-----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, QktJqiFi8fMNOazDPG4dj8FrlkB4VyuCjmc8bZZromGYhEwfGs6QuHWyoa1IHimv HPyIxKW+lHJnssHp/jFTrg== 0000930413-04-001714.txt : 20040406 0000930413-04-001714.hdr.sgml : 20040406 20040406143531 ACCESSION NUMBER: 0000930413-04-001714 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20040322 ITEM INFORMATION: Acquisition or disposition of assets ITEM INFORMATION: Changes in registrant's certifying accountant ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 20040406 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PENTHOUSE INTERNATIONAL INC CENTRAL INDEX KEY: 0001164123 STANDARD INDUSTRIAL CLASSIFICATION: PERIODICALS: PUBLISHING OR PUBLISHING AND PRINTING [2721] IRS NUMBER: 651158257 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 333-83448 FILM NUMBER: 04720104 BUSINESS ADDRESS: STREET 1: 11 PENN PLAZA CITY: NEW YORK STATE: NY ZIP: 10001 BUSINESS PHONE: 7022481588 MAIL ADDRESS: STREET 1: 11 PENN PLAZA CITY: NEW YORK STATE: NY ZIP: 10001 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN PULP EXCHANGE INC DATE OF NAME CHANGE: 20011227 8-K 1 c31878_8k.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 Date of Report (Date of earliest event reported) March 22, 2004 PENTHOUSE INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) FLORIDA 65-1158257 (State of incorporation) (IRS Employer Identification No.) 2200 S.W. 10TH STREET, DEERFIELD BEACH, FL 33442 (Address of principal executive offices) (954) 363-4400 (Registrant's telephone number) SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: This Form 8-K contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance, and underlying assumptions and other statements which are other than statements of historical facts. These statements are subject to uncertainties and risks including, but not limited to, product and service demand and acceptance, changes in technology, economic conditions, the impact of competition and pricing, government regulation, and other risks defined in this document and in statements filed from time to time with the Securities and Exchange Commission. All readers are encouraged to review this Form 8-K, including with specific reference the section entitled "Risk Factors." All such forward-looking statements, whether written or oral, and whether made by or on behalf of the companies, are expressly qualified by the cautionary statements and any other cautionary statements which may accompany the forward-looking statements. In addition, the companies disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date hereof. ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS ACQUISITION OF iBILL THE PURCHASE AGREEMENT On March 16, 2004, Media Billing, LLC, a New York limited liability company 99% of which is owned by our company ("Media Billing"), entered into the Member Interest Purchase Agreement (the "iBill Agreement"), by and among our subsidiary Media Billing, Internet Billing Company, LLC ("iBill") and InterCept, Inc. ("InterCept"), the sole membership holder of iBill. The iBill Agreement closed on March 22, 2004. Pursuant to the iBill Agreement, Media Billing purchased 100% of the membership interests in iBill from InterCept, whereupon iBill became a wholly owned subsidiary of Media Billing. Total consideration for the transaction, including capitalized transaction costs, was approximately $34.0 million, inclusive of consulting and banking fees of approximately 2.6 million. The purchase price we paid for iBill consists of the following: The sum of $1.5 million, of which (i) $750,000 was paid in cash, and (ii) $750,000 is evidenced by a promissory note of Media Billing maturing in two weeks (the "iBill Note"). An additional $2,804,000 in cash was loaned by Penthouse International to iBill and was placed on deposit with First Data Merchant Services to be held as a restricted cash reserve. The cash payment is subject to reduction within 45 days of the closing date, to the extent that the actual working capital deficit, as defined, of iBill exceeded $22.0 million on the closing date of the iBill Agreement. Similarly, the iBill note is subject to increase within 45 days of the closing date, to the extent that the actual working capital deficit of iBill as at the closing date was less than $22.0 million. In addition, Media Billing agreed to indemnify InterCept for any claims or losses related to iBill's financial obligations. We also agreed to release InterCept from liability to certain parties to which it has provided security or guarantees on behalf of or for the benefit of iBill. Consequently, at closing we delivered to InterCept a maximum $20.0 million indemnity insurance policy that InterCept may make claims against to satisfy and pay any claims that we have agreed to indemnify InterCept. The policy has a term of two years. However, the face amount of the policy will be reduced from $20.0 million to $5.0 million on the 375th day following the closing date of the iBill Agreement. We paid an approximately $2.178 million insurance premium for this coverage. We entered into a secured borrowing arrangement with an affiliate of American International Group ("AIG"). The policy is underwritten on an equal basis by an affiliate of CNA, an A-rated carrier, and Lloyds of London. We believe that it is unlikely that we are at risk of loss based on the credit ratings of these insurers. At the closing of the iBill acquisition, a software license agreement and a transition support services agreement was entered into between iBill and InterCept. In addition, the agreement provides that on or before April 20, 2004 Media Billing shall obtain the release from First Data Merchant Services, Inc. of InterCept's $3.0 million letter of credit, which currently serves to secure iBill's obligations under certain of its processing agreements. On the closing date, Dr. Luis Enrique Fernando Molina, our majority stockholder, entered into an agreement with InterCept whereby he guaranteed Media Billing's obligations under the iBill Note as well as the letter of credit. The description of the purchase of IBill contained in this Current Report on Form 8-K is qualified in its entirety by reference to the text of the iBill Agreement, which is attached hereto as Exhibit 2.01 hereto and is incorporated by reference herein in its entirety. BUSINESS OF iBILL iBill is a provider of turnkey e-commerce solutions for businesses selling products and services over the Internet. iBill provides secure Internet payment processing solutions and transaction services that enable Web Merchants to accept and process real-time payments for goods and services purchased on the Internet. iBill also manages all back-office functions including reporting, tracking, customer service and sales transactions. During its seven year history, iBill's yearly processed transactions have grown from approximately $2.4 million to over $330.0 million in 2003. To accommodate its business growth, the iBill organization has grown to approximately 220 persons, occupying a 50,000 square foot facility located in Deerfield Beach, Florida. iBill's client base consists of merchants offering products and services over the Internet. Approximately 80% of the payment transactions processed by iBill are for merchants offering adult oriented products or services containing high sexual content on limited access websites. Because of the nature of their offerings, many of these merchant clients are unable to directly purchase merchant accounts from traditional banks and credit card processors. Accordingly, iBill represents a significant solution for these clients, in that iBill handles their entire credit, screening and payment process for the merchant, and assumes the risk of a customer's disputing the credit card charge subsequently appearing on his or her statement. iBill provides payment to its clients through its credit processing arrangement with First Data Corporation. iBill generates recurring fee income principally by collecting funds from consumers on behalf of Web merchant clients and retaining a percentage of client revenue. We believe that iBill is one of the largest Web-based transaction service providers in the United States. iBill believes that it differentiates itself from its competition through its proprietary real-time Internet-based merchant interface software technology that incorporates multiple payment options, fraud screening and automated customer service and support functionality. iBill offers its clients two core products: IBILL COMPLETE, an all inclusive payment processing solution and PROCESSING PLUS, a strictly transaction processing service. The iBill brand is marketed to consumers in two visible and selective ways: o Whenever a customer seeks to make a purchase at the website of an iBill merchant client, they are automatically redirected to an iBill branded pay page to complete the payment process. The iBill pay pages are offered in 16 different languages. o When the consumers receives their credit card bill, the charge for the purchase is in the name of iBill (with iBill's 800 number) rather than in the name of the merchant. This is significant in that it provides the consumers with confidentiality so that the often provocative name of the sexually oriented merchant's web site does not appear on the users' credit card statements. In order to further enhance consumer privacy, iBill intends to offer debit card purchase arrangements under which a consumer purchases in advance the right to use the iBill processing system for a defined dollar amount of transactions, and is then free to effect such transactions on all of the merchant websites being serviced under the iBill system. Currently, iBill processes over 130,000 transactions daily and its consumer and client service center handles approximately 470,000 contacts via voice or email per month. Typically, iBill customer refunds or "charge backs" are posted within 5 to 10 days of the refund request and seen on the customer's statement within two billing cycles. - 2 - As a result of the significance of potential consumer charge backs, iBill pays its merchant clients for processed transactions usually within 15 to 30 days cycles after the end of each month, depending upon the volume of business generated by a specific merchant client. E-commerce transactions, especially those involve adult-oriented sexual content, expose the online merchant to significant risks, including liability for fraudulent "card not-present" transactions. iBill's risk management division integrates sophisticated fraud detection and prevention tools to combat fraudulent Internet-based transactions, and uses the following multi-phased approach: o incoming transactions are first run through a series of comprehensive internal negative databases of known fraudulent credit card numbers, IP addresses and email addresses - these databases are updated and maintained on a daily basis; o multiple velocity checks are used on both authorized and declining transactions to identify suspicious customer and/or merchant activity. For example, checks are in place to signal if a consumer has been declined more than five times in the past two days using the same IP address, or checks on cards that are used more than eight times in a one week period. If the cardholder or merchant fails any of these tests, the system will institute temporary blocking protocols; o banking network scrubbing is performed on the transaction and includes address verification service checks and card verification value validation; and o the previous days' authorized transactions are aggregated and analyzed by iBill's risk management group on a daily basis. Our present strategy is to o offer through our merchant clients, the opportunity for customers viewing our clients' Websites to prepay iBill for a specified dollar amount of purchases at any one of the 4,000 or more iBill client Websites; a service that we believe will both increases confidentiality for the Website user and significantly eliminate charge back risks to iBill; and o offer to the thousands of its merchant clients offering adult-oriented products over the Internet, access to PENTHOUSE brand, including the ability to offer subscriptions, videos and other promotional offerings at our PENTHOUSE clubs and related venues. In this way we feel that we will be able to enhance both the revenue base of iBill and that of General Media, our subsidiary that ones and operates our Penthouse publications and media businesses. Based on the financial information provided to us by InterCept, for the fiscal year ended December 31, 2003 iBill generates net revenues of approximately $36.9 million and net income before taxes of $1.0 million, as compared to net revenues and a net pre-tax loss of approximately $58.4 million and $3.0 million for fiscal 2002. RISK FACTORS RISKS RELATED TO THE BUSINESS OF IBILL. IF iBILL IS UNABLE TO MAINTAIN A RELATIONSHIP WITH A FIRST DATA CORPORATION OR ANOTHER BANKING SOURCE TO SPONSOR AND PROCESS OUR MERCHANT PAYMENT TRANSACTIONS, WE WOULD BE UNABLE TO OPERATE A SIGNIFICANT PORTION OUR BUSINESS. iBill assumes the credit risk and processes payment transactions for its merchant client under an agreement with First Data Corporation. First Data changes iBill a percentage of each sale for sponsoring the transaction through its wholly owned bank, First Financial Bank, Utah. Such agreement is subject to termination by First Data on 90 days notice. First Data has recently increased its rates and, as a condition to providing the consent to the change of control of iBill, negotiated a transaction agreement with Penthouse pursuant to which iBill has agreed to migrate its processing to a new financial institution. The agreement provides for this transition to be completed in 90 days, with a second 90 day extension period available to us. Although we believe that iBill will be - 3 - able to enter into a similar relationship with another banking source, if we are unable to do so on financially acceptable terms, if at all, iBill could lose a majority, if not all, of its revenue base, which would have a material, adverse effect on our results