purchaser and its consolidated subsidiaries at the dates thereof and the consolidated results of their operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal, recurring and certain non-recurring audit adjustments). 6. CONDITIONS TO THE OBLIGATIONS OF PURCHASER AND I-MAGIC. The obligations of Purchaser and I-Magic to effect the Merger shall be subject to the satisfaction at or prior to the Effective Time of each of the following conditions, any one or more of which may be waived by Purchaser, to the extent permitted by applicable law: 6.1 Legal Opinion. Purchaser and I-Magic shall have received the opinion of counsel to MPGN, Hettinger and the Stockholders, dated the Effective Time and addressed to Purchaser and I-Magic, in substantially the form of EXHIBIT 6.1. 6.2 No Injunction. There shall not be in effect any injunction, order or decree of a court of competent jurisdiction that prohibits or delays consummation of the Contemplated Transactions, or that will require any divestiture by Purchaser as a result of the Contemplated Transactions. 6.3 Representations, Warranties and Agreements. (a) The representations and warranties of MPGN, Hettinger, each of the Stockholders and Clendenon set forth in this Agreement shall be true and correct in all material respects as of the date of this Agreement, and as of the Effective Time with the same effect as though made as of the Effective Time, (b) each of Hettinger, the Stockholders, MPGN and Clendenon shall have performed and complied with the agreements contained in this Agreement required to be performed and complied with by them prior to or as of the Effective Time, and (c) Purchaser shall have received a certificate to the foregoing effect signed by the President of MPGN, Hettinger, each Stockholder and Clendenon. 6.4 Litigation. No Proceeding shall have been instituted by any Governmental Body or by any other Person and, at what would otherwise have been the Effective Time, remain pending to delay, restrain or prohibit the Contemplated Transactions or to seek any divestiture or to revoke or suspend any Approval by reason of any or all of the Contemplated Transactions; nor shall any Governmental Body have notified any Party or any of their respective Affiliates that consummation of any part of the Contemplated Transactions would constitute a violation of any Law or that it intends to commence a Proceeding to restrain or prohibit any part of the Contemplated Transactions or to require such divestiture, revocation or suspension; unless, in either such case, such -26- Governmental Body or other Person shall have withdrawn such notice and abandoned such Proceeding. 6.5 Approvals. All Approvals of, (a) any Person or (b) Governmental Bodies, necessary in connection with the execution, delivery and performance of this Agreement by MPGN, Hettinger or any Stockholder or for the consummation of the Contemplated Transactions shall have been obtained or made and shall be in full force and effect. 6.6 No Material Adverse Effect. No event, occurrence, fact, condition, change, development or effect shall have occurred, exist or come to exist since the date of this Agreement that, individually or in the aggregate, has constituted or resulted in, or could reasonably be expected to constitute or result in a Material Adverse Effect. 6.7 Completion of Due Diligence. Purchaser shall have completed its due diligence investigation of MPGN, including accounting and legal matters, and Purchaser in its sole discretion shall be satisfied with the results of such investigation. 6.8 Payment of Transaction Expenses. Each of MPGN, Hettinger and the Stockholders shall have paid, or made all necessary arrangements with respect to payment of, all costs, liabilities and expenses incurred by or for the benefit of MPGN, Hettinger or any Stockholder (including, without limitation, all legal and accounting fees, stock transfer, real estate transfer and other transfer taxes and expenses and any brokerage or finder's fees or commission or similar payment due to any Person listed on SCHEDULE 4.24) in connection with the negotiation and execution of this Agreement and the consummation of the Contemplated Transactions, in each case at no cost or obligation to Purchaser or the Surviving Corporation following the Closing; and MPGN, Hettinger and each Stockholder shall have provided Purchaser with evidence reasonably satisfactory to Purchaser of such payments or other arrangements. 6.9 Resignations. The officers and directors of MPGN listed on SCHEDULE 6.9 shall have delivered to MPGN duly executed resignations, dated the Effective Time. 6.10 Registration Rights Agreement. The Stockholders and Clendenon shall have executed and delivered the Registration Rights Agreement in the form of EXHIBIT C attached hereto, which agreement shall be in full force and effect. 6.11 Indebtedness Agreements. Purchaser shall have received an agreement from Bill Hettinger in form and substance satisfactory to Purchaser, with respect to the discharge of the Indebtedness in shares of Purchaser's Common Stock. 6.12 Proceedings Satisfactory. All certificates, opinions and other documents to be delivered by Hettinger, the Stockholders, MPGN and Clendenon and all other matters to be accomplished by Hettinger, the Stockholders, MPGN and Clendenon prior to or at the Closing shall be satisfactory in the judgment of Purchaser and its counsel. -27- 6.13 Stockholder Approval. Prior to the Effective Time, this Agreement and the Plan of Merger shall have been duly approved by the Stockholders and Clendenon, in accordance with applicable law. 6.14 Cancellation of Indebtedness. The Stockholders and Hettinger shall have cancelled any notes payable by MPGN to any Stockholder or Hettinger; any indebtedness owed by MPGN to any Stockholder, Hettinger, Bruce Oberfest & Associates or any related party described on SCHEDULE 4.19, shall have been repaid, discharged or contributed to the capital of MPGN and, as of the Effective Time, there shall be no outstanding notes, loans, payables or other indebtedness owed by MPGN to any Stockholder, Hettinger, Bruce Oberfest & Associates or any related party. 6.15 Escrow Agreement. Each Stockholder and the Escrow Agent (as defined therein) shall have executed and delivered to Purchaser the Escrow Agreement, substantially in the form attached as EXHIBIT B, with such modifications thereto as are reasonably requested by the Escrow Agent prior to execution thereof. 6.16 Pooling Letter. MPGN and each of its Affiliates (within the meaning of Rule 145 of the rules and regulations promulgated under the Securities Act or applicable accounting releases of the Securities and Exchange Commission with respect to pooling of interests accounting treatment) shall have executed and delivered to Purchaser's accountants a letter in form and substance reasonably satisfactory to Purchaser and its accountants relating to "pooling of interests" accounting. 6.17 Opinion of Accountants. Purchaser shall have received a letter, dated as of the date of the Closing, from Ernst & Young LLP, accountants for Purchaser, in form and substance satisfactory to Purchaser, regarding the appropriateness of pooling of interests accounting for the transactions contemplated by this Agreement. 6.18 Secretary of State Certificates. Purchaser shall have received Certificates of the Secretary of State of the State of Delaware with respect to MPGN, and of each state in which MPGN is qualified to do business as a foreign corporation as of a recent date showing MPGN to be validly existing or qualified as a foreign corporation in its states of existence and qualification, as the case may be, and in good standing and that all franchise taxes required to be paid and all reports required to be filed have been duly paid and filed, and with respect to the Certificate of the Secretary of State of the State of Delaware, listing all documents filed and attaching certified copies thereof. 6.19 Secretary's Certificate of the Company. Purchaser shall have received a Certificate of the Secretary of MPGN, stating that (i) no document has been filed relating to or affecting the Certificate of Incorporation of MPGN after the date of the Certificate of the Secretary of State of the state of its incorporation furnished pursuant to SECTION 6.18 and (ii) attached to the Certificate is a true and complete copy of the By-Laws of MPGN, as in full force and effect immediately prior to the Effective Time. -28- 6.20 Lease. The lease relating to MPGN's facility at 801 Eisenhower Drive Key West Florida shall be terminated. 7. CONDITIONS TO THE OBLIGATIONS OF MPGN AND STOCKHOLDER. The obligations of MPGN and each Stockholder to effect the Merger shall be subject to the satisfaction at or prior to the Effective Time of each of the following conditions, any one or more of which may be waived by MPGN and each of the Stockholders, to the extent permitted by applicable law: 7.1 No Injunction. There shall not be in effect any injunction, order or decree of a court of competent jurisdiction that prohibits or delays consummation of any material part of the Contemplated Transactions. 7.2 Representations, Warranties and Agreements. (a) The representations and warranties of Purchaser and I-Magic set forth in this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the Effective Time with the same effect as though made as of the Effective Time, (b) Purchaser and I-Magic shall have performed and complied in all material respects with the agreements contained in this Agreement required to be performed and complied with by it prior to or at the Closing and (c) the Stockholders and MPGN shall have received a certificate to the foregoing effect signed by an authorized officer of Purchaser. 7.3 Litigation. No Proceeding shall have been instituted by any Governmental Body or by any other Person and, at what would otherwise have been the Effective Time, remain pending to delay, restrain or prohibit any material part of the Contemplated Transactions; nor shall any Governmental Body have notified any Party or any of their respective Affiliates that consummation of any material part of the Contemplated Transactions would constitute a violation of any Law or that it intends to commence a Proceeding to restrain or prohibit any material part of the Contemplated Transactions; unless, in either such case, such Governmental Body or other Person shall have withdrawn such notice and abandoned such Proceeding. 7.4 Approvals. All Approvals of (a) any Person or (b) Governmental Bodies, necessary in connection with the execution, delivery and performance of this Agreement by Purchaser and I-Magic or for the consummation of the Contemplated Transactions shall have been obtained or made and shall be in full force and effect. -29- 7.5 Registration Rights Agreement. Purchaser shall have executed and delivered the Registration Rights Agreement in the form of EXHIBIT C attached hereto, which agreement shall be in full force and effect. 7.6 Legal Opinion. MPGN shall have received the legal opinion of Bachner, Tally, Polevoy & Misher LLP, counsel to Purchaser, in substantially the form of EXHIBIT 7.6. 8. FURTHER AGREEMENTS OF THE PARTIES. 8.1 Expenses. (a) The Parties shall each bear their own respective expenses incurred in connection with the Contemplated Transactions, except as otherwise specifically provided herein. If the Contemplated Transactions shall not be consummated for any reason and this Agreement is terminated as provided in SECTION 10.1, MPGN shall repay to Purchaser working capital advances made by Purchaser to MPGN in the amount of $250,000 (plus interest accrued to the date of repayment) no later than 90 days following termination of this Agreement. 8.2 Access Prior to the Closing. (a) Between the date of this Agreement and the Effective Time, each Stockholder shall, and shall cause MPGN to, as Purchaser may from time to time request with reasonable notice to MPGN, (i) give Purchaser and its authorized representatives full and complete access to all properties, personnel, facilities and offices of MPGN and to the books and records of MPGN (and permit Purchaser to make copies thereof), (ii) permit Purchaser to make inspections thereof, (iii) cause the officers and employees of, and consultants to MPGN to furnish Purchaser with all financial information and operating data and other information with respect to the business and properties of MPGN, and to discuss with Purchaser and its authorized representatives the affairs of MPGN. (b) Between the date of this Agreement and the Effective Time, each of the Parties shall and shall cause their respective Affiliates and officers and directors, and shall use reasonable efforts to cause all their other respective employees, auditors, attorneys, consultants, advisors and agents, to treat as confidential and hold in strict confidence, unless compelled to disclose by judicial or administrative process or, in the opinion of its counsel, by other requirements of Law, and after prior written notice to the other Party, all confidential information of the Stockholders and MPGN, or Purchaser and its Affiliates, as the case may be, furnished to Purchaser by the Stockholders and MPGN or to the Stockholders and MPGN by Purchaser, as the case may be, or any of their respective representatives in connection with the Contemplated Transactions and will not release or disclose such confidential information to any other Person, except their respective auditors, attorneys, financial advisors and other consultants, agents and advisors in connection with the consummation of the Contemplated Transactions. If the Closing does not occur (i) such confidence shall be maintained by the Parties and each Party shall cause its officers and directors and Affiliates and shall use reasonable efforts to cause such other Persons to maintain such confidence, except to the extent such information comes into the public domain (other than as a result of an action by such Party, its officers, directors or such other persons in contravention of this Agreement), (ii) each Party shall and shall cause its officers and directors and Affiliates and shall use reasonable efforts to cause such other Persons to refrain from using any of such confidential -30- information except in connection with this Agreement, and (iii) upon the request of any Party, the other Party shall promptly return to the requesting Party any written materials remaining in its possession, which materials it has received from the requesting Party, or their respective representatives. 8.3 Publicity. Between the date of this Agreement and the Effective Time, except to the extent required by law, neither Purchaser nor the Stockholders, MPGN or Clendenon shall, and none of them shall permit any Affiliate to, issue any press release or public announcement of any kind concerning, or otherwise publicly disclose, the Contemplated Transactions without the consent of the other; and in the event any such public announcement, release or disclosure is required by law, the Parties will consult prior to the making thereof and use their best efforts to agree upon a mutually satisfactory text. 8.4 Non-Competition; Confidentiality. (a) (i) Each of the Stockholders and Hettinger agree that for the period commencing on the date of this Agreement and until the later of (i) three (3) years from the Effective Time and (ii) two years following the date of termination of Hettinger's employment with Purchaser or any of its Affiliates (the "Non-Competition Period"), neither any Stockholder nor Hettinger shall, directly or indirectly, on behalf of itself or himself or in any way on behalf of any Person, within the Territory, engage or participate in or make any financial investment in, or become employed by, or act as an agent or principal of, or render advisory, consulting or other services to or for, any Competing Enterprise; provided however, that this provision shall not prohibit the Stockholders or Hettinger from acquiring, solely as an investment and without any management or other active participation therein, up to one percent (1%) of any class of securities of any Person listed on a national securities exchange or regularly traded in the over-the-counter market. Notwithstanding the foregoing, in the event that Hettinger's employment with Purchaser or any of its Affiliates is terminated by such employer other than for "Just Cause", the restrictions set forth in SECTION 8(A)(I) shall simultaneously terminate. For purposes of this SECTION 8(A)(I), "Just Cause" shall mean (i) if Hettinger is convicted of a crime (A) which involves either fraud or embezzlement, (B) involving moral turpitude or (C) which constitutes a felony; or (ii) an act of material dishonesty or fraud against, or in connection with, the services rendered for, such employer; or (iii) a willful failure by Hettinger to perform his duties and fulfill his obligations to such employer in any material respect; or (iv) willful misconduct or gross negligence in the performance of Hettinger's duties and fulfillment of his obligations to such employer; or (v) a breach by Hettinger of any of the material terms of this Agreement or other agreement with such employer, or a material breach of any rules or policies established by the Board of Directors of such employer or any of its Affiliates. (ii) Each of the Stockholders and Hettinger further agree that during the Non-Competition Period neither it, he nor any of their respective Affiliates shall, directly or indirectly, (i) solicit, encourage, induce or employ any Person who is now or becomes an employee or independent contractor of MPGN, Purchaser, the Surviving Corporation or any of their respective Affiliates, to leave the employment or association with any of such entities, or (ii) solicit, divert or induce Persons to which MPGN, Purchaser, the Surviving Corporation or any of their respective -31- Affiliates currently or hereafter sells products, to terminate their arrangements with Purchaser, the Surviving Corporation or any of their respective Affiliates, or obtain similar products from any other Person, or do business with any such Persons. The Parties agree and acknowledge that the duration and scope of the covenant not to compete described in this SECTION 8.4(A) are fair, reasonable and necessary in order to protect the legitimate interests of Purchaser, and that adequate consideration has been received by the Stockholders and Hettinger for such obligations. If, however, for any reason any court determines that the restrictions in this SECTION 8.4(A) are not reasonable or that such consideration is inadequate, such restrictions shall be interpreted, modified or rewritten to include as much of the duration, scope and geographic area identified in this SECTION 8.4(A) as will render such restrictions valid and enforceable. (b) Each of the Stockholders and Hettinger agree that following the Effective Time, it, he and their respective Affiliates shall and shall cause their respective officers and directors and shall use reasonable efforts to cause all of its or his other employees, auditors, attorneys, consultants, advisors and agents to, hold in strict confidence, unless compelled to disclose by judicial or administrative process or in the opinion of counsel by other requirements of law and after prior written notice to Purchaser, all confidential information of MPGN in their respective possession and will not release or disclose such confidential information to any other Person, except to the auditors, attorneys, financial advisors and other consultants, agents and advisors to MPGN in connection with post-Closing matters hereunder or other matters as to which the Stockholders or Hettinger have retained obligations or liabilities hereunder; PROVIDED that the foregoing obligations shall not apply to any such information which otherwise comes into the public domain (other than as a result of an action by any Stockholder, Hettinger, their Affiliates or such other persons). Upon expiration of the time periods set forth in SECTION 9.4 and upon expiration and/or satisfaction of any other matters as to which the Stockholders or Hettinger have retained obligations or liabilities hereunder, and except for information required for tax purposes, upon the request of Purchaser, the Stockholders and Hettinger will promptly turn over to Purchaser all documents containing such confidential information (and copies thereof) remaining in each Stockholders' or Hettinger's possession. (c) The Parties acknowledge that any breach of the provisions contained in SECTION 8.2(B) and this SECTION 8.4 will result in serious and irreparable injury. Therefore, the Parties acknowledge and agree that in the event of a breach by a Party, the other Party shall be entitled, in addition to any other remedy at law or in equity to which it or they may be entitled, to equitable relief against the other, including, without limitation, an injunction to restrain the other from such breach and to compel compliance with its obligations hereunder. 8.5 Conduct of Business of MPGN. Except as expressly permitted by this Agreement, between the date of this Agreement and the Effective Time, MPGN shall conduct its business only in the ordinary course in substantially the same manner as heretofore conducted, and use all its reasonable efforts to preserve intact its present business organization and to preserve the goodwill of Persons having business relations with MPGN. Without limiting the generality of the foregoing, except as otherwise expressly provided in this Agreement, between the date of this Agreement and the Effective Time, MPGN shall pay accounts payable and pay and perform other obligations of the -32- business of MPGN when they become due and payable in the ordinary course of business consistent with prior practice, or when required to be performed, as the case may be, and shall not: (a) amend its articles or certificate of incorporation or by-laws; (b) declare or pay any dividend or make any other payment or distribution in respect of its capital stock; (c) purchase, redeem, issue, sell or otherwise acquire or dispose of, either directly or indirectly, any of its capital stock, or reclassify, split or otherwise change any of its capital stock or grant or enter into any options, warrants, puts or calls or other rights to purchase, sell or convert any obligation into any of, its capital stock; (d) organize any Subsidiary or acquire any capital stock or other equity securities of any Person or any equity or ownership interest in any business; (e) borrow any funds or incur, assume or acquire any obligation or liability (whether fixed, accrued, contingent or otherwise, whether due or to become due), except for current liabilities incurred in the ordinary course of business in connection with the Contemplated Transactions or the purchase of goods or services consistent with prior practice; (f) pay, discharge or satisfy any Encumbrance (other than an Encumbrance then required to be paid, discharged or satisfied), claim, liability or obligation (whether fixed, accrued, contingent or otherwise, whether due or to become due), except for payment, discharge or satisfaction for cash of a claim, liability or obligation that is a current liability either shown on the most Recent Balance Sheet, or incurred since the date of the Recent Balance Sheet in the ordinary course of business consistent with prior practice; (g) make or grant any increase in the compensation (whether salary, commission, bonus, benefits (retirement, severance or other) or other direct or indirect remuneration) of any employees of MPGN, or enter into any employment contract with any employee of MPGN other than as contemplated by SECTIONS 4.14; (h) sell, assign, transfer, convey, lease, pledge, encumber or otherwise dispose of any of its assets or properties (real or personal, tangible or intangible) or any other material right; (i) transfer or grant any right under, or enter into any settlement regarding the breach or infringement of, any Intellectual Property right, or modify any existing right with respect thereto; (j) enter into any instrument which would constitute a Lease or Contract or enter into any material amendment, supplement or waiver in respect of any such Lease or Contract; -33- (k) incur any severance pay obligation by reason of this Agreement or the Contemplated Transactions; (l) grant or extend any power of attorney other than in the ordinary course of business which does not affect a material part of MPGN's business or act as guarantor, surety, co-signer, endorser, co-maker, indemnitor or otherwise in respect of the obligation of any Person other than through endorsements of negotiable instruments in the ordinary course of business or; (m) cancel or compromise any debt or claim, or waive or release any material right, other than adjustments in the ordinary course of business for goods sold and received which, in the aggregate, are not material; (n) make any capital expenditures or capital additions or improvements in excess of an aggregate of $10,000, other than pursuant to capital expenditure commitments disclosed on SCHEDULE 4.13 or not required to be disclosed thereon; (o) enter into or amend any collective bargaining or union contract or agreement; (p) institute or settle any Proceeding; (q) incur any Tax liability other than in the ordinary course of business; (r) in any other manner, modify, change or otherwise alter the fundamental nature of the business of MPGN as presently conducted; or (s) agree or otherwise commit, whether in writing or otherwise, to do, or take any action or omit to take any action that would result in, any of the foregoing. 8.6 Further Assurances. Following the Closing, the Parties shall, and shall cause each of their Affiliates to, from time to time, execute and deliver such additional instruments, documents, conveyances or assurances and take such other actions as shall be necessary, or otherwise reasonably requested by the other Party, to confirm and assure the rights and obligations provided for in this Agreement and in the Stockholder Documents and Purchaser Documents and render effective the consummation of the Contemplated Transactions. 8.7 Tax Matters. (a) Purchaser shall cause MPGN and/or the Surviving Corporation, as appropriate, to file all its Tax Returns due after the Effective Time with respect to the operations of MPGN, including any Tax Returns due for any short taxable year of MPGN ending at the Effective Time. Copies of any such Tax Returns with respect to the operations of MPGN, for periods which end on or prior to or which include the date of the Closing, but which are due thereafter, shall be furnished to the Stockholders Representative by the Purchaser at least 30 days prior to the filing thereof. Any such Tax Return shall be prepared in a manner that, to the extent consistent with -34- applicable laws and regulations, is reasonably consistent with the positions taken and accounting methods employed by MPGN, provided that the Stockholder Representative advises Purchaser of such positions and methods, in the preparation of similar Tax Returns for prior periods (to the extent consistent with applicable law and without (in Purchaser's reasonable judgment) risking imposition of a penalty). All Tax Returns required to be furnished to the Stockholder Representative hereunder shall be filed in the form delivered to the Stockholder Representative, unless the Stockholder Representative, within 15 days after their receipt of that Tax Return, gives notice to Purchaser of his objection to that Tax Return and setting forth in reasonable detail the basis for that objection. If the Stockholder Representative gives such a notice with respect to a Tax Return, but the parties are unable to resolve such dispute prior to the due date of such Tax Return, that Tax Return shall be timely filed in the form proposed by Purchaser but any Tax or indemnification liability of the Stockholders and/or Hettinger arising therefrom shall be resolved pursuant to SECTION 8.7(B) hereof. (b) If Purchaser and the Stockholder Representative, after good faith negotiations, are unable to reach agreement prior to the filing date of the Tax Return, then after such filing, the dispute shall be referred to the Accountants selected in accordance with subparagraph (g) hereof, whose determination shall be final. In the event that the Accountants determine that the disputed amount of such Taxes, or any portion thereof, should not have been included with such Tax Return, Purchaser shall cause the Surviving Corporation to take all necessary steps, including, without limitation, preparing an amendment to such Tax Return or a request for a refund of Taxes paid thereunder, in order to enable the Stockholders to receive a refund of such disputed amount (or portion thereof) or, at its option, shall reimburse the Stockholders for any tax paid by them as a result of such disputed amount. The fees and expenses of such accounting firm shall be paid by the Stockholders and Purchaser as follows: (i) the Stockholders shall pay that portion of the fees and expenses which is equal to the product obtained by multiplying (A) such fees and expenses by (B) a fraction, the numerator of which is the portion of the disputed amount that the Accountants determine should have been included with the Tax Return and the denominator of which is the disputed amount; and (ii) Purchaser shall pay the balance, if any, of the fees and expenses of such accounting firm. (c) The Stockholders agree to assist in and execute, to the extent required, any Tax Returns required to be filed by Purchaser or the Surviving Corporation in connection with the Contemplated Transactions on or after the Effective Time, including without limitation, Tax Returns related to any Taxes payable as a result of the Contemplated Transactions. (d) The Stockholders agree to join in making any elections permitted under the Code or other applicable tax statute reasonably requested by Purchaser with respect to MPGN. (e) Stockholders and/or Hettinger shall be jointly and severally liable for, and shall upon request by Purchaser, pay all Tax liabilities of MPGN reflected on Tax Returns of MPGN or the Surviving Corporation described in SECTION 8.7(A) hereof with respect to the operations of MPGN, covering periods ending on or prior to, or which include the Effective Time but which are due thereafter (with respect to Tax liabilities for periods which include, but do not end on, the Effective Time, to the extent reasonably allocable to the period ending at the Effective -35- Time), to the extent such liabilities exceed the amount of the reserve for Taxes (excluding any deferred Taxes or any contingent Tax reserve) accrued on the Recent Balance Sheet. Such payment shall be made sufficiently in advance of the filing of the relevant Tax Return so that Purchaser may timely pay any Taxes due upon the filing of such Tax Return. In addition, the Stockholders and Hettinger shall, jointly and severally, indemnify and hold harmless Purchaser and the Surviving Corporation from and against all Tax liabilities of MPGN or for which it may be liable for all periods ending on or prior to the Effective Time, or which include the Effective Time (to the extent reasonably allocable to the period ending at the Effective Time) including, without limitation, all liability for Taxes of MPGN or the Stockholders attributable to the Merger or the other Contemplated Transactions to the extent such liabilities exceed the amount of the reserve for Taxes (excluding any deferred Taxes or the contingent Tax reserve) accrued on the Recent Balance Sheet. (f) Each Stockholder and MPGN shall provide Purchaser with such assistance as may reasonably be requested by it in connection with the preparation of any Tax Return or any Tax contest and each will retain and provide Purchaser with any records or information which may be relevant to any such Tax Return or Tax contest. (g) Purchaser and the Stockholder Representative shall select an accounting firm to resolve disputes with respect to Taxes for which Stockholders or Hettinger may be liable if the parties are unable to resolve any such dispute within thirty (30) days. If Purchaser and the Stockholder Representative are unable to agree on an accounting firm within an additional thirty (30) days, a firm shall be selected by the North Carolina office of the American Arbitration Association from among the 20 largest firms of independent certified public accountants in the United States (the firm selected by either Purchaser and the Stockholder Representative or the American Arbitration Association being hereinafter referred to as the "Accountants") which firm shall have no affiliation with Stockholders, Hettinger, Purchaser, MPGN or the Surviving Corporation. Purchaser, on the one hand, and the Stockholders, on the other hand, shall each bear 50% of the fees of the American Arbitration Association, if any, and the Accountants, in connection with such determination. 8.8 Exclusivity. Through the earlier of the Effective Time or the date of termination of this Agreement pursuant to ARTICLE 10 hereof, neither Hettinger, the Stockholders nor MPGN shall (i) solicit, initiate or encourage the submission of inquiries, proposals or offers from any Person relating to (x) any business combination with MPGN (y) the sale or transfer of any Intellectual Property of MPGN or to which MPGN has rights or (z) the sale of a material portion of the assets and/or capital stock of MPGN (a "Transaction"), (ii) enter into or participate in any negotiations, nor initiate any discussions or continue any discussions initiated by others, regarding any Transaction, or furnish to any other person any information with respect to the assets or business of MPGN for the purposes of pursuing a possible Transaction with any other party, or (iii) otherwise participate in, assist, facilitate or encourage any effort or attempt by any other Person to do any of the foregoing. Neither Hettinger, the Stockholders nor MPGN shall authorize their investment bankers or other advisors to violate the provisions of this paragraph and shall use reasonable efforts to prevent their investment bankers or other advisors from violating the provisions of this paragraph. -36- 8.9 Retrieval of Confidential Information. At the Closing, the Stockholders and MPGN shall deliver to Purchaser a list of all Persons (other than directors, officers and employees of MPGN) who received confidential information concerning MPGN and copies of all confidentiality agreements entered into by such Persons in connection with the solicitation of prospective acquirors of MPGN. Following the Closing, the Stockholders and MPGN shall, with respect to confidential information given to such persons pursuant to or in connection with confidentiality agreements that do not run directly to MPGN, authorize Purchaser to retrieve or cause its agents to retrieve all such confidential information from such Persons. The Stockholders and MPGN shall provide their full cooperation in connection with the foregoing. In addition, the Stockholders and MPGN shall assign to Purchaser all rights of the Stockholders and MPGN, if any, to enforce the confidentiality agreements entered into by such Persons. 8.10 Pooling of Interests. Each of the Parties shall refrain from taking any action which would disqualify the transactions contemplated by this Agreement from pooling of interests accounting treatment by Purchaser. 8.11 Amending Schedules. From time to time prior to the Closing, MPGN and the Stockholders shall promptly supplement or amend the Schedules hereto with respect to any matter arising after the date of this Agreement which, if existing or occurring at the date of this Agreement, would have been required to have been set forth in the Schedules hereto. Such supplement or amendment shall have the effect of curing any related misrepresentation or breach of warranty made in connection with the transactions contemplated by this Agreement; provided, however, that Purchaser shall have a commercially reasonable period of time following receipt of any supplemented or amended Schedules to elect (i) to terminate this Agreement without any further liability to MPGN or the Stockholders or (ii) in Purchaser's sole discretion, to elect to waive such breach and consummate the transactions contemplated by this Agreement. 8.12 Consents: Regulatory Approval. Each Party will take all such commercially reasonable actions as may be necessary to obtain all approvals or consents from Persons or Governmental Bodies in order to permit the consummation of the Contemplated Transactions. 9. INDEMNIFICATION AND RELATED MATTERS. 9.1 Indemnification by MPGN, Hettinger and the Stockholders. MPGN, Hettinger and the Stockholders shall jointly and severally indemnify and hold harmless Purchaser and its Affiliates, Subsidiaries, officers, directors, employees and agents thereof (the "Purchaser Indemnified Parties"), and shall reimburse Purchaser Indemnified Parties for, any loss, liability, claim, damage, expense (including, but not limited to, costs of investigation and defense and reasonable attorneys' fees) or diminution of value (collectively, "Damages"), arising from or in connection with (a) any inaccuracy in any of the representations and warranties of MPGN, Hettinger or a Stockholder in this Agreement or in any certificate delivered by MPGN, Hettinger or a Stockholder pursuant to this Agreement, or any actions, omissions or statements of fact inconsistent with any such representation or warranty, (b) any failure by MPGN, Hettinger or a Stockholder to perform or comply with any agreement in this Agreement, (c) any claim by any -37- Person for brokerage or finder's fees or commissions or similar payments based upon any agreement or understanding alleged to have been made by any such Person with MPGN, Hettinger or a Stockholder (or any Person acting on his or its behalf) in connection with any of the Contemplated Transactions, except for any claim for fees arising out of the letter agreement between Kaufman Bros., L.P. and Multiplayer Games Network, Inc. dated July 24, 1998 or (d) Taxes attributable to any transaction or event occurring on or prior to the Closing (including Taxes attributable to the Contemplated Transactions) to the extent such liabilities exceed the amount of the reserve for Taxes accrued on the Recent Balance Sheet. 9.2 Indemnification by Purchaser. Purchaser shall indemnify and hold harmless each Stockholder and MPGN, and shall reimburse each Stockholder and MPGN, as applicable, for, any Damages arising from or in connection with (a) any inaccuracy in any of the representations and warranties of Purchaser or I-Magic in this Agreement or in any certificate delivered by Purchaser or I-Magic pursuant to this Agreement, or any actions, omissions or statements of fact inconsistent with any such representation or warranty, (b) any failure by Purchaser or I-Magic to perform or comply with any agreement in this Agreement, or (c) any claim by any Person for brokerage or finder's fees or commissions or similar payments based upon any agreement or understanding alleged to have been made by such Person with Purchaser or I-Magic (or any Person acting on their behalf) in connection with any of the Contemplated Transactions. 9.3 Survival. All representations, warranties, covenants and agreements of each of the Parties contained in this Agreement or in any certificate delivered pursuant to this Agreement shall survive the Closing for the time period set forth in SECTION 9.4 notwithstanding any investigation conducted with respect thereto. 9.4 Time Limitations. Neither MPGN, Hettinger nor any Stockholder shall have any liability (for indemnification or otherwise) with respect to any representation or warranty, or agreement to be performed and complied with prior to the Effective Time (other than those set forth in SECTIONS 4.2, 4.6, 4.12, 4.14, 4.18 AND 8.7, which shall not be subject to such limitation) unless on or before the second anniversary of the Effective Time, the Stockholder Representative is given notice asserting a claim with respect thereto specifying the factual basis therefor in reasonable detail to the extent then known by Purchaser. Purchaser shall have no liability (for indemnification or otherwise) with respect to any representation or warranty, or agreement to be performed and complied with prior to the Effective Time, unless on or before the second anniversary of the Effective Time, Purchaser is given notice of a claim with respect thereto specifying the factual basis therefor in reasonable detail to the extent then known by any Stockholder. However, the provisions of this SECTION 9.4 shall not apply to any liability resulting from any intentional misrepresentation, wilful neglect, fraud or intentional failure to perform or comply with any agreement. 9.5 Limitations as to Amount -- Stockholders. No Party shall have any liability (for indemnification or otherwise) with respect to the matters described in clause (a) or (b) of SECTION 9.1 until the total of all Damages with respect thereto exceeds $50,000, in which event such indemnification shall be effective with respect to all of the Damages. This SECTION 9.5 shall not apply to any liability resulting from any intentional misrepresentation or breach of warranty or any intentional failure to perform or comply with any agreement and Purchaser shall be liable for all Damages with respect thereto. -38- 9.6 Procedure for Indemnification. Promptly after receipt by an indemnified party under SECTION 9.1 or 9.2 of notice of the commencement of any action for which indemnification is available under SECTION 9.1 or 9.2, such indemnified party shall, if a claim in respect thereof is to be made against an indemnifying party under such section, give notice to the indemnifying party of the commencement thereof, but the failure so to notify the indemnifying party shall not relieve it of any liability that it may have to any indemnified party except to the extent the indemnifying party demonstrates that the defense of such action is prejudiced thereby. In case any such action shall be brought against an indemnified party and it shall give notice to the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, to assume the defense thereof with counsel satisfactory to such indemnified party and, after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party under such section for any fees of other counsel or any other expenses, in each case subsequently incurred by such indemnified party in connection with the defense thereof, other than reasonable costs of investigation and costs and expenses of legal counsel, if the indemnified party and the indemnifying party are both parties to the action and the indemnified party has been advised by counsel that there may be one or more defenses available to it and not available to the indemnifying party. If an indemnifying party assumes the defense of such an action, (a) no compromise or settlement thereof may be effected by the indemnifying party without the indemnified party's consent (which shall not be unreasonably withheld) unless (i) there is no finding or admission of any violation of law or any violation of the rights of any Person and no effect on any other claims that may be made against the indemnified party and (ii) the sole relief provided is monetary damages that are paid in full by the indemnifying party and (b) the indemnifying party shall have no liability with respect to any compromise or settlement thereof effected without its consent (which shall not be unreasonably withheld). If notice is given to an indemnifying party of the commencement of any action and it does not, within ten days after the indemnified party's notice is given, give notice to the indemnified party of its election to assume the defense thereof, the indemnifying party shall be bound by any determination made in such action or any compromise or settlement thereof effected by the indemnified party. Notwithstanding the foregoing, if an indemnified party determines in good faith that there is a reasonable probability that an action may adversely affect it or its affiliates other than as a result of monetary damages, such indemnified party may, by notice to the indemnifying party, assume the exclusive right to defend, compromise or settle such action, but the indemnifying party shall not be bound by any determination of an action so defended or any compromise or settlement thereof effected without its consent (which shall not be unreasonably withheld). An indemnified party may make payment of any Taxes at the time the same is due and payable, whether or not a proceeding relating thereto has been commenced, and such payment shall not affect its right to indemnification hereunder. 10. TERMINATION. 10.1 Termination Procedures. This Agreement may be terminated before the Effective Time only as follows: (a) by written agreement of the Stockholders, MPGN and Purchaser at any time; -39- (b) by Purchaser, by notice to the Stockholders and MPGN, if satisfaction of any of the conditions to Purchaser's or I-Magic's obligations set forth in SECTION 6 becomes impossible, and such condition has not been waived by Purchaser; or (c) by the Stockholders and MPGN, by notice to Purchaser, if satisfaction of any of the conditions to MPGN's, Hettinger's and the Stockholder's obligations set forth in SECTION 7 becomes impossible, and such condition has not been waived by the Stockholders and MPGN. 10.2 Effect of Termination. In the event that this Agreement is terminated pursuant to SECTION 10.1, this Agreement shall terminate without any liability or further obligation of any Party to another, except for the obligations of the Parties under SECTIONS 8.1 and 8.2. 11. MISCELLANEOUS. 11.1 Entire Agreement. This Agreement, the Stockholder's Documents and Purchaser Documents contain, and are intended as, a complete statement of all of the terms and the arrangements between the Parties with respect to the matters provided for, supersede any previous agreements and understandings between the Parties with respect to those matters, and cannot be changed or terminated orally. No Party makes, and each Party hereby expressly disclaims reliance upon, any representations or warranties with respect to the Contemplated Transactions other than as expressly set forth herein as limited by the exceptions contained in the Schedules hereto or in the other Stockholder Documents and Purchaser Documents. 11.2 Governing Law. This Agreement shall be governed by and construed in accordance with the law of the State of Delaware applicable to agreements made and to be performed therein. 11.3 Headings. The section headings contained in this Agreement are solely for the purpose of reference, are not part of the Agreement of the Parties and shall not in any way affect the meaning or interpretation of this Agreement. All references in this Agreement to Sections, Schedules and Exhibits are to sections, schedules and exhibits to this Agreement, unless otherwise indicated. 11.4 Notices. All notices and other communications under this Agreement shall be in writing and shall be deemed given when (a) delivered by hand, (b) transmitted by facsimile (and confirmed by return facsimile), or (c) delivered, if sent by Express Mail, Federal Express or other express delivery service, or registered or certified mail, return receipt requested, to the addressee at the following addresses or telecopier numbers (or to such other addresses, telex number or telecopier number as a party may specify by notice given to the other party pursuant to this provision): If to Purchaser, I-Magic or the Surviving Corporation to: -40- Interactive Magic Inc. 215 Southport Drive, Suite 100 Morrisville, North Carolina Attention: President Facsimile No.: (919) 461-0723 with copies to: Bachner, Tally, Polevoy & Misher LLP 380 Madison Avenue New York, New York 10017-2590 Attention: Jill M. Cohen, Esq. Facsimile No.: (212) 682-5729 If to MPGN, the Stockholders or Clendenon, to them c/o: James Hettinger 900 Eisenhower Boulevard Key West, Florida 33040 with a copy to: Branden Burmingham 455 E. 500 South, Suite 205 Salt Lake City, Utah 84111 Facsimile No.: (801) 355-7126 11.5 Binding Effect; Assignment. This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors and permitted assigns. Nothing in this Agreement shall create or be deemed to create any Third Party beneficiary rights in any Person who is not a Party. No assignment of this Agreement or of any rights or obligations hereunder may be made by MPGN or the Stockholders (by operation of law or otherwise) and any such attempted assignment shall be void. Purchaser or I-Magic may assign this Agreement provided that such assignment does not relieve Purchaser from its obligations hereunder. 11.6 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 11.7 Amendment and Waiver. This Agreement may be amended, or any provision of this Agreement may be waived, provided that such amendment or waiver will be binding on Purchaser only if such amendment or waiver is set forth in a writing executed by Purchaser, and provided that any such amendment or waiver will be binding upon MPGN or any Stockholder only if such amendment or waiver is set forth in a writing executed by MPGN or such Stockholder. The waiver of any Party hereto of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any other breach. -41- 11.8 Dispute Resolution. The Parties agree to attempt initially to solve all claims, disputes, or controversies arising under, out of, or in connection with this Agreement by conducting good faith negotiations. If the Parties are unable to settle the matter between themselves, the matter shall thereafter be resolved by alternative dispute resolution, starting with mediation and including, if necessary, a final and binding arbitration. Whenever a Party shall decide to institute arbitration proceedings, it shall give written notice to that effect to the other Party. The Party giving such notice shall refrain from instituting the arbitration proceedings for a period of sixty (60) days following such notice. During such period, the Parties shall make good faith efforts to amicably resolve the dispute without arbitration. Any arbitration hereunder shall be conducted under the rules of the American Arbitration Association. Each such arbitration shall be conducted by a panel of three arbitrators: one arbitrator shall be appointed by each of Purchaser and the Stockholders and the third shall be appointed by the American Arbitration Association. Any such arbitration shall be held in Raleigh, North Carolina. The arbitrators shall have the authority to grant specific performance. Judgment upon the award so rendered may be entered in any court having jurisdiction or application may be made to such court for judicial acceptance of any award and an order of enforcement, as the case may be. In no event shall a demand for arbitration be made after the date when institution of a legal or equitable proceeding based on such claim, dispute or other matter in question would be barred by the applicable statute of limitations. 11.9 Attorneys' Fees. In the event that either of the parties hereto (or any successor thereto) resorts to legal action or arbitration in order to enforce, defend or interpret any of the terms or the provisions of this Agreement, the prevailing party shall be entitled to receive, in addition to such other remedies as shall be awarded to it in such legal action or arbitration, reimbursement from the non-prevailing party for all reasonable attorneys' fees and all other costs incurred in commencing or defending such action or arbitration. In addition, the prevailing party shall be entitled to recover from the non-prevailing party post-judgment reasonable attorneys' fees incurred by the prevailing party in enforcing a judgment against the non-prevailing party. Notwithstanding anything in this Agreement to the contrary, the provisions of the preceding sentence are intended to be severable from the balance of this Agreement, shall survive any judgment rendered in connection with the aforesaid legal action or arbitration, and shall not be merged into any such judgment. -42- IN WITNESS WHEREOF, the Parties hereto have executed this instrument as of the date and year first above written. INTERACTIVE MAGIC, INC. By: /s/ J. W. Stealey ------------------------------------- Name: Title: iMAGIC ONLINE CORPORATION By: /s/ J. W. Stealey ------------------------------------- Name: Title: MPG-NET, INC. By: /s/ James Hettinger ------------------------------------- Name: Title: MULTIPLAYER GAMES NETWORK, INC. By: /s/ James Hettinger ------------------------------------- Name: Title TANTALUS, INC. By: /s/ James Hettinger ------------------------------------- Name: Title /s/ James Hettinger ------------------------------------- James Hettinger /s/ Donn A. Clendenon ------------------------------------- Donn A. Clendenon EX-10 3 EXHIBIT 10.28 EXHIBIT 10.28 SECURITIES PURCHASE AGREEMENT ----------------------------- SECURITIES PURCHASE AGREEMENT (this "AGREEMENT"), dated as of January 25, 1999, between Interactive Magic, Inc., a corporation organized under the laws of the State of North Carolina (the "COMPANY"), with headquarters located at 215 Southport Drive, Suite 1000, Morrisville, NC 27560, and the purchaser (the "PURCHASER") set forth on the execution page hereof (the "EXECUTION PAGE"). WHEREAS: A. The Company and the Purchaser are executing and delivering this Agreement in reliance upon the exemption from securities registration afforded by the provisions of Regulation D ("REGULATION D"), as promulgated by the United States Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended (the "SECURITIES ACT"); B. The Purchaser desires to purchase from the Company, upon the terms and conditions stated in this Agreement, a convertible note in the aggregate principal amount of $4,000,000, in the form attached hereto as Exhibit A (the "NOTE"), (i) convertible into shares of the Company's common stock, par value $.10 per share (the "COMMON STOCK") and (ii) in certain circumstances, entitling the holder to warrants (the "WARRANTS") to acquire a number of shares of Common Stock determined at the time of such conversion. The shares of Common Stock issuable upon conversion of or otherwise pursuant to the Note are referred to herein as the "CONVERSION SHARES" and the shares of Common Stock issuable upon exercise of or otherwise pursuant to the Warrants are referred to herein as the "WARRANT SHARES". The Note, the Warrants, the Conversion Shares and the Warrant Shares are collectively referred to herein as the "SECURITIES." C. Contemporaneous with the execution and delivery of this Agreement, the parties hereto are executing and delivering a Registration Rights Agreement, in the form attached hereto as Exhibit B (the "REGISTRATION RIGHTS AGREEMENT"), pursuant to which the Company has agreed to provide certain registration rights under the Securities Act and the rules and regulations promulgated thereunder, and applicable state securities laws; NOW, THEREFORE, the Company and the Purchaser hereby agree as follows: 1. PURCHASE AND SALE OF SECURITIES a. Purchase of Note. On the Closing Date (as defined below), subject to the satisfaction (or waiver) of the conditions set forth in Section 6 and Section 7 below, the Company shall issue and sell to the Purchaser, and the Purchaser agrees to purchase from the Company, the Note for an aggregate purchase price (the "PURCHASE PRICE") equal to $4,000,000. b. Form of Payment. On the Closing Date, the Purchaser shall pay the aggregate Purchase Price hereunder by wire transfer to the Company, in accordance with the Company's written wiring instructions, against delivery of the duly executed Note and the Company shall deliver the Note against delivery of the Purchase Price. c. Closing Date. Subject to the satisfaction (or waiver) of the conditions thereto set forth in Section 6 and Section 7 below, the date and time of the issuance and sale of the Note pursuant to this Agreement (the "CLOSING") shall be 12:00 noon Eastern Standard Time on January 26, 1999, subject to a two business day grace period at either party's option, but in no event later than January 28, 1999, or such other time as may be mutually agreed upon by the Company and the Purchaser (the "CLOSING DATE"). The Closing shall occur at the offices of Klehr, Harrison, Harvey, Branzburg & Ellers LLP, 1401 Walnut Street, Philadelphia, Pennsylvania 19102. 2. PURCHASER'S REPRESENTATIONS AND WARRANTIES The Purchaser represents and warrants to the Company as follows: a. Investment Purpose. The Purchaser is purchasing the Securities for the Purchaser's own account and not with a present view towards the public sale or distribution thereof; provided, however, by making the representations herein, the Purchaser does not agree to hold any of the Securities for any minimum or other specific term and reserves the right to dispose of the Securities at any time in accordance with or pursuant to a registration statement or an exemption under the Securities Act. b. Accredited Investor Status. The Purchaser is an "ACCREDITED INVESTOR" as that term is defined in Rule 501(a) of Regulation D. c. Reliance on Exemptions. The Purchaser understands that the Securities are being offered and sold to the Purchaser in reliance upon specific exemptions from the registration requirements of United States federal and state securities laws and that the Company is relying upon the truth and accuracy of, and the Purchaser's compliance with, the representations, warranties, agreements, acknowledgments and understandings of the Purchaser set forth herein in order to determine the availability of such exemptions and the eligibility of the Purchaser to acquire the Securities. d. Information. The Purchaser and its counsel have been furnished all materials relating to the business, finances and operations of the Company and materials relating to the offer and sale of the Securities which have been specifically requested by the Purchaser or its counsel. The Purchaser and its counsel have been afforded the opportunity to ask questions of the Company and have received what the Purchaser believes to be satisfactory answers to any such inquiries. Neither such inquiries nor any other due diligence investigation conducted by the Purchaser or its counsel or any of its representatives shall modify, amend or affect the Purchaser's right to rely on the Company's representations and warranties contained in Section 3 below. The Purchaser understands that Purchaser's investment in the Securities involves a significant degree of risk. -2- e. Governmental Review. The Purchaser understands that no United States federal or state agency or any other government or governmental agency has passed upon or made any recommendation or endorsement of the Securities. f. Transfer or Resale. The Purchaser understands that (i) except as provided in the Registration Rights Agreement, the sale or resale of the Securities has not been and is not being registered under the Securities Act or any applicable state securities laws, and the Securities may not be transferred unless (a) the Securities are sold pursuant to an effective registration statement under the Securities Act, (b) the Purchaser shall have delivered to the Company an opinion of counsel (which opinion shall be in form, substance and scope customary for opinions of counsel in comparable transactions and shall be given by counsel reasonably acceptable to the Company) to the effect that the Securities to be sold or transferred may be sold or transferred pursuant to an exemption from such registration, (c) the Securities are sold or transferred to an "affiliate" (as defined in Rule 144 promulgated under the Securities Act (or a successor rule) ("RULE 144")) of the Purchaser who agrees to sell or otherwise transfer the Securities only in accordance with this Section 2(f) and who is an Accredited Investor or (d) the Securities are sold pursuant to Rule 144; (ii) any sale of such Securities made in reliance on Rule 144 may be made only in accordance with the terms of such Rule and further, if such Rule is not applicable, any resale of such Securities under circumstances in which the seller (or the person through whom the sale is made) may be deemed to be an underwriter (as that term is defined in the Securities Act) may require compliance with some other exemption under the Securities Act or the rules and regulations of the SEC thereunder; and (iii) neither the Company nor any other person is under any obligation to register such Securities under the Securities Act or any state securities laws or to comply with the terms and conditions of any exemption thereunder (in each case, other than pursuant to the Registration Rights Agreement). Notwithstanding the foregoing or anything else contained herein to the contrary, the Securities may be pledged as collateral in connection with a bona fide margin account or other lending arrangement; provided that any transfer by the pledgee of such Securities must be in accordance with Rule 144. g. Legends. The Purchaser understands that the Note and the Warrants and, until such time as the Conversion Shares and the Warrant Shares have been registered under the Securities Act as contemplated by the Registration Rights Agreement or otherwise may be sold pursuant to Rule 144(k) (or a successor rule), the Conversion Shares and the Warrant Shares shall bear a restrictive legend in substantially the following form (and a stop-transfer order may be placed against transfer of the certificates for such Securities): "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended. The securities may not be sold, transferred or assigned in the absence of an effective registration statement for the securities under such Act, or an opinion of counsel, in form, substance and scope customary for opinions of counsel in comparable transactions, that registration is not required under such Act or unless sold pursuant to Rule 144 under such Act." -3- The legend set forth above shall be removed and the Company shall issue a certificate without such legend to the holder of any Security upon which it is stamped, if, unless otherwise required by applicable state securities laws, (a) such Security is registered for sale under an effective registration statement filed under the Securities Act or otherwise may be sold pursuant to Rule 144(k) (or a successor rule), or (b) such holder provides the Company with an opinion of counsel, in form, substance and scope customary for opinions of counsel in comparable transactions and given by counsel reasonably acceptable to the Company, to the effect that a public sale or transfer of such Security may be made without registration under the Securities Act and such sale or transfer is effected or (c) such holder provides the Company with reasonable assurances that such Security can be sold pursuant to Rule 144 and such sale is effected. The Purchaser agrees to sell all Securities, including those represented by a certificate(s) from which the legend has been removed, in compliance with applicable prospectus delivery requirements, if any. h. Authorization; Enforcement. This Agreement has been duly authorized, executed and delivered on behalf of the Purchaser and is a valid and binding agreement of the Purchaser, enforceable against the Purchaser in accordance with its terms. The Registration Rights Agreement has been duly authorized and, when executed and delivered on behalf of the Purchaser, will be a valid and binding agreement of the Purchaser, enforceable against the Purchaser in accordance with its terms. i. Residency. The Purchaser is a resident of the jurisdiction set forth under the Purchaser's name on the Execution Page hereto executed by the Purchaser. j. Transactions in the Common Stock. Purchaser has not sold (including any short sale), offered to sell, granted any option or purchased any contract to sell, or granted any option or purchased any contract to buy, any Common Stock during the period commencing 20 trading days prior to the Closing Date. 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to the Purchaser as follows: a. Organization and Qualification. The Company and each of its Subsidiaries (as defined below) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated, and has the requisite corporate power to own, lease and operate its properties and to carry on its business as and where now owned, leased, used, operated and conducted. Schedule 3(a) sets forth a list of all of the Subsidiaries of the Company and the jurisdiction in which each is incorporated. The Company and each of its Subsidiaries is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which its ownership or use of property or the nature of the business conducted by it makes such qualification necessary and where the failure so to qualify would have a Material Adverse Effect. "MATERIAL ADVERSE EFFECT" means any material adverse effect on (i) the Securities, (ii) the ability of the Company to perform its obligations hereunder or under the Note or the Registration Rights Agreement or (iii) the business, operations, properties, prospects or financial condition of the -4- Company and its Subsidiaries, taken as a whole. "SUBSIDIARY" shall have the meaning set forth in Regulation S-X promulgated by the SEC. b. Authorization; Enforcement. (i) The Company has the requisite corporate power and authority to enter into and perform its obligations under this Agreement, the Note, the Warrants and the Registration Rights Agreement, to issue and sell the Note in accordance with the terms hereof, to issue the Conversion Shares upon conversion of or otherwise pursuant to the Note in accordance with the terms thereof, to issue the Warrants in accordance with the terms of the Note and to issue the Warrant Shares in accordance with the terms of the Warrants; (ii) the execution, delivery and performance of this Agreement, the Note, the Warrants and the Registration Rights Agreement by the Company and the consummation by it of the transactions contemplated hereby and thereby (including, without limitation, the issuance of the Note and the Warrants and the issuance and reservation for issuance of the Conversion Shares and the Warrant Shares, subject to the terms and conditions set forth in the Note) have been duly authorized by the Company's Board of Directors and no further consent or authorization of the Company, its Board of Directors or its stockholders is required, except as contemplated by Article II.A.2 of the Note and Section 7(g)(ii) of the Warrants; (iii) this Agreement has been duly executed and delivered by the Company; and (iv) this Agreement constitutes, and upon execution and delivery by the Company of the Registration Rights Agreement, the Note and the Warrants, such agreements will constitute, valid and binding obligations of the Company enforceable against the Company in accordance with their terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or similar laws relating to creditors' rights generally and the application of equitable principles in any action, legal or equitable, and except as rights to indemnity or contribution may be limited by applicable law. c. Capitalization. The capitalization of the Company as of the date hereof, including the authorized capital stock, the number of shares issued and outstanding, the number of shares issuable and reserved for issuance pursuant to the Company's stock option plans, the number of shares issuable and reserved for issuance pursuant to securities (other than the Note and the Warrants) exercisable for, or convertible into or exchangeable for any shares of capital stock and the number of shares to be reserved for issuance upon conversion of or otherwise pursuant to the Note and upon exercise of or otherwise pursuant to the Warrants is set forth on Schedule 3(c). All of such outstanding shares of capital stock have been, or upon issuance will be, validly issued, fully paid and nonassessable. No shares of the authorized and unissued capital stock of the Company (including the Conversion Shares and the Warrant Shares) are subject to preemptive rights or any other similar rights of the stockholders of the Company or any liens or encumbrances. Except for the Securities and as disclosed in Schedule 3(c), as of the date of this Agreement, (i) there are no outstanding options, warrants, scrip, rights to subscribe for, puts, calls, rights of first refusal, agreements, understandings, claims or other commitments or rights of any character whatsoever relating to, or securities or rights convertible into or exercisable or exchangeable for, any shares of capital stock of the Company or any of its Subsidiaries, or arrangements by which the Company or any of its Subsidiaries is or may become bound to issue additional shares of capital stock of the Company or any of its Subsidiaries, (ii) there are no agreements or arrangements under which the Company or any of its Subsidiaries is obligated to register the sale of any of its or their securities under the Securities Act (except the Registration Rights Agreement) and (iii) there are no anti- -5- dilution or price adjustment provisions contained in any security issued by the Company (or in any agreement providing rights to security holders). Except as set forth on Schedule 3(c), there are no securities or instruments containing antidilution or similar provisions that will be triggered by the issuance of the Securities in accordance with the terms of this Agreement, the Note or the Warrants. The Company has furnished to the Purchaser true and correct copies of the Company's Certificate of Incorporation as in effect on the date hereof ("CERTIFICATE OF INCORPORATION"), the Company's Bylaws as in effect on the date hereof (the "BY-LAWS"), and all other instruments and agreements to which the Company is a party governing securities convertible into or exercisable or exchangeable for capital stock of the Company other than (i) agreements under the Company's option and stock plans for its directors, officers and employees in accordance with such plans, (ii) the Jamco Warrant (defined below), and (iii) warrants the Company has agreed to issue to investment banking firms exercisable for up to 200,000 shares of Common Stock at an exercise price per share of Common Stock equal to or greater than the closing sale price of the Common Stock on the trading day immediately preceding the date such warrants are issued. d. Issuance of Shares. The Conversion Shares and Warrant Shares are duly authorized and reserved for issuance and, (i) upon conversion of the Note in accordance with the terms thereof and (ii) exercise of the Warrants in accordance with the terms thereof and the terms of the Note, will be validly issued, fully paid and non-assessable, and free from all taxes (other than taxes payable by the Company), liens, claims and encumbrances (other than such as may arise from obligations or agreements of the Purchaser) and will not be subject to preemptive rights or other similar rights of stockholders of the Company and will not impose personal liability upon the holder thereof. e. No Conflicts. The execution, delivery and performance of this Agreement, the Registration Rights Agreement, the Note and the Warrants by the Company, and the consummation by the Company of the transactions contemplated hereby and thereby (including, without limitation, the issuance and reservation for issuance, as applicable, of the Note, the Warrants and the Conversion Shares and the Warrant Shares) will not (i) conflict with or result in a violation of any provision of the Certificate of Incorporation or By-laws or (ii) conflict with, or result in a breach of any provision of, or constitute a default (or an event which with notice or lapse of time or both could become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture, patent, patent license or instrument to which the Company or any of its Subsidiaries is a party, or (iii) result in a violation of any law, rule, regulation, order, judgment or decree (including U.S. federal and state securities laws and regulations and regulations of any self-regulatory organizations to which the Company or its securities are subject) applicable to the Company or any of its Subsidiaries or by which any property or asset of the Company or any of its Subsidiaries is bound or affected (except, with respect to clause (ii), for such conflicts, defaults, terminations, amendments, accelerations, cancellations and violations as would not, individually or in the aggregate, have a Material Adverse Effect). Neither the Company nor