of operations and financial condition. IF iBILL'S CHARGE-BACK RATE IS EXCESSIVE, CREDIT CARD ASSOCIATIONS CAN FINE IT OR TERMINATE ITS ABILITY TO ACCEPT CREDIT CARDS FOR PAYMENT. In cases of fraud or disputes between cardholders and merchants, iBill faces charge-backs when cardholders dispute items for which they have been billed. Charge-backs may arise from the unauthorized use of the cardholder's name or bank account information or from a cardholder's claim that a merchant failed to perform. If a billing dispute between a card holder and a merchant is not resolved in favor of the merchant, the transaction is normally charged back to the merchant, and the purchase price is refunded to the cardholder. If iBill's charge-back rate becomes excessive, our credit bank can fine it or terminate its agreement. If iBill is prohibited from accepting credit cards for payment, this would materially adversely affect our financial condition and results of operations. We cannot predict with certainty, however, whether or when First Data or any other bank or financing source processing iBill credit card transactions will fine iBill or elect to terminate their agreements with us. Visa recently announced revisions to its charge-back monitoring program that are designed to reduce the impact of charge-backs on the Visa payment system. The new rules heighten the scrutiny on problematic merchants and place greater responsibility on acquirers like iBill to deal appropriately with merchants that have excessive levels of chargebacks. Effective October 1, 2003, Visa reduced the charge-back threshold from 2.5% to 1.0% for VisaUSA transactions, and effective January 1, 2004, the charge-back threshold dropped from 2.5(degree)/o to 2.0% for Visa International transactions. Merchants that exceed these charge-back thresholds become subject to Visa's charge-back monitoring program. This monitoring program results in greater scrutiny of transactions, potential fines and possible suspension from the Visa payments system. In addition, Visa has issued a detailed program that specifies the responsibilities of the acquirer and the fees and actions required when a merchant is placed into the charge-back monitoring program. Implementation of the new rules by Visa will require iBill to further reduce the charge-back activity of its sponsored merchants. If any of iBill's merchants do not meet the new Visa thresholds, Visa could impose fees and take further action, including termination of the merchant. Any such fines or termination could negatively affect our results of operations. CHANGES IN CARD ASSOCIATION FEES, PRODUCTS OR PRACTICES COULD INCREASE iBILL'S COSTS OR OTHERWISE LIMIT ITS OPERATIONS. From time to time, the card associations increase the interchange fees that they charge processors and the sponsoring banks. For example, Visa increased its interchange fees by 0.19% in April 2003. At their sole discretion, iBill's sponsoring banks may seek to increase their Visa and MasterCard sponsorship fees they impose, all of which are based upon the dollar amount of the payment transactions iBill processes. Competitive pressures might force iBill to absorb a portion of those increases in the future, which would increase iBill's operating costs and reduce its margins. Furthermore, the rules and regulations of the various card associations and networks prescribe certain capital requirements for settlement banks. Any increase in that capital requirement may adversely affect a bank's ability to serve as iBill's settlement bank. Visa's RIS program identifies merchants that have excessive fraud counts each month. Visa places merchants with monthly fraud activity in excess of 1,500 transactions and $50,000 and a fraud to sales ratio of .50% or more in the program. Fines under this program escalate from $5,000 in the first month of the program to $100,000 after the fifth month. iBill has been placed in the RIS program. iBill has informed its merchants that iBill will be passing this fine to the merchants. Visa has also established a monitoring program for its acquiring banks in which Visa compares the number of fraudulent transactions processed through a bank against unpublished thresholds for a given industry. Visa notified iBill's acquiring bank, First Financial Bank (First Data), that First Data had exceeded the program thresholds. First Data notified iBill that it intends to allocate the fine amongst its merchants. iBill has informed its merchants that iBill will be passing this fine to the merchants. ONLINE PAYMENT PROCESSING SYSTEMS MIGHT BE USED FOR ILLEGAL OR IMPROPER PURPOSES, WHICH COULD EXPOSE iBILL TO ADDITIONAL LIABILITY AND HARM ITS BUSINESS. Despite iBill's efforts to review and monitor the types of transactions it processes, all online payment processing systems remain susceptible to potentially illegal or improper uses. These may include illegal online gaming, fraudulent sales of goods and services, software and other intellectual property - 4 - piracy, child pornography trafficking, prohibited sales of alcoholic beverages and tobacco products and online securities fraud. iBill's business could suffer if customers use its system for illegal or improper purposes. UNAUTHORIZED DISCLOSURE OF MERCHANT AND CARDHOLDER DATA, WHETHER THROUGH BREACH OF iBILL'S COMPUTER SYSTEMS OR OTHERWISE, COULD EXPOSE iBILL AND US TO PROTRACTED AND COSTLY LITIGATION. iBill collects and stores sensitive data about merchants and cardholders, including names, addresses, social security numbers, drivers license numbers, checking and savings account numbers and payment history records, such as account closures and returned checks. In addition, iBill maintains a database of cardholder data relating to specific transactions, including payment card numbers and cardholder addresses, to process the transactions and for fraud prevention and other internal processes. If a person penetrates iBill's network security or otherwise misappropriates sensitive merchant or cardholder data, iBill could be subject to liability or business interruption. Hackers have in the past penetrated computer systems of payment processors. If iBill suffers such an attack, it may be subject to liability, including claims for unauthorized purchases with misappropriated card information, impersonation or other similar fraud claims. iBill could also be subject to liability for claims relating to misuse of personal information, such as unauthorized marketing purposes. These claims also could result in protracted and costly litigation. IN THE EVENT WE DO NOT RETAIN OUR GENERAL MEDIA GROUP SUBSIDIARIES, WE WILL BE UNABLE TO UTILIZE OUR PENTHOUSE BRAND. Our Penthouse publishing and media businesses are owned by our General Media subsidiary. General Media and its subsidiaries are currently debtors-in-possession in a bankruptcy case pending in the United States Bankruptcy Court for the Southern District of New York. Although we have proposed a plan of reorganization that, if approved by the creditors and the bankruptcy court, would enable us to retain our 99.5% equity interest in General Media and its subsidiaries, there can be no assurance that our plan will be approved or that we will succeed in our efforts. In the event that a competing plan of reorganization is confirmed or the assets of General Media and subsidiaries are sold to an unaffiliated third party, we would lose all of our equity in both General Media and in the Penthouse trademarks, brands and related intellectual property. As such, we would be unable to implement our strategy of combining our Penthouse name and brands with our iBill business. The loss of General Media and our Penthouse business, trademarks, brands and related intellectual property would have a material adverse effect on our overall business strategy and prospects. RISKS RELATED TO THE iBILL ACQUISITION OUR ACQUISITION OF iBILL WILL RESULT IN THE RECORDING OF SUBSTANTIAL GOODWILL. The acquisition of iBill will be accounted for as a purchase by our company, through our subsidiary Media Billing, of 100% of the capital stock of iBill. As a result, the excess of the value of the consideration issued to InterCept as iBill's former stockholder (approximately $23.5 million) over the fair value of the identifiable iBill tangible assets acquired, less the fair value of liabilities assumed, will be recorded by our company as goodwill. The amount of such goodwill will be established based upon the balance sheet of iBill as at March 22, 2004, subject to adjustment 45 days thereafter, and may be assumed to be substantial. According to applicable accounting rules, goodwill and other intangible assets must be evaluated on a regular basis and the re-evaluation may result in impairment charges which may reduce our company's future net income. ONLY INTERCEPT OBTAINED A FORMAL VALUATION DETERMINING THE FAIRNESS OF THE ACQUISITION CONSIDERATION. The acquisition consideration was determined by arms' length negotiations between Registrant's management and InterCept, but there was no formal valuation of iBill by an independent third party. InterCept obtained a fairness opinion issued by SunTrust Robertson Humphrey, an investment banking firm. Since the acquisition of iBill did not require the approval of our stockholders, we are unable to determine whether our stockholders, other than The Molina Vector Investment Trust and its affiliated persons, would have agreed with the determination by our company's board of directors that the terms of the iBill acquisition were fair to our company and in the best interests of our stockholders. TO FINANCE THE IBILL ACQUISITION, WE ISSUED SECURITIES CONVERTIBLE INTO OR EXERCISABLE FOR A SIGNIFICANT NUMBER OF SHARES OF OUR COMMON STOCK, AND FUTURE SALES OF SUCH SHARES MAY LOWER THE PRICE OF OUR COMMON STOCK. Our company had 293,679,473 shares of our common stock outstanding prior to the iBill acquisition. To assist us in financing the iBill acquisition (including payment of the premium on the indemnity insurance policy we obtained), we issued the Mercator Momentum Funds and its affiliates (the "Mercator Group") an aggregate of 4,000,000 of shares of our Series D preferred stock convertible into an aggregate of 36,363,636 shares of our common stock. In addition, the Mercator Group has been issued warrants to purchase an additional 12,000,000 shares of our common stock and has purchased, for nominal consideration, 14,345,500 additional shares of common stock from the Molina Vector Investment Trust, our principal stockholder and an affiliate of Dr. Luis Enrique Fernando Molina. Under a registration rights agreement, we are obligated, by no later than May 23, 2004, to register for resale under the Securities Act of 1933, as amended (the "Securities Act') all shares of common stock issuable in connection with our Series D preferred stock and warrants and shares purchased from the Molina Trust. Sales of substantial amounts of common stock into the public market could lower the market price of such shares. - 5 - AUTHORIZED AND OUTSTANDING CAPITAL STOCK As of the date of this Current Report on Form 8-K, our authorized capitalization consisted of 770,000,000 shares of capital stock, comprising: (i) 750,000,000 shares of common stock, par value $0.0025 per share, and (ii) 20,000,000 shares of preferred stock, par value $0.0025 per share. COMMON STOCK As of the date of this Current Report on Form 8-K, there were 293,679,473 shares of our common stock issued and outstanding, all of which were fully paid, non-assessable and entitled to vote. Each share of our common stock entitles its holder to one vote on each matter submitted to our stockholders (subject under certain conditions to the rights of the holders of our preferred stock - see below). SERIES A PREFERRED STOCK We are authorized to issue 5,000 shares of Series A Preferred Stock. As of the date of this Current Report on Form 8-K, there were 5,000 shares of our Series A Preferred Stock issued and outstanding, all of which were fully paid, non-assessable and entitled under certain circumstances to vote. The shares of Series A Preferred Stock have a stated value of one thousand dollars ($1,000) per share. To the extent that under the Business Corporation Act of the State of Florida (the "FBCA") the approval of the holders of Series A Preferred Stock, voting separately as a class or series as applicable (whether by written consent or otherwise), is required to authorize a given action of our company, the affirmative approval of the holders of at least a majority of the shares of Series A Preferred Stock constitutes the approval of the action by such holders. Holders of Series A Preferred Stock are entitled to notice of all stockholder meetings or written consents (and copies of proxy materials and other information sent to stockholders) with respect to which they would be entitled to vote. The shares of Series A Preferred Stock are not convertible into shares of our common stock. As at the date hereof, two thirds of the 5,000 issued and outstanding shares of Series A Preferred Stock are owned of record and beneficially by General Media International, Inc., a corporation wholly-owned by Robert C. Guccione. The remaining shares of Series A Preferred Stock are owned by the Robert C. Guccione Family Trust. SERIES B PREFERRED STOCK We are authorized to issue 5,000 shares of Series B Preferred Stock. As of the date of this Current Report on Form 8-K, no shares of our Series B Preferred Stock are issued and outstanding. SERIES C PREFERRED STOCK We are authorized to issue 11,550,000 shares of Series C Preferred Stock. As of the date of this Current Report on Form 8-K, there were 11,550,000 shares of our Series C Preferred Stock issued and outstanding. The shares of Series C Preferred Stock have a stated value of ten dollars ($10.00) per share. To the extent that under the FBCA the approval of the holders of Series C Preferred Stock, voting separately as a class or series as applicable (whether by written consent or otherwise), is required to authorize a given action of our company, the affirmative approval of the holders of at least a majority of the shares of Series C Preferred Stock