any of its Subsidiaries is in violation of its Certificate of Incorporation, By-laws or other organizational documents and neither the Company nor any of its Subsidiaries is in default (and no event has occurred which, with notice or lapse of time or both, could put the Company or any of its Subsidiaries in default) under, nor has there occurred any event giving others (with notice or lapse of time or both) any rights of termination, amendment, acceleration or cancellation of, any -6- agreement, indenture or instrument to which the Company or any of its Subsidiaries is a party or by which any property or assets of the Company or any of its Subsidiaries is bound or affected, except for actual or possible violations, defaults or rights as would not, individually or in the aggregate, have a Material Adverse Effect. The businesses of the Company and its Subsidiaries are not being conducted, and shall not be conducted so long as the Purchaser owns any of the Securities, in violation of any law, ordinance or regulation of any governmental entity, except for actual or possible violations, if any, the sanctions for which either singly or in the aggregate would not have a Material Adverse Effect. Subject to the accuracy of the representations and warranties of the Purchaser set forth herein, except as specifically contemplated by this Agreement and the Note and as required under the Securities Act and any applicable state securities laws, the Company is not required to obtain any consent, approval, authorization or order of, or make any filing or registration with, any court or governmental agency or any regulatory or self-regulatory agency, the NASDAQ National Market ("NASDAQ") or any third party in order for it to execute, deliver or perform any of its obligations under this Agreement, the Registration Rights Agreement, the Note or the Warrants, in each case in accordance with the terms hereof or thereof, other than such as will have been made or obtained by the Closing. Except as disclosed in SCHEDULE 3(E), all consents, authorizations, orders, filings and registrations which the Company is required to obtain pursuant to the preceding sentence have been obtained or effected on or prior to the date hereof. The Company and its Subsidiaries are unaware of any facts or circumstances which might give rise to any of the foregoing. The Company is not in violation of the maintenance requirements of NASDAQ and does not reasonably anticipate that the Common Stock will be delisted by NASDAQ for the foreseeable future. f. SEC Documents, Financial Statements. Since July 27, 1998, the date on which the Company completed its initial public offering (the "IPO DATE"), the Company has timely filed all reports, schedules, forms, statements and other documents required to be filed by it with the United States Securities and Exchange Commission ("SEC") pursuant to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT") (all of the foregoing filed prior to the date hereof and on or after the IPO Date and all exhibits included therein and financial statements and schedules thereto and documents incorporated by reference therein, being hereinafter referred to herein as the "SEC DOCUMENTS"). The Company has delivered to the Purchaser true and complete copies of the SEC Documents, except for the exhibits and schedules thereto and the documents incorporated therein. As of their respective dates, the SEC Documents complied in all material respects with the applicable requirements of the Exchange Act or the Securities Act, as the case may be, and the rules and regulations of the SEC promulgated thereunder applicable to the SEC Documents, and none of the SEC Documents, at the time they were filed with the SEC, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. As of their respective dates, the financial statements of the Company included in the SEC Documents complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC applicable with respect thereto. Such financial statements have been prepared in accordance with U.S. generally accepted accounting principles, consistently applied, during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto, or (ii) in the case of unaudited -7- interim statements, to the extent they may not include footnotes or may be condensed or summary statements) and fairly present in all material respects the consolidated financial position of the Company and its consolidated Subsidiaries as of the dates thereof and the consolidated results of their operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to immaterial year-end audit adjustments). Except as set forth in the financial statements of the Company included in the SEC Documents, the Company has no liabilities, contingent or otherwise, other than (i) liabilities incurred in the ordinary course of business subsequent to the date of such financial statements, (ii) obligations under contracts and commitments incurred in the ordinary course of business and not required under generally accepted accounting principles to be reflected in such financial statements, (iii) liabilities related to the proposed acquisition of MPG-Net, Inc. and (iv) liabilities related to borrowings under lines of credit in existence on the date of such financial statements (which liabilities and obligations referred to in clauses (i) and (ii), individually or in the aggregate, are not material to the financial condition or operating results of the Company). g. Absence of Certain Changes. Since December 31, 1997, there has been no material adverse change and no material adverse development in the assets, liabilities, business, properties, operations, financial condition, results of operations or prospects of the Company and its Subsidiaries, except as disclosed in or as contemplated by the SEC Documents. h. Absence of Litigation. Except as disclosed in the SEC Documents, there is no action, suit, claim, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the Company or any of its Subsidiaries, threatened against or affecting the Company, any of its Subsidiaries, or any of their respective directors or officers in their capacities as such that could have a Material Adverse Effect. There are no facts which, if known by a potential claimant or governmental authority, could give rise to a claim or proceeding which, if asserted or conducted with results unfavorable to the Company or any of its Subsidiaries, could have a Material Adverse Effect. i. Intellectual Property. Each of the Company and its Subsidiaries owns or is licensed to use all patents, patent applications, trademarks, trademark applications, trade names, service marks, copyrights, copyright applications, licenses, permits, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures) and other similar rights and proprietary knowledge (collectively, "INTELLECTUAL PROPERTY") necessary for the conduct of its business as now being conducted and as described in the Company's Prospectus dated July 21, 1998 included in the Company's Registration Statement on Form SB-2, SEC File No. 333-53755. To the knowledge of the Company, neither the Company nor any of its Subsidiaries infringes or is in conflict with any right of any other person with respect to any Intellectual Property which, individually or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a Material Adverse Effect. Neither the Company nor any of its Subsidiaries has received written notice of any pending conflict with or infringement upon such third party Intellectual Property. Neither the Company nor any of its Subsidiaries has entered into any consent, indemnification, forbearance to sue or settlement agreements with respect to the validity of the Company's or its Subsidiaries' ownership or right to use its Intellectual Property and, -8- to the knowledge of the Company, there is no reasonable basis for any such claim to be successful. The Intellectual Property is valid and enforceable and no registration relating thereto has lapsed, expired or been abandoned or canceled or is the subject of cancellation or other adversarial proceedings, and all applications therefor are pending and in good standing. The Company and its Subsidiaries have complied, in all material respects, with their respective contractual obligations relating to the protection of the Intellectual Property used pursuant to licenses. To the best knowledge of the Company, no person is infringing on or violating the Intellectual Property owned or used by the Company of its Subsidiaries. The Company and each of its Subsidiaries have taken reasonable security measures to protect the secrecy, confidentiality and value of their Intellectual Property. j. No Materially Adverse Contracts, Etc. Except as disclosed in the SEC Documents, neither the Company nor any of its Subsidiaries is subject to any charter, corporate or other legal restriction, or any judgment, decree, order, rule or regulation which, to the knowledge of the Company, has or could reasonably be expected in the future to have a Material Adverse Effect. Neither the Company nor any of its Subsidiaries is a party to any contract or agreement which, to the knowledge of the Company, has or is expected to have a Material Adverse Effect. k. Year 2000 Compliance. All of the Company's computer software and computer hardware, and other similar or related items of automated, computerized or software systems that are used or relied on by the Company in the conduct of its business or that were, or currently are being, sold or licensed by the Company to customers (collectively, "INFORMATION TECHNOLOGY"), are Year 2000 Compliant, except to the extent any noncompliance would not have a Material Adverse Effect. For purposes of this Agreement, the term "YEAR 2000 COMPLIANT" means, with respect to the Company's Information Technology, that the Information Technology is designed to be used prior to, during and after the calendar Year 2000 A.D., and the Information Technology used during each such time period will accurately receive, provide and process date and time data (including, but not limited to, calculating, comparing and sequencing) from, into and between the 20th and 21st centuries, including the years 1999 and 2000, and leap-year calculations and will not malfunction, cease to function, or provide invalid or incorrect results as a result of date or time data, to the extent that other information technology, used in combination with the Information Technology, properly exchanges date and time data with it. l. Foreign Corrupt Practices. Neither the Company, nor any of its Subsidiaries, nor any director, officer, agent, employee or other person acting on behalf of the Company or any Subsidiary has, in the course of his actions for, or on behalf of, the Company, used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expenses relating to political activity; made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds; violated or is in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977; or made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment to any foreign or domestic government official or employee. m. Disclosure. All information relating to or concerning the Company or its Subsidiaries set forth in this Agreement or provided to the Purchaser pursuant to Section 2(d) hereof or in the -9- SEC Documents and otherwise in connection with the transactions contemplated hereby is true and correct in all material respects and the Company has not omitted to state any material fact necessary in order to make the statements made herein or therein, in light of the circumstances under which they were made, not misleading. No event or circumstance has occurred or exists with respect to the Company or its Subsidiaries or their respective businesses, properties, prospects, operations or financial conditions, which has not been publicly disclosed but, under applicable law, rule or regulation, would be required to be disclosed by the Company in a registration statement filed on the date hereof by the Company under the Securities Act with respect to a primary issuance of the Company's securities other than (i) the proposed acquisition by the Company of MPG-Net, Inc., (ii) financial information relating to the Company's fiscal year ended December 31, 1998, (iii) events or circumstances contemplated by the SEC Documents and (iv) such events or circumstances that have occurred or exist in the ordinary course of the Company's business. n. Acknowledgment Regarding the Purchaser's Purchase of the Securities. The Company acknowledges and agrees that the Purchaser is acting solely in the capacity of an arm's- length purchaser with respect to this Agreement and the transactions contemplated hereby. The Company further acknowledges that the Purchaser is not acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to this Agreement or the transactions contemplated hereby and that any statement made by the Purchaser or any of its representatives or agents in connection with this Agreement and the transactions contemplated hereby is not advice or a recommendation and is merely incidental to the Purchaser's purchase of Securities and, except for the representations and warranties of the Purchaser set forth in Section 2 hereof, has not been relied upon by the Company, its officers or directors in any way. The Company further represents to the Purchaser that the Company's decision to enter into this Agreement has been based solely on an independent evaluation by the Company and its representatives. o. Form SB-2 and S-1 Eligibility. The Company is currently eligible to register the resale of its Common Stock on a registration statement on Form SB-2 or S-1 under the Securities Act. There exist no facts or circumstances known to the Company that would prohibit the preparation and filing of a registration statement on Form SB-2 or S-1 with respect to the Registrable Securities (as defined in the Registration Rights Agreement) within the time periods referred to therein. p. No General Solicitation. Neither the Company nor any distributor participating on the Company's behalf in the transactions contemplated hereby (if any) nor any person acting for the Company, or any such distributor, has conducted any "general solicitation," as such term is defined in Regulation D, with respect to any of the Securities being offered hereby. q. No Integrated Offering. Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf, has directly or indirectly made any offers or sales of any security or solicited any offerers to buy any security under circumstances that would require registration of the Securities being offered hereby under the Securities Act or cause this offering of Securities to be integrated with any other offering of securities of the Company (past, current or future) for purposes of any stockholder approval provisions applicable to the Company or its securities. -10- r. Brokers. The Company has taken no action which would give rise to any claim by any person for brokerage commissions, finder's fees or similar payments by the Purchaser relating to this Agreement or the transactions contemplated hereby, except for dealings with Jamco Holding, Inc. ("JAMCO"), whose commissions and fees will be paid by the Company. The Company has agreed to issue a warrant to Jamco (the "JAMCO WARRANT") exercisable for up to 200,000 shares of Common Stock in connection with this Agreement and the transactions contemplated hereby and no other securities of the Company will be issued to Jamco in connection with this Agreement and the transactions contemplated hereby. The Jamco Warrant shall contain terms and conditions satisfactory to Purchaser. s. Acknowledgment of Dilution. The Company understands and acknowledges the potentially dilutive effect to the Common Stock upon the issuance of the Conversion Shares upon conversion of or otherwise pursuant to the Note and upon issuance of the Warrant Shares upon exercise of or otherwise pursuant to the Warrants. The Company has studied and fully understands the nature of the Securities being sold hereunder. The Company acknowledges that its obligation to issue Conversion Shares in accordance with the terms of the Note and to issue the Warrant Shares in accordance with the terms of the Warrants is absolute and unconditional, regardless of the dilution that such issuance may have on the ownership interests of other stockholders. Taking the foregoing into account, the Company's Board of Directors has determined in its good faith business judgment that the issuance of the Note hereunder and the issuance of the Warrants in accordance with the terms of the Note and the consummation of the other transactions contemplated hereby and thereby are in the best interests of the Company and its stockholders. t. Tax Status. Except as set forth in the SEC Documents or on Schedule 3(t), the Company and each of its Subsidiaries has made or filed all federal, state, foreign and local income and all other tax returns, reports and declarations required by any jurisdiction to which it is subject (unless and only to the extent that the Company and each of its Subsidiaries has set aside on its books provisions reasonably adequate for the payment of all unpaid and unreported taxes) and has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and has set aside on its books provisions reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company know of no basis for any such claim. The Company has not executed a waiver with respect to any statute of limitations relating to the assessment or collection of any federal, state or local tax. None of the Company's tax returns has been or is being audited by any taxing authority. u. Certain Transactions. Except as set forth in the SEC Documents, and except for arm's length transactions pursuant to which the Company or any of its Subsidiaries makes payments in the ordinary course of business upon terms no less favorable than the Company or any of its Subsidiaries could obtain from third parties and other than the grant of stock options disclosed on Schedule 3(c), none of the officers, directors, or employees of the Company is presently a party to any transaction with the Company or any of its Subsidiaries (other than for services as employees, -11- officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any corporation, partnership, trust or other entity in which any officer, director or any such employee has a substantial interest or is an officer, director, trustee or partner. v. Title. The Company and its Subsidiaries have good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by them which is material to the business of the Company and its Subsidiaries, in each case free and clear of all liens, encumbrances and defects except such as are described in Schedule 3(v) or such as do not materially affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by the Company and its Subsidiaries. Any real property and facilities held under lease by the Company and its Subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not materially interfere with the use made and proposed to be made of such property and buildings by the Company and its Subsidiaries. w. Permits; Compliance. The Company and each of its Subsidiaries is in possession of all franchises, grants, authorizations, licenses, permits, easements, variances, exemptions, consents, certificates, approvals and orders necessary to own, lease and operate its properties and to carry on its business as it is now being conducted (collectively, the "COMPANY PERMITS"), and there is no action pending or, to the knowledge of the Company, threatened regarding suspension or cancellation of any of the Company Permits, except for such Company Permits the absence of which would not have a Material Adverse Effect. Neither the Company nor any of its Subsidiaries is in conflict with, or in default or violation of, any of the Company Permits, except for any such conflicts, defaults or violations which, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect. Since the IPO Date, neither the Company nor any of its Subsidiaries has received any notification with respect to possible conflicts, defaults or violations of applicable laws, except for notices relating to possible conflicts, defaults or violations, which conflicts, defaults or violations would not have a Material Adverse Effect. x. Internal Accounting Controls. The Company and each of its Subsidiaries maintain a system of internal accounting controls sufficient, in the judgment of the Company's board of directors, to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management's general or specific authorization and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. -12- 4. COVENANTS. a. Best Efforts. The parties shall use their best efforts to satisfy timely each of the conditions described in Section 6 and Section 7 of this Agreement. b. Form D; Blue Sky Laws. The Company agrees, if required, to file a Form D with respect to the Securities as required under Regulation D and to provide a copy thereof to the Purchaser promptly after such filing. The Company shall, on or before the Closing Date, take such action as the Company shall reasonably determine is necessary to qualify the Securities for sale to the Purchaser pursuant to this Agreement under applicable securities or "blue sky" laws of the states of the United States or obtain exemption therefrom, and shall provide evidence of any such action so taken to the Purchaser on or prior to the Closing Date. c. Reporting Status; Eligibility to Use Forms SB-2, S-1 and S-3. The Company's Common Stock is registered under Section 12(g) of the Exchange Act. So long as the Purchaser beneficially owns any of the Securities, the Company shall timely file all reports required to be filed with the SEC pursuant to the Exchange Act, and the Company shall not terminate its status as an issuer required to file reports under the Exchange Act even if the Exchange Act or the rules and regulations thereunder would permit such termination. The Company meets the "registrant eligibility" requirements set forth in the general instructions to Forms SB-2 and S-1 and will take all action necessary to continue to meet such requirements. From and after such time as the Company meets the "registrant eligibility" requirements set forth in the general instructions to Form S-3 or any successor form, the Company will use its best efforts to continue to meet such requirements. d. Use of Proceeds. The Company shall use the proceeds from the sale of the Note in the manner set forth in Schedule 4(d) attached hereto and shall not, except as set forth in such Schedule 4(d), directly or indirectly, use such proceeds for any loan to or investment in any other corporation, partnership, enterprise or other person (except in connection with its currently existing direct or indirect Subsidiaries). e. Additional Equity Capital; Right of First Offer. Subject to the exceptions described below, the Company agrees that during the period (the "LOCK-UP PERIOD") beginning on the date hereof and ending on the date that is 180 days after the effective date of the Registration Statement (as defined in the Registration Rights Agreement) required pursuant to Section 2(a) of the Registration Rights Agreement, the Company will not, without the prior written consent of the Purchaser, contract with any party to obtain additional financing in which any equity or equity- linked securities are issued (including any debt financing with an equity component) ("FUTURE OFFERINGS"). In addition, the Company will not conduct any Future Offering during the 180-day period immediately following the expiration of the Lock-Up Period, unless it shall have first delivered to the Purchaser, at least 15 days prior to the closing of such Future Offering, written notice describing the proposed Future Offering, including the terms and conditions thereof, and providing the Purchaser and its affiliates an option during the ten-day period following delivery of such notice to purchase all of the securities being offered in the Future Offering on the same terms -13- as contemplated by such Future Offering (the limitations referred to in this and the immediately preceding sentence are collectively referred to as the "CAPITAL RAISING LIMITATIONS"). The Capital Raising Limitations shall not apply to (i) any transaction involving issuances of securities as consideration in a merger, consolidation or acquisition of assets, or in connection with any strategic partnership or joint venture (the primary purpose of which is not to raise equity capital), or as consideration for the acquisition of a business, product or license by the Company, (ii) the issuance of securities pursuant to a firm commitment underwritten public offering (other than a continuous offering pursuant to Rule 415 of the SEC), (iii) the issuance of securities upon exercise or conversion of the Company's options, warrants or other convertible securities outstanding as of the date hereof and/or disclosed on Schedule 3(c) hereto, (iv) the grant of additional options or warrants, or the issuance of additional securities, under any Company stock option or restricted stock plan approved by the stockholders of the Company, (v) the issuance of Common Stock or securities convertible into or exchangeable for Common Stock in a private placement by the Company (A) that is consummated within the Lock-Up Period, and (B) wherein the cash consideration received by the Company for each share of Common Stock issued in such private placement, or for each security (or portion thereof) convertible or exchangeable into one share of Common Stock, is equal to or greater than the product of (x) two multiplied by (y) the Fixed Conversion Price (as defined in the Note) or (vi) the issuance of warrants by the Company to an institutional lender in connection with a commercial loan facility permitted by Article III.C of the Note at an exercise price equal to or greater than the closing sale price of the Common Stock on the trading day immediately preceding the date such warrants are issued. f. Expenses. The Company shall pay to Rose Glen Capital Management, L.P. at the Closing a non-accountable expense allowance equal to $30,000 ($10,000 of which has been previously paid by the Company) for the expenses incurred by it in connection with the negotiation, preparation, execution and delivery of this Agreement and the other agreements to be executed in connection herewith, including, without limitation, attorneys' and consultants' fees and expenses. g. Financial Information. The Company agrees to send the following reports to the Purchaser until the Purchaser transfers, assigns or sells all of its Securities: (i) within ten days after the filing with the SEC, a copy of its Annual Report on Form 10-KSB, its Quarterly Reports on Form 10-QSB, its proxy statements and any Current Reports on Form 8-K; (ii) within one day after release, copies of all press releases issued by the Company or any of its Subsidiaries; and (iii) contemporaneously with the making available or giving to the stockholders of the Company, copies of any notices or other information the Company makes available or gives to such stockholders. h. Reservation of Shares. The Company shall at all times have authorized and reserved for the purpose of issuance a sufficient number of shares of Common Stock to provide for the full conversion of the Note and issuance of the Conversion Shares in connection therewith (based on the lesser of the Market Price in effect from time to time and the Fixed Conversion Price (each as defined in the Note)) and as otherwise required by, and subject to the terms and conditions of, the Note and the full exercise of the Warrants and the issuance of the Warrant Shares in connection therewith (based on the Exercise Price (as defined in the Warrants) in effect from time to time -14- thereunder) and as otherwise required by the Warrant. The Company shall not reduce the number of shares reserved for issuance upon conversion of or otherwise pursuant to the Note and upon exercise of or otherwise pursuant to the Warrants (except as a result of any such conversion or exercise thereof) without the consent of the Purchaser. The Company shall use its best efforts at all times to maintain the number of shares of Common Stock so reserved for issuance at no less than two times the number that is then actually issuable upon full conversion of the Note (based on the lesser of the Market Price in effect from time to time and the Fixed Conversion Price) and full exercise of the Warrants (based on the Exercise Price (as defined in the Warrants) in effect from time to time thereunder), subject to the limitations on issuance contained in Article II.A(2) of the Note and Section 7(g)(ii) of the Warrants until such time as a Triggering Event (as defined in the Note) occurs, and thereafter without regard to such limitations. If at any time the number of shares of Common Stock authorized and reserved for issuance is below the aggregate number of Conversion Shares issued and issuable upon conversion of or otherwise pursuant to the Note (based on the lesser of the Market Price in effect from time to time and the Fixed Conversion Price) and the aggregate number of Warrant Shares issued and issuable upon exercise of or otherwise pursuant to the Warrants (based on the Exercise Price (as defined in the Warrants) in effect from time to time thereunder), subject to the limitations on issuance contained in Article II.A(2) of the Note and Section 7(g)(ii) of the Warrants until such time as a Triggering Event occurs, and thereafter without regard to such limitations, the Company will promptly take all corporate action necessary to authorize and reserve a sufficient number of shares, including, without limitation, calling a special meeting of stockholders to authorize additional shares to meet the Company's obligations under this Section 4(h), in the case of an insufficient number of authorized shares, and using its best efforts to obtain shareholder approval of an increase in such authorized number of shares. i. Listing. The Company shall promptly secure the listing of the Conversion Shares and the Warrant Shares upon each national securities exchange or automated quotation system, if any, upon which shares of Common Stock are then listed (subject to official notice of issuance) and shall maintain, so long as any other shares of Common Stock shall be so listed, such listing of all Conversion Shares from time to time issuable upon conversion of or otherwise pursuant to the Note and all Warrant Shares from time to time issuable upon exercise of or otherwise pursuant to the Warrants, subject to the limitations on issuance contained in Article II.A(2) of the Note and Section 7(g)(ii) of the Warrants until such time as a Triggering Event occurs and thereafter without regard to such limitations. The Company will use its best efforts to continue the listing and trading of its Common Stock on the NASDAQ, the New York Stock Exchange ("NYSE") or the American Stock Exchange ("AMEX") and will comply in all respects with the Company's reporting, filing and other obligations under the bylaws or rules of the National Association of Securities Dealers, Inc. ("NASD") and such exchanges, as applicable. In the event the Common Stock is not eligible to be traded on any of the NASDAQ, the NYSE or the AMEX and the Common Stock is not eligible for listing on any such exchange or system, the Company shall use its best efforts to cause the Common Stock to be eligible for trading on the NASDAQ SmallCap Market or the over-the-counter bulletin board at the earliest practicable date and remain eligible for trading while any Conversion Shares are outstanding. The Company shall provide to the Purchaser and any holder of the Note copies of any notices it receives from NASDAQ and any other exchanges or quotation system on which the Common Stock is then listed regarding the continued eligibility of the Common Stock for listing on -15- such exchanges and quotation systems simultaneously with or promptly after such notices are publicly available. j. [Intentionally Omitted] k. No Integrated Offerings. The Company shall not make any offers or sales of any security (other than the Securities) under circumstances that would require registration of the Securities being offered or sold hereunder under the Securities Act or cause this offering of Securities to be integrated with any other offering of securities by the Company for purposes of any stockholder approval provision applicable to the Company or its securities. l. Redemptions and Dividends. So long as the Purchaser beneficially owns the Note, the Company shall not, without first obtaining the written approval of the Purchaser, redeem, or declare or pay any cash dividend or distribution on, any shares of capital stock of the Company. m. Trading Limitations. So long as the Purchaser owns any Securities, the Purchaser shall not sell shares of Common Stock in any calendar month in excess of the product of (i) 25% multiplied by (ii) the total trading volume of the Common Stock for the immediately preceding calendar month as reported by the principal securities exchange or trading market on which the Common Stock is then listed or admitted for trading; provided, however, the foregoing limitation shall not (A) restrict the Purchaser from selling in any trading day a number of shares not exceeding 15% of the total trading volume of the Common Stock (as so reported) for such trading day or (B) apply to block sales of at least 10,000 shares of Common Stock to a single purchaser. The Purchaser will conduct all transactions in the Common Stock in compliance with applicable securities laws and will not execute a trade at or below the then low trading price of the Common Stock. n. Voting Agreements; Waivers. (i) The Company shall cause each of James W. Stealey, David H. Kestel, as trustee of certain trusts for Mr. Stealey's children, and Vertical Financial Holdings (each a "STOCKHOLDER" and collectively, the "STOCKHOLDERS") to execute and deliver to the Purchaser, prior to or simultaneously with the Closing hereunder, irrevocable voting agreements (the "VOTING AGREEMENTS") pursuant to which each such Stockholder agrees to vote all shares of the capital stock of the Company (A) which are identified under the caption "Principal Shareholders" in the Company's Registration Statement on Form SB-2, SEC File No. 333-53755, as being beneficially owned by such Stockholder or over which such Stockholder has voting power and (B) which such Stockholder may subsequently acquire beneficial ownership of, or voting power with respect to, in favor of this Agreement, the Note, the Warrants and the transactions contemplated hereby and thereby (including, without limitation, the issuance of the Note and the Warrants, the issuance of Conversion Shares upon conversion of or otherwise pursuant to the Note and the issuance of Warrant Shares upon exercise of or otherwise pursuant to the Warrants) at any meeting of the stockholders of the Company or any other circumstance when such stockholders are entitled to vote with respect thereto, whether pursuant to the Company's obligation to seek and obtain the Stockholder Approval (as defined in the Note) or otherwise. The Voting Agreements shall also -16- contain waivers by the Stockholders of their right to require the Company to include any shares of the capital stock of the Company which they beneficially own, or have voting power with respect to, in any Registration Statement (as defined in the Registration Rights Agreement) required to be filed by the Company pursuant to the Registration Rights Agreement. (ii) The Company agrees that any registration rights to be granted to the shareholders of MPG-Net, Inc. in connection with the Company's acquisition of MPG-Net, Inc. shall exclude the right to have the shares of the Company's capital stock to be issued to such shareholders in connection with such acquisition included in any Registration Statement (as defined in the Registration Rights Agreement) required to be filed by the Company pursuant to the Registration Rights Agreement. (iii) The Company shall cause each of Bluestone Capital Partners, L.P. and Royce Investment Group, Inc. (each an "UNDERWRITER" and collectively, the "UNDERWRITERS") to execute and deliver to the Purchaser, prior to or simultaneously with the Closing hereunder, waivers (the "WAIVERS") by the Underwriters of their right to require the Company to include any shares of the capital stock of the Company which they beneficially own or have voting power with respect to in any Registration Statement (as defined in the Registration Rights Agreement) required to be filed by the Company pursuant to the Registration Rights Agreement. 