constitutes the approval of the action by such holders. Holders of Series C Preferred Stock are entitled to notice of all stockholder meetings or written consents (and copies of proxy materials and other information sent to stockholders) with respect to which they would be entitled to vote. In addition, the holders of a majority of the issued and outstanding shares of Series C Preferred Stock shall have the right, voting as a separate class, to elect to our board of directors such number of persons who shall constitute an absolute majority of the members of the board. The holders of a majority of the issued and outstanding shares of Series C Preferred Stock shall also have the right to fill any vacancies on our board or to increase the number of members thereof in order to maintain a majority of our board of directors. The remaining members of our board of directors shall be elected by the holders of a majority of the issued and outstanding shares of our common stock. The Series C Preferred Stock is convertible into shares of our common stock, at the option of the holder, at a price - 6 - per share equal to the figure $10.00 divided by eighty percent (80%) of the fair market value of a share of common stock on the market where such shares are then traded, where the fair market value means the average of the three lowest closing per share bid prices of the common stock over the ten (10) trading days immediately prior to the date of the conversion. The minimum conversion price is $3.00 per share, subject to reduction to the lowest price at which shares of our common stock or securities convertible or exercisable for such shares are issued subsequent to the November 2003 date of original issuance of the Series C Preferred Stock. Based upon February 2004 sale of $24.0 million principal amount of notes convertible at $0.11 per share and our March 2004 Series D preferred stock convertible into common stock at $0.11 per share, the conversion price of the shares of Series C preferred Stock has been reduced to $0.11. As of the date of this Current Report on Form 8-K, The Molina-Vector Investment Trust owns of record 10,500,000 shares of Series C Preferred Stock, or 90.9% of the authorized shares. The remaining 1,050,000 shares of Series C Preferred Stock are owned by ANL Capital LLC. The Molina-Vector Investment Trust is a trust created by Dr. Luis Enrique Fernando Molina for the benefit of his minor children. Dr. Molina serves as the sole trustee of the Molina Vector Investment Trust, with sole power to convert and dispose of its shares of Series C Preferred Stock. SERIES D PREFERRED STOCK We are authorized to issue 4,000,000 shares of Series D Preferred Stock. As of the date of this Current Report on Form 8-K, there were 4,000,000 shares of our Series D Preferred Stock issued and outstanding, all of which were fully paid, non-assessable and entitled under certain circumstances to vote. The shares of Series D Preferred Stock have a stated value of one dollar ($1.00) per share. To the extent that under the FBCA the approval of the holders of Series D Preferred Stock, voting separately as a class or series as applicable (whether by written consent or otherwise), is required to authorize a given action of our company, the affirmative approval of the holders of at least a majority of the shares of Series D Preferred Stock constitutes the approval of the action by such holders. The Series D Preferred Stock is convertible into shares of our common stock, at the option of the holder, at a price per share equal to the aggregate stated value of such shares divided by eleven cents ($0.11). The aggregate stated value of the shares of Series D Preferred Stock presently issued and outstanding is $4,000,000, for an aggregate of 36,363,636 shares of our common stock issuable upon conversion of all shares of Series D Preferred Stock. As at the date of this Form 8-K, Mercator Momentum Fund LP owns 2,040,000, or 51% of the outstanding shares of our Series D Preferred Stock, and Mercator Momentum Fund III, LP owns 1,960,000, or 49% of the outstanding shares of our Series D Preferred Stock. ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT On May 29, 2003, Eisner LLP ("Eisner") resigned as our independent certified public accountants. The report of Eisner on our consolidated financial statements as of and for the year ended December 31, 2002 did not contain an adverse opinion or a disclaimer of opinion; however, Eisner's report for the year ended December 31, 2002 contained a qualification due to uncertainty regarding our ability to generate sufficient funds from operations to make all the mandatory payments required by the Series C Notes of General Media, Inc. and our ability to continue as a going concern as described in Note 2 to our financial statements for the fiscal year ended December 31, 2002 and Note 3 to our financial statements for the fiscal year ended October 31, 2002. This uncertainty was also reported in Note 1 to our condensed consolidated financial statements for the three-month interim period ended March 31, 2003, which was not reviewed by an independent certified public accountant. During the period from our inception on December 11, 2001 to our latest report on Form 10-K for the fiscal year ended December 31, 2002 and any subsequent interim period preceding Eisner's resignation there were no disagreements with Eisner on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Eisner, would have caused them to make reference thereto in their report on our financial statements except with respect to the interim quarterly period March 31, 2003. - 7 - On May 29, 2003, we received a letter from Eisner in which Eisner claimed that our Form 10Q for the period ending March 31, 2003 did not expressly disclose that those financial statements were not reviewed by Eisner or by other independent certified public accountants. In addition, Eisner claimed that we had requested Eisner to consider the accounting treatment regarding a specific transaction in which Eisner presented us with a contrary preliminary view, and that our financial statements in the Form 10-Q filing for the period ending March 31, 2003, applied an accounting treatment contrary to their preliminary view. On May 30, 2003, we filed a current report on Form 8-K (the "Original 8-K") to report the resignation of Eisner as our independent certified public accountants and certain other matters. These matters included the appropriateness of the accounting treatment of a transaction involving our company in our financial statements contained in our Form 10-Q for the quarter ending March 31, 2003. Our company's treatment was contrary to a preliminary view by Eisner of the appropriate accounting treatment of such transaction and Eisner did not review our financial statements for the quarter ended March 31, 2003. As previously disclosed in our Form 8-K filed on June 13, 2003, investors are urged not to rely on the 10-Q filed on May 23, 2003 for our quarterly period ending March 31, 2003. We filed an amended Form 10-Q for this quarter on September 25, 2003. As of June 18, 2003, we engaged Weinberg and Company, P.A. ("Weinberg") as our independent accountants to audit our financial statements for our fiscal year ending December 31, 2003. We dismissed Weinberg as our auditors on March 26, 2004, primarily due to the fact that the staff member most familiar with the accounts of our General Media subsidiary left Weinberg to become associated with Stonefield Josephson, Inc. (see below). Weinberg never audited our financial statements, and we are unaware of any matter that would have resulted in Weinberg issuing an adverse opinion or a disclaimer of opinion, or one that was qualified or modified as to uncertainty, audit scope, or accounting principles. On April 5, 2004 we provided Weinberg with a copy of this disclosure and requested that it furnish a letter to us, addressed to the Commission, stating that it agreed with the statements made herein as applicable thereto or the reasons why it disagreed. On April 6, 2004 we received a letter from Weinberg that it agreed with the statements contained herein as applicable thereto, and which is filed as Exhibit 16.1 to this Form 8-K. On April 2, 2004, we engaged Stonefield Josephson, Inc. to serve as our independent certified public accountants to audit our financial statements for the fiscal years ended December 31, 2003 and 2004, and to review our unaudited consolidated financial statements. During our two most recent fiscal years, and during any subsequent period through April 2, 2004, we did not consult with Stonefield Josephson on any accounting or auditing issues. ITEM 5. OTHER EVENTS LAURUS MASTER FUND In February of 2004, in order to financing the purchase of the townhouse located at 14-16 East 67th Street, New York, New York, we issued a convertible term note in the principal amount of $24,000,000 to the Laurus Master Fund, LLC ("Laurus") which is due on February 22, 2007 (the "Laurus Note"). The Laurus Note was issued pursuant to the terms of the Securities Purchase Agreement entered into between us and Laurus, each of which is attached hereto as Exhibits 4.01 and 10.01, respectively, and incorporated by reference in its entirety herein. The reason we issued the Laurus Note was to assist us in enabling our 99.5% owned subsidiaries, General Media, Inc. and its subsidiaries, to emerge from bankruptcy. Laurus is a private investment fund that provides asset based convertible financing to public companies. The Laurus Note bears interest at the "prime rate" published in The Wall Street Journal from time to time, plus 3.5%, subject to a minimum interest rate of 7.5% per annum and a maximum interest rate of 13.5% per annum. At the closing, we placed in escrow approximately $1.8 million, representing an estimate of one years' minimum interest due on the Laurus Note. To the extent not applied toward interest payments on the Laurus Note, such interest reserve will be released to us if we retain the equity of General Media and its subsidiaries when such subsidiaries emerge from bankruptcy. Under the terms of the Laurus Note we commence payment of principal installments on a monthly basis commencing on September 30, 2004. We will be required to make monthly repayments of $200,000 per month for the first year, $400,000 per month for the second year and $600,000 every month thereafter until the maturity date. The terms of the Laurus Note provide that Laurus may elect to receive its monthly payments of principal and interest in either cash or shares of our common stock. The number of shares of our common stock we would be required to issue is determined by dividing the applicable dollar amount by the figure $0.11. The portion of the monthly repayment amount that Laurus may elect to receive in shares of our common stock is limited by the trading price of our common stock during the period immediately preceding the election. - 8 - The Laurus Note is convertible at anytime while any portion thereof is outstanding into shares of our common stock at the same ratio used to determine the repayment option, i.e., one share of common stock for every $0.11 converted. We will under certain circumstances be required to maintain an effective registration statement with respect to the shares of common stock issuable by us. In February 2004, Laurus sold approximately 50% of the Laurus Note to affiliates of Alexandra Global Master Fund, Ltd. MERCATOR GROUP In March 2004, we issued $4,000,000 of our newly authorized Series D preferred stock to Mercator Momentum Fund, LP, Mercator Momentum Fund III, LP and Mercator Advisory Group LP (collectively, the "Mercator Group") and five year warrants entitling the holders to purchase up to 12,000,000 shares of our common stock. The shares of Series D Preferred Stock, the certificate of designation for which is attached hereto as Exhibit 4.02, were issued pursuant to the terms of the Subscription Agreement entered into between us and the Mercator Group, a copy of which is attached hereto as Exhibit 10.02, each of which is exhibits is incorporated by reference in its entirety herein. Our Series D preferred stock is convertible at the option of the holders into shares of our common stock at a conversion price of $0.11 per share, subject to weighted average anti-dilution and other adjustments. Our warrants are exercisable at any time at $0.12 per share. In a related transaction, The Molina Vector Investment Trust sold an aggregate of 14,345,500 shares of its common stock to the Mercator Group (representing approximately 9.1% of the 157,500,000 shares of common stock owned by the Trust) for $35,863.75. Accordingly, the Mercator Group is presently the beneficial owner, as calculated pursuant to Rule 13d-3(d)(1) of the Exchange Act, of 62,709,136 shares of our common stock. Notwithstanding the foregoing, no shares of our common stock shall be issuable upon conversion of the Series D Preferred Stock or upon the exercise of warrants if such issuance would increase the aggregate number of shares of our common stock then owned by the Mercator Group to a number then constituting more than 9.99%, as determined in accordance with Rule 13d-3 of the Exchange Act, of our shares of our common stock then issued and outstanding. If all such 62,709,136 shares were held of record by the Mercator Group. It would be the owner of approximately 19.1 % of our shares of common stock then issued and outstanding. GENERAL MEDIA PREFERRED STOCK PURCHASE AGREEMENT On March 31, 2004, we, together with our principal stockholder, Dr. Luis Enrique Fernando Molina, entered into an agreement with the holders of 75% of the outstanding Class A preferred stock of General Media, Inc. Under the terms of such agreement, on April 15, 2004, Dr. Molina will acquire all shares of Class A preferred stock owned by such holders. General Media and its subsidiaries are currently debtors in a bankruptcy case pending in the United States Bankruptcy Court for the Southern District of New York. On March 3, 2004, General Media and its subsidiaries filed their proposed first amended and restated plan of reorganization to be financed primarily through debt and equity financing to be provided by Dr. Molina or his affiliates. The holders of the Class A preferred stock, who also own approximately 89% of the approximately $46.0 million outstanding amount of General Media 15% senior secured notes due 2004, had originally objected to the General Media plan, and proposed a competing plan of reorganization that, if confirmed by the Bankruptcy Court, would cause us to lose ownership of General Media. Under the terms of the March 31, 2004, agreement, Dr. Molina and our company will purchase the General Media Class A preferred stock from the sellers for approximately $10.25 million, payable on March 31, 2008 pursuant to a 7% increasing rate note given by Dr. Molina that we have guaranteed. The note is to be secured by a pledge of our Series C Preferred Stock held by The Molina-Vector Investment Trust, an affiliate of Dr. Molina. The 10,500,000 shares of Series C Preferred Stock held by the Molina Trust has a stated value of $105.0 million and is currently convertible into approximately 954.0 million shares of our common stock. Under the terms of the agreement, the sellers and their affiliates agreed to waive all objections to and support our - 9 - proposed plan of reorganization and withdraw their competing plan. Closing of the purchase is scheduled to occur on or before April 15, 2004. ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION, AND EXHIBITS (a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED. To be filed by amendment to this Form 8-K. (b) PRO FORMA FINANCIAL INFORMATION. To be filed by amendment to this Form 8-K. (c) EXHIBITS - THE FOLLOWING DOCUMENTS ARE ATTACHED AS EXHIBITS TO THIS REPORT ON FORM 8-K: 2.01 Member Interest Purchase Agreement (the "iBill Agreement'), by and among our subsidiary Media Billing, Internet Billing Company, LLC ("iBill") and InterCept, Inc. ("InterCept"), the sole membership holder of iBill. 4.01 Amended and Restated Convertible Term Note issued to the Laurus Master Fund, Ltd. by Penthouse International, Inc. 4.02 Certificate of Designation of Series D Preferred Stock. 10.01 Securities Purchase Agreement by and between Laurus Master Fund, Ltd. and Penthouse International, Inc. 10.02 Subscription Agreement by and among Mercator Advisory Group LLC, Mercator Momentum Fund, LP, Mercator Momentum Fund III, LP International, Inc. and Penthouse International, Inc. 16.1 Letter from Weinberg & Company, P.A. - 10 - Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunder duly authorized. PENTHOUSE INTERNATIONAL, INC. By: /s/ Claude Bertin ----------------- Claude Bertin Executive Vice President April 6, 2004 - 11 - EX-2.01 3 c31878_ex2-01.txt MEMBER INTEREST PURCHASE AGREEMENT BY AND AMONG MEDIA BILLING, L.L.C., INTERNET BILLING COMPANY, LLC AND INTERCEPT, INC., THE SOLE MEMBER OF INTERNET BILLING COMPANY, LLC DATED AS OF MARCH 16, 2004 MEMBER INTEREST PURCHASE AGREEMENT THIS MEMBER INTEREST PURCHASE AGREEMENT (this "AGREEMENT") is made and entered into as of March 16, 2004, by and among Media Billing, L.L.C., a New York limited liability company ("PURCHASER"); Internet Billing Company, LLC, a Georgia limited liability company (the "COMPANY," formerly known as Internet Merger Company, LLC, a Georgia limited liability company, and successor in interest by merger to a Georgia limited liability company also known as Internet Billing Company, LLC); and InterCept, Inc., a Georgia corporation ("SELLER"). Seller is the sole member of the Company, and Seller and the Company are sometimes together referred to as the "INTERCEPT PARTIES." R E C I T A L S A. The Company is primarily engaged in the business of providing various services that enable, among other things, merchants (providing services to both adult-related and non-adult-related customers) to accept and process real-time payments for goods and services over the Internet, as well as services related to outsourced payment processing, transaction processing, risk management, transaction security, fraud control, reporting tools, subscription, accounting/bookkeeping services, shopping cart functionality, marketing, payment options, interface, and back office management (the "SUBJECT BUSINESS," which shall specifically exclude any assets to be transferred in the transaction to Seller or one of its Affiliates as contemplated in Section C below and otherwise described herein). B. As of the date hereof, Seller owns 100% of the member interests of the Company, constituting a 100% ownership interest in the Company under the terms of the Company's Operating Agreement, and is entitled to that percentage of the profits of the Company and must bear that percentage of the Company's losses. C. Seller wishes to sell to Purchaser and Purchaser wishes to purchase from Seller 100% of the member interests of the Company. Prior to the closing, the Company will transfer certain of its assets, including its non-adult-related customers and certain claims of the Company, to an affiliate of Seller. By virtue of this acquisition, Purchaser will acquire, through the Company, substantially all of the Company's customer relationships (other than those specifically transferred to an affiliate of Seller as otherwise described herein) and the "iBill" trademark, and such other trademarks and other assets currently owned by the Company as identified herein. In addition, Purchaser will acquire (1) a perpetual royalty-free license to the Company of Seller's NexGen and iBill transaction processing and support software, and (2) an assignment of rights in any other components of the Company's existing infrastructure not owned by the Company but necessary to continue services to the Company's customers consistent with the services provided to them on the date hereof, all as specifically subject to the terms and conditions set forth in this Agreement. D. The Company has significant financial obligations, including customer obligations, that Purchaser and the Company after Closing will be required to satisfy pursuant to this Agreement. Additionally, Purchaser is releasing Seller from liability to certain parties to which it has provided security or guarantees on behalf of or for the benefit of the Company. Purchaser has agreed to indemnify Seller for any claims or losses related to these matters pursuant to the terms of this Agreement. To secure Purchaser's performance of these obligations, Purchaser is providing to Seller an insurance policy with a policy limit of at least $20,000,000 that Seller may make claims against to satisfy indemnification claims up to that amount. E. The above sale and purchase, including the asset transfers, licenses and insurance policy referenced in Paragraphs C and D and all of the transactions contemplated herein, are hereinafter collectively referred to as the "CONTEMPLATED TRANSACTIONS." NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants, representations, warranties, conditions and agreements herein contained, the parties hereto, intending to be legally bound, hereby agree as follows: ARTICLE 1 DEFINITIONS The following terms used in this Member Interest Purchase Agreement shall have the following respective meanings: "2002 FINANCIAL STATEMENTS" has the meaning set forth in Section 3.7(a). "ACCOUNTS RECEIVABLE" has the meaning set forth in Section 3.19. "AFFILIATE" means, with respect to any Person, (i) a director, officer, manager, member or stockholder of such Person, (ii) a spouse, parent, sibling or descendant of such Person (or spouse, parent, sibling or descendant of any director or executive officer of such Person), and (iii) any other Person that, directly or indirectly through one or more intermediaries, Controls, or is Controlled by, or is under common Control with, such Person. "AGE-RESTRICTED SERVICES" means goods and services related to the adult entertainment industry. "AGREEMENT" has the meaning set forth in the preamble. "ASSET TRANSFERS" has the meaning set forth in Section 2.1(a). "ASSET TRANSFER AGREEMENTS" has the meaning set forth in Section 2.1(a). "BALANCE SHEET" means the balance sheet set forth in the Most Recent Financial Statements. "BALANCE SHEET DATE" means December 31, 2003. "BOARD OF DIRECTORS" means, with respect to any Person, the board of directors of such Person. "BREAK-UP FEE" has the meaning set forth in Section 13.2. "BUSINESS DAY" means any day that is not a Saturday, Sunday or a day on which banking institutions in Atlanta, Georgia are not required to be open. "BYLAWS" means, with respect to any Person, the bylaws of such Person. "CASH PAYMENT" has the meaning set forth in Section 2.1(c). "CLAIM" has the meaning set forth in Section 11.3. 2 "CLAIMANT" has the meaning set forth in Section 11.3. "CLOSING" has the meaning set forth in Section 10.1. "CLOSING DATE" has the meaning set forth in Section 10.1. "CLOSING DATE BALANCE SHEET" has the meaning set forth in Section 2.2(a). "CODE" means the Internal Revenue Code of 1986, as amended. "COMPANY" has the meaning set forth in the preamble. "CONFIDENTIAL INFORMATION" means Intellectual Property Rights of Seller, the Company and Purchaser and all information of a proprietary or confidential nature relating to Seller, the Company, Purchaser, the Subject Business or the Contemplated Transactions (other than information that is in the public domain at the time of its use or disclosure other than as a result of the breach by such party of its agreement hereunder). "CONTEMPLATED TRANSACTIONS" has the meaning set forth in the preamble. "CONTRACT" means any loan or credit agreement, note, bond, mortgage, indenture, lease, sublease, purchase order or other agreement, instrument, permit, concession, franchise, license contract, obligation, promise, or undertaking (whether written or oral and whether express or implied). "CONTROL" means, with respect to any Person, the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person. "CREDIT AGREEMENT" has the meaning set forth in Section 9.12. "DEERFIELD BEACH LEASE" means the lease for the Company's main office location in Deerfield Beach, Florida. "EMPLOYEE PLAN" means any "employee benefit plan" (as defined in Section 3(3) of ERISA) as well as any other plan, program or arrangement involving direct and indirect compensation, under which the Company or any ERISA Affiliate of the Company has any present or future obligations or Liability on behalf of its employees or former employees, contractual employees or their dependents or beneficiaries. "ENCUMBRANCES" means and includes Taxes, security interests, mortgages, liens, pledges, charges, claims, conditions, easements, reservations, restrictions, clouds, equities, rights of way, options, community property rights, rights of first refusal and all other encumbrances, whether or not relating to the extension of credit or the borrowing of money, or any other restriction of any kind, including any restriction on use, voting, transfer, receipt of income, or exercise of any other attribute of ownership. "ENVIRONMENTAL LAWS" has the meaning set forth in Section 3.8. "ERISA" means the Employment Retirement Income Security Act of 1974, as amended. 3 "ESTIMATED WORKING CAPITAL DEFICIT" means the estimate of the Company as of the Closing Date of the amount calculated by subtracting the total liabilities of the Company transferred in the Subject Business from the current assets of the Company transferred in the Subject Business, specifically to include any cash held as security for the letter of credit securing the Deerfield Beach Lease, both as reflected on the Pre-Closing Balance Sheet. "EVENT OF DEFAULT" has the meaning set forth in Section 11.8. "FINANCIAL STATEMENTS" has the meaning set forth in Section 3.7(a). "FINAL WORKING CAPITAL DEFICIT" has the meaning set forth in Section 2.2(a). "FINE" has the meaning set forth in Section 9.10. "FIRST DATA" has the meaning set forth in Section 8.5. "FIRST DATA LETTER OF CREDIT" has the meaning set forth in Section 9.13. "GAAP" means generally accepted accounting principles, as commonly practiced in the United States, and as applied on a basis consistent with the basis on which the Balance Sheet and the other financial statements referred to in Section 3.7 were prepared. "GOVERNMENTAL ENTITY" means any court, administrative agency or commission or other governmental authority or instrumentality, domestic or foreign, Federal, state or local. "GUARANTOR" has the meaning set forth in Section 9.14. "GUARANTY AGREEMENT" has the meaning set forth in Section 9.14. "INITIAL DEPOSIT" has the meaning set forth in Section 2.1(d). "INSURANCE POLICY" has the meaning set forth in Section 9.6. "INTELLECTUAL PROPERTY RIGHTS" means, whether patentable or unpatentable and whether or not reduced to practice, all industrial and intellectual property rights, including, without limitation, patents, patent applications, patent rights, trademarks (registered and unregistered), trademark applications, trade names, service marks, service mark applications, copyrights (in both published and unpublished works), copyright applications, know-how, trade secrets, proprietary processes and formulae, software, confidential information, technical information, data, process technology, franchises, licenses, inventions, discoveries, instructions, marketing materials, trade dress, logos, slogans, corporate names, fictitious business names, internet domain names, customer and supplier lists, rights in telephone numbers, pricing and costing information, business and marketing plans, advertising and promotional materials, and designs and all documentation and media constituting, describing or relating to the foregoing, including, without limitation, manuals, memoranda and records together with all translations, adaptations, derivations, including all goodwill associated therewith. "INTERCEPT PARTIES" has the meaning set forth in the preamble. "IPS" has the meaning set forth in Section 2.1(a). 