5. TRANSFER AGENT INSTRUCTIONS. The Company shall issue irrevocable instructions to its transfer agent to issue certificates, registered in the name of the Purchaser or its nominee, for the Conversion Shares and the Warrant Shares in such amounts as specified from time to time by the Purchaser to the Company upon conversion of the Note and upon exercise of the Warrants in accordance with the terms thereof (the "IRREVOCABLE TRANSFER AGENT INSTRUCTIONS"). Prior to registration of the Conversion Shares and the Warrant Shares under the Securities Act or the date on which such shares may be sold pursuant to Rule 144(k) (or any successor rule), all such certificates shall bear the restrictive legend specified in Section 2(g) of this Agreement. The Company warrants that no instruction other than the Irrevocable Transfer Agent Instructions referred to in this Section 5, and stop transfer instructions to give effect to Sections 2(f) and 2(g) hereof (in the case of the Conversion Shares and the Warrant Shares, prior to registration of the Conversion Shares and the Warrant Shares under the Securities Act or the date on which the Conversion Shares and the Warrant Shares may be sold pursuant to Rule 144(k) (or any successor rule), will be given by the Company to its transfer agent and that the Securities shall otherwise be freely transferable on the books and records of the Company to the extent provided, and subject to the terms and conditions of, this Agreement, the Note and the Registration Rights Agreement. Nothing in this Section shall affect in any way the Purchaser's obligations and agreement set forth in Section 2(g) hereof to comply with all applicable prospectus delivery requirements, if any, upon resale of the Securities. If the Purchaser provides the Company with (i) an opinion of counsel, in form, substance and scope customary for opinions in comparable transactions and given by counsel reasonably acceptable to the Company, to the effect that a public sale or transfer of such Securities may be made without registration under the Securities Act and such sale or transfer is effected or (ii) the Purchaser provides reasonable assurances that the -17- Securities can be sold pursuant to Rule 144 and such sale is effected, the Company shall permit the transfer, and, in the case of the Conversion Shares and the Warrant Shares, promptly instruct its transfer agent to issue one or more certificates, free from any restrictive legend, in such name and in such denominations as specified by the Purchaser. 6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL. The obligation of the Company hereunder to issue and sell the Note to the Purchaser hereunder is subject to the satisfaction, at or before the Closing Date, of each of the following conditions thereto, provided that these conditions are for the Company's sole benefit and may be waived by the Company at any time in its sole discretion. a. The Purchaser shall have executed the signature page to this Agreement and the Registration Rights Agreement, and delivered such pages to the Company. b. The Purchaser shall have delivered the Purchase Price in accordance with Section 1(b). c. The representations and warranties of the Purchaser shall be true and correct as of the date when made and as of the Closing Date as though made at that time (except for representations and warranties that speak as of a specific date, which representations and warranties shall be true and correct as of such date), and the Purchaser shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Purchaser at or prior to the Closing Date. d. No statute, rule, regulation, executive order, decree, ruling, injunction, action or proceeding shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction or any self-regulatory organization having authority over the matters contemplated hereby which questions the validity of, or challenges or prohibits the consummation of any of the transactions contemplated by this Agreement. 7. CONDITIONS TO THE PURCHASER'S OBLIGATION TO PURCHASE. The obligation of the Purchaser hereunder to purchase the Note hereunder is subject to the satisfaction, at or before the Closing Date, of each of the following conditions, provided that these conditions are for the Purchaser's sole benefit and may be waived by the Purchaser at any time in the Purchaser's sole discretion: a. The Company shall have executed the signature page to this Agreement and the Registration Rights Agreement, and delivered such pages to the Purchaser. b. The Company shall have delivered to the Purchaser the duly executed Note (in such denominations as such Purchaser shall request) in accordance with Section 1(b). -18- c. The Common Stock shall be authorized for quotation on NASDAQ and trading in the Common Stock (or NASDAQ generally) shall not have been suspended by the SEC or NASDAQ. d. The representations and warranties of the Company shall be true and correct as of the date when made and as of the Closing Date as though made at that time (except for representations and warranties that speak as of a specific date, which representations and warranties shall be true and correct as of such date) and the Company shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Company at or prior to the Closing Date. The Purchaser shall have received a certificate, executed by the Chief Executive Officer of the Company, dated as of the Closing Date, to the foregoing effect and as to such other matters as may be reasonably requested by the Purchaser. e. No statute, rule, regulation, executive order, decree, ruling, injunction, action or proceeding shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction or any self-regulatory organization having authority over the matters contemplated hereby which questions the validity of, or challenges or prohibits the consummation of, any of the transactions contemplated by this Agreement. f. The Purchaser shall have received an opinion of the Company's counsel, dated as of the Closing Date, in form, scope and substance reasonably satisfactory to the Purchaser and in substantially the form of Exhibit C attached hereto. g. The Irrevocable Transfer Agent Instructions, in the form attached hereto as Exhibit D, shall have been delivered to and acknowledged in writing by the Company's transfer agent and a copy of such instructions and acknowledgment shall have been delivered to the Purchaser. h. No material adverse change or development in the business, operations, properties, prospects, financial condition, or results of operations of the Company shall have occurred since the date hereof. i. The Company shall have delivered to the Purchaser the Voting Agreement(s) in form and substance satisfactory to the Purchaser, duly executed by each of the Stockholders, and the Waiver(s) in form and substance satisfactory to the Purchaser, duly executed by each of the Underwriters. 8. GOVERNING LAW; MISCELLANEOUS. a. Governing Law; Jurisdiction. This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed in the State of New York (without regard to principles of conflict of laws). The Company irrevocably consents to the jurisdiction of the United States federal courts and the state courts located in New York County, New York in any suit or proceeding based on or arising under this -19- Agreement, the agreements entered into in connection herewith or the transactions contemplated hereby or thereby and irrevocably agrees that all claims in respect of such suit or proceeding may be determined in such courts. The Company irrevocably waives the defense of an inconvenient forum to the maintenance of such suit or proceeding. The Company further agrees that service of process upon the Company mailed by first class mail shall be deemed in every respect effective service of process upon the Company in any such suit or proceeding. Nothing herein shall affect the right of the Purchaser to serve process in any other manner permitted by law. The Company agrees that a final non-appealable judgment in any such suit or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on such judgment or in any other lawful manner. b. Counterparts. This Agreement may be executed in two or more counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party. This Agreement, once executed by a party, may be delivered to the other parties hereto by facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement. In the event any signature is delivered by facsimile transmission, the party using such means of delivery shall cause the manually executed Execution Page(s) hereof to be physically delivered to the other party within five days of the execution hereof. c. Headings. The headings of this Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement. d. Severability. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement or the validity or enforceability of this Agreement in any other jurisdiction. e. Entire Agreement; Amendments. This Agreement and the instruments referenced herein contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company nor the Purchaser makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be waived or amended other than by an instrument in writing signed by the party to be charged with enforcement and no provision of this Agreement may be amended other than by an instrument in writing signed by the Company and the Purchaser. f. Notices. Any notices required or permitted to be given under the terms of this Agreement shall be sent by certified or registered mail (return receipt requested) or delivered personally or by courier (including a recognized overnight delivery service) or by facsimile, and shall be effective five days after being placed in the mail, if mailed, or upon receipt or refusal of receipt, if delivered personally or by courier or by facsimile, in each case addressed to a party. The addresses for such communications shall be: -20- If to the Company: Interactive Magic, Inc. 215 Southport Drive, Suite 1000 Morrisville, NC 27560 Facsimile: (919) 461-0723 Attention: Chief Executive Officer If to the Purchaser, to the address set forth under the Purchaser's name on the signature page hereto executed by the Purchaser. Each party shall provide notice to the other party of any change in address or facsimile number. g. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and assigns. Except as provided herein, neither the Company nor the Purchaser shall assign this Agreement or any rights or obligations hereunder. Notwithstanding the foregoing, the Purchaser may assign its rights hereunder to any person that purchases Securities in a private transaction from the Purchaser in accordance with the securities laws or to any of the Purchaser's "affiliates," as that term is defined under the Exchange Act, without the consent of the Company or to any other person or entity with the consent of the Company. This provision shall not limit the Purchaser's right to transfer the Securities pursuant to the terms of this Agreement, the Note, the Warrants or the Registration Rights Agreement or to assign the Purchaser's rights hereunder or thereunder to any such transferee. h. Third Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other person. i. Survival. The representations and warranties of the Company and the agreements and covenants set forth in Sections 3, 4, 5 and 8 shall survive the Closing hereunder until the Purchaser no longer beneficially owns any Securities notwithstanding any due diligence investigation conducted by or on behalf of the Purchaser. Moreover, none of the representations and warranties made by the Company herein shall act as a waiver of any rights or remedies the Purchaser may have under applicable federal or state securities laws. The Company agrees to indemnify and hold harmless the Purchaser and each of the Purchaser's officers, directors, employees, partners, members, agents and affiliates for loss or damage arising as a result of or related to any breach or alleged breach by the Company of any of its representations, warranties or covenants set forth herein or in the Registration Rights Agreement, including advancement of expenses as they are incurred. j. Publicity. The Company and the Purchaser shall have the right to review a reasonable period of time before issuance any press releases, SEC, NASDAQ or NASD filings, or any other public statements with respect to the transactions contemplated hereby; PROVIDED, HOWEVER, that the Company shall be entitled, without the prior approval of the Purchaser, to make any press release or SEC, NASDAQ or NASD filings with respect to such transactions as is required by -21- applicable law and regulations (although the Purchaser shall be consulted by the Company in connection with any such press release prior to its release and shall be provided with a copy thereof and be given an opportunity to comment thereon). k. Further Assurances. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. l. Joint Participation in Drafting. Each party to this Agreement has participated in the negotiation and drafting of this Agreement, the Note, the Warrants and the Registration Rights Agreement. As such, the language used herein and therein shall be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction will be applied against any party to this Agreement. m. Equitable Relief. The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Purchaser by vitiating the intent and purpose of the transactions contemplated hereby. Accordingly, the Company acknowledges that the remedy at law for a breach of its obligations hereunder (including, but not limited to, its obligations pursuant to Section 5 hereof) will be inadequate and agrees, in the event of a breach or threatened breach by the Company of the provisions of this Agreement (including, but not limited to, its obligations pursuant to Section 5 hereof), that the Purchaser shall be entitled, in addition to all other available remedies, to an injunction restraining any breach and requiring immediate issuance and transfer, without the necessity of showing economic loss and without any bond or other security being required. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -22- IN WITNESS WHEREOF, the undersigned Purchaser and the Company have caused this Agreement to be duly executed as of the date first above written. INTERACTIVE MAGIC, INC. By: /s/ J. W. Stealey ---------------------- Name: J. W. Stealey --------------------- Title: Chairman and Chief Executive Officer ------------------------------------ PURCHASER: RGC INTERNATIONAL INVESTORS, LDC By: Rose Glen Capital Management, L.P., Investment Manager By: RGC General Partner Corp., as General Partner By: /s/ Steve Katznelson ---------------------------- Name: Steve Katznelson ----------------------- Managing Director RESIDENCE: Cayman Islands ADDRESS: c/o Rose Glen Capital Management, L.P. Three Bala Plaza East Suite 200 251 St. Asaphs Road Bala Cynwyd, PA 19004 Facsimile: 610-617-0570 Telephone: 610-617-5900 with copies of all notices to: Klehr, Harrison, Harvey, Branzburg & Ellers 1401 Walnut Street Philadelphia, PA 19102 Telecopy: (215) 568-6603 Attention: Robert W. Cleveland, Esquire EX-10 4 EXHIBIT 10.29 EXHIBIT 10.29 EXHIBIT A TO SECURITIES PURCHASE AGREEMENT THIS CONVERTIBLE NOTE AND THE SHARES ISSUABLE UPON CONVERSION HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THE SECURITIES REPRESENTED HEREBY MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL, IN FORM, SUBSTANCE AND SCOPE CUSTOMARY FOR OPINIONS OF COUNSEL IN COMPARABLE TRANSACTIONS, THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SUCH ACT. CONVERTIBLE NOTE ---------------- January 26, 1999 $4,000,000 FOR VALUE RECEIVED, INTERACTIVE MAGIC, INC., a corporation organized under the laws of the State of North Carolina (hereinafter called the "BORROWER" or the "CORPORATION") hereby promises to pay to the order of RGC INTERNATIONAL INVESTORS, LDC or registered assigns (the "HOLDER") the sum of Four Million Dollars ($4,000,000) on January 26, 2002 (the "AUTOMATIC CONVERSION DATE") and to pay interest on the unpaid principal balance hereof at the rate of six percent (6%) per annum from the date hereof (the "ISSUE DATE") until the same becomes due and payable (which interest shall accrue on a daily basis), whether at maturity or upon conversion, redemption, acceleration or otherwise. Any amount of principal of or interest on this Note which, to the extent not converted in accordance with the provisions hereof, is not paid when due shall bear interest at the rate of fifteen percent (15%) per annum from the due date thereof until the same is paid. Interest shall be calculated based on a 360-day year and shall commence accruing on the Issue Date and, to the extent not converted in accordance with the provisions hereof, shall be payable in arrears at such time as the outstanding principal balance hereof with respect to which such interest has accrued becomes due and payable hereunder. All payments of principal and interest (to the extent not converted into shares of the Corporation's common stock, par value $.10 per share ("COMMON STOCK"), in accordance with the terms hereof) shall be made in, and all references herein to monetary denominations shall refer to, lawful money of the United States of America. All payments shall be made at such address as Holder shall hereafter give to the Borrower by written notice made in accordance with the provisions of this Note. The Automatic Conversion Date is subject to extension as provided in Article IV hereof. This Note is being issued by the Borrower pursuant to the Securities Purchase Agreement, dated as of January 25, 1999, between the Borrower and Holder (the "PURCHASE AGREEMENT"). Each capitalized term used, but not otherwise defined, herein shall have the meaning ascribed thereto in the Purchase Agreement. For purposes hereof, the term "NOTES" shall be deemed to refer to this Note, all other convertible notes issued pursuant to the Purchase Agreement and all convertible notes issued in replacement hereof or thereof or otherwise with respect hereto or thereto. I. REDEMPTION A. MANDATORY REDEMPTION. If any of the following events (each, a "MANDATORY REDEMPTION EVENT") shall occur: (1) The Corporation (i) fails to issue shares of Common Stock or Warrants to the holders of the Notes upon exercise by the holders of their conversion rights in accordance with the terms of the Notes (for a period of at least 60 days if such failure is solely as a result of the circumstances governed by the second paragraph of Article II.F below and the Corporation is using its best efforts to authorize a sufficient number of shares of Common Stock as soon as practicable), (ii) fails to transfer or to cause its transfer agent to transfer (electronically or in certificated form) any certificate for shares of Common Stock issued to the holders upon conversion of or otherwise pursuant to the Notes or upon exercise of or otherwise pursuant to the Warrants (as defined in Article II.E below) as and when required by the Notes, the Warrants or the Registration Rights Agreement, dated as of January 25, 1999, by and among the Corporation and the other signatories thereto (the "REGISTRATION RIGHTS AGREEMENT"), (iii) fails to remove any restrictive legend (or to withdraw any stop transfer instructions in respect thereof) on any certificate or any shares of Common Stock issued to the holders of the Notes upon conversion of or otherwise pursuant to the Notes or upon exercise of or otherwise pursuant to the Warrants as and when required by the Notes, the Warrants, the Purchase Agreement or the Registration Rights Agreement, or (iv) fails to fulfill its obligations pursuant to Sections 4(c), 4(e), 4(h), 4(i), 4(l) or 5 of the Purchase Agreement (or makes any announcement, statement or threat that it does not intend to honor the obligations described in this paragraph) and any such failure shall continue uncured (or any announcement, statement or threat not to honor its obligations shall not be rescinded in writing) for ten days after the Corporation shall have been notified thereof in writing by any holder of the Notes; (2) The Corporation fails to obtain effectiveness with the Securities and Exchange Commission (the "SEC") prior to June 25, 1999 of the Registration Statement(s) (as defined in the Registration Rights Agreement, the "REGISTRATION STATEMENT(S)") required to be filed pursuant to Section 2(a) of the Registration Rights Agreement, or fails to obtain the effectiveness of any additional Registration Statement (required to be filed pursuant to Section 3(b) of the Registration Rights Agreement) within 120 days after the Registration Trigger Date (as defined in the Registration Rights Agreement), or any such Registration Statement, after its initial effectiveness and during the Registration Period (as defined in the Registration Rights Agreement), lapses in effect or sales of all of the Registrable Securities (as defined in the Registration Rights Agreement, the "REGISTRABLE SECURITIES") otherwise cannot be made thereunder (whether by reason of the -2- Corporation's failure to amend or supplement the prospectus included therein in accordance with the Registration Rights Agreement, the Corporation's failure to file and obtain effectiveness with the SEC of an additional Registration Statement required pursuant to Section 3(b) of the Registration Rights Agreement or otherwise) for more than 30 consecutive days or more than 60 days in any 12- month period after such Registration Statement becomes effective; (3) The Corporation or any subsidiary of the Corporation shall make an assignment for the benefit of creditors, or apply for or consent to the appointment of a receiver or trustee for it or for all or substantially all of its property or business; or such a receiver or trustee shall otherwise be appointed and shall not be discharged within 30 days; (4) Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Corporation or any material subsidiary of the Corporation and, if not instituted by the Corporation or any such subsidiary, shall be consented to or acquiesced in by the Corporation or such subsidiary, shall be converted to a voluntary case or shall remain for 60 days undismissed; (5) The Corporation shall fail to maintain the listing of the Common Stock on one of the Nasdaq National Market ("NASDAQ"), the New York Stock Exchange ("NYSE") or the American Stock Exchange ("AMEX"); (6) The sale, conveyance or disposition of all or substantially all of the assets of the Corporation or the effectuation by the Corporation of a transaction or series of related transactions in which more than 50% of the voting power of the Corporation is disposed of (other than transactions described in subparagraph (7) or (8) below, which shall be governed by such subparagraphs); (7) the consolidation, merger or other business combination of the Corporation with or into any other individual, corporation, limited liability company, partnership, association, trust or other entity or organization (each a "PERSON") or Persons when the Corporation is not the Survivor (as defined below) and either (i) the Survivor is not subject to the periodic filing requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "SEC FILING REQUIREMENTS"), or (ii) the Survivor is subject to the SEC Filing Requirements and the consideration to be paid to the stockholders of the Corporation in such transactions consists of cash or a combination of cash and securities or other property; (8) the consolidation, merger or other business combination of the Corporation with or into any other Person or Persons when the Corporation is not the Survivor and (i) the Survivor is subject to the SEC Filing Requirements, (ii) the consideration to be paid to the stockholders of the Corporation in such transaction consists solely of capital stock of the Survivor and (iii) (A) the average of the Closing Bid Prices of the Common Stock for the 20 consecutive Trading Days (as defined in Article II.B) ending on the later of (I) the third Trading Day immediately preceding the closing of such transaction, and (II) the date such transaction is approved -3- by the holders of the requisite percentage of outstanding capital stock of the Corporation (such later date, the "MEASUREMENT DATE") (such average being hereinafter referred to as the "AVERAGE PRICE") is less than the product of (x) two, multiplied by (y) the Conversion Price in effect on the Measurement Date or (B) if the Average Price is equal to or greater than the product of (x) two, multiplied by (y) the Conversion Price in effect on the Measurement Date, the Closing Bid Price of the Common Stock on the Trading Day immediately preceding the Measurement Date is less than the Average Price; or (9) The Corporation breaches in any material respect any covenant contained in Article III hereof and such breach continues uncured for a period of ten days after written notice thereof to the Corporation from any holder of Notes; then, upon the occurrence and during the continuation of any Mandatory Redemption Event specified in subparagraphs (1), (2), (5), (6), (8) or (9) at the option of the holders of at least 50% of the then outstanding principal amount of the Notes exercisable by the delivery of written notice (the "MANDATORY REDEMPTION NOTICE") to the Corporation of such Mandatory Redemption Event, or upon the occurrence of any Mandatory Redemption Event specified in subparagraphs (3), (4) or (7) the Notes shall become immediately redeemable and the Corporation shall purchase each holder's Notes for an amount equal to the greater of (i) 120% multiplied by the sum of (a) the then outstanding principal amount of the Notes, plus (b) all accrued and unpaid interest thereon for the period beginning on the Issue Date and ending on the date of payment of the Mandatory Redemption Amount (the "MANDATORY REDEMPTION DATE"), plus (c) all Conversion Default Payments (as defined in Article II.F below), Delivery Default Payments (as defined in Article II.D(3) below) and any other amounts owed to such holder pursuant to Section 2(c) of the Registration Rights Agreement, and (ii) the "PARITY VALUE" of the Notes to be redeemed, where parity value means (except as provided below with respect to a Mandatory Redemption Event described in subparagraph (7) above) the product of (a) the highest number of shares of Common Stock issuable upon conversion of such Notes in accordance with Article II below (without giving any effect to any limitations on conversions of Notes contained herein, and treating the Trading Day immediately preceding the Mandatory Redemption Date as the "CONVERSION DATE" (as defined in Article II.B(1)) for purposes of determining the lowest applicable Conversion Price, unless the Mandatory Redemption Event arises as a result of a breach in respect of a specific Conversion Date in which case such Conversion Date shall be the Conversion Date), multiplied by (b) the highest Closing Bid Price (as defined in Article II.B(1)) for the Common Stock during the period beginning on the date of first occurrence of the Mandatory Redemption Event and ending one day prior to the Mandatory Redemption Date (the greater of such amounts being referred to as the "MANDATORY REDEMPTION AMOUNT"). In the case of a Mandatory Redemption Event described in subparagraph (7) above, "parity value" means the product of (a) the highest number of shares of Common Stock issuable upon conversion of the Notes to be redeemed in accordance with Article II below (without giving effect to any limitations on conversions of Notes contained herein) based on the lowest Conversion Price that would have been in effect for a conversion occurring on any Trading Day during the period beginning on the Announcement Date (as defined in Article II.B(2)) with respect to the transaction giving rise to such Mandatory Redemption Event and ending on the Measurement Date (the "MEASUREMENT PERIOD"), multiplied by (b) the highest Closing Bid Price for the Common -4- Stock during the Measurement Period. The Mandatory Redemption Amount, together with all other ancillary amounts payable hereunder, shall immediately become due and payable, all without demand, presentment or notice, all of which hereby are expressly waived, together with all costs, including, without limitation, reasonable legal fees and expenses of collection, and Holder shall be entitled to exercise all other rights and remedies available at law or in equity. For purposes of this Agreement, "Survivor" means, with respect to any consolidation, merger or other business combination to which the Corporation is a party, the surviving entity of such transaction; provided, however, if the Corporation merges with and into another Person and more than 50% of the outstanding voting stock of the Corporation (if the Corporation is the surviving entity), or more than 50% of the outstanding voting stock of such Person (if such Person is the surviving entity), is owned by another Person that is subject to the SEC Filing Requirements, then the Person subject to such requirements shall be deemed the Survivor. B. TRADING MARKET REDEMPTION. If any Notes cease to be convertible by any holder as a result of the limitations described in Article II.A(2) below (a "TRADING MARKET REDEMPTION EVENT"), and the Corporation has not, prior to the date that such Trading Market Redemption Event arises, (1) either (i) obtained the Stockholder Approval (as defined in Article II.A(2)) or (ii) eliminated any prohibitions under applicable law or the rules or regulations of any stock exchange, interdealer quotation system or other self-regulatory organization with jurisdiction over the Corporation or any of its securities on the Corporation's ability to issue shares of Common Stock in excess of the Maximum Share Amount (as defined in Article II.A(2)) and (2) delivered to the holders of the Notes a Share Limit Waiver (as defined in Article II.A), then the Corporation shall be obligated to redeem immediately all of the then outstanding principal amount of the Notes, in accordance with this Article I.B. An irrevocable redemption notice (the "TRADING MARKET REDEMPTION NOTICE") shall be delivered promptly to the holders of the Notes in accordance with the terms hereof and shall state (i) that the Maximum Share Amount (as defined in Article II.A(2)) has been issued upon conversion of the Notes, (ii) that the Corporation is obligated to redeem all of the outstanding Notes and (iii) the Mandatory Redemption Date, which shall be a date within five business days of the earlier of (a) the date of the Trading Market Redemption Notice or (b) the date on which the holders of the Notes notify the Corporation of the occurrence of a Trading Market Redemption Event. On the Mandatory Redemption Date, the Corporation shall make payment of the Mandatory Redemption Amount (as defined in Article I.A above) in cash. C. FAILURE TO PAY REDEMPTION AMOUNTS. In the case of a Mandatory Redemption Event, if the Corporation fails to pay the Mandatory Redemption Amount within five business days of written notice that such amount is due and payable, then (assuming there are sufficient authorized shares) in addition to all other available remedies, Holder shall have the right at any time, so long as the Mandatory Redemption Event continues, to require the Corporation, upon written notice, to issue as soon as practicable thereafter (in accordance with and subject to the terms of Article II below, including paragraph A(2) thereof), in lieu of the Mandatory Redemption Amount, the number of shares of Common Stock of the Corporation equal to such applicable redemption amount divided by any Conversion Price, as chosen in the sole discretion of Holder, in effect from the date of the Mandatory Redemption Event until the date Holder elects to exercise its rights pursuant to this Article I.C. In the case of a Trading Market Redemption Event, if the -5- Corporation fails to pay the Mandatory Redemption Amount within five business days after the occurrence of the Trading Market Redemption Event, the Corporation shall be required to immediately deliver to the holders of the Notes the Share Limit Waiver, provided that the conditions set forth in Article I.B(1)(i) or (ii) have been satisfied. II. CONVERSION AT THE OPTION OF HOLDER A. OPTIONAL CONVERSION (1) CONVERSION AMOUNT. Subject to Article II.A(2) below, Holder may, at its option at any time and from time to time, upon surrender of this Note, convert all or any portion of this Note into Common Stock as set forth below (an "OPTIONAL CONVERSION"). This Note shall be convertible into such number of fully paid and nonassessable shares of Common Stock as such Common Stock exists on the Issue Date, or any other shares of capital stock or other securities of the Corporation into which such Common Stock is thereafter changed or reclassified, as is determined by dividing (a) the Conversion Amount (as defined below) by (b) the Conversion Price (as defined in Article II.B below); provided, however, that in no event (other than pursuant to the Automatic Conversion (as defined in Article IV)) shall Holder be entitled to convert this Note to the extent that the sum of (x) the number of shares of Common Stock beneficially owned by Holder and its affiliates (other than shares of Common Stock which may be deemed beneficially owned through the ownership of the unconverted portion of this Note, the unexercised Warrants or the unexercised or unconverted portion of any other securities of the Corporation subject to a limitation on conversion or exercise analogous to the limitations contained herein) and (y) the number of shares of Common Stock issuable upon the conversion of the portion of this Note with respect to which the determination of this proviso is being made, would result in beneficial ownership by Holder and Holder's affiliates of more than 4.99% of the outstanding shares of Common Stock. For purposes of the proviso to the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and Regulation 13D-G thereunder, except as otherwise provided in clause (x) of such proviso. "CONVERSION AMOUNT" means the portion of the principal amount of this Note being converted, plus all accrued and unpaid interest thereon for the period beginning on the Issue Date and ending on the Conversion Date (as defined in Article II(B)(1)), plus any Conversion Default Payments (as defined in Article II.F) and Delivery Default Payments (as defined in Article II.D(3)) payable with respect thereto, together with any other amounts owed to Holder pursuant to Section 2(c) of the Registration Rights Agreement. (2) TRADING MARKET LIMITATION. Unless the Corporation (a) either (i) is permitted by the applicable rules and regulations of the principal securities market on which the Common Stock is listed or traded to issue shares of Common Stock upon conversion of or otherwise pursuant to the Notes and upon exercise of or otherwise pursuant to the Warrants in excess of the Maximum Share Amount (as defined below) or (ii) has obtained stockholder approval of the issuance of shares of Common Stock upon conversion of or otherwise pursuant to the Notes and upon exercise of or otherwise pursuant to the Warrants in excess of the Maximum Share Amount -6- in accordance with applicable law and the rules and regulations of any stock exchange, interdealer quotation system or other self-regulatory organization with jurisdiction over the Corporation or any of its securities (the "STOCKHOLDER APPROVAL"), and (b) has provided written notice to the holders of the Notes that it has waived the restrictions contained in this subparagraph (2) on issuing shares of Common Stock upon conversion of or otherwise pursuant to the Notes and upon exercise of or otherwise pursuant to the Warrants in excess of the Maximum Share Amount (as defined below) (the "SHARE LIMIT WAIVER"), in no event shall the total number of shares of Common Stock issued upon conversion of or otherwise pursuant to the Notes and upon exercise of