4 "KNOWLEDGE" of a party to this Agreement shall mean the current awareness of management of that party, which with respect to (i) Seller (on or before Closing) and the Company shall only include John Collins, Lynn Boggs, John Perry, Scott Meyerhoff and Linda Pinne, and (ii) Purchaser and Seller (following Closing) shall only include Jason Galanis and Charles Samel. "LAW" means any law, statute, treaty, rule, directive, regulation or Order of any Governmental Entity. "LEASED REAL PROPERTY" means the Company's leased premises in Deerfield Beach, Florida and Woodland Hills, California. "LEASES" has the meaning set forth in Section 3.10. "LENDER CONSENT" has the meaning set forth in Section 9.12. "LIABILITY" of a Person means any liability or obligation, whether known or unknown, asserted or unasserted, absolute or contingent, accrued or unaccrued, liquidated or unliquidated and whether due or to become due, joint or several, regardless of when asserted, including all liability for Taxes, and whether or not the same is required to be accrued on the financial statements of such Person. "LOSS" or "LOSSES" means any and all losses, Liabilities, demands, claims, actions, causes of action, assessments, shortages, damages (including incidental and consequential), costs, expenses (including court costs, the cost of any investigation, expert witnesses and preparation, and attorneys', accountants' and other professionals' fees including the value of services of in-house accountants and attorneys), assessments, Tax deficiencies and Taxes incurred, whether directly or indirectly, net of any accruals reflected on the Closing Date Balance Sheet, in connection with the receipt of indemnification payments (including interest or penalties thereon) arising from or in connection with any such matter that is the subject of indemnification under Article 11 whether or not involving Third Party Claims. "MATERIAL ADVERSE CHANGE" or "MATERIAL ADVERSE EFFECT" means, whether in the whole or in the aggregate, with respect to any Person, any material adverse change in the business, operations, assets (including levels of working capital and components thereof), condition (financial or otherwise), operating results, Liabilities, employee relations or business prospects of such Person or any material casualty loss or damage to the assets of such Person, whether or not covered by insurance. "MEMBER INTEREST" the meaning set forth in Section 2.1(b). "MOST RECENT FINANCIAL STATEMENTS" has the meaning set forth in Section 3.7(a). "NELSON MULLINS" has the meaning set forth in Section 7.5. "NON-COMPETITION PERIOD" has the meaning set forth in Section 12.1. "NOTE" has the meaning set forth in Section 2.1(c). "OBLIGOR" has the meaning set forth in Section in Section 11.3. "ORDERS" means judgments, writs, decrees, compliance agreements, injunctions or orders of any Governmental Entity or arbitrator. 5 "ORDINARY COURSE" means, with respect to the Company, the ordinary course of commercial operations engaged in by the Company, consistent with past practice. "ORGANIZATIONAL DOCUMENTS" means (i) the articles or certificate of incorporation and the bylaws of a corporation; (ii) the partnership agreement and any statement of partnership of a general partnership; (iii) the limited partnership agreement and the certificate of limited partnership of a limited partnership; (iv) the articles of organization or certificate of formation and operating agreement or limited liability company agreement of any limited liability company, (v) any charter or similar document adopted or filed in connection with the creation, formation, or organization of a Person; and (vi) any amendment to any of the foregoing. "PART" means a part or section of a Disclosure Letter. "PERMITS" means all permits, licenses, authorizations, registrations, franchises, approvals, certificates, variances and similar rights obtained, or required to be obtained, from Governmental Entities. "PERMITTED ENCUMBRANCE" means (i) any Encumbrance for Taxes not yet due or delinquent or being contested in good faith by appropriate Proceedings for which adequate reserves have been established in accordance with GAAP, (ii) any statutory Encumbrance arising in the ordinary course of business by operation of Law with respect to a liability that is not yet due or delinquent, (iii) any minor imperfection of title or similar Encumbrance which individually does not materially impair the value of the property subject to such Encumbrance or the use of such property in the conduct of the Subject Business, and (iv) Encumbrances associated with the Leases. "PERSON" shall be construed broadly and shall include an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization or a Governmental Entity (or any department, agency or political subdivision thereof) and any and all officers, directors and any other managers of the preceding. "PRE-CLOSING BALANCE SHEET" has the meaning set forth in Section 7.3. "PROCEEDING" means actions, audits, suits, claims, hearings, investigations or legal or administrative or arbitration proceedings. "PROCESSING AGREEMENTS" has the meaning set forth in Section 8.5. "PURCHASER" has the meaning set forth in the preamble. "PURCHASER DISCLOSURE LETTER" means the disclosure letter delivered by Purchaser to Seller concurrently with the execution and delivery of this Agreement. "PURCHASE PRICE" has the meaning set forth in Section 2.1(c). "PURCHASE PRICE ADJUSTMENT" has the meaning set forth in Section 2.2(b). "PURCHASER ADJUSTMENT PAYMENT" has the meaning set forth in Section 2.2(b). "PURCHASER REVIEW PERIOD" has the meaning set forth in Section 2.2(a). "RESOLUTION PERIOD" has the meaning set forth in Section 2.2(d). 6 "SEC" shall mean the Securities and Exchange Commission. "SECURITIES ACT" shall mean the Securities Act of 1933, as amended from time to time. "SELECTED AUDITOR" shall mean Ernst & Young. "SELLER" has the meaning set forth in the preamble. "SELLER ADJUSTMENT PAYMENT" has the meaning set forth in Section 2.2(b). "SELLER DISCLOSURE LETTER" means the disclosure letter delivered by Seller to Purchaser concurrently with the execution and delivery of this Agreement. "SELLER REVIEW PERIOD" has the meaning set forth in Section 2.2(d). "SGS" has the meaning set forth in Section 8.5. "SOFTWARE LICENSE AGREEMENT" has the meaning set forth in Section 9.2. "SUBJECT BUSINESS" has the meaning set forth in the recitals. "TAX RETURNS" means returns, reports, statements, declarations, forms and information statements with respect to Taxes, including any schedule or attachment thereto, required to be submitted to or be filed with the IRS or any other federal, foreign, state, local or provincial taxing authority, domestic or foreign. "TAXES" or "TAX," as applicable, means taxes, fees, assessments, levies, duties, tariffs, imports, and governmental impositions or charges of any kind in the nature of (or similar to) taxes, payable to any federal, state, local or foreign taxing authority whether or not disputed, including without limitation (a) income (including whether or not based upon net income, gross income, income as specially defined, earnings, profits or selected items of income, earnings or profits), franchise, profits, gains, gross receipts, excise, sales, use, ad valorem, transfer, net worth, value added, license, withholding, payroll, employment, social security (or similar), workers' compensation, unemployment compensation, environmental, utility, excise, severance, production, stamp, occupation, premium, customs duties, property or windfall profits, alternative or add-on minimum taxes, or any other tax of any kind whatsoever, together with all interest and penalties, additions to tax and other additional amounts imposed by any taxing authority (domestic or foreign), and (b) any liability for the payment of any amount of the type described in the immediately preceding clause (a) as a result of (1) being a "transferee" within the meaning of Section 6901 of the Code or any other applicable Law, (2) being a member of an affiliated or combined group within the meaning of the Code or any other applicable Law or (3) any contractual obligation. "THIRD PARTY CLAIM" means any claim brought by a Person who is not a party to this Agreement. "THIRD PARTY INTELLECTUAL PROPERTY RIGHTS" has the meaning set forth in Section 3.12(a). 7 "TRANSACTION SERVICES" shall mean the business of providing transaction processing solutions for consumer-to-business, business-to-business, and person-to-person electronic commerce for third parties. "TRANSFERRED CUSTOMERS" has the meaning set forth in Section 9.4. "TRANSFERRED CLAIMS" has the meaning set forth in Section 9.5. "TRANSITION PERIOD" has the meaning set forth in the introductory paragraph of Article 5. "TRANSITION SUPPORT AGREEMENT" has the meaning set forth in Section 9.3. ARTICLE 2 PURCHASE AND SALE OF MEMBER INTERESTS 2.1. PURCHASE AND SALE OBLIGATION. (a) THE IBC ASSET TRANSFER. Immediately before the Closing, Seller shall cause the Company to transfer to both Seller and Seller's and the Company's Affiliate, InterCept Payment Solutions, LLC ("IPS"), the Transferred Customers (and related contracts and relationships), the Transferred Claims, certain software, and other assets and liabilities (collectively, the "ASSET TRANSFERS") all as more fully described in, and in accordance with the terms and conditions set forth in, the Asset Transfer Agreements attached hereto as EXHIBIT 2.1(A) (the "ASSET TRANSFER AGREEMENTS"), and IPS shall license certain software to the Company pursuant to the Software License Agreement. (b) SALE OF MEMBER INTEREST. Upon the terms and subject to the conditions set forth in this Agreement, at the Closing, and immediately after the Asset Transfers from the Company to Seller or its Affiliates as contemplated herein, Seller shall transfer, assign and sell to Purchaser, and Purchaser shall purchase, acquire and accept from Seller, all of Seller's right, title and interest in and to Seller's interest as a member of the Company (the "MEMBER INTEREST"). The Member Interest will constitute all of the Company's member interests upon the Closing. The Member Interest shall be delivered by Seller to Purchaser free and clear of all Encumbrances. (c) PURCHASE OF MEMBER INTEREST. In exchange for the Member Interest, on the Closing Date, Purchaser shall: (1) pay to Seller in immediately available funds the amount of (x) $750,000 MINUS (y) the amount, if any, by which the Estimated Working Capital Deficit of the Company exceeds $22,000,000 (the "CASH PAYMENT"); (2) deliver to Seller a promissory note in the amount of (x) $750,000 PLUS (y) the amount, if any, by which the Estimated Working Capital Deficit of the Company is less than $22,000,000 (the "NOTE") (collectively, the amounts payable in the Cash Payment and the Note shall be the "PURCHASE PRICE"); (3) cause the Insurance Policy to be delivered to Seller; and (4) enter into the agreements as set forth in Article 9 hereof. (d) INITIAL DEPOSIT. Upon the signing of this Agreement and subject to the terms of Sections 13.1 and 13.2, Purchaser shall make a nonrefundable deposit of $750,000 (the "INITIAL DEPOSIT") into the 8 following depository account of Seller with Bank of America, N.A. as designated in writing by Seller on the date hereof. The Initial Deposit shall be credited at Closing toward the cash portion of the Purchase Price set forth in Section 2.1(c) above. 2.2. PURCHASE PRICE ADJUSTMENT. (a) Within 45 days following the Closing (the "PURCHASER REVIEW PERIOD"), Purchaser shall deliver to Seller (i) a final closing balance sheet of the Company as of the Closing Date (reflecting the Subject Business transferred at Closing and excluding the Asset Transfers) prepared in accordance with GAAP (other than exceptions to GAAP specified in the notes to the Pre-Closing Balance Sheet) using the same accounting principles, policies and practices used to prepare the Pre-Closing Balance Sheet (the "CLOSING DATE BALANCE SHEET"); and (ii) Purchaser's calculation of the final working capital deficit of the Company determined by the sum of the value of the current assets of the Company and the total liabilities of the Company as determined in the Closing Date Balance Sheet (the "FINAL WORKING CAPITAL DEFICIT") using the same methodology used to calculate the Estimated Working Capital Deficit. (b) If (i) the Final Working Capital Deficit is less than (i.e., a lesser negative number) the Estimated Working Capital Deficit, then Purchaser shall pay Seller such difference (the "PURCHASER ADJUSTMENT PAYMENT") as provided in Section 2.2(e) below, or (ii) the Final Working Capital Deficit is greater than (i.e., a greater negative number) the Estimated Working Capital Deficit, then Seller shall pay Purchaser such difference (the "SELLER ADJUSTMENT PAYMENT") as provided in Section 2.2(e) below, and in either event the Purchase Price shall be adjusted accordingly (in either case, the "PURCHASE PRICE ADJUSTMENT"). (c) If Purchaser fails to deliver the Closing Date Balance Sheet to Seller during the Purchaser Review Period, then Purchaser shall have the right to extend the Purchaser Review Period for up to an additional 15 days by providing written notice to Seller before the end of the Purchaser Review Period. If Purchaser fails to deliver the Closing Date Balance Sheet to Seller during the extended Purchaser Review Period, as extended, then Purchaser shall be deemed to have waived its rights to the Purchase Price Adjustment, and Seller may submit a Closing Date Balance Sheet to Purchaser if it would be entitled to the Purchaser Adjustment Payment thereunder. (d) Provided Purchaser delivers the Closing Date Balance Sheet to Seller before the end of the Purchaser Review Period, Seller shall have 20 business days after its receipt of the Closing Date Balance Sheet to review and dispute the Closing Date Balance Sheet, including the computation of the Final Working Capital Deficit (the "SELLER REVIEW PERIOD"). If Seller fails to dispute the Closing Date Balance Sheet, including the computation of the Final Working Capital Deficit, during the Seller Review Period, Seller shall be deemed to have accepted the terms of the Closing Date Balance Sheet, including the Seller Adjustment Payment or the Purchaser Adjustment Payment thereunder, as determined by Purchaser. If Seller disputes the computation of the Final Working Capital Deficit