or otherwise pursuant to the Warrants (including any shares of capital stock or rights to acquire shares of capital stock issued by the Corporation which are aggregated or integrated with the Common Stock issued or issuable upon conversion of the Notes and upon exercise of or otherwise pursuant to the Warrants for purposes of any such rule or regulation) exceed the maximum number of shares of Common Stock that the Corporation can so issue pursuant to any rule of the principal United States securities market on which the Common Stock trades (including Rule 4460(i) of the Nasdaq Stock Market or any successor rule) (the "MAXIMUM SHARE AMOUNT") which, as of the Issue Date, shall be 2,119,889 (19.99% of the total shares of Common Stock outstanding on the Issue Date), subject to equitable adjustments from time to time for stock splits, stock dividends, combinations, capital reorganizations and similar events relating to the Common Stock occurring after the Issue Date. With respect to each Holder of Notes, the Maximum Share Amount shall refer to such Holder's pro rata share thereof determined in accordance with Article VI.K below. In the event that (a) the aggregate number of shares of Common Stock actually issued upon conversion of or otherwise pursuant to the Notes and upon exercise of or otherwise pursuant to the Warrants represents at least 50% of the Maximum Share Amount and (b) the sum of (x) the aggregate number of shares of Common Stock actually issued upon conversion of or otherwise pursuant to the Notes and upon exercise of or otherwise pursuant to the Warrants plus (y) the aggregate number of shares of Common Stock that remain issuable upon conversion of the then outstanding Notes at the then effective Conversion Price and upon exercise of or otherwise pursuant to the Warrants, represents at least 100% of the Maximum Share Amount (the "TRIGGERING EVENT"), the Corporation will use its best efforts to seek and obtain Stockholder Approval (or obtain such other relief as will allow conversions hereunder in excess of the Maximum Share Amount) as soon as practicable following the Triggering Event. B. CONVERSION PRICE. (1) CALCULATION OF CONVERSION PRICE. Subject to subparagraph (2) below, the "CONVERSION PRICE" shall be the lesser of the Market Price and the Fixed Conversion Price. The Conversion Price shall be subject to adjustments pursuant to the provisions of Article II.C below. "MARKET PRICE" shall mean the product of (x) the Applicable Percentage (as defined below) and (y) the average of the lowest Closing Bid Prices on any two Trading Days (which days need not be consecutive) (the "MARKET PRICE DAYS") during the 22 consecutive Trading Day period ending one Trading Day prior to the date (the "CONVERSION DATE") the Notice of Conversion (as defined in Article II.D) is sent by a holder to the Corporation via facsimile (the "PRICING PERIOD"). The Market Price Days shall be designated by the converting holder (from among the days comprising the Pricing Period) in the Notice of Conversion. "FIXED CONVERSION PRICE" shall mean the product of (x) the Applicable Percentage and (y) $4.0125 (subject to adjustment for stock splits, stock -7- dividends and similar events). The "APPLICABLE PERCENTAGE" shall initially mean, in the case of the Market Price, 93%, and, in the case of the Fixed Conversion Price, 120%; provided, however, that on each of the 151st, 211th, 271st, 331st, 391st, 451st, 511th and 571st day after the Issue Date, the Applicable Percentage shall be reduced by two full percentage points (2%) for a total reduction of sixteen full percentage points (16%) by such 571st day (for example, on such 151st day, the Applicable Percentage shall be reduced to, in the case of the Market Price, 91%, and, in the case of the Fixed Conversion Price, 118%, in accordance with this proviso); provided, further, however, that in the event the average daily trading volume of the Common Stock on the principal market on which the Common Stock is traded (provided such market is at least one of the Nasdaq, the NYSE or the AMEX) is less than 45,000 shares in any given calendar month, the Applicable Percentage will be permanently reduced by an additional two full percentage points (2%) beginning on the first day of the next succeeding calendar month; provided, further, however, that the Applicable Percentage shall be permanently reduced by an additional two full percentage points (2%) (or a pro rata portion thereof) for each 30 day period (or any portion thereof) with respect to which any Holder is entitled to payments pursuant to Section 2(c) of the Registration Rights Agreement with such reduction occurring on each date such payments are due pursuant to the Registration Rights Agreement; provided, further, however, that in the event the Corporation's Common Stock is no longer listed and authorized for trading on at least one of the Nasdaq, the NYSE or the AMEX, the Applicable Percentage will be permanently reduced by an additional ten full percentage points (10%). The Applicable Percentage shall be subject to further adjustment as provided herein. "CLOSING BID PRICE" means, for any security as of any date, the closing bid price on Nasdaq as reported by Bloomberg Financial Markets or an equivalent reliable reporting service mutually acceptable to and hereafter designated by the holders of a majority in interest of the Notes and the Corporation ("BLOOMBERG") or, if Nasdaq is not the principal trading market for such security, the closing bid price of such security on the principal securities exchange or trading market where such security is listed or traded as reported by Bloomberg, or if the foregoing do not apply, the closing bid price of such security in the over-the-counter market on the electronic bulletin board for such security as reported by Bloomberg, or, if no closing bid price of such security is available in the over-the-counter market on the electronic bulletin board for such security or in any of the foregoing manners, the average of the bid prices of any market makers for such security that are listed in the "pink sheets" by the National Quotation Bureau, Inc. If the Closing Bid Price cannot be calculated for such security on such date in the manner provided above, the Closing Bid Price shall be the fair market value as mutually determined by the Corporation and the holders of a majority in interest of the Notes being converted for which the calculation of the Closing Bid Price is required in order to determine the Conversion Price of such Notes. "TRADING DAY" shall mean any day on which the Common Stock is traded for any period on Nasdaq, or on the principal securities exchange or other securities market on which the Common Stock is then being traded. (2) CONVERSION PRICE DURING MAJOR ANNOUNCEMENTS. Notwithstanding anything contained in subparagraph (1) of this Paragraph B to the contrary, in the event the Corporation (a) makes a public announcement that it intends to consolidate or merge with any other corporation (other than a merger in which the Corporation is the surviving or continuing corporation and its capital stock is unchanged) or sell or transfer all or substantially all of the assets of the Corporation or (b) any person, group or entity (including the Corporation) publicly announces a -8- tender offer to purchase 50% or more of the Corporation's Common Stock (or any other takeover scheme) (the date of the announcement referred to in clause (a) or (b) is hereinafter referred to as the "ANNOUNCEMENT DATE"), then the Conversion Price shall, effective upon the Announcement Date and continuing through the Adjusted Conversion Price Termination Date (as defined below), be equal, for each such date, to the lower of (x) the Conversion Price which would have been applicable for an Optional Conversion occurring on the Announcement Date and (y) the Conversion Price that would otherwise be in effect on such date. From and after the Adjusted Conversion Price Termination Date, the Conversion Price shall be determined as set forth in subparagraph (1) of this Article II.B. For purposes hereof, "ADJUSTED CONVERSION PRICE TERMINATION DATE" shall mean, with respect to any proposed transaction or tender offer (or takeover scheme) for which a public announcement as contemplated by this subparagraph (2) has been made, the date upon which the Corporation (in the case of clause (a) above) or the person, group or entity (in the case of clause (b) above) consummates or publicly announces the termination or abandonment of the proposed transaction or tender offer (or takeover scheme) which caused this subparagraph (2) to become operative. C. ADJUSTMENTS TO CONVERSION PRICE. The Conversion Price shall be subject to adjustment from time to time as follows: (1) ADJUSTMENT TO CONVERSION PRICE DUE TO STOCK SPLIT, STOCK DIVIDEND, ETC. If at any time when this Note is outstanding, the number of outstanding shares of Common Stock is increased or decreased by a stock split, stock dividend, combination, reclassification or other similar event, which event shall have taken place during the reference period for determination of the Conversion Price for any Optional Conversion or Automatic Conversion, then the Conversion Price shall be calculated giving appropriate effect to the stock split, stock dividend, combination, reclassification or other similar event. In such event, the Corporation shall notify the Transfer Agent of such change on or before the effective date thereof. (2) ADJUSTMENT DUE TO MERGER, CONSOLIDATION, ETC. If, at any time when this Note is outstanding and prior to the conversion of all Notes, there shall be any merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event (other than a transaction described in Article V), as a result of which shares of Common Stock of the Corporation shall be changed into the same or a different number of shares of another class or classes of stock or securities of the Corporation or another entity, or in case of any sale or conveyance of all or substantially all of the assets of the Corporation other than in connection with a plan of complete liquidation of the Corporation, then Holder shall thereafter have the right to receive upon conversion of this Note, upon the basis and upon the terms and conditions specified herein and in lieu of the shares of Common Stock immediately theretofore issuable upon conversion, such stock, securities or assets which Holder would have been entitled to receive in such transaction had this Note been converted in full immediately prior to such transaction (without regard to any limitations on conversion contained herein), and in any such case appropriate provisions shall be made with respect to the rights and interests of Holder to the end that the provisions hereof (including, without limitation, provisions for adjustment of the Conversion Price and of the number of shares of Common Stock issuable upon conversion of this Note) shall thereafter be applicable, -9- as nearly as may be practicable in relation to any securities or assets thereafter deliverable upon the conversion of this Note. The Corporation shall not effect any transaction described in this subparagraph (2) unless (a) it first gives, to the extent practical, prior written notice of the record date of the special meeting of stockholders to approve, or if there is no such record date, the consummation of, such merger, consolidation, exchange of shares, recapitalization, reorganization or other similar event or sale of assets to the extent required by law (during which time Holder shall be entitled to convert this Note), which notice shall be given concurrently with the first public announcement of such transaction, and (b) the resulting successor or acquiring entity (if not the Corporation) assumes by written instrument the obligations of the Corporation hereunder (including under this subparagraph (2)). The above provisions shall similarly apply to successive consolidations, mergers, sales, transfers or share exchanges. (3) ADJUSTMENT DUE TO DISTRIBUTION. If the Corporation shall declare or make any distribution of its assets (or rights to acquire its assets) to holders of Common Stock as a dividend, stock repurchase, by way of return of capital or otherwise (including any dividend or distribution to the Corporation's shareholders in cash or shares (or rights to acquire shares) of capital stock of a subsidiary (i.e., a spin-off)) (a "DISTRIBUTION"), then Holder shall be entitled, upon any conversion of this Note after the date of record for determining shareholders entitled to such Distribution, to receive the amount of such assets which would have been payable to Holder with respect to the shares of Common Stock issuable upon conversion had Holder converted the Note and been the holder of the number of shares of Common Stock into which the Note was convertible on the record date for the determination of shareholders entitled to such Distribution. (4) PURCHASE RIGHTS. If at any time when this Note is outstanding the Corporation issues any convertible securities or rights to purchase stock, warrants, securities or other property (the "PURCHASE RIGHTS") pro rata to the record holders of any class of Common Stock, then Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which Holder could have acquired if Holder had held the number of shares of Common Stock acquirable upon complete conversion of this Note (without regard to any limitations on conversion contained herein and based upon the lesser of the Market Price and the Fixed Conversion Price as would then be in effect) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights. (5) ADJUSTMENT FOR RESTRICTED PERIODS. In the event that (a) the Corporation fails to obtain effectiveness with the SEC of any Registration Statement required to be filed pursuant to the Registration Rights Agreement on or prior to the date on which such Registration Statement is required to become effective pursuant to the terms of the Registration Rights Agreement, or (b) any such Registration Statement, after its initial effectiveness and during the Registration Period, lapses in effect, or sales of all of the Registrable Securities (as defined in the Registration Rights Agreement) otherwise cannot be made thereunder, whether by reason of the Corporation's failure or inability to amend or supplement the prospectus (the "PROSPECTUS") included therein in accordance with the Registration Rights Agreement or otherwise, then, at the election of -10- Holder, the Pricing Period shall be comprised of (x) in the case of an event described in clause (a), the 22 Trading Days preceding the date on which such Registration Statement is required to become effective pursuant to the terms of the Registration Rights Agreement plus all Trading Days through and including the third Trading Day following the actual date of effectiveness of the Registration Statement and (y) in the case of an event described in clause (b), the 22 Trading Days preceding the date on which Holder is first notified that sales may not be made under the Registration Statement, plus all Trading Days through and including the third Trading Day following the date on which Holder is first notified that such sales may again be made under the Registration Statement. If Holder determines that sales may not be made pursuant to the Registration Statement (whether by reason of the Corporation's failure or inability to amend or supplement the Prospectus or otherwise) it shall so notify the Corporation in writing and, unless the Corporation provides such holder with a written opinion of the Corporation's counsel to the contrary, such determination shall be binding for purposes of this paragraph. D. MECHANICS OF CONVERSION. In order to convert this Note into shares of Common Stock, Holder shall: (1) submit a copy of the fully executed notice of conversion in the form attached hereto as Exhibit A ("NOTICE OF CONVERSION") to the Corporation by facsimile dispatched prior to Midnight, New York City time (the "CONVERSION NOTICE DEADLINE"), on the date specified therein as the Conversion Date (as defined in Article II.D(5)) (or by other means resulting in, or reasonably expected to result in, written notice to the Corporation on the date specified therein as the Conversion Date) to the office of the Corporation, which notice shall specify the principal amount of this Note to be converted, the applicable Conversion Price and a calculation of the number of shares of Common Stock issuable upon such conversion; and (2) subject to Article II.D(1) below, surrender this Note along with a copy of the Notice of Conversion to the office of the Corporation as soon as practicable thereafter. In the case of a dispute as to the calculation of the Conversion Price, the Corporation shall promptly issue that number of shares of Common Stock as is not disputed in accordance with subparagraph (3) below. The Corporation shall submit the disputed calculations to its outside accountant via facsimile within two business days of receipt of the Notice of Conversion. The accountant shall review the calculations and notify the Corporation and Holder of the results no later than 48 hours from the time it receives the disputed calculations. The accountant's calculation shall be deemed conclusive absent manifest error. (1) Notwithstanding anything to the contrary set forth herein, upon conversion of this Note in accordance with the terms hereof, Holder shall not be required to physically surrender this Note to the Corporation unless the entire unpaid principal amount of this Note is so converted. Holder and the Corporation shall maintain records showing the principal amount so converted and the dates of such conversions or shall use such other method, reasonably satisfactory to Holder and the Corporation, so as not to require physical surrender of this Note upon each such conversion. In the event of any dispute or discrepancy, such records of the Corporation shall be controlling and determinative in the absence of manifest error. Notwithstanding the foregoing, if any portion of this Note is converted as aforesaid, Holder may not transfer this Note unless Holder first physically surrenders this Note to the Corporation, whereupon the Corporation will forthwith issue and deliver upon the order of Holder a new Note of like tenor, registered as Holder may request, representing in the aggregate the remaining unpaid principal amount of this -11- Note. Holder and any assignee, by acceptance of this Note, acknowledge and agree that, by reason of the provisions of this paragraph, following conversion of a portion of this Note, the unpaid and unconverted principal amount of this Note may be less than the amount stated on the face hereof. (2) LOST OR STOLEN NOTES. Upon receipt by the Corporation of evidence of the loss, theft, destruction or mutilation of this Note, and (in the case of loss, theft or destruction) of indemnity reasonably satisfactory to the Corporation, and upon surrender and cancellation of this Note, if mutilated, the Corporation shall execute and deliver a new Note of like tenor and date. (3) DELIVERY OF COMMON STOCK UPON CONVERSION. Upon the submission of a Notice of Conversion, the Corporation shall, within three business days after the Conversion Date (the "DELIVERY PERIOD"), issue and deliver (or cause its Transfer Agent so to issue and deliver) in accordance with the terms hereof and the Purchase Agreement (including, without limitation, in accordance with the requirements of Section 2(g) of the Purchase Agreement) to or upon the order of Holder that number of shares of Common Stock for the portion of this Note converted as shall be determined in accordance herewith. In addition to any other remedies available to Holder, including actual damages and/or equitable relief, the Corporation shall pay to Holder $2,000 per day in cash for each day beyond a two-day grace period following the Delivery Period that the Corporation fails to deliver Common Stock (a "DELIVERY DEFAULT") issuable upon conversion of this Note pursuant to the Notice of Conversion until such time as the Corporation has delivered all such Common Stock (the "DELIVERY DEFAULT PAYMENTS"); provided, however, in the event of a failure by the Corporation to deliver shares upon conversion as a result of a Conversion Default (as defined below), Holder shall not be entitled to receive Delivery Default Payments but shall be entitled to receive Conversion Default Payments in accordance with Article II.F. Such Delivery Default Payments shall be paid to Holder by the fifth day of the month following the month in which they have accrued or, at the option of Holder (by written notice to the Corporation by the first day of the month following the month in which they have accrued), shall be convertible into Common Stock in accordance with the terms of this Article II. In lieu of delivering physical certificates representing the Common Stock issuable upon conversion, provided the Corporation's Transfer Agent is participating in the Depository Trust Company ("DTC") Fast Automated Securities Transfer ("FAST") program, upon written request of Holder and its compliance with the provisions contained in Article II.A and in this Article II.D, the Corporation shall use its best efforts to cause its Transfer Agent to electronically transmit the Common Stock issuable upon conversion to Holder by crediting the account of Holder's Prime Broker with DTC through its Deposit Withdrawal Agent Commission ("DWAC") system. The time periods for delivery and penalties described in the immediately preceding paragraph shall apply to the electronic transmittals described herein. (4) NO FRACTIONAL SHARES. If any conversion of this Note would result in a fractional share of Common Stock or the right to acquire a fractional share of Common Stock, such fractional share shall be disregarded and the number of shares of Common Stock issuable upon conversion of this Note shall be the next higher number of shares. -12- (5) CONVERSION DATE. The "CONVERSION DATE" shall be the date specified in the Notice of Conversion, provided that the Notice of Conversion is submitted by facsimile (or by other means resulting in, or reasonably expected to result in, written notice) to the Corporation or its Transfer Agent before Midnight, New York City time, on the date so specified, otherwise the Conversion Date shall be the first business day after the date so specified (provided that the Notice of Conversion is actually received by the Corporation or its Transfer Agent on such business day). The person or persons entitled to receive the shares of Common Stock issuable upon conversion shall be treated for all purposes as the record holder or holders of such securities as of the Conversion Date and all rights with respect to this Note (or portion thereof) surrendered shall forthwith terminate except the rights set forth in Article VI.J. E. WARRANTS. Subject to Article II.A(2), on any Conversion Date relating to a conversion of this Note by Holder on which the Common Stock trades at a price higher than the Fixed Conversion Price, the Corporation shall deliver to Holder warrants (the "WARRANTS") in the form attached hereto as Exhibit B exercisable for one share of Common Stock for every two shares of Common Stock issued as a result of such conversion at an exercise price equal to the applicable Conversion Price. Holder shall have the option to exercise such Warrants, in whole or in part, on such Conversion Date, in which event Holder shall so indicate on the Notice of Conversion in respect of such Conversion Date and pay to the Corporation, in immediately available funds, on or within one business day following the Conversion Date, the aggregate exercise price for the shares of Common Stock issuable as a result of the exercise of such Warrants. F. RESERVATION OF SHARES. A number of shares of the authorized but unissued Common Stock sufficient to provide for the conversion in full of the Notes outstanding (based on the lesser of the then current Market Price and the Fixed Conversion Price) and the exercise in full of the Warrants shall at all times be reserved by the Corporation, free from preemptive rights, for such conversion or exercise. As of the Issue Date, 2,119,889 authorized and unissued shares of Common Stock have been duly reserved for issuance upon conversion of the Notes and upon exercise of the Warrants (the "RESERVED AMOUNT"). The Reserved Amount shall be increased from time to time in accordance with the Corporation's obligations pursuant to Section 4(h) of the Purchase Agreement. In addition, if the Corporation shall issue any securities or make any change in its capital structure which would change the number of shares of Common Stock into which the Notes shall be convertible and for which the Warrants shall be exercisable, the Corporation shall at the same time also make proper provision so that thereafter there shall be a sufficient number of shares of Common Stock authorized and reserved, free from preemptive rights, for conversion of the Notes and exercise of the Warrants. If at any time Holder submits a Notice of Conversion, and the Corporation does not have sufficient authorized but unissued shares of Common Stock duly reserved and available for issuance to effect such conversion in accordance with the provisions of this Article II (a "CONVERSION DEFAULT"), subject to Article VI.K, the Corporation shall issue to Holder all of the shares of Common Stock which are available to effect such conversion. The portion of the principal amount of this Note included in the Notice of Conversion which exceeds the amount which is then convertible into available shares of Common Stock (the "EXCESS AMOUNT") shall, notwithstanding -13- anything to the contrary contained herein, not be convertible into Common Stock in accordance with the terms hereof until (and at Holder's option at any time after) the date additional shares of Common Stock are authorized and duly reserved by the Corporation to permit such conversion, at which time the Conversion Price in respect thereof shall be the lesser of (i) the Conversion Price on the Conversion Default Date (as defined below) and (ii) the Conversion Price on the Conversion Date elected by Holder in respect thereof. The Corporation shall use its best efforts to effect an increase in the authorized number of shares of Common Stock as soon as possible following the earlier of (x) such time that Holder notifies the Corporation or that the Corporation otherwise becomes aware that there are or likely will be insufficient authorized and unissued shares to allow full conversion hereof and (y) a Conversion Default. In addition, the Corporation shall pay to Holder payments ("CONVERSION DEFAULT PAYMENTS") for a Conversion Default in the amount of (a) .24, multiplied by (b) the Conversion Default Amount (as defined below), multiplied by (c) (N/365), where N = the number of days from the day Holder submits a Notice of Conversion giving rise to a Conversion Default (the "CONVERSION DEFAULT DATE") to the date (the "AUTHORIZATION DATE") that the Corporation, authorizes a sufficient number of shares of Common Stock to effect conversion of the Notes. "CONVERSION DEFAULT AMOUNT" means the then outstanding principal amount of all Notes held by Holder plus the aggregate accrued interest thereon as of the first day of the Conversion Default. The Corporation shall send notice to Holder of the authorization of additional shares of Common Stock, the Authorization Date and the amount of Holder's accrued Conversion Default Payments. The accrued Conversion Default Payment for each calendar month shall be paid in cash or shall be convertible into Common Stock at the applicable Conversion Price, at the Corporation's option, as follows: (1) In the event the Corporation elects to make such payment in cash, cash payment shall be made to Holder by the fifth day of the month following the month in which it has accrued; provided, however, that if such payment is not made on or before such day, the Corporation shall make such payment in Common Stock (at the Conversion Price as in effect at the time of Conversion) not later than the second business day after such cash payment was due (so long as there is then a sufficient number of authorized shares of Common Stock); and (2) In the event the Corporation elects to make such payment in Common Stock, Holder may convert such payment amount into Common Stock at the Conversion Price (as in effect at the time of Conversion) at any time after the fifth day of the month following the month in which it has accrued in accordance with the terms of this Article II (so long as there is then a sufficient number of authorized shares of Common Stock). The Corporation's election shall be made in writing to Holder at any time prior to 9:00 p.m, New York City time, on the third day of the month following the month in which Conversion Default payments have accrued. If no election is made, the Corporation shall be deemed to have elected to make such payment in shares of Common Stock. Nothing herein shall limit Holder's right to pursue actual damages (to the extent in excess of the Conversion Default Payments) for the Corporation's failure to maintain a sufficient number of authorized shares of Common Stock, and Holder shall have the right to pursue all remedies available at law or in equity (including a decree of specific performance and/or injunctive relief). -14- G. NOTICE OF CONVERSION PRICE ADJUSTMENTS. Upon the occurrence of each adjustment or readjustment of the Conversion Price pursuant to this Article II, the Corporation, at its expense, shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to Holder a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of Holder, furnish or cause to be furnished to Holder a like certificate setting forth (i) such adjustment or readjustment, (ii) the Conversion Price at the time in effect and (iii) the number of shares of Common Stock and the amount, if any, of other securities or property which at the time would be received upon conversion of this Note. III. CERTAIN COVENANTS A. DISTRIBUTIONS ON CAPITAL STOCK. So long as the Corporation shall have any obligation under this Note, the Corporation shall not, without the written consent of the holders of a majority of the then outstanding principal amount of the Notes, (a) pay, declare or set apart for such payment, any dividend or other distribution (whether in cash, property or other securities) on shares of capital stock or (b) directly or indirectly through any subsidiary make any other payment or distribution in respect of its capital stock, in either case other than dividends on shares of Common Stock solely in the form of additional shares of Common Stock. B. RESTRICTION ON STOCK REPURCHASES. So long as the Corporation shall have any obligation under this Note, the Corporation shall not, without the written consent of the holders of a majority of the then outstanding principal amount of the Notes, redeem, repurchase or otherwise acquire (whether for cash or in exchange for property or other securities or otherwise) in any one transaction or series of related transactions any shares of capital stock of the Corporation or any warrants, rights or options to purchase or acquire any such shares, except pursuant to the "cashless exercise" provisions of such securities. C. BORROWINGS. So long as the Corporation shall have any obligation under this Note, the Corporation shall not, without the written consent of the holders of a majority of the then outstanding principal amount of the Notes, create, incur, assume or suffer to exist any liability for borrowed money, except (a) borrowings in existence or committed on the date hereof and of which the Corporation has informed Holder in writing prior to the date hereof, (b) indebtedness to trade creditors incurred in the ordinary course of business, (c) borrowings, the proceeds of which shall be used to repay this Note and (d) borrowings under loan agreements or lines of credit entered into with banks or other financial institutions engaged principally in commercial lending. D. ADVANCES AND LOANS. So long as the Corporation shall have any obligation under this Note, the Corporation shall not, without the written consent of the holders of a majority of the then outstanding principal amount of the Notes, lend money, give credit or make advances to any person, firm, joint venture or corporation, including, without limitation, officers, directors, employees, subsidiaries and affiliates of the Corporation, except loans, credits or advances (a) in -15- existence or committed on the date hereof and which the Corporation has informed Holder in writing prior to the date hereof, and (b) made in the ordinary course of business. E. CONTINGENT LIABILITIES. So long as the Corporation shall have any obligation under this Note, the Corporation shall not, without the written consent of the holders of a majority of the then outstanding principal amount of the Notes, assume, guarantee, endorse, contingently agree to purchase or otherwise become liable upon the obligation of any person, firm, partnership, joint venture or corporation, except by the endorsement of negotiable instruments for deposit or collection and except assumptions, guarantees, endorsements and contingencies (a) in existence or committed on the date hereof and which the Corporation has informed Holder in writing prior to the date hereof, and (b) similar transactions in the ordinary course of business. IV. AUTOMATIC CONVERSION Subject to the limitations on conversion set forth in Article II.A.(2), so long as (i) all of the shares of Common Stock issuable upon conversion of or otherwise pursuant to all of the then outstanding Notes are then (x) authorized and reserved for issuance, (y) registered for re-sale under the Securities Act by the holders of the Notes (or may otherwise be resold publicly without restriction) and (z) eligible to be traded on Nasdaq, the NYSE or the AMEX and (ii) there is not then a continuing Mandatory Redemption Event or Trading Market Redemption Event, the entire principal amount of the Notes then outstanding (together with any accrued and unpaid interest thereon, Conversion Default Payments, Delivery Default Payments and all other amounts due and payable by the Corporation pursuant to Section 2(c) of the Registration Rights Agreement) outstanding on the Automatic Conversion Date, automatically shall be converted into shares of Common Stock on such date at the then effective Conversion Price in accordance with, and subject to, the provisions of Article II hereof (the "AUTOMATIC CONVERSION"). The Automatic Conversion Date shall be delayed by one Trading Day for each Trading Day occurring prior thereto and prior to the full conversion of the Notes that (i) any Registration Statement required to be filed and to be effective pursuant to the Registration Rights Agreement is not effective or sales of all of the Registrable Securities otherwise cannot be made thereunder during the Registration Period (whether by reason of the Corporation's failure to properly supplement or amend the prospectus included therein in accordance with the terms of the Registration Rights Agreement or otherwise), (ii) any Mandatory Redemption Event or Trading Market Redemption Event exists, without regard to whether any cure periods shall have run or (iii) the Corporation is in breach of any of its obligations pursuant to Section 4(h) of the Purchase Agreement. The Automatic Conversion Date shall be the Conversion Date for purposes of determining the Conversion Price and the time within which certificates representing the Common Stock must be delivered to the holder. V. MANDATORY CONVERSION IN CERTAIN EVENTS In the event that the Corporation enters into a consolidation, merger or other business combination with any Person or Persons when the Corporation is not the Survivor and (i) the -16- Survivor is subject to the SEC Filing Requirements, (ii) the consideration to be paid to the stockholders of the Corporation in such transaction consists solely of capital stock of the Survivor ("SURVIVOR CAPITAL STOCK"), (iii) the Average Price is equal to or greater than the product of (x) two, multiplied by (y) the Conversion Price in effect on the Measurement Date, and (iv) the Closing Bid Price of the Common Stock on the Trading Day immediately preceding the Measurement Date is equal to or greater than the Average Price, then, so long as the Survivor Capital Stock is then listed on Nasdaq, the NYSE or the AMEX and the resale thereof by Holder has been registered under the Securities Act or such stock may be resold by Holder without registration or restriction (including volume limitations) under the Securities Act, the entire principal amount of the Notes then outstanding (together with any accrued and unpaid interest thereon, Conversion Default Payments, Delivery Default Payments and all other amounts due and payable by the Corporation pursuant to Section 2(c) of the Registration Rights Agreement) automatically shall be converted on the closing date for such transaction into the number of shares of Survivor Capital Stock that Holder would have received in such transaction if Holder had converted this Note in full into Common Stock in accordance with, and subject to, the provisions of Article II, but without regard to the limitations contained in Article II.A.(2), at the lowest Conversion Price that would have been in effect for a conversion occurring on any Trading Day during the Measurement Period. The Corporation shall not effect any transaction described in this Article V unless (a) it first gives, to the extent practical, prior written notice of the record date of the special meeting of stockholders to approve, or if there is no such record date, the consummation of, such transaction, to the extent required by law, which notice shall be given concurrently with the first public announcement of such transaction and (b) the Survivor assumes by written instrument the obligations of the Corporation under this Article V. The Holder shall be permitted to convert this Note in accordance with the terms of Article II at any time following receipt of the notice described in clause (a) of the preceding sentence. VI. MISCELLANEOUS A. FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of Holder in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege. B. NOTICES. Any notices required or permitted to be given under the terms of this Note shall be sent by certified or registered mail (return receipt requested) or delivered personally or by courier (including a recognized overnight delivery service) or by facsimile, and shall be effective five days after being placed in the mail, if mailed, or upon receipt or refusal of receipt, if delivered personally or by courier or by facsimile, in each case addressed to a party. The addresses for such communications shall be: If to the Corporation: Interactive Magic, Inc. 215 Southport Drive, Suite 1000 Morrisville, North Carolina 27560 -17- Facsimile: 461-0723 Attention: Chief Executive Officer If to Holder, to the address set forth immediately below Holder's name on the signature pages to the Purchase Agreement or such other address as is communicated to the Corporation by notice by Holder in accordance with the terms hereof. C. AMENDMENT PROVISION. The Notes may be amended only by an instrument in writing signed by the Corporation and the holders of a majority of the then outstanding principal amount of the Notes. D. ASSIGNABILITY. This Note shall be binding upon the Corporation and its successors and assigns and shall inure to the benefit of Holder and its successors and assigns. Holder may assign this Note, in whole or in part, or any of its rights hereunder, subject to compliance with Sections 2(f), 2(g) and 8(g) of the Purchase Agreement. In the event Holder shall sell or otherwise transfer any portion of this Note, each transferee shall be allocated a pro rata portion of such transferor's Maximum Share Amount and Reserved Amount. Any portion of the Maximum Share Amount or Reserved Amount which remains allocated to any person or entity which does not hold any Notes shall be allocated to the remaining holders of Notes, pro rata based on the total principal amount of Notes then held by such holders. E. COST OF COLLECTION. If default is made in the payment of this Note, the Corporation shall pay Holder costs of collection, including reasonable attorneys' fees. F. GOVERNING LAW. This Note shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed in the State of New York (without regard to principles of conflict of laws). The Corporation irrevocably consents to the jurisdiction of the United States federal courts and state courts located in the New York County, New York in any suit or proceeding based on or arising under this Note, the agreements entered into in connection herewith or the transactions contemplated hereby or thereby and irrevocably agrees that all claims in respect of such suit or proceeding may be determined in such courts. The Corporation irrevocably waives the defense of an inconvenient forum to the maintenance of such suit or proceeding. The Corporation further agrees that service of process upon the Corporation mailed by first class mail shall be deemed in every respect effective service of process upon the Corporation in any such suit or proceeding. Nothing herein shall affect Holder's right to serve process in any other manner permitted by law. The Corporation agrees that a final non-appealable judgment in any such suit or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on such judgment or in any other lawful manner. G. DENOMINATIONS. At the request of Holder, upon surrender of this Note, the Corporation shall promptly issue new Notes in the aggregate outstanding principal amount hereof, in the form hereof, in such denominations of at least $25,000 as Holder shall request. -18- H. STATEMENTS OF AVAILABLE SHARES. The Corporation shall deliver (or cause its transfer agent to deliver) to Holder a written report notifying Holder of any occurrence which prohibits the Corporation from issuing Common Stock upon any conversion of Notes. The Corporation (or its transfer agent) shall also provide, within 15 days after delivery to the Corporation of a written request by Holder, any of the following information as of the date of such request: (i) the total outstanding principal amount of all Notes, (ii) the total number of shares of Common Stock issued upon all conversions of all Notes prior to such date, (iii) the total number of shares of Common Stock which are reserved for issuance upon conversion of the Notes which are then outstanding, and (iv) the total number of shares of Common Stock which may thereafter be issued by the Corporation upon conversion of the Notes before the Corporation would exceed the Maximum Share Amount and the Reserved Amount. I. PAYMENT OF CASH; DEFAULTS. Whenever the Corporation is required to make any cash payment to Holder under this Note (as a Conversion Default Payment or otherwise but not including payments of principal and interest hereunder), such cash payment shall be made to Holder within five Trading Days after delivery by Holder of a notice specifying that Holder elects to receive such payment in cash and the method (E.G., by check, wire transfer) in which such payment should be made and appropriate delivery instructions, including any necessary wire transfer instructions. If such payment is not delivered within such five-Trading Day period, Holder shall thereafter be entitled to interest on the unpaid amount at a per annum rate equal to the lower of 24% and the highest interest rate permitted by applicable law until such amount is paid in full to Holder. J. STATUS AS NOTEHOLDER. Upon submission of a Notice of Conversion by Holder, the principal amount of this Note and the interest thereon covered thereby (other than any portion of this Note, if any, which cannot be converted because the conversion thereof would exceed such holder's allocated portion of the Maximum Share Amount or Reserved Amount) shall be deemed converted into shares of Common Stock as of the Conversion Date and Holder's rights as a holder of this Note shall cease and terminate, excepting only the right to receive certificates for such shares of Common Stock and to any remedies provided herein or otherwise available at law or in equity to such holder because of a failure by the Corporation to comply with the terms of this Note. Notwithstanding the foregoing, if Holder has not received certificates for all shares of Common Stock prior to the tenth business day after the expiration of the Delivery Period with respect to a conversion for any reason, then (unless Holder otherwise elects to retain its status as a holder of Common Stock by so notifying the Corporation) the portion of the principal amount and interest thereon subject to such conversion shall be deemed outstanding under this Note and the Corporation shall, as soon as practicable, return this Note to Holder. In all cases, Holder shall retain all of its rights and remedies (including, without limitation, (i) the right to receive Conversion Default Payments pursuant to Article II.F to the extent required thereby for such Conversion Default and any subsequent Conversion Default and (ii) the right to have the Conversion Price with respect to subsequent conversions determined in accordance with Article II.F) for the Corporation's failure to convert this Note. K. PRO RATA ALLOCATIONS. The Maximum Share Amount and the Reserved Amount (including any increases thereto) shall be allocated by the Corporation pro rata among the -19- holders of the Notes based on the total principal amount of Notes originally issued to each holder. Each increase to the Maximum Share Amount and the Reserved Amount shall be allocated pro rata among the holders of the Notes based on the total principal amount of Notes held by each holder at the time of the increase in the Maximum Share Amount or Reserved Amount. In the event a holder shall sell or otherwise transfer any of such holder's shares of the Notes, each transferee shall be allocated a pro rata portion of such transferor's Maximum Share Amount and Reserved Amount. Any portion of the Maximum Share Amount or Reserved Amount which remains allocated to any person or entity which does not hold any the Notes shall be allocated to the remaining holders of shares of the Notes, pro rata based on the total principal amount of Notes held by such holders. L. REMEDIES CUMULATIVE. The remedies provided in this Note shall be cumulative and in addition to all other remedies available under this Note, at law or in equity (including a decree of specific performance and/or other injunctive relief), no remedy contained herein shall be deemed a waiver of compliance giving rise to such remedy and nothing herein shall limit Holder's right to pursue actual damages for any failure by the Corporation to comply with the terms of this Note. The Corporation acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to Holder and that the remedy at law for any such breach may be inadequate. The Corporation therefore agrees, in the event of any such breach or threatened breach, Holder shall be entitled, in addition to all other available remedies, to an injunction restraining any breach, without the necessity of showing economic loss and without any bond or other security being required. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -20- IN WITNESS WHEREOF, Borrower has caused this Note to be signed in its name by its duly authorized officer as of the date first above written. INTERACTIVE MAGIC, INC. By: /s/ J.W. Stealey ------------------------- Name: J. W. Stealey Title: Chairman and Chief Executive Officer -21- EXHIBIT A NOTICE OF CONVERSION (To be Executed by the Registered Holder in order to Convert the Notes) The undersigned hereby irrevocably elects to convert $________ principal amount of the Note (defined below) into shares of common stock, par value $.10 per share ("Common Stock"), of Interactive Magic, Inc., a North Carolina corporation (the "CORPORATION") according to the conditions of the convertible notes of the Corporation dated as of [_________] (the "Notes"), as of the date written below. If securities are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates. No fee will be charged to the Holder for any conversion, except for transfer taxes, if any. A copy of each Note is attached hereto (or evidence of loss, theft or destruction thereof). The Corporation shall electronically transmit the Common Stock issuable pursuant to this Notice of Conversion to the account of the undersigned or its nominee with DTC through its Deposit Withdrawal Agent Commission system ("DWAC Transfer"). Name of DTC Prime Broker:___________________________________________ Account Number:_____________________________________________________ |_| In lieu of receiving shares of Common Stock issuable pursuant to this Notice of Conversion by way of a DWAC Transfer, the undersigned hereby requests that the Corporation issue a certificate or certificates for the number of shares of Common Stock set forth below (which numbers are based on the Holder's calculation attached hereto) in the name(s) specified immediately below or, if additional space is necessary, on an attachment hereto: Name:_______________________________________________________________ Address:____________________________________________________________ The undersigned represents and warrants that all offers and sales by the undersigned of the securities issuable to the undersigned upon conversion of the Notes shall be made pursuant to registration of the securities under the Securities Act of 1933, as amended (the "ACT"), or pursuant to an exemption from registration under the Act. Date of Conversion:___________________________ Market Price Days:____________________________ Applicable Conversion Price:__________________ Number of Shares of Common Stock to be Issued Pursuant to Conversion of the Notes:__________ Signature:____________________________________ Name:_________________________________________ Address:______________________________________ AGREED and ACKNOWLEDGED: INTERACTIVE MAGIC, INC. By:__________________________________ Name and Title:______________________ *The Corporation is not required to issue shares of Common Stock until the original Note(s) (or evidence of loss, theft or destruction thereof) to be converted are received by the Corporation or its Transfer Agent. The Corporation shall issue and deliver shares of Common Stock to an overnight courier not later than three business days following receipt of the original Note(s) to be converted, and shall make payments pursuant to the Notes for the number of business days such issuance and delivery is late. EX-10 5 EXHIBIT 10.30 EXHIBIT 10.30 EXHIBIT B TO SECURITIES PURCHASE AGREEMENT REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT"), dated as of January 25, 1999, by and among INTERACTIVE MAGIC, INC., a corporation organized under the laws of the State of North Carolina (the "COMPANY"), and the undersigned (together with its affiliates and any assignee or transferee of all of its rights hereunder, the "INITIAL INVESTORS"). WHEREAS: A. In connection with the Securities Purchase Agreement, dated as of January 25, 1999, between the parties hereto (the "SECURITIES PURCHASE AGREEMENT"), the Company has agreed, upon the terms and subject to the conditions contained therein, to issue and sell to the Initial Investors convertible notes ( "NOTES") in the aggregate principal amount of Four Million Dollars ($4,000,000), which (i) are convertible into shares of the Company's common stock, par value $.10 per share (the "COMMON STOCK") and (ii) in certain circumstances, entitle the holder to warrants (the "WARRANTS") to acquire a number of shares of Common Stock determined in accordance with the terms of the Notes. B. To induce the Initial Investors to execute and deliver the Securities Purchase Agreement, the Company has agreed to provide certain registration rights under the Securities Act of 1933, as amended, and the rules and regulations thereunder, or any similar successor statute (collectively, the "SECURITIES ACT"), and applicable state securities laws; NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and each of the Initial Investors hereby agree as follows: 1. DEFINITIONS. a. As used in this Agreement, the following terms shall have the following meanings: (i) "INVESTORS" means the Initial Investors and any transferee or assignee who agrees to become bound by the provisions of this Agreement in accordance with Section 9 hereof. (ii) "REGISTER," "REGISTERED," and "REGISTRATION" refer to a registration effected by preparing and filing a Registration Statement or Statements in compliance with the Securities Act and pursuant to Rule 415 under the Securities Act or any successor rule providing for offering securities on a continuous basis ("RULE 415"), and the declaration or ordering of effectiveness of such Registration Statement by the United States Securities and Exchange Commission (the "SEC"). (iii) "REGISTRABLE SECURITIES" means (i) the Conversion Shares, (ii) the Warrant Shares and (iii) any shares of capital stock issued or issuable, from time to time (with any adjustments), as a distribution on or in exchange for or otherwise with respect to any of the foregoing (including, without limitation, any shares issued or issuable pursuant to Section 2(c) hereof). (iv) "REGISTRATION STATEMENTS" means any registration statements of the Company under the Securities Act. b. Capitalized terms used herein and not otherwise defined herein shall have the respective meanings set forth in the Securities Purchase Agreement or the Notes. 2. REGISTRATION. a. Mandatory Registration. The Company shall prepare and file with the United States Securities and Exchange Commission ("SEC"), as soon as practicable after the Closing Date a Registration Statement on Form SB-2 or S-1 covering the resale of the Registrable Securities, which Registration Statement, to the extent allowable under the Securities Act and the rules and regulations promulgated thereunder (including Rule 416), shall state that such Registration Statement also covers such indeterminate number of additional shares of Common Stock as may become issuable upon conversion of or otherwise pursuant to the Notes and upon exercise of or otherwise pursuant to the Warrants to prevent dilution resulting from stock splits, stock dividends or similar transactions or by reason of changes in the Conversion Price and/or Exercise Price applicable thereto in accordance with the terms thereof. The number of shares of Common Stock initially included in such Registration Statement shall be no less than 2,119,889. The Company acknowledges that the number of shares initially included in the Registration Statement represents a good faith estimate of the maximum number of shares issuable upon the conversion of or otherwise pursuant to the Notes and upon exercise of or otherwise pursuant to the Warrants. The Registrable Securities included in the Registration Statement shall be allocated to the Investors as set forth in Section 11(k) hereof. The Registration Statement (and each amendment or supplement thereto, and each request for acceleration of effectiveness thereof) shall be provided to (and subject to the approval of) the Initial Investors and its counsel prior to its filing or other submission. -2- b. Underwritten Offering. If any offering pursuant to a Registration Statement pursuant to Section 2(a) hereof involves an underwritten offering, the Investors who hold a majority in interest of the Registrable Securities subject to such underwritten offering, with the consent of the Initial Investors, shall have the right to select one legal counsel to represent the Investors and an investment banker or bankers and manager or managers to administer the offering, which investment banker or bankers or manager or managers shall be reasonably satisfactory to the Company. In the event that any Investors elect not to participate in such underwritten offering, the Registration Statement covering all of the Registrable Securities shall contain appropriate plans of distribution reasonably satisfactory to the Investors participating in such underwritten offering and the Investors electing not to participate in such underwritten offering (including, without limitation, the ability of nonparticipating Investors to sell from time to time and at any time during the effectiveness of such Registration Statement). c. Payments by the Company. The Company shall use its best efforts to cause the Registration Statement required to be filed pursuant to Section 2(a) hereof to become effective as soon as practicable, but in no event later than the 105th day after the Closing Date (the "REGISTRATION DEADLINE"). If (i) the Registration Statement(s) covering the Registrable Securities required to be filed by the Company pursuant to Section 2(a) hereof is not declared effective by the SEC on or before the Registration Deadline, (ii) after the Registration Statement has been declared effective by the SEC and prior to the expiration of the Registration Period, sales of all the Registrable Securities cannot be made pursuant to the Registration Statement or (iii) the Common Stock is not listed or included for quotation on the Nasdaq National Market (the "NNM"), the New York Stock Exchange (the "NYSE") or the American Stock Exchange (the "AMEX") at any time after the Registration Deadline, then the Company will make payments to the Investors in such amounts and at such times as shall be determined pursuant to this Section 2(c) as partial relief for the damages to the Investors by reason of any such delay in or reduction of their ability to sell the Registrable Securities (which remedy shall not be exclusive of any other remedies available at law or in equity). The Company shall pay to each Investor an amount equal to the product of (i) the aggregate principal amount of the Notes held by such Investor (including, without limitation, any Notes that have been converted into Conversion Shares then held by such Investor) (the "AGGREGATE PRINCIPAL AMOUNT"), multiplied by (ii) four percent, multiplied by (iii) the sum of (x) the number of months (pro rated for partial months) after the Registration Deadline and prior to the date the Registration Statement filed pursuant to Section 2(a) is declared effective by the SEC, plus (y) the number of months (prorated for partial months) prior to the expiration of the Registration Period that sales of all of the Registrable Securities cannot be made pursuant to the Registration Statement after the Registration Statement has been declared effective (including, without limitation, when sales cannot be made by reason of the Company's failure to properly supplement or amend the prospectus included therein in accordance with the terms of this Agreement (including Section 3(b) hereof) or otherwise) or the Common Stock is not listed or included for quotation on the NNM, the NYSE or AMEX or that trading thereon is halted after the Registration Statement has been declared effective; PROVIDED, HOWEVER, that there shall be excluded from each such period any delays which are solely attributable to (i) the Investors' failure to review any Registration Statement (or any amendment or supplement thereto, or any request for acceleration of effectiveness thereof) and provide comments to the Company within three business days of receipt thereof pursuant to Section 2(a) hereof, (ii) the -3- Investors' failure to timely provide information to the Company in accordance with Section 4(a) hereof, or (iii) changes (other than corrections of Company mistakes with respect to information previously provided by the Investors) required by the Investors in the Registration Statement with respect to information relating to the Investors, including, without limitation, changes to the plan of distribution. For example, if the Registration Statement is not effective by the Registration Deadline, the Company would pay $40,000 for each $1,000,000 of Aggregate Principal Amount for each month after the Registration Deadline until the Registration Statement becomes effective (prorated for partial months). Such amounts shall be paid in cash. Payments of cash pursuant hereto shall be made within five days after the end of each period that gives rise to such obligation, provided that, if any such period extends for more than 30 days, interim payments shall be made for each such 30-day period. If any such payments of cash are not timely made, each Investor can elect to add the amount of such payments to the principal amount of the Notes and such amounts shall thereafter be convertible into Common Stock at the "CONVERSION PRICE" (as defined in the Notes), subject to Article II.A(2) of the Notes. Any shares of Common Stock issued upon conversion of such amounts shall be Registrable Securities. If any Investor desires to convert the amounts due hereunder into Registrable Securities (subject to Article II.A(2) of the Notes), it shall so notify the Company in writing at any time after the date on which such amounts become payable in cash and such amounts shall be so convertible (pursuant to the mechanics set forth under Article II of the Notes and in accordance with Article II.A(2) of the Notes), beginning on the last day upon which the cash amount would otherwise be due. d. Piggy-Back Registrations. Subject to the last sentence of this Section 2(d), if at any time prior to the expiration of the Registration Period (as hereinafter defined) the Company shall file with the SEC a Registration Statement relating to an offering for its own account or the account of others under the Securities Act of any of its equity securities (other than on Form S-4 or Form S-8 or their then equivalents relating to equity securities to be issued solely in connection with any acquisition of any entity or business or equity securities issuable in connection with stock option or other employee benefit plans), the Company shall send to each Investor who is entitled to registration rights under this Section 2(d) written notice of such determination and, if within 15 days after the effective date of such notice, such Investor shall so request in writing, the Company shall include in such Registration Statement all or any part of the Registrable Securities such Investor requests to be registered, except that if, in connection with any underwritten public offering for the account of the Company the managing underwriter(s) thereof shall impose a limitation on the number of shares of Common Stock which may be included in the Registration Statement because, in such underwriter(s)' judgment, marketing or other factors dictate such limitation is necessary to facilitate public distribution, then the Company shall be obligated to include in such Registration Statement only such limited portion of the Registrable Securities with respect to which such Investor has requested inclusion hereunder as the underwriter shall permit. Any exclusion of Registrable Securities shall be made pro rata among the Investors seeking to include Registrable Securities, in proportion to the number of Registrable Securities sought to be included by such Investors; PROVIDED, HOWEVER, that the Company shall not exclude any Registrable Securities unless the Company has first excluded all outstanding securities, the holders of which are not entitled to inclusion of such securities in such Registration Statement or are not entitled to pro rata inclusion with the Registrable Securities; and PROVIDED FURTHER that, after giving effect to the immediately -4- preceding proviso, any exclusion of Registrable Securities shall be made pro rata with holders of other securities having the right to include such securities in the Registration Statement other than holders of securities entitled to inclusion of their securities in such Registration Statement by reason of demand registration rights. No right to registration of Registrable Securities under this Section 2(d) shall be construed to limit any registration required under Section 2(a) hereof. If an offering in connection with which an Investor is entitled to registration under this Section 2(d) is an underwritten offering, then each Investor whose Registrable Securities are included in such Registration Statement shall, unless otherwise agreed by the Company, offer and sell such Registrable Securities in an underwritten offering using the same underwriter or underwriters and, subject to the provisions of this Agreement, on the same terms and conditions as other shares of Common Stock included in such underwritten offering. Notwithstanding anything to the contrary set forth herein, the registration rights of the Investors pursuant to this Section 2(d) shall only be available in the event the Company fails to obtain effectiveness or maintain effectiveness of any Registration Statement to be filed pursuant to Section 2(a) in accordance with the terms of this Agreement. e. Use of Form S-3. The Company shall file all reports required to be filed by the Company with the SEC in a timely manner so as to become eligible, and thereafter to maintain its eligibility, for the use of Form S-3. Not later than ten days after the Company first meets the registrant eligibility and transaction requirements for the use of Form S-3 (or any successor form) for registration of the offer and sale by the Initial Investors and any other Investors of Registrable Securities, the Company shall file on Form S-3 (or such successor form), a post-effective amendment to the Form SB-2 or S-1 filed pursuant to Section 2(a), and shall use its best efforts to have such post-effective amendment declared effective as soon as possible there after. 3. OBLIGATIONS OF THE COMPANY. In connection with the registration of the Registrable Securities, the Company shall have the following obligations: a. The Company shall prepare promptly and use its best efforts to file with the SEC the Registration Statement required by Section 2(a) as soon as practicable after the Closing Date, and use its best efforts to (i) cause such Registration Statement relating to Registrable Securities to become effective as soon as practicable after such filing (but in no event later than the Registration Deadline), and (ii) keep the Registration Statement (or, following the declaration of effectiveness of the later Registration Statement on Form S-3 referred to in Section 2(e), such later Registration Statement) effective pursuant to Rule 415 at all times until such date as is the earlier of (A) the date on which all of the Registrable Securities have been sold and (B) the date on which all of the Registrable Securities (in the opinion of counsel to the Initial Investors) may be immediately sold to the public without registration or restriction (including, without limitation, as to volume by each holder thereof) under the Securities Act (the "REGISTRATION PERIOD"), which Registration Statement (including any amendments or supplements thereto and prospectuses contained therein and all documents incorporated by reference therein) shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein, or necessary -5- to make the statements therein, in light of the circumstances under which they were made, not misleading. b. The Company shall prepare and file with the SEC such amendments (including post-effective amendments) and supplements to the Registration Statements and the prospectus used in connection with the Registration Statements as may be necessary to keep the Registration Statement effective at all times during the Registration Period, and, during such period, comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities of the Company covered by the Registration Statements. After such time, if any, as a Triggering Event has occurred (as defined in the Notes), in the event the number of shares available under a Registration Statement filed pursuant to this Agreement is, on any trading day (such trading day being the "REGISTRATION TRIGGER DATE"), insufficient to cover 135% of the Registrable Securities issued or issuable upon conversion of or otherwise pursuant to the Notes and upon exercise of or otherwise pursuant to the Warrants (without giving effect to any limitations on conversion or exercise contained in the Notes or the Warrants), the Company shall amend the Registration Statement, or file a new Registration Statement (on the short form available therefor, if applicable), or both, so as to cover 200% of the Registrable Securities so issued or issuable (without giving effect to any limitations on conversion or exercise contained in the Notes or the Warrants) as of the Registration Trigger Date, in each case, as soon as practicable, but in any event within 15 days after the Registration Trigger Date (based on the market price of the Common Stock and other relevant factors on which the Company reasonably elects to rely). The Company shall use its best efforts to cause such amendment and/or new Registration Statement to become effective as soon as practicable following the filing thereof, but in any event within 90 days after the Registration Trigger Date. The provisions of Section 2(c) above shall be applicable with respect to the Company's obligations under this Section 3(b). c. The Company shall furnish to each Investor whose Registrable Securities are included in a Registration Statement and one firm of legal counsel designated by the Investors (i) promptly after the same is prepared and publicly distributed, filed with the SEC, or received by the Company, one copy of each Registration Statement and any amendment thereto, each preliminary prospectus and prospectus and each amendment or supplement thereto, and, in the case of the Registration Statement referred to in Section 2(a), each letter written by or on behalf of the Company to the SEC or the staff of the SEC and each item of correspondence from the SEC or the staff of the SEC, in each case relating to such Registration Statement (other than any portion, if any, thereof which contains information for which the Company has sought confidential treatment), and (ii) such number of copies of a prospectus, including a preliminary prospectus, and all amendments and supplements thereto and such other documents as such Investor may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such Investor. The Company will immediately notify each Investor by facsimile of the effectiveness of each Registration Statement or any post-effective amendment. The Company will promptly respond to any and all comments received from the SEC, with a view towards causing each Registration Statement or any amendment thereto to be declared effective by the SEC as soon as practicable and shall file an acceleration request as soon as practicable following the resolution or clearance of all SEC comments or, if -6- applicable, following notification by the SEC that any such Registration Statement or any amendment thereto will not be subject to review. d. The Company shall use its best efforts to (i) register and qualify the Registrable Securities covered by the Registration Statements under such other securities or "blue sky" laws of such jurisdictions in the United States as each Investor who holds Registrable Securities being offered reasonably requests in writing, (ii) prepare and file in those jurisdictions such amendments (including post-effective amendments) and supplements to such registrations and qualifications as may be necessary to maintain the effectiveness thereof during the Registration Period, (iii) take such other actions as may be necessary to maintain such registrations and qualifications in effect at all times during the Registration Period, and (iv) take all other actions reasonably necessary or advisable to qualify the Registrable Securities for sale in such jurisdictions; PROVIDED, HOWEVER, that the Company shall not be required in connection therewith or as a condition thereto to (a) qualify to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(d), (b) subject itself to general taxation in any such jurisdiction, (c) file a general consent to service of process in any such jurisdiction, (d) provide any undertakings that cause the Company undue expense or burden, or (e) make any change in its charter or bylaws, which in each case the Board of Directors of the Company determines to be contrary to the best interests of the Company and its stockholders. e. In the event the Investors who hold a majority in interest of the Registrable Securities being offered in the offering (with