during the Seller Review Period, then Seller and Purchaser shall have 20 business days from the delivery of notice of its dispute to Purchaser to reach an agreement with regard to the disputed computation (the "RESOLUTION PERIOD"). If the parties fail to reach an agreement during the Resolution Period, then the dispute shall be submitted to the Selected Auditor for full and final resolution applying the principles, policies and practices referenced in Section 2.2(a). The Selected Auditor shall make a determination of the Final Working Capital Deficit and the Seller Adjustment Payment or the Purchaser Adjustment Payment 9 thereunder, as applicable, within 60 days following the end of the Resolution Period. For purposes of this Agreement, the determination of the Selected Auditor with respect to the Purchase Price Adjustment shall be final and conclusive as to all parties, absent clear error. If Purchaser fails to deliver the Closing Date Balance Sheet to Seller as described in Section 2.2(c), and Seller submits to Purchaser a Closing Date Balance Sheet, then the review provisions described in this Section 2.2(d) for the benefit of Seller shall apply for the benefit of Purchaser, and the same dispute resolution procedures shall be applicable in the event of an unresolved dispute. (e) Following final determination of the amount of the Purchase Price Adjustment, if any, in accordance with the above paragraphs, (i) Seller shall remit the Seller Adjustment Payment, if any, to Purchaser or the Company in immediately available funds within five business days after the final determination of the Purchase Price Adjustment, or (ii) either Purchaser or the Company (being jointly and severally obligated to do so) shall remit to Seller the Purchaser Adjustment Payment, if any, in immediately available funds within five business days after the final determination of the Purchase Price Adjustment, provided that if Purchaser and the Company fail to make the Purchaser Adjustment Payment in such period, Seller, at its sole option, may immediately draw against the Letter to Credit for the amount of the Purchaser Adjustment Payment. (f) The fees and expenses of the Selected Auditor shall be split equally between Purchaser, on the one hand, and Seller, on the other hand. (g) During all periods contemplated in this Section 2.2, the parties shall reasonably cooperate with each other (and the Selected Auditor if applicable), including providing reasonable access to each party's books and records, to facilitate the determination of the Final Working Capital Deficit and any Purchase Price Adjustment. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND SELLER To the Knowledge of Seller with respect to all representations and warranties set forth in this Article 3 other than Section 3.1, Seller represents and warrants to Purchaser as follows: 3.1. CAPITALIZATION AND ORGANIZATION. Seller is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Georgia. The Company is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Georgia and is foreign qualified to transact business and is in good standing in the States of Florida and California. Except as set forth in PART 3.1 of the Seller Disclosure Letter, the Company is not foreign qualified or required to be foreign qualified in any other state. Seller owns the Member Interest, which constitutes 100% of the outstanding member interests of the Company and there are no rights, options, warrants or other agreements to acquire any additional membership interests of the Company. The Company has delivered to Purchaser complete and correct copies of its Articles of Organization and Operating Agreement, each as amended to date, and the records of any and all proceedings and actions at all meetings of, or taken by written consent by, the manager and member of the Company. The Company owns equity positions in the entities listed in PART 3.1 of the Seller Disclosure Letter in the percentages stated therein. 10 3.2. AUTHORITY. Seller and the Company have the power and authority to execute and deliver this Agreement. Seller and the Company have taken all necessary corporate action, including all action required by their respective board of directors or board of managers, to authorize the execution and delivery of this Agreement. Upon execution, this Agreement shall constitute the legal, valid, and binding obligation of Seller and the Company, enforceable against Seller and the Company in accordance with its terms and conditions, except as such enforcement may be subject to or limited by bankruptcy, insolvency, reorganization, moratorium or other similar Laws now or hereafter in effect affecting creditors' rights generally, and by general principles of equity. 3.3. NO GOVERNMENT CONSENTS. Except as disclosed in PART 3.3 of the Seller Disclosure Letter, no approval, authorization, consent, permission, or waiver to or from, or notice, filing, or recording to or with, any Government Entity is necessary for the valid execution and delivery of this Agreement by Seller and the Company. 3.4. NO THIRD PARTY CONSENTS. Except as disclosed in PART 3.4 of the Seller Disclosure Letter, no approval, authorization, consent, permission, or waiver to or from, or notice, filing, or recording to or with, any Person that is a party to a material contract or agreement with Seller or the Company is necessary for (a) the execution and delivery of this Agreement by Seller and the Company; or (b) the transfer and assignment to Purchaser at Closing of the Leases and the material Contracts of the Company. 3.5. NO CONFLICTS. Except as disclosed in PART 3.5 of the Seller Disclosure Letter, the execution and delivery by the Company and Seller of this Agreement and the consummation of the Contemplated Transactions do not and will not (i) conflict with, or result in any violation of, or cause a default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, amendment, the loss of any material benefit under, any term, condition or provision of the Organizational Documents of the InterCept Parties, any material Contract to which the any of the InterCept Parties is a party, or by which the InterCept Parties or their respective properties may be bound, or (ii) violate any Law applicable to the InterCept Parties or any of their respective properties. Except as set forth on PART 3.5 of the Seller Disclosure Letter, there are no agreements between Seller and any other Person with respect to its Member Interest that would prevent or encumber Seller's right to transfer its Member Interest in the Company as contemplated herein. 3.6. NO ADDITIONAL BROKERS. Except as set forth in PART 3.6 of the Seller Disclosure Letter, no investment banker, broker or finder is entitled to receive a commission or fee in respect of this Agreement or the transactions contemplated hereby, based upon any arrangement or agreement made by or on behalf of either of Seller or the Company. 3.7. FINANCIAL STATEMENTS. (a) The (i) unaudited consolidated balance sheets and statements of operations for the Company as of and for the period from April 9, 2002 to December 31, 2002 (the "2002 FINANCIAL STATEMENTS"); and (ii) the unaudited consolidated balance sheets and statements of operations for the Company as of and for the one year period ended December 31, 2003 (the "MOST RECENT FINANCIAL STATEMENTS") (collectively, the 2002 Financial Statements and the Most Recent Financial Statements are referred to as the "FINANCIAL STATEMENTS") fairly present the combined financial position of the Company with regard to the Financial Statements as of the respective dates thereof and the results of their operations for the respective periods thereof. The Financial Statements were prepared in accordance with GAAP (except as disclosed on PART 3.7 of the Seller Disclosure Letter and for the absence of normal footnote disclosures and the absence of immaterial normal year-end adjustments in the Most Recent Financial Statements). 11 (b) Except as set forth on PART 3.7 of the Seller Disclosure Letter, the Company has no material obligations or liabilities of any nature (matured or unmatured, fixed or contingent) other than (i) those set forth or adequately provided for (including any reserves) in the Most Recent Financial Statements, (ii) those incurred in the ordinary course of business and not required to be set forth in the Most Recent Financial Statements under GAAP, (iii) those incurred in the ordinary course of business since the date of the Most Recent Financial Statements and consistent with past practice and (iv) those incurred in connection with the execution of this Agreement. 3.8. ENVIRONMENTAL MATTERS. Neither Seller nor the Company has received any notice of any pending or threatened investigation, Proceeding or claim with respect to the Company to the effect that the Company is or may be liable to any person or entity, or responsible or potentially responsible for the costs of any remedial or removal action or other cleanup costs, as a result of noncompliance with any applicable Laws relating to pollution or protection of the environment ("ENVIRONMENTAL LAWS"). There is no past or present action, activity, condition or circumstance that could be expected to give rise to any such liability on the part of the Company to any person or entity or for any such cleanup costs. 3.9. LITIGATION. Except as set forth on PART 3.9 of the Seller Disclosure Letter, neither the Company nor Seller, nor any officer, director, employee, agent or Affiliate of the Company is a party to any material pending or threatened Proceeding, whether at law or in equity, or before or by any Governmental Entity or arbitrator, nor does any basis exist for any such Proceeding. 3.10. LEASES. The leases disclosed in PART 3.10 of the Seller Disclosure Letter (the "LEASES") constitute all material leasing or rental contracts, agreements, and other commitments and arrangements in effect as of the execution of this Agreement and to which the Company is a party. 3.11. PERSONNEL, BENEFIT ARRANGEMENTS AND EMPLOYEE PLANS. (a) LIST OF PERSONNEL. PART 3.11(a)(1) of the Seller Disclosure Letter contains a true and complete list of the names, positions and current compensation levels of all salaried or annual employees and of the Company. PART 3.11(a)(2) of the Seller Disclosure Letter contains a true and complete list of the names, positions and current compensation levels of all other employees of the Company, including without limitation, temporary employees and employees compensated on an hourly or commission basis, who are not included on PART 3.11(a)(1) of the Seller Disclosure Letter. (b) EMPLOYEE RELATIONS. There is no labor strike, dispute, slowdown, stoppage, or similar activity pending or threatened against the Company. Except as described in PART 3.11(b) of the Seller Disclosure Letter, there are no Proceedings pending before the Equal Employment Opportunity Commission or any federal, state, or local agency or court against Seller pertaining to the Company or the employees of the Company. (c) LIST OF EMPLOYEE PLANS. The Employee Plans set forth in PART 3.11(c) of the Seller Disclosure Letter is accurate list of the Employee Plans of the Company. (d) NO LIABILITIES OR OBLIGATIONS. Except as reflected on the Financial Statements, the Company has no liabilities or obligations to any beneficiaries, governmental authorities, or any other parties arising out of or relating to the Employee Plans. (e) NO MULTI-EMPLOYER OR CERTAIN OTHER PLANS. None of the Employee Plans is a multi-employer plan, as defined in Section 3(37) of ERISA, or is subject to Title IV of ERISA or Code section 412; and neither the Company nor any of its Affiliates has or has had any liability or other obligation in 12 connection with any such multi-employer plan, or plan which is or was subject to Title IV of ERISA or Code section 412. (f) WARN ACT COMPLIANCE. The Company has complied in all respects with the Worker Adjustment and Retraining Notification Act. 3.12. INTELLECTUAL PROPERTY. (a) PART 3.12 of the Seller Disclosure Letter lists (1) material patents, patent applications, registered and unregistered trademarks and service marks, trade names, domain names, registered and unregistered copyrights, including software, and maskworks owned by the Company, (2) material licenses, sublicenses and other agreements as to which Company is a party and under which a third party is authorized or permitted to use such Intellectual Property Rights listed pursuant to Section 3.12(a)(1), and (3) material licenses, sublicenses and other agreements as to which Company is a party and pursuant to which Company is authorized to use third party (including Seller or any of its Affiliates other than the Company) patents, trademarks or copyrights, including software ("THIRD PARTY INTELLECTUAL PROPERTY RIGHTS"), which are incorporated solely in, are, or form a primary part of material product or service offerings of Company to conduct its business. PART 3.12 of the Seller Disclosure Letter does not, and need not, include or describe Intellectual Property Rights of a generalized nature such as know how and goodwill. The Company is not in violation of any license, sublicense, or agreement described in PART 3.12 of the Seller Disclosure Letter. The Intellectual Property Rights and Third Party Intellectual Property Rights set forth on PART 3.12 of the Seller Disclosure Letter are all those in existence that are necessary for the operation of the Company's businesses as they are currently conducted, including the Subject Business. The Company, or its wholly-owned subsidiary, is the owner of all right, title, and interest in and to each of such Intellectual Property Rights or licensee of such Third Party Intellectual Property Rights, free and clear of all Encumbrances, other than Permitted Encumbrances. (b) Except as disclosed in PART 3.12 of the Seller Disclosure Letter, there is no unauthorized use, disclosure, infringement or misappropriation of any Intellectual Property Rights of the Company, or misappropriation of any trade secret material owned by the Company, by any third party, including any former employee of the Company. (c) All material patents and registered and unregistered trademarks, service marks and copyrights held by the Company are valid and existing. The Company has not received any written notice of any assertion or claim challenging the validity of any Intellectual Property Rights of the Company. Except as described in PART 3.12 of the Seller Disclosure Letter, the Company has not been sued, or threatened to be sued, in any suit or other Proceeding which involves a claim of infringement of any patents, trademarks, service marks, copyrights or misappropriation of any trade secret or violation of other proprietary right of any third party. Except as described in PART 3.12 of the Seller Disclosure Letter, there is no claim, nor has the Company recognized any facts or circumstances which could lead to a claim, of infringement of any patents, trademarks, service marks, copyrights or misappropriation of any trade secret or violation of other proprietary right of any third party. Except as described in PART 3.12 of the Seller Disclosure Letter, the Company has not received written notice that any third party is challenging the ownership of any of the Company's Intellectual Property Rights. Except as described in PART 3.12 of the Seller Disclosure Letter, the Company has not brought or threatened to bring any action, suit, or Proceeding for infringement of Intellectual Property Rights or breach of any license or agreement involving its Intellectual Property Rights against any third party. There are no pending or threatened interference Proceedings or re-examinations involving any patents or patent applications of the Company. 13 3.13. ABSENCE OF CHANGES. Except as set forth on PART 3.13 of the Seller Disclosure Letter, since the Balance Sheet Date and other than the Asset Transfers, with respect to the Company there has not occurred any of the following: (a) change in the Company's authorized or issued membership interests; grant of any option or right to purchase any membership interests or similar rights with respect to the Company or any of its subsidiaries; issuance of any security convertible into membership interest or similar rights; grant of any registration rights; purchase, redemption, retirement, or other acquisition by the Company of any membership interests or similar rights; or declaration or payment of any dividend or other distribution or payment in respect of membership interests; (b) amendment to the Organizational Documents of the Company or any of its subsidiaries; (c) payment or increase by the Company or any of its subsidiaries of any bonuses, salaries, or other compensation to any stockholder, member, director, officer, or employee (except for year-end bonuses and salary increases in the Ordinary Course of Business) or entry into any employment, severance, or similar contract with any director, officer, or employee; (d) adoption of, or increase in the payments to or benefits under, any profit sharing, bonus, deferred compensation, savings, insurance, pension, retirement, or other employee benefit plan for or with any employees of the Company or any of its subsidiaries, other than an adoption or increase of Seller affecting all of its subsidiaries; (e) damage to or destruction or loss of any asset or property of the Company or any of its subsidiaries, whether or not covered by insurance, that has or could have a Material Adverse Effect on the properties, assets, business, or financial condition of the Company or any of its subsidiaries, taken as a whole; (f) entry into, termination of, or receipt of notice of termination of (i) any license, distributorship, dealer, sales representative, joint venture, credit, or similar agreement, or (ii) any contract or transaction involving a total remaining commitment by or to the Company or any of its subsidiaries of at least $100,000; (g) sale (other than sales of inventory in the Ordinary Course of Business), lease, or other disposition of any asset or property of the Company or any of its subsidiaries or mortgage, pledge, or imposition of any new Encumbrance on any material asset or property of the Company or any of its subsidiaries, including the sale, lease, or other disposition of any of the Intellectual Property Rights; (h) cancellation or waiver of any claims or rights with a value to the Company or any of its subsidiaries in excess of $100,000; (i) material change in the accounting methods used by the Company or any of its subsidiaries; or (j) agreement, whether oral or written, by the Company or any of its subsidiaries to do any of the foregoing. 3.14. TAX RETURNS. The Company has filed all Tax returns and reports that it is required to file with the appropriate Governmental Entities. Such returns and reports are accurate and complete, and the Company has paid in full all Taxes, interest, penalties, assessments, or deficiencies shown to be due on 14 such reports, claimed to be due by any taxing authority, or otherwise due and owing. The Company has made all withholdings of Tax required to be made under all applicable federal state and local tax regulations. 3.15. TITLE TO ASSETS, PROPERTIES AND RIGHTS AND RELATED MATTERS. (a) Except as set forth on PART 3.15(a) of the Seller Disclosure Letter, the Company has good title to the Intellectual Property Rights as provided in Section 3.12 and to all other assets, properties and interests in properties, real, personal or mixed, reflected on the Balance Sheet or acquired after the Balance Sheet Date (except inventory or other property sold or otherwise disposed of since the Balance Sheet Date in the Ordinary Course and accounts receivable and notes receivable paid in full subsequent to the Balance Sheet Date), free and clear of all Encumbrances, except for Permitted Encumbrances. Except as set forth on PART 3.15 of the Seller Disclosure Letter, and except for inventory and supplies in transit in the Ordinary Course, all material tangible personal property is located on one or more of the Leased Real Properties. (b) Except as set forth on PART 3.15(b) of the Seller Disclosure Letter, neither the Company, nor any of its subsidiaries, has transferred to Seller or any of its Affiliates any material assets other than in the Ordinary Course. 3.16. AGREEMENTS, NO DEFAULTS. Except as set forth on PART 3.16 of the Seller Disclosure Letter, the Company is not a party to any: (a) Contract for the employment of any officer, individual employee or other Person on a full-time, part-time, consulting or other basis or agreement with any Affiliates; (b) Contract relating to the borrowing of money or to the mortgaging, pledging or otherwise placing an Encumbrance, other than Permitted Encumbrances, on any asset owned by the Company and/or used in the Subject Business; (c) Contract relating to any guarantee of any obligation for borrowed money or otherwise; (d) Contract with respect to the lending or investing of funds; (e) Contract relating to the licensing of any rights of any third party; (f) Contract or group of related Contracts with the same party (excluding purchase orders entered into in the Ordinary Course which are to be completed within three months of entering into such purchase orders) for the purchase or sale of products or services under which the undelivered balance of such products and services has a purchase price in excess of $100,000; or (g) Contract that prohibits it from freely engaging in business anywhere in the world. 3.17. COMPLIANCE. Except as set forth in PART 3.17, the Company has not received any notice of violation from any government or regulatory agency related to an alleged violation of any statute, ordinance, regulation, order or requirement relating to its operations, and the Company and Seller have no Knowledge of any such violation. 3.18. BANK ACCOUNTS; POWERS OF ATTORNEY. PART 3.18 of the Seller Disclosure Letter sets forth a complete and correct list of (a) the names of each bank account in which the Company has an account or 15 safe deposit box, and the names of all persons authorized to draw thereon, or have access thereto and (b) the names of all Persons holding general or special powers of attorney from the Company and a summary of the terms thereof. 3.19. ACCOUNTS RECEIVABLE. Except as set forth in PART 3.19 of the Seller Disclosure Letter, the accounts receivable of the Company that are reflected on the Most Recent Financial Statements or on the accounting records of the Company as of the Closing Date (the "ACCOUNTS RECEIVABLE") have arisen in the Ordinary Course in the aggregate recorded amounts thereof, net of any applicable reserve reflected in the Most Recent Financial Statements. Except as set forth in PART 3.19 of the Seller Disclosure Letter, the Accounts Receivable (a) arose from bona fide sales or services transactions in the ordinary course of business and are payable on ordinary trade terms, (b) are not the subject of any actions or Proceedings brought by or on behalf of the Company, (c) have not been challenged or disavowed by the obligor of such Accounts Receivable, and (d) are, to the Knowledge of the Company, fully collectible subject to any aggregate reserve reflected in the Most Recent Financial Statements. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF PURCHASER Purchaser hereby represents and warrants to the Company and Seller as follows: 4.1. CORPORATE EXISTENCE. Purchaser is a New York limited liability company duly organized, validly existing and in good standing under the laws of its jurisdiction of organization. Penthouse International, Inc. owns 99% of the member interests of Purchaser, and Mr. Charles L. Samel ("Samel") and Dr. Luis Enrique Molina G. respectively own .5% of the member interests of Purchaser and are the sole managers of Purchaser. 4.2. CORPORATE POWER AND AUTHORIZATION. Purchaser has the power, authority, and legal right to execute this Agreement, to consummate the Contemplated Transactions, to execute any instrument necessary to fully complete the terms of this Agreement, and to otherwise perform all of its obligations hereunder. The execution, delivery, and performance of this Agreement and all other agreements required hereunder have been duly authorized by all necessary corporate or other similar action. This Agreement and all other agreements required hereunder have been duly executed and delivered by Purchaser and, assuming due and valid execution and delivery by all other parties hereto, constitute the legal, valid, and binding obligations of Purchaser, enforceable against Purchaser in accordance with their terms and conditions except as such enforcement may be subject to or limited by bankruptcy, insolvency, reorganization, moratorium or other similar Laws now or hereafter in effect affecting creditors' rights generally, and by general principles of equity. 4.3. NO ADDITIONAL BROKERS. Except as set forth on PART 4.3 of the Purchaser Disclosure Letter, no investment banker, broker or finder is entitled to receive a commission or fee from the execution of this Agreement or from the consummation of the Contemplated Transactions, based upon any arrangement or agreement made by or on behalf of Purchaser. 4.4. NO CONSENTS REQUIRED. Except as otherwise provided in this Agreement, no Permit, consent, approval or authorization of, or any notification of or filing with, any Person or Governmental Entity is required in connection with the execution and delivery by Purchaser of this Agreement, any other agreement required hereunder, or the consummation of any of the Contemplated Transactions to be performed by Purchaser. 4.5. FINANCIAL RESOURCES. On the Closing Date, Purchaser: 16 (a) owns property having a value, at fair valuations, greater than the amount required to pay its debts; (b) has capital sufficient to carry on its business and transactions and all business and transactions in which it is about to engage following acquisition of the Subject Business; and (c) does not intend or believe it will incur following consummation of the Contemplated Transactions debts beyond its ability to repay them as they mature. 4.6. NO RESTRICTIONS. The execution and delivery of this Agreement, the execution and delivery of the other agreements contemplated by this Agreement, and the consummation of the Contemplated Transactions do not and will not result in: (a) the breach of any contract to which Purchaser is a party or by which Purchaser is bound, (b) the violation of the Organizational Documents of Purchaser, including but not limited to the organizational agreement of Purchaser, or (c) the violation of any statute, regulation, or governmental order by which Purchaser is bound. 4.7. PURCHASE FOR OWN ACCOUNT. Purchaser is purchasing the Member Interest of the Company for its own account for investment, not as a nominee or agent for any other Person, and not with a view to, or for sale in connection with, the distribution of any part thereof, and Purchaser has no present intention of distributing the same. 4.8. RELIANCE UPON PURCHASER'S REPRESENTATIONS. Purchaser understands that the Member Interest is not registered under the Securities Act nor qualified under applicable state securities law on the ground that the sale provided for in this Agreement is exempt from registration under the Securities Act and qualification under applicable state securities law, and that Seller's reliance on such exemptions is predicated on Purchaser's representations set forth in this Agreement. 4.9. PURCHASER IS ON AN "AS IS" BASIS; RECEIPT OF ALL MATERIAL INFORMATION. Purchaser represents that it is purchasing the Company on an "as is" basis. Purchaser believes that, as of Closing, Purchaser will have received all the information Purchaser considers necessary or appropriate for deciding whether to purchase the Member Interest of the Company. By Closing, Purchaser will have had a satisfactory opportunity to ask questions and receive answers from Seller and the Company regarding the terms and conditions of the purchase of the Member Interest and the business, properties, prospects, and financial condition of the Company. Also by Closing, Purchaser will have had a satisfactory opportunity to obtain additional information sufficient to satisfy itself with respect to the foregoing. Purchaser hereby acknowledges that by participating in the Closing, it will be affirming: (a) that it has taken advantage of its opportunity to ask questions and receive answers from Seller and the Company, and (b) that every material fact necessary to induce Purchaser into its purchase of the Member Interest of the Company is addressed in this Agreement or in the accompanying Seller Disclosure Letter. 