the approval of a majority in interest of the Initial Investors) select underwriters for the offering, the Company shall enter into and perform its obligations under an underwriting agreement, in usual and customary form, including, without limitation, customary indemnification and contribution obligations, with the underwriters of such offering. f. As promptly as practicable after becoming aware of such event, the Company shall notify each Investor of the happening of any event, of which the Company has knowledge, as a result of which the prospectus included in any Registration Statement, as then in effect, includes an untrue statement of a material fact or omission to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and use its best efforts promptly to prepare a supplement or amendment to any Registration Statement to correct such untrue statement or omission, and deliver such number of copies of such supplement or amendment to each Investor as such Investor may reasonably request. g. The Company shall use its best efforts to prevent the issuance of any stop order or other suspension of effectiveness of any Registration Statement, and, if such an order is issued, use its best efforts to obtain the withdrawal of such order at the earliest possible moment and to notify each Investor who holds Registrable Securities being sold (or, in the event of an underwritten offering, the managing underwriters) of the issuance of such order and the resolution thereof. -7- h. The Company shall permit a single firm of counsel designated by the Initial Investors to review such Registration Statement and all amendments and supplements thereto (as well as all requests for acceleration or effectiveness thereof) a reasonable period of time prior to their filing with the SEC, and not file any document in a form to which such counsel reasonably objects and will not request acceleration of such Registration Statement without prior notice to such counsel. The sections of such Registration Statement covering information with respect to the Investors, the Investors' beneficial ownership of securities of the Company or the Investors' intended method of disposition of Registrable Securities shall conform to the information provided to the Company in writing by each of the Investors. i. The Company shall make generally available to its security holders as soon as practicable, but not later than 90 days after the close of the period covered thereby, an earnings statement (in form complying with the provisions of Rule 158 under the Securities Act) covering a twelve-month period beginning not later than the first day of the Company's fiscal quarter next following the effective date of the Registration Statement. j. At the request of any Investor, the Company shall, on the date that Registrable Securities are delivered to an underwriter for sale in connection with any Registration Statement (i) furnish an opinion, dated as of such date, from counsel representing the Company for purposes of such Registration Statement in form, scope and substance as is customarily given in an underwritten public offering, addressed to the underwriters and the Investors and (ii) use its best efforts to furnish a letter, dated such date, from the Company's independent certified public accountants in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters and the Investors. k. The Company shall make available for inspection on reasonable notice and at reasonable times by (i) any Investor, (ii) any underwriter participating in any disposition pursuant to a Registration Statement, (iii) one firm of attorneys and one firm of accountants or other agents retained by the Initial Investors and (iv) one firm of attorneys retained by all such underwriters (collectively, the "INSPECTORS") all pertinent financial and other records, and pertinent corporate documents and properties of the Company (collectively, the "RECORDS"), as shall be reasonably deemed necessary by each Inspector to enable each Inspector to exercise its due diligence responsibility, and cause the Company's officers, directors and employees to supply all information which any Inspector may reasonably request for purposes of such due diligence; PROVIDED, HOWEVER, that each Inspector shall hold in confidence and shall not make any disclosure (except to an Investor) of any Record or other information which the Company determines in good faith to be confidential, and of which determination the Inspectors are so notified, unless (a) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in any Registration Statement, (b) the release of such Records is ordered pursuant to a subpoena or other order from a court or government body of competent jurisdiction, or (c) the information in such Records has been made generally available to the public other than by disclosure in violation of this or any other agreement. The Company shall not be required to disclose any confidential information in such Records to any Inspector until and unless such Inspector shall have entered into confidentiality agreements (in form and substance satisfactory to the Company) with the Company with respect thereto, substantially -8- in the form of this Section 3(k). Each Investor agrees that it shall, upon learning that disclosure of such Records is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt notice to the Company and allow the Company, at its expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, the Records deemed confidential. Nothing herein (or in any other confidentiality agreement between the Company and any Investor) shall be deemed to limit the Investors' ability to sell Registrable Securities in a manner which is otherwise consistent with applicable laws and regulations. l. The Company shall hold in confidence and not make any disclosure of information concerning an Investor provided to the Company unless (i) disclosure of such information is necessary to comply with federal or state securities laws, (ii) the disclosure of such information is necessary to avoid or correct a misstatement or omission in any Registration Statement, (iii) the release of such information is ordered pursuant to a subpoena or other order from a court or governmental body of competent jurisdiction, or (iv) such information has been made generally available to the public other than by disclosure in violation of this or any other agreement. The Company agrees that it shall, upon learning that disclosure of such information concerning an Investor is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt notice to such Investor prior to making such disclosure, and allow the Investor, at its expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, such information. m. The Company shall use its best efforts to (i) cause all the Registrable Securities covered by the Registration Statement to be quoted on the NNM or listed on the NYSE or the AMEX or another national securities exchange and on each additional national securities exchange on which securities of the same class or series issued by the Company are then listed, if any, if the listing of such Registrable Securities is then permitted under the rules of such exchange, or (ii) to the extent the securities of the same class or series are not then quoted on the NNM or listed on a national securities exchange, secure the designation and quotation, of all the Registrable Securities covered by the Registration Statement on the Nasdaq SmallCap Market and, without limiting the generality of the foregoing, to arrange for or maintain at least two market makers to register with the National Association of Securities Dealers, Inc. ("NASD") as such with respect to such Registrable Securities. n. The Company shall provide a transfer agent and registrar, which may be a single entity, for the Registrable Securities not later than the effective date of the Registration Statement. o. The Company shall cooperate with the Investors who hold Registrable Securities being offered and the managing underwriter or underwriters, if any, to facilitate the timely preparation and delivery of certificates (not bearing any restrictive legends) representing Registrable Securities to be offered pursuant to any Registration Statement and enable such certificates to be in such denominations or amounts, as the case may be, as the managing underwriter or underwriters, if any, or the Investors may reasonably request and registered in such names as the managing underwriter or underwriters, if any, or the Investors may request, and, within three business days -9- after a Registration Statement which includes Registrable Securities is ordered effective by the SEC, the Company shall cause legal counsel selected by the Company to deliver to the transfer agent for the Registrable Securities (with copies to the Investors whose Registrable Securities are included in such Registration Statement) an opinion of such counsel in the form attached hereto as EXHIBIT 1. p. At the request of any Investor, the Company shall prepare and file with the SEC such amendments (including post-effective amendments) and supplements to a Registration Statement and any prospectus used in connection with the Registration Statement as may be necessary in order to change the plan of distribution set forth in such Registration Statement. q. The Company shall comply in all material respects with all applicable laws related to a Registration Statement and offering and sale of securities and all applicable rules and regulations of governmental authorities in connection therewith (including without limitation the Securities Act and the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated by the SEC). r. The Company shall not, and shall not agree to, allow the holders of any securities of the Company (other than the holders of the Jamco Warrant (as defined in the Securities Purchase Agreement)) to include any of their securities (other than up to 200,000 shares of Common Stock issuable upon exercise of the Jamco Warrant) in any Registration Statement under Section 2(a) hereof or any amendment or supplement thereto under Section 3(b) hereof without the consent of the holders of a majority in interest of the Registrable Securities. s. The Company shall take all other reasonable actions necessary to effect the registration of Registrable Securities pursuant to a Registration Statement in accordance with the plan of distribution therein and applicable law. 4. OBLIGATIONS OF THE INVESTORS. In connection with the registration of the Registrable Securities, the Investors shall have the following obligations: a. It shall be a condition precedent to the obligations of the Company to complete the registration pursuant to this Agreement with respect to the Registrable Securities of a particular Investor that such Investor shall furnish to the Company in writing such information regarding itself, the Registrable Securities held by it and the intended method of disposition of the Registrable Securities held by it as shall be reasonably required to effect the registration of such Registrable Securities and shall execute such documents in connection with such registration as the Company may reasonably request. At least five business days prior to the first anticipated filing date of the Registration Statement, the Company shall notify each Investor of the information the Company requires from each such Investor and each Investor shall respond within three business days after the date of receipt of such notice. -10- b. Each Investor, by such Investor's acceptance of the Registrable Securities, agrees to cooperate with the Company as reasonably requested by the Company in connection with the preparation and filing of the Registration Statements hereunder, unless such Investor has notified the Company in writing of such Investor's election to exclude all of such Investor's Registrable Securities from the Registration Statements. c. In the event Investors holding a majority in interest of the Registrable Securities being registered (with the approval of the Initial Investors) determine to engage the services of an underwriter, each Investor agrees to enter into and perform such Investor's obligations under an underwriting agreement, in usual and customary form, including, without limitation, customary indemnification and contribution obligations, with the managing underwriter of such offering and take such other actions as are reasonably required in order to expedite or facilitate the disposition of the Registrable Securities, unless such Investor has notified the Company in writing of such Investor's election to exclude all of such Investor's Registrable Securities from such Registration Statements. d. Each Investor agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 3(f) or 3(g), such Investor will immediately discontinue disposition of Registrable Securities pursuant to the Registration Statement covering such Registrable Securities until such Investor's receipt of the copies of the supplemented or amended prospectus contemplated by Section 3(f) or 3(g) and, if so directed by the Company, such Investor shall deliver to the Company (at the expense of the Company) or destroy (and deliver to the Company a certificate of destruction) all copies in such Investor's possession, of the prospectus covering such Registrable Securities current at the time of receipt of such notice. e. No Investor may participate in any underwritten registration hereunder unless such Investor (i) agrees to sell such Investor's Registrable Securities on the basis provided in any underwriting arrangements in usual and customary form entered into by the Company, (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements, and (iii) agrees to pay its pro rata share of all underwriting discounts and commissions and any expenses in excess of those payable by the Company pursuant to Section 5 below. 5. EXPENSES OF REGISTRATION. All reasonable expenses, other than underwriting discounts and commissions, incurred in connection with registrations, filings or qualifications pursuant to Sections 2 and 3, including, without limitation, all registration, listing and qualification fees, printers and accounting fees, the fees and disbursements of counsel for the Company, and the reasonable fees and disbursements of one counsel selected by the Initial Investors pursuant to Sections 2(b) and 3(h) hereof, shall be borne by the Company. In addition, the Company shall pay all of the Investors' costs and expenses (including reasonable legal fees) incurred in connection with the enforcement of the rights of the Investors hereunder. -11- 6. INDEMNIFICATION. In the event any Registrable Securities are included in a Registration Statement under this Agreement: a. To the extent permitted by law, the Company will indemnify, hold harmless and defend (i) each Investor who holds such Registrable Securities, and (ii) the directors, officers, partners, members, employees and agents of such Investor and each person who controls any Investor within the meaning of the Securities Act or the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), if any, (iii) any underwriter (as defined in the Securities Act) for the Investors, and (iv) the directors, officers, partners, employees and each person who controls any such underwriter within the meaning of the Securities Act or the Exchange Act, if any (each, an "INDEMNIFIED PERSON"), against any joint or several losses, claims, damages, liabilities or expenses (collectively, together with actions, proceedings or inquiries by any regulatory or self-regulatory organization, whether commenced or threatened, in respect thereof, "CLAIMS") to which any of them may become subject insofar as such Claims arise out of or are based upon: (i) any untrue statement or alleged untrue statement of a material fact in a Registration Statement or the omission or alleged omission to state therein a material fact required to be stated or necessary to make the statements therein not misleading, (ii) any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus if used prior to the effective date of such Registration Statement, or contained in the final prospectus (as amended or supplemented, if the Company files any amendment thereof or supplement thereto with the SEC) or the omission or alleged omission to state therein any material fact necessary to make the statements made therein, in light of the circumstances under which the statements therein were made, not misleading, or (iii) any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any other law, including, without limitation, any state securities law, or any rule or regulation thereunder relating to the offer or sale of the Registrable Securities (the matters in the foregoing clauses (i) through (iii) being, collectively, "VIOLATIONS"). Subject to the restrictions set forth in Section 6(c) with respect to the number of legal counsel, the Company shall reimburse the Indemnified Person, promptly as such expenses are incurred and are due and payable, for any reasonable legal fees or other reasonable expenses incurred by them in connection with investigating or defending any such Claim. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(a): (i) shall not apply to a Claim arising out of or based upon a Violation which occurs in reliance upon and in conformity with information furnished in writing to the Company by or on behalf of such Indemnified Person or underwriter for such Indemnified Person expressly for use in connection with the preparation of such Registration Statement or any such amendment thereof or supplement thereto; (ii) shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Company, which consent shall not be unreasonably withheld; and (iii) with respect to any preliminary prospectus, shall not inure to the benefit of any Indemnified Person if the untrue statement or omission of material fact contained in the preliminary prospectus was corrected on a timely basis in the prospectus, as then amended or supplemented, if such corrected prospectus was timely made available by the Company pursuant to Section 3(c) hereof, and the Indemnified Person was promptly advised in writing not to use the incorrect prospectus prior to the use giving rise to a Violation and such Indemnified Person, -12- notwithstanding such advice, used it. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Indemnified Person and shall survive the transfer of the Registrable Securities by the Investors pursuant to Section 9. b. In connection with any Registration Statement in which an Investor is participating, each such Investor agrees, severally and not jointly, to indemnify, hold harmless and defend, to the same extent and in the same manner set forth in Section 6(a), the Company, each of its directors, each of its officers who signs the Registration Statement, each person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act, and any other stockholder selling securities pursuant to the Registration Statement or any of its directors or officers or any person who controls such stockholder or underwriter within the meaning of the Securities Act or the Exchange Act (collectively and together with an Indemnified Person, an "INDEMNIFIED PARTY"), against any Claim to which any of them may become subject, under the Securities Act, the Exchange Act or otherwise, insofar as such Claim arises out of or is based upon any Violation by such Investor, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished to the Company by or on behalf of such Investor expressly for use in connection with such Registration Statement; and subject to Section 6(c) such Investor will reimburse any legal or other expenses (promptly as such expenses are incurred and are due and payable) reasonably incurred by an Indemnified Party under this Section 6(b) in connection with investigating or defending any such Claim; PROVIDED, HOWEVER, that the indemnity agreement contained in this Section 6(b) shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of such Investor, which consent shall not be unreasonably withheld; PROVIDED, FURTHER, HOWEVER, that the Investor shall be liable under this Agreement (including this Section 6(b) and Section 7) for only that amount as does not exceed the net proceeds to such Investor as a result of the sale of Registrable Securities pursuant to such Registration Statement. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Indemnified Party and shall survive the transfer of the Registrable Securities by the Investors pursuant to Section 9. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(b) with respect to any preliminary prospectus shall not inure to the benefit of any Indemnified Party if the untrue statement or omission of material fact contained in the preliminary prospectus was corrected on a timely basis in the prospectus, as then amended or supplemented. c. Promptly after receipt by an Indemnified Person or Indemnified Party under this Section 6 of notice of the commencement of any action (including any governmental action), such Indemnified Person or Indemnified Party shall, if a Claim in respect thereof is to be made against any indemnifying party under this Section 6, deliver to the indemnifying party a written notice of the commencement thereof, and the indemnifying party shall have the right to participate in and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume control of the defense thereof with counsel mutually satisfactory to the indemnifying party and the Indemnified Person or the Indemnified Party, as the case may be; PROVIDED, HOWEVER, that, if the defendants include both the Indemnified Person or Indemnified Party, as the case may be, and the indemnifying party, an Indemnified Person or Indemnified Party shall have the right to retain its own counsel with the fees and expenses to be paid by the indemnifying -13- party, if, in the reasonable opinion of counsel retained by the indemnifying party, the representation by such counsel of the Indemnified Person or Indemnified Party and the indemnifying party would be inappropriate due to actual or potential differing interests between such Indemnified Person or Indemnified Party and any other party represented by such counsel in such proceeding. The indemnifying party shall pay for only one separate legal counsel for the Indemnified Persons or the Indemnified Parties, as applicable, and such legal counsel shall be selected by Investors holding a majority in interest of the Registrable Securities included in the Registration Statement to which the Claim relates (with the approval of a majority in interest of the Initial Investors, if the Investors are entitled to indemnification hereunder, or by the Company, if the Company is entitled to indemnification hereunder, as applicable. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve such indemnifying party of any liability to the Indemnified Person or Indemnified Party under this Section 6, except to the extent that the indemnifying party is actually prejudiced in its ability to defend such action. The indemnification required by this Section 6 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as such expense, loss, damage or liability is incurred and is due and payable. 7. CONTRIBUTION. To the extent any indemnification by an indemnifying party is prohibited or limited by law, the indemnifying party agrees to make the maximum contribution with respect to any amounts for which it would otherwise be liable under Section 6 to the fullest extent permitted by law; PROVIDED, HOWEVER, that (i) no contribution shall be made under circumstances where the maker would not have been liable for indemnification under the fault standards set forth in Section 6, (ii) no seller of Registrable Securities guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any seller of Registrable Securities who was not guilty of such fraudulent misrepresentation, and (iii) contribution (together with any indemnification or other obligations under this Agreement) by any seller of Registrable Securities shall be limited in amount to the net amount of proceeds received by such seller from the sale of such Registrable Securities. 8. REPORTS UNDER THE EXCHANGE ACT. With a view to making available to the Investors the benefits of Rule 144 promulgated under the Securities Act or any other similar rule or regulation of the SEC that may at any time permit the Investors to sell securities of the Company to the public without registration ("RULE 144"), the Company agrees to: a. make and keep public information available, as those terms are understood and defined in Rule 144; b. file with the SEC in a timely manner and make and keep available all reports and other documents required of the Company under the Securities Act and the Exchange Act so long as the Company remains subject to such requirements (it being understood that nothing herein shall -14- limit the Company's obligations under Section 4(c) of the Securities Purchase Agreement) and the filing of such reports and other documents is required for the applicable provisions of Rule 144; and c. furnish to each Investor so long as such Investor owns the Notes, Warrants or Registrable Securities, promptly upon request, (i) a written statement by the Company that it has complied with the reporting requirements of Rule 144, the Securities Act and the Exchange Act, (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested to permit the Investors to sell such securities pursuant to Rule 144 without registration. 9. ASSIGNMENT OF REGISTRATION RIGHTS. The rights of the Investors hereunder, including the right to have the Company register Registrable Securities pursuant to this Agreement, shall be automatically assignable by each Investor to any permitted transferee of all or any portion of the Notes, the Warrants or the Registrable Securities if: (i) the Investor agrees in writing with the transferee or assignee to assign such rights, and a copy of such agreement is furnished to the Company within a reasonable time after such assignment, (ii) the Company is, within a reasonable time after such transfer or assignment, furnished with written notice of (a) the name and address of such transferee or assignee and (b) the securities with respect to which such registration rights are being transferred or assigned, (iii) following such transfer or assignment, the further disposition of such securities by the transferee or assignee is restricted under the Securities Act and applicable state securities laws, (iv) at or before the time the Company receives the written notice contemplated by clause (ii) of this sentence, the transferee or assignee agrees in writing with the Company to be bound by all of the provisions contained herein, (v) such transfer shall have been made in accordance with the applicable requirements of the Securities Purchase Agreement and (vi) such transferee shall be an "ACCREDITED INVESTOR" as that term defined in Rule 501 of Regulation D promulgated under the Securities Act. 10. AMENDMENT OF REGISTRATION RIGHTS. Provisions of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with written consent of the Company, each of the Initial Investors (to the extent such Initial Investors still own Notes, Warrants or Registrable Securities) and Investors who hold a majority in interest of the Registrable Securities or, in the case of a waiver, with the written consent of the party charged with the enforcement of any such provision. Any amendment or waiver effected in accordance with this Section 10 shall be binding upon each Investor and the Company. 11. MISCELLANEOUS. a. A person or entity is deemed to be a holder of Registrable Securities whenever such person or entity owns of record such Registrable Securities. If the Company receives conflicting instructions, notices or elections from two or more persons or entities with respect to the -15- same Registrable Securities, the Company shall act upon the basis of instructions, notice or election received from the registered owner of such Registrable Securities. b. Any notices required or permitted to be given under the terms hereof shall be sent by certified or registered mail (return receipt requested) or delivered personally or by courier (including a recognized overnight delivery service) or by facsimile, and shall be effective five days after being placed in the mail, if mailed, or upon receipt or refusal of receipt, if delivered personally or by courier (including a recognized overnight delivery service) or by facsimile, in each case addressed to a party. The addresses for such communications shall be: If to the Company: Interactive Magic, Inc. 215 Southport Drive Suite 1000 Morrisville, NC 27560 Facsimile: (919) 461-0723 Attention: Chief Executive Officer If to an Investor, at such address as such Investor shall have provided in writing to the Company or such other address as such Investor furnishes by notice given in accordance with this Section 11(b). c. Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof. d. This Agreement shall be enforced, governed by and construed in accordance with the laws of the State of New York applicable to agreements made and to be performed entirely within such state (without regard to principles of conflict of laws). In the event that any provision of this Agreement is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any provision hereof which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision hereof. The parties hereto hereby submit to the exclusive jurisdiction of the United States federal courts and the state courts located in New York County, New York with respect to any dispute arising under this Agreement, the agreements entered into in connection herewith or the transactions contemplated hereby or thereby. The Company irrevocably waives the defense of an inconvenient forum to the maintenance of such suit or proceeding. The Company further agrees that service of process upon the Company mailed by first class mail shall be deemed in every respect effective service of process upon the Company in any such suit or proceeding. Nothing herein shall affect an Investor's right to serve process in any other manner permitted by law. The Company agrees that a final non-appealable judgment in any such suit or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on such judgment or in any other lawful manner. -16- e. This Agreement, the Securities Purchase Agreement, the Notes and the Warrants (including all schedules and exhibits thereto) collectively constitute the entire agreement among the parties hereto with respect to the subject matter hereof and thereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein. This Agreement, the Securities Purchase Agreement, the Notes and the Warrants supersede all prior agreements and understandings among the parties hereto and thereto with respect to the subject matter hereof and thereof. f. Subject to the requirements of Section 9 hereof, this Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties hereto. g. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. h. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement. This Agreement, once executed by a party, may be delivered to the other party hereto by facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement. i. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. j. Except as otherwise provided herein, all consents, approvals and other determinations to be made by the Investors pursuant to this Agreement shall be made by the Investors holding a majority in interest of the Registrable Securities (determined as if all of the Notes then outstanding had been converted into, and all of the Warrants then unexercised had been exercised for, Registrable Securities) then held by all Investors, as the case may be. k. The initial number of Registrable Securities included on any Registration Statement and each increase to the number of Registrable Securities included thereon shall be allocated pro rata among the Investors based on the number of Registrable Securities held by each Investor at the time of such establishment or increase, as the case may be. In the event an Investor shall sell or otherwise transfer any of such holder's Registrable Securities, each transferee shall be allocated a pro rata portion of the number of Registrable Securities included on a Registration Statement for such transferor. Any shares of Common Stock included on a Registration Statement and which remain allocated to any person or entity which does not hold any Registrable Securities shall be allocated to the remaining Investors, pro rata based on the number of shares of Registrable Securities then held by such Investors. For the avoidance of doubt, the number of Registrable Securities held by an Investor shall be determined as if all of the Notes then outstanding and all of -17- the Warrants then unexercised and held by an Investor were converted into or exercised for Registrable Securities. l. For purposes of this Agreement, the term "business day" means any day other than a Saturday or Sunday or a day on which banking institutions in the State of New York are authorized or obligated by law, regulation or executive order to close. m. The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to each Investor by vitiating the intent and purpose of the transactions contemplated hereby. Accordingly, the Company acknowledges that the remedy at law for breach of its obligations hereunder will be inadequate and agrees, in the event of a breach or threatened breach by the Company of any of the provisions hereunder, that each Investor shall be entitled, in addition to all other available remedies in law or in equity, to an injunction or injunctions to prevent or cure breaches of the provisions of this Agreement and to enforce specifically the terms and provisions hereof. n. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -18- IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the date first above written. INTERACTIVE MAGIC, INC. By: /s/ J.W. Stealey ---------------------- Name: J.W. Stealey -------------------- Its: Chairman and Chief Executive Officer --------------------------------------- Initial Investors: RGC INTERNATIONAL INVESTORS, LDC By: Rose Glen Capital Management, L.P., Investment Manager By: RGC General Partner Corp., as General Partner By: /s/ Steve Katznelson ---------------------------- Name: Steve Katznelson -------------------------- Managing Director -19- EXHIBIT 1 TO REGISTRATION RIGHTS AGREEMENT [Date] [Name and address of transfer agent] RE: INTERACTIVE MAGIC, INC. Ladies and Gentlemen: We are counsel to INTERACTIVE MAGIC, INC., a corporation organized under the laws of the State of North Carolina (the "COMPANY"), and we understand that RGC International Investors, LDC (the "HOLDER") has purchased from the Company convertible notes due ___________, 2002 (the "NOTES"), which (i) are convertible into shares of the Company's common stock, $.10 par value per share (the "COMMON STOCK") and (ii) in certain circumstances, entitle the holder to warrants (the "WARRANTS") exercisable for shares of the Common Stock. The Notes were issued by the Company pursuant to a Securities Purchase Agreement, dated as of January 25, 1999, between the Company and the Holder (the "AGREEMENT"). Under certain circumstances, the Company is obligated to issue shares of Common Stock in connection with the conversion of the Notes and the exercise of the Warrants. Pursuant to a Registration Rights Agreement dated as of January 25, 1999 between the Company and the Holder (the "REGISTRATION RIGHTS AGREEMENT"), the Company agreed, among other things, to register the resale of the Registrable Securities (as that term is defined in the Registration Rights Agreement) under the Securities Act of 1933, as amended (the "SECURITIES ACT"), upon the terms provided in the Registration Rights Agreement. The shares of Common Stock issuable upon conversion of the Notes and exercise of the Warrants are included in the Registrable Securities. In connection with the Company's obligations under the Registration Rights Agreement, on [_______________], the Company filed a Registration Statement on Form [S-1][SB-2] (File No. 333- [____________]) (the "REGISTRATION STATEMENT") with the Securities and Exchange Commission (the "SEC") relating to the Registrable Securities, which names the Holder as a selling stockholder thereunder, which Registration Statement has been declared effective by the SEC. [Other customary introductory and scope of examination language to be inserted] Based on the foregoing, we are of the opinion that the Registrable Securities have been registered under the Securities Act. [Other customary language to be included.] Very truly yours, cc: [The Investors] EX-10 6 EXHIBIT 10.31 EXHIBIT 10.31 EXHIBIT B TO CONVERTIBLE NOTE VOID AFTER 5:00 P.M. NEW YORK CITY TIME ON [THIRD ANNIVERSARY HEREOF] THIS WARRANT AND THE SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER SUCH ACT, OR AN OPINION OF COUNSEL, IN FORM, SUBSTANCE AND SCOPE CUSTOMARY FOR OPINIONS OF COUNSEL IN COMPARABLE TRANSACTIONS, THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SUCH ACT. Right to Purchase [________] Shares of Common Stock, par value $.10 per share Date: [Issue Date] INTERACTIVE MAGIC, INC. STOCK PURCHASE WARRANT THIS CERTIFIES THAT, for value received, RGC INTERNATIONAL INVESTORS, LDC, or its registered assigns, is entitled to purchase from INTERACTIVE MAGIC, INC., a corporation organized under the laws of the State of North Carolina (the "COMPANY"), at any time or from time to time during the period specified in Section 2 hereof, [_______________] fully paid and nonassessable shares of the Company's common stock, par value $.10 per share (the "COMMON STOCK"), at an exercise price per share (the "EXERCISE PRICE") equal to [Conversion Price on Issue Date]. The number of shares of Common Stock purchasable hereunder (the "WARRANT SHARES") and the Exercise Price are subject to adjustment as provided in Section 4 hereof. The term "WARRANTS" means this Warrant and the other warrants of the Company issued pursuant to the convertible note, dated as of January 26, 1999 (the "NOTE"), issued by the Company pursuant to the Securities Purchase Agreement, dated as of January 25, 1999, by and among the Company and the other signatories thereto (the "SECURITIES PURCHASE AGREEMENT"). All monetary denominations set forth herein shall refer to the lawful currency of the United States of America. This Warrant is subject to the following terms, provisions, and conditions: 1. Manner of Exercise; Issuance of Certificates; Payment for Shares. Subject to the provisions hereof, including, without limitation, the limitations contained in Section 7 hereof, this Warrant may be exercised by the holder hereof, in whole or in part, by the surrender of this Warrant, together with a completed exercise agreement in the form attached hereto (the "EXERCISE AGREEMENT"), to the Company during normal business hours on any business day at the Company's principal executive offices (or such other office or agency of the Company as it may designate by notice to the holder hereof), and upon (i) payment to the Company in cash, by certified or official bank check or by wire transfer for the account of the Company, of the Exercise Price for the Warrant Shares specified in the Exercise Agreement or (ii) if the holder is permitted to effect a Cashless Exercise (as defined in Section 11(c) hereof) pursuant to Section 11(c) hereof, delivery to the Company of a written notice of an election to effect a Cashless Exercise for the Warrant Shares specified in the Exercise Agreement. The Warrant Shares so purchased shall be deemed to be issued to the holder hereof or such holder's designee, as the record owner of such shares, as of the close of business on the date on which this Warrant shall have been surrendered, the completed Exercise Agreement shall have been delivered, and payment shall have been made for such shares as set forth above or, if such date is not a business day, on the next succeeding business day. Certificates for the Warrant Shares so purchased, representing the aggregate number of shares specified in the Exercise Agreement, shall be delivered to the holder hereof within a reasonable time, not exceeding three business days, after this Warrant shall have been so exercised (the "DELIVERY PERIOD"). The certificates so delivered shall be in such denominations as may be requested by the holder hereof and shall be registered in the name of such holder or such other name as shall be designated by such holder. If this Warrant shall have been exercised only in part, then, unless this Warrant has expired, the Company shall, at its expense, at the time of delivery of such certificates, deliver to the holder a new Warrant representing the number of shares with respect to which this Warrant shall not then have been exercised. If, at any time, a holder of this Warrant submits this Warrant, an Exercise Agreement and payment to the Company of the Exercise Price for each of the Warrant Shares specified in the Exercise Agreement, and the Company fails for any reason to deliver, on or prior to the fourth business day following the expiration of the Delivery Period for such exercise, the number of shares of Common Stock to which the holder is entitled upon such exercise (an "EXERCISE DEFAULT"), then the Company shall pay to the holder payments ("EXERCISE DEFAULT PAYMENTS") for an Exercise Default in the amount of (a) (N/365), multiplied by (b) the difference between the Market Price (as defined in Section 4(j) below) on the date the Exercise Agreement giving rise to the Exercise Default is transmitted in accordance with Section 1 (the "EXERCISE DEFAULT DATE") less the Exercise Price, multiplied by (c) the number of shares of Common Stock the Company failed to so deliver in such Exercise Default, multiplied by (d) .24, where N = the number of days from the Exercise Default Date to the date that the Company effects the full exercise of this Warrant which gave rise to the Exercise Default. The accrued Exercise Default Payment for each calendar month shall be paid in cash or shall be convertible into Common Stock at the Exercise Price, at the Company's option, as follows: 2 (a) In the event the Company elects to make such payment in cash, cash payment shall be made to holder by the fifth day of the month following the month in which it has accrued; provided, however, that if such payment is not made on or before such day, the Company shall make such payment in Common Stock (converting such payment into Common Stock (in accordance with the terms contained in Article II of the Note) at the lower of the Exercise Price or the Conversion Price (as defined in the Note) as in effect at the time of such conversion) not later than the second business day after such cash payment was due; and (b) In the event the Company elects to make such payment in Common Stock, the holder may convert such payment amount into Common Stock (in accordance with the terms contained in Article II of the Note) at the lower of the Exercise Price or the Conversion Price (as in effect at the time of such conversion) at any time after the fifth day of the month following the month in which it has accrued (so long as there is then a sufficient number of authorized shares of Common Stock). Nothing herein shall limit the holder's right to pursue actual damages (to the extent in excess of the Exercise Default Payments) for the Company's failure to maintain a sufficient number of authorized shares of Common Stock as required pursuant to the terms of Section 3(b) or to otherwise issue shares of Common Stock upon exercise of this Warrant in accordance with the terms hereof, and each holder shall have the right to pursue all remedies available at law or in equity (including a decree of specific performance and/or injunctive relief). Notwithstanding anything to the contrary set forth herein, in the period beginning on the date this Warrant is to be issued to the holder in accordance with the terms of the Note and ending on the date the holder hereof physically receives this Warrant, the holder shall not be required to physically surrender this Warrant to the Company in connection with any exercise thereof in such period and thereafter the holder shall not be required to physically surrender this Warrant to the Company unless this Warrant has been exercised in full. The holder and the Company shall maintain records showing the number of shares subject to such exercise and the dates of such exercise or shall use such other method, reasonably satisfactory to the holder and the Company, so as not to require physical surrender of this Warrant upon each such exercise. In the event of any dispute or discrepancy, such records of the Company shall be controlling and determinative in the absence of manifest error. Notwithstanding the foregoing, if any portion of this Warrant is exercised as aforesaid, the holder may not transfer this Warrant unless the holder first physically surrenders this Warrant to the Company, whereupon the Company will forthwith issue and deliver upon the order of the holder a new Warrant of like tenor, registered as the holder may request, representing in the aggregate the remaining unexercised portion of this Warrant. The holder and any assignee, by acceptance of this Warrant, acknowledge and agree that, by reason of the provisions of this paragraph, following the exercise of a portion of this Warrant the unexercised portion of this Warrant may be less than the number of shares stated on the face hereof. 2. Period of Exercise. This Warrant is immediately exercisable, at any time or from time to time on or after the date of initial issuance hereof (the "ISSUE DATE") and before 5:00 p.m., 3 New York City time on the third anniversary of the original date of issuance of this Warrant (the "EXERCISE PERIOD"). 3. Certain Agreements of the Company. The Company hereby covenants and agrees as follows: (a) Shares to be Fully Paid. All Warrant Shares will, upon issuance in accordance with the terms of this Warrant, be validly issued, fully paid, and nonassessable and free from all taxes, liens, claims and encumbrances. (b) Reservation of Shares. During the Exercise Period, the Company shall at all times have authorized, and reserved for the purpose of issuance upon exercise of this Warrant, a suf ficient number of shares of Common Stock to provide for the exercise in full of this Warrant (without giving effect to the limitations on exercise set forth in Section 7(g) hereof). (c) Listing. The Company shall use its best efforts to promptly secure the listing of the shares of Common Stock issuable upon exercise of this Warrant upon each national securities exchange or automated quotation system, if any, upon which shares of Common Stock are then listed or become listed (subject to official notice of issuance upon exercise of this Warrant) and shall use its best efforts to maintain, so long as any other shares of Common Stock shall be so listed, such listing of all shares of Common Stock from time to time issuable upon the exercise of this Warrant; and the Company shall use its best efforts to so list on each national securities exchange or automated quotation system, as the case may be, and shall maintain such listing of, any other shares of capital stock of the Company issuable upon the exercise of this Warrant if and so long as any shares of the same class shall be listed on such national securities exchange or automated quotation system. (d) Certain Actions Prohibited. The Company will not, by amendment of its charter or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed by it hereunder, but will at all times in good faith assist in the carrying out of all the provisions of this Warrant and in the taking of all such action as may reasonably be requested by the holder of this Warrant in order to protect the exercise privilege of the holder of this Warrant against dilution or other impairment, consistent with the tenor and purpose of this Warrant. Without limiting the generality of the foregoing, the Company (i) will not increase the par value of any shares of Common Stock receivable upon the exercise of this Warrant above the Exercise Price then in effect, and (ii) will take all such actions as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock upon the exercise of this Warrant. (e) Successors and Assigns. This Warrant will be binding upon any entity succeeding to the Company by merger, consolidation, or acquisition of all or substantially all of the Company's assets. 4 4. Antidilution Provisions. During the Exercise Period, the Exercise Price and the number of Warrant Shares issuable hereunder shall be subject to adjustment from time to time as provided in this Section 4. In the event that any adjustment of the Exercise Price as required herein results in a fraction of a cent, such Exercise Price shall be rounded up or down to the nearest cent. (a) Subdivision or Combination of Common Stock. If the Company, at any time during the Exercise Period, subdivides (by any stock split, stock dividend, recapitalization, reorganization, reclassification or otherwise) its shares of Common Stock into a greater number of shares, then, after the date of record for effecting such subdivision, the Exercise Price in effect immediately prior to such subdivision will be proportionately reduced. If the Company, at any time during the Exercise Period, combines (by reverse stock split, recapitalization, reorganization, reclassification or otherwise) its shares of Common Stock into a smaller number of shares, then, after the date of record for effecting such combination, the Exercise Price in effect immediately prior to such combination will be proportionately increased. (b) Adjustment in Number of Shares. Upon each adjustment of the Exercise Price pursuant to the provisions of this Section 4, the number of shares of Common Stock issuable upon exercise of this Warrant shall be adjusted by multiplying a number equal to the Exercise Price in effect immediately prior to such adjustment by the number of shares of Common Stock issuable upon exercise of this Warrant immediately prior to such adjustment and dividing the product so obtained by the adjusted Exercise Price. (c) Consolidation, Merger or Sale. In case of any consolidation of the Company with, or merger of the Company into any other corporation, or in case of any sale or conveyance of all or substantially all of the assets of the Company other than in connection with a plan of complete liquidation of the Company at any time during the Exercise Period, then as a condition of such consolidation, merger or sale or conveyance, adequate provision will be made whereby the holder of this Warrant will have the right to acquire and receive upon exercise of this Warrant in lieu of the shares of Common Stock immediately theretofore acquirable upon the exercise of this Warrant, such shares of stock, securities, cash or assets as were issued or payable with respect to or in exchange for the number of shares of Common Stock immediately theretofore acquirable and receivable upon exercise of this Warrant had such consolidation, merger or sale or conveyance not taken place. In any such case, the Company will make appropriate provision to insure that the provisions of this Section 4 hereof will thereafter be applicable as nearly as may be in relation to any shares of stock or securities thereafter deliverable upon the exercise of this Warrant. The Company will not effect any consolidation, merger or sale or conveyance unless prior to the consummation thereof, the successor corporation (if other than the Company) assumes by written instrument the obligations under this Section 4 and the obligations to deliver to the holder of this Warrant such shares of stock, securities or assets as, in accordance with the foregoing provisions, the holder may be entitled to acquire. (d) Distribution of Assets. In case the Company shall declare or make any distribution of its assets (or rights to acquire its assets) to holders of Common Stock as a partial liquidating dividend, stock repurchase, by way of return of capital or otherwise (including any 5 dividend or distribution to the Company's shareholders of cash or shares (or rights to acquire shares) of capital stock of a subsidiary) (a "DISTRIBUTION"), at any time during the Exercise Period, then the holder of this Warrant shall be entitled upon exercise of this Warrant for the purchase of any or all of the shares of Common Stock subject hereto, to receive the amount of such assets (or rights) which would have been payable to the holder had such holder been the holder of such shares of Common Stock on the record date for the determination of shareholders entitled to such Distribution. (e) Notice of Adjustment. Upon the occurrence of any event which requires any adjustment of the Exercise Price, then, and in each such case, the Company shall give notice thereof to the holder of this Warrant, which notice shall state the Exercise Price resulting from such adjustment and the increase or decrease in the number of Warrant Shares purchasable at such price upon exercise, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. Such calculation shall be certified by the chief financial officer of the Company. (f) Minimum Adjustment of Exercise Price. No adjustment of the Exercise Price shall be made in an amount of less than 1% of the Exercise Price in effect at the time such adjustment is otherwise required to be made, but any such lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which, together with any adjustments so carried forward, shall amount to not less than 1% of such Exercise Price. (g) No Fractional Shares. No fractional shares of Common Stock are to be issued upon the exercise of this Warrant, but the Company shall pay a cash adjustment in respect of any fractional share which would otherwise be issuable in an amount equal to the same fraction of the Market Price of a share of Common Stock on the date of such exercise. (h) Other Notices. In case at any time: (i) the Company shall declare any dividend upon the Common Stock payable in shares of stock of any class or make any other distribution (other than dividends or distributions payable in cash out of retained earnings consistent with the Company's past practices with respect to declaring dividends and making distributions) to the holders of the Common Stock; (ii) the Company shall offer for subscription pro rata to the holders of the Common Stock any additional shares of stock of any class or other rights; (iii) there shall be any capital reorganization of the Company, or reclassification of the Common Stock, or consolidation or merger of the Company with or into, or sale of all or substantially all of its assets to, another corporation or entity; or (iv) there shall be a voluntary or involuntary dissolution, liquidation or winding-up of the Company; 6 then, in each such case, the Company shall give to the holder of this Warrant (a) notice of the date or estimated date on which the books of the Company shall close or a record shall be taken for determining the holders of Common Stock entitled to receive any such dividend, distribution, or subscription rights or for determining the holders of Common Stock entitled to vote in respect of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding-up and (b) in the case of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding-up, notice of the date (or, if not then known, a reasonable estimate thereof by the Company) when the same shall take place. Such notice shall also specify the date, if known, on which the holders of Common Stock shall be entitled to receive such dividend, distribution, or subscription rights or to exchange their Common Stock for stock or other securities or property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation, or winding-up, as the case may be. Such notice shall be given on the date such transaction or event is first publicly announced. Failure to give any such notice or any defect therein shall not affect the validity of the proceedings referred to in clauses (i), (ii), (iii) and (iv) above. (i) Certain Events. If, at any time during the Exercise Period, any event occurs of the type contemplated by the adjustment provisions of this Section 4 but not expressly provided for by such provisions, the Company will give notice of such event as provided in Section 4(e) hereof, and the Company's Board of Directors will make an appropriate adjustment in the Exercise Price and the number of shares of Common Stock acquirable upon exercise of this Warrant so that the rights of the holder shall be neither enhanced nor diminished by such event. (j) Certain Definitions. (i) "COMMON STOCK," for purposes of this Section 4, includes the Common Stock and any additional class of stock of the Company having no preference as to dividends or distributions on liquidation, provided that the shares purchasable pursuant to this Warrant shall include only Common Stock in respect of which this Warrant is exercisable, or shares resulting from any subdivision or combination of such Common Stock, or in the case of any reorganization, reclassification, consolidation, merger, or sale of the character referred to in Section 4(c) hereof, the stock or other securities or property provided for in such Section. (ii) "MARKET PRICE," as of any date, (i) means the average of the closing bid prices for the shares of Common Stock as reported on the Nasdaq National Market for the five trading days immediately preceding such date, or (ii) if the Nasdaq National Market is not the principal trading market for the shares of Common Stock, the average of the last reported bid prices on the principal trading market for the Common Stock for the five trading days immediately preceding such date or, if there is no bid price for such period, the last reported sales price for such period, or (iii) if market value cannot be calculated as of such date on any of the foregoing bases, the Market Price shall be the average fair market value as reasonably determined by an investment banking firm selected by the Company and reasonably acceptable to the holder, with the costs of the appraisal to be borne by the Company. The manner of determining the Market Price of the Common 7 Stock set forth in the foregoing definition shall apply with respect to any other security in respect of which a determination as to market value must be made hereunder. 5. Issue Tax. The issuance of certificates for Warrant Shares upon the exercise of this Warrant shall be made without charge to the holder of this Warrant or such shares for any issuance tax or other costs in respect thereof, provided that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than the holder of this Warrant. 6. No Rights or Liabilities as a Shareholder. This Warrant shall not entitle the holder hereof to any voting rights or other rights as a shareholder of the Company. No provision of this Warrant, in the absence of affirmative action by the holder hereof to purchase Warrant Shares, and no mere enumeration herein of the rights or privileges of the holder hereof, shall give rise to any liability of such holder for the Exercise Price or as a shareholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. 7. Transfer, Exchange, Redemption and Replacement of Warrant. (a) Restriction on Transfer. This Warrant and the rights granted to the holder hereof are transferable, in whole or in part, upon surrender of this Warrant, together with a properly executed assignment in the form attached hereto, at the office or agency of the Company referred to in Section 7(e) below; PROVIDED, HOWEVER, that any transfer or assignment shall be subject to the conditions set forth in Section 7(f) hereof and to the provisions of Sections 2(f) and 2(g) of the Securities Purchase Agreement. Until due presentment for registration of transfer on the books of the Company, the Company may treat the registered holder hereof as the owner and holder hereof for all purposes, and the Company shall not be affected by any notice to the contrary. Notwithstanding anything to the contrary contained herein, the registration rights described in Section 8 hereof are assignable only in accordance with the provisions of that certain Registration Rights Agreement, dated as of January 25, 1999, by and among the Company and the other signatories thereto (the "REGISTRATION RIGHTS AGREEMENT"). (b) Warrant Exchangeable for Different Denominations. This Warrant is exchangeable, upon the surrender hereof by the holder hereof at the office or agency of the Company referred to in Section 7(e) below, for new Warrants of like tenor of different denominations representing in the aggregate the right to purchase the number of shares of Common Stock which may be purchased hereunder, each of such new Warrants to represent the right to purchase such number of shares as shall be designated by the holder hereof at the time of such surrender. (c) Replacement of Warrant. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction, or mutilation of this Warrant and, in the case of any such loss, theft, or destruction, upon delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company, or, in the case of any such mutilation, upon surrender and cancellation of this Warrant, the Company, at its expense, will execute and deliver, in lieu thereof, a new Warrant of like tenor. 8 (d) Cancellation; Payment of Expenses. Upon the surrender of this Warrant in connection with any transfer, exchange, or replacement as provided in this Section 7, this Warrant shall be promptly canceled by the Company. The Company shall pay all taxes (other than securities transfer taxes) and all other expenses (other than legal expenses, if any, incurred by the Holder or transferees) and charges payable in connection with the preparation, execution, and delivery of Warrants pursuant to this Section 7. The Company shall indemnify and reimburse the holder of this Warrant for all costs and expenses (including legal fees) incurred by such holder in connection with the enforcement of its rights hereunder. (e) Warrant Register. The Company shall maintain, at its principal executive offices (or such other office or agency of the Company as it may designate by notice to the holder hereof), a register for this Warrant, in which the Company shall record the name and address of the person in whose name this Warrant has been issued, as well as the name and address of each transferee and each prior owner of this Warrant. (f) Exercise or Transfer Without Registration. If, at the time of the surrender of this Warrant in connection with any exercise, transfer, or exchange of this Warrant, this Warrant (or, in the case of any exercise, the Warrant Shares issuable hereunder), shall not be registered under the Securities Act and under applicable state securities or blue sky laws, the Company may require, as a condition of allowing such exercise, transfer, or exchange, (i) that the holder or transferee of this Warrant, as the case may be, furnish to the Company a written opinion of counsel (which opinion shall be in form, substance and scope customary for opinions of counsel in comparable transactions) to the effect that such exercise, transfer, or exchange may be made without registration under the Securities Act and under applicable state securities or blue sky laws, (ii) that the holder or transferee execute and deliver to the Company an investment letter in form and substance acceptable to the Company and (iii) that the transferee be an "ACCREDITED INVESTOR" as defined in Rule 501(a) promulgated under the Securities Act; provided that no such opinion, letter, status as an "accredited investor" shall be required in connection with a transfer pursuant to Rule 144 under the Securities Act. (g) Additional Restrictions on Exercise. (i) Notwithstanding anything contained herein to the contrary, in no event shall the holder hereof exercise Warrants to the extent that (A) the number of shares of Common Stock beneficially owned by such holder and its affiliates (other than shares of Common Stock which may be deemed beneficially owned through the ownership of the unexercised portion of the Warrants or the unexercised or unconverted portion of any other securities of the Company subject to a limitation on conversion or exercise analogous to the limitation contained herein) and (B) the number of shares of Common Stock issuable upon exercise of the Warrants (or portion thereof) with respect to which the determination described herein is being made, would result in beneficial ownership by such holder and its affiliates of more than 4.99% of the outstanding shares of Common Stock. For purposes of the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and Regulation 13D-G thereunder, except as otherwise provided in clause (A) hereof. The 9 restrictions contained in this Section 7(g)(i) may not be amended without the consent of the holder of this Warrant and the holders of a majority of the Company's then outstanding Common Stock. (ii) In addition to the restrictions on exercise contained in subsection (i) above, the ability of the holder hereof to exercise this Warrant is further subject to the limitations set forth in Article II.A(2) of the Notes. 8. Registration Rights. The initial holder of this Warrant (and certain assignees thereof) is entitled to the benefit of such registration rights in respect of the Warrant Shares as are set forth in the Registration Rights Agreement, including the right to assign such rights to certain assignees as set forth therein. 9. Notices. Any notices required or permitted to be given under the terms of this Warrant shall be sent by certified or registered mail (return receipt requested) or delivered personally or by courier (including a recognized overnight delivery service) or by facsimile, and shall be effective five days after being placed in the mail, if mailed, or upon receipt or refusal of receipt, if delivered personally or by courier or by facsimile, in each case addressed to a party. The addresses for such communications shall be: If to the Company: Interactive Magic, Inc. 215 Southport Drive, Suite 1000 Morrisville, NC 27560 Facsimile: (919) 461-0723 Attention: Chief Executive Officer If to the holder hereof, to the address set forth immediately below such holder's name on the signature pages to the Securities Purchase Agreement or such other address as is communicated to the Company by notice by the holder hereof in accordance with the terms hereof. 10. Governing Law; Jurisdiction. This Warrant shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed within such State (without regard to principles of conflict of laws). The Company irrevocably consents to the jurisdiction of the United States federal courts and state courts located in New York County, New York in any suit or proceeding based on or arising under this Warrant and irrevocably agrees that all claims in respect of such suit or proceeding may be determined in such courts. The Company irrevocably waives the defense of an inconvenient forum to the maintenance of such suit or proceeding. The Company further agrees that service of process upon the Company mailed by first class mail shall be deemed in every respect effective service of process upon the Company in any such suit or proceeding. Nothing herein shall affect the holder's right to serve process in any other manner permitted by law. The Company agrees that a final non-appealable judgment in any 10 such suit or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on such judgment or in any other lawful manner. 11. Miscellaneous. (a) Amendments. This Warrant and any provision hereof may only be amended by an instrument in writing signed by the Company and the holder hereof. (b) Descriptive Headings. The descriptive headings of the several Sections of this Warrant are inserted for purposes of reference only, and shall not affect the meaning or construction of any of the provisions hereof. (c) Cashless Exercise. Notwithstanding anything to the contrary contained in this Warrant, if the resale of the Warrant Shares by the holder is not then registered pursuant to an effective registration statement under the Securities Act, this Warrant may be exercised at any time by presentation and surrender of this Warrant to the Company at its principal executive offices with a written notice of the holder's intention to effect a cashless exercise, including a calculation of the number of shares of Common Stock to be issued upon such exercise in accordance with the terms hereof (a "CASHLESS EXERCISE"). In the event of a Cashless Exercise, in lieu of paying the Exercise Price in cash, the holder shall surrender this Warrant for that number of shares of Common Stock determined by multiplying the number of Warrant Shares to which it would otherwise be entitled by a fraction, the numerator of which shall be the difference between the last reported sale price per share of the Common Stock on the date of exercise (as reported on the Nasdaq National Market, or if not so reported, as reported on the principle United States securities market on which the Common Stock is then traded) and the Exercise Price, and the denominator of which shall be such last reported sale price per share of Common Stock. (d) Business Day. For purposes of this Warrant, the term "business day" means any day other than a Saturday or Sunday or a day on which banking institutions in the State of New York are authorized or obligated by law, regulation or executive order to close. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 11 IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly authorized officer. INTERACTIVE MAGIC, INC. By: _________________________________ Name:_____________________________ Title:____________________________ FORM OF EXERCISE AGREEMENT (TO BE EXECUTED BY THE HOLDER IN ORDER TO EXERCISE THE WARRANT) To: Interactive Magic, Inc. 215 Southport Drive, Suite 1000 Morrisville, NC 27560 Facsimile: (919) 461-0723 Attention: Chief Executive Officer The undersigned hereby irrevocably exercises the right to purchase _____________ shares of the Common Stock of Interactive Magic, Inc., a corporation organized under the laws of North Carolina (the "COMPANY"), evidenced by the attached Warrant, and herewith makes payment of the Exercise Price with respect to such shares in full, all in accordance with the conditions and provisions of said Warrant. i. The undersigned agrees not to offer, sell, transfer or otherwise dispose of any Common Stock obtained on exercise of the Warrant, except under circumstances that will not result in a violation of the Securities Act of 1933, as amended, or any state securities laws, and agrees that the following legend may be affixed to the stock certificate for the Common Stock hereby subscribed for if resale of such Common Stock is not registered or if an exemption from registration is unavailable: THIS WARRANT AND THE SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER SUCH ACT, OR AN OPINION OF COUNSEL, IN FORM, SUBSTANCE AND SCOPE CUSTOMARY FOR OPINIONS OF COUNSEL IN COMPARABLE TRANSACTIONS, THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SUCH ACT. ii. The undersigned requests that stock certificates for such shares be issued, and a Warrant representing any unexercised portion hereof be issued, pursuant to the Warrant in the name of the Holder and delivered to the undersigned at the address set forth below: Dated:_________________ _____________________________________ Signature of Holder _____________________________________ Name of Holder (Print) Address: _____________________________________ _____________________________________ FORM OF ASSIGNMENT FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers all the rights of the undersigned under the within Warrant, with respect to the number of shares of Common Stock covered thereby set forth hereinbelow, to: Name of Assignee Address No of Shares - ---------------- ------- ------------ , and hereby irrevocably constitutes and appoints ______________ ________________________ as agent and attorney-in-fact to transfer said Warrant on the books of the within-named corporation, with full power of substitution in the premises. Dated: _____________________, ____, In the presence of __________________ Name: ____________________________ Signature: _______________________ Title of Signing Officer or Agent (if any): ________________________ Address: ________________________ ________________________ Note: The above signature should correspond exactly with the name on the face of the within Warrant. -----END PRIVACY-ENHANCED MESSAGE-----