4.10. INVESTMENT EXPERIENCE. Purchaser's officers are experienced in evaluating and investing in securities, and Purchaser acknowledges that through their expertise, it is able to make investment decisions for itself, can bear the economic risk of its investment and has such knowledge and 17 experience in financial and business matters that it is capable of evaluating the merits and risks of the investment in the Member Interest. 4.11. RESTRICTED SECURITIES. Purchaser understands that the Member Interest may not be sold, transferred or otherwise disposed of without registration under the Securities Act and/or qualification under applicable state securities law, or an exemption therefrom, and that in the absence of an effective registration statement and/or applicable state qualification covering the Member Interest or an available exemption from registration under the Securities Act and/or qualification under applicable state securities law, the Member Interest must be held indefinitely. 4.12. NO KNOWLEDGE OF BREACH OF THE COMPANY'S OR SELLER'S REPRESENTATIONS OR WARRANTIES. To the Knowledge of Purchaser, there are no facts, events or occurrences which would cause the Company or Seller to be in breach of any of their respective representations or warranties contained in this Agreement. 4.13. COMPANY INSURANCE. Purchaser acknowledges that the Company's insurance policies are held by Seller and that at Closing, Purchaser shall be required to obtain new insurance policies for the Company. 4.14. CERTAIN RELATED DOCUMENTS. The ancillary documents to be executed by Purchaser in connection with this Agreement have been duly executed and delivered by the parties thereto other than Seller and the Company and constitute the legal, valid, and binding obligations of such parties, enforceable against such parties in accordance with their terms and conditions. ARTICLE 5 COVENANTS DURING THE TRANSITION PERIOD The Company, Seller and Purchaser agree to abide by the following covenants from and after the date of this Agreement until the Closing or the earlier termination of this Agreement pursuant to Section 13.1 (the "TRANSITION PERIOD"). 5.1. CONSENTS, APPROVALS, ETC. The Company, Seller and Purchaser shall each use commercially reasonable efforts: (a) to cooperate with one another in determining whether any filings are required to be made with, or consents, permits, authorizations or approvals are required to be obtained from, any other Person or Governmental Entity in connection with the execution and delivery of this Agreement and the consummation of the Contemplated Transactions, and timely making all such filings and timely seeking all such consents, permits, authorizations or approvals (provided that Seller shall only be required to obtain the consent of applicable parties under its Senior credit facility); and (b) to take, or cause to be taken, all other actions and do, or cause to be done, all other things necessary, proper or advisable to consummate and make effective the Contemplated Transactions as soon as reasonably practicable. 5.2. AFFIRMATIVE COVENANTS OF THE COMPANY AND SELLER. Except as otherwise consented to in writing by Purchaser, the Company shall, and Seller shall cause the Company: (a) to conduct its operations in the Ordinary Course (including the collection of receivables and the payment of payables) and use reasonable efforts to preserve intact its business organization, keep 18 available the services of officers and employees, and maintain satisfactory relationships with suppliers, customers and others having business relationships with them; (b) to maintain its assets in customary repair, order and condition, maintain insurance reasonably comparable to that in effect on the Balance Sheet Date, replace in accordance with past practice inoperable, worn out or obsolete assets with modern assets of comparable quality and, in the event of a casualty, loss or damage to any of such assets or properties before the Closing Date for which the Company is insured or the condemnation of any assets or properties, either repair or replace such assets or property or, if Purchaser agrees, retain such insurance or condemnation proceeds; (c) to use its reasonable efforts to obtain all consents known by the Company or Seller to be needed, or specified by Purchaser, on or before the Closing Date, to the Contemplated Transactions (provided that Seller shall only be required to obtain the consent of applicable parties under its Senior credit facility); and (d) to maintain its insurance policies in full force and effect, or shall renew or replace the same before the expiration or termination of the expiring policies with policies from a reputable insurance carrier with a "Best's Rating" equal to or better than that of the existing carrier, containing insurance coverage in the same or greater amount than the existing policies in substantially the same form and substance as the existing policies. 5.3. NEGATIVE COVENANTS OF THE COMPANY AND SELLER. Without the prior written consent of Purchaser, except as expressly contemplated by this Agreement, the Company shall not, and Seller shall cause the Company not: (a) to sell, lease, transfer or assign any of its material assets, tangible or intangible, other than inventory sold in the Ordinary Course and the Asset Transfers; (b) except as set forth on PART 5.3(b) of the Seller Disclosure Letter, to acquire or agree to acquire by merging or consolidating with, or by purchasing any material portion of the capital stock or assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof; (c) to amend the Organizational Documents of the Company; (d) to split, combine, reclassify, encumber or make any change in the Company's membership interests, or issue any new member interests or issue or become a party to any subscriptions, warrants, rights, options, convertible securities or other agreements or commitments of any character relating to the interests of the Company; (e) to incur or commit to incur any capital expenditures in excess of $250,000 in the aggregate; (f) to incur, assume or guarantee any long-term or short-term indebtedness except under existing credit facilities or replacements for the same; (g) to distribute any cash or assets to its members, or make any payments to Seller or any of its affiliates, to the extent necessary to ensure that on the Closing Date, the Company shall have at least the amount of cash (restricted and unrestricted) on its balance sheet at Closing as reflected on the Balance Sheet; or 19 (h) to authorize any of the foregoing, or enter into any agreement to do any of the foregoing. 5.4. TAX MATTERS. Except as set forth on PART 5.4 of the Seller Disclosure Letter, without the prior written consent of Purchaser, the Company shall not make or change any election, change an annual accounting period, adopt or change any accounting method, file any amended Tax Return, enter into any closing agreement, settle any Tax claim or assessment, surrender any right to claim a refund of Taxes, consent to any extension or waiver of the limitation period applicable to any Tax claim or assessment relating to Company, or take any other similar action relating to the filing of any Tax Return or the payment of any tax, if such election, adoption, change, amendment, agreement, settlement, surrender, consent or other action would have the effect of increasing the Tax liability of the Company for any period ending after the Closing Date or decreasing any Tax attribute existing on the Closing Date. 5.5. REAL PROPERTY AND LEASES. (a) MAINTENANCE OF REAL PROPERTY. Seller will cause the Company to maintain the Leased Real Property, including any and all improvements situated thereon, in substantially the same condition as of the date of this Agreement, ordinary wear and tear and acts of God excepted, and shall not demolish or remove any of the existing improvements situated thereon, or erect new improvements on the Leased Real Property or any portion thereof, without the prior written consent of Purchaser. (b) LEASES. Except with regard to assisting Purchaser with its efforts to obtain any necessary consents related to the Company's leases, Seller will not cause or permit the Company's leases to be amended, modified, extended renewed or terminated, nor shall the Company enter into any new lease, sublease, license or other agreement for the use or occupancy of any real property, without the prior written consent of Purchaser. 5.6. ADDITIONAL COVENANTS OF SELLER AND THE COMPANY. (a) Seller and the Company shall cooperate with Purchaser in preparing and making all filings or submissions to Governmental Entities required, if any, in connection with the Contemplated Transactions. Seller and the Company, at any time before or after the Closing, shall execute, acknowledge and deliver any further assignments, assurances, documents and instruments of transfer reasonably requested by Purchaser, and shall take any other action consistent with the terms of this Agreement that may reasonably be requested by Purchaser, for the purpose of delivering the Member Interest to Purchaser, and obtaining the consents necessary to complete the Contemplated Transactions. (b) Seller shall use its, and shall cause the Company to use its, commercially reasonable efforts to fulfill the conditions set forth in Article 7 of this Agreement over which they have control or influence and to complete the Contemplated Transactions. 5.7. COVENANTS OF PURCHASER. (a) Purchaser shall cooperate with Seller and the Company in preparing and making all filings or submissions to Governmental Entities required in connection with the Contemplated Transactions, if any. (b) Purchaser shall use its reasonable efforts to obtain all consents and releases related to the Processing Agreements and the contracts related to the Leased Real Property (provided that Purchaser shall only be required to obtain the consents of First Data and SGS under the Processing Agreements). 20 (c) Purchaser shall use its commercially reasonable efforts to fulfill all of the conditions set forth in Article 8 of this Agreement over which it has control or influence, and to complete the Contemplated Transactions. 5.8. EXPENSES. Except as otherwise provided in this Agreement, each of Seller on one hand, and Purchaser on the other hand, shall pay its own expenses incidental to the preparation of this Agreement, the carrying out of the provisions of this Agreement and the consummation of the Contemplated Transactions, including without limitation its own respective legal, accounting, brokerage and other costs, if any, incurred in connection with the Contemplated Transactions. ARTICLE 6 CONDITIONS TO EACH PARTY'S OBLIGATIONS The respective obligations of each party hereto to effect the Contemplated Transactions are subject to the satisfaction at or before the Closing of all the following conditions, unless waived (to the extent such conditions can be waived) in writing by Purchaser or Seller, as applicable: 6.1. NO INJUNCTIONS OR RESTRAINTS. No temporary restraining order, preliminary or permanent injunction or other Order issued by any Governmental Entity nor other legal restraint or prohibition preventing the Contemplated Transactions shall be in effect. 6.2. STATUTES. No action shall have been taken or threatened, and no Law or Order shall have been enacted, promulgated or issued or deemed applicable to the transactions contemplated hereby by any Governmental Entity that would: (a) make the Contemplated Transactions illegal or substantially delay the consummation of any material aspect of the transactions contemplated hereby; (b) compel the Company or Purchaser to dispose or hold separate all or a material portion of the Subject Business or assets of the Company, Purchaser or any Affiliate thereof as a result of the consummation of the Contemplated Transactions; or (c) render any party unable to consummate the Contemplated Transactions. ARTICLE 7 CONDITIONS TO THE OBLIGATIONS OF PURCHASER The obligations of Purchaser to effect the Contemplated Transactions are subject to the satisfaction at or before the Closing of all the following conditions, unless waived (to the extent such conditions can be waived) in writing by Purchaser: 7.1. REPRESENTATIONS AND WARRANTIES TRUE AND COMPLETE AT CLOSING. Seller shall deliver a certificate to the Purchaser confirming that the representations and warranties of Seller and the Company contained in this Agreement shall be true and complete in all material respects at and as of the Closing Date with the same effect as if such representations and warranties had been made at and as of the Closing Date. 21 7.2. PERFORMANCE OF COVENANTS AND AGREEMENTS. Seller shall deliver a certificate to the Purchaser confirming that the all of the covenants and agreements required to be performed by the Company and Seller at or before the Closing pursuant to the terms of this Agreement shall have been duly performed in all material respects. 7.3. PRE-CLOSING BALANCE SHEET. Purchaser shall have received from Seller an estimated balance sheet of the Company reflecting the Subject Business transferred at Closing, and excluding the Asset Transfers, (the "PRE-CLOSING BALANCE SHEET") and which is set forth on EXHIBIT 7.3 attached hereto. 7.4. CLOSING DELIVERIES. Purchaser shall have received duly executed copies of the closing documents set forth in Section 10.1(a) and such documents shall be in full force and effect. 7.5. OPINION OF COUNSEL. Purchaser shall have received the opinion of Nelson Mullins Riley & Scarborough, L.L.P. ("NELSON MULLINS"), counsel to the Company and Seller, in the form and substance attached hereto as EXHIBIT 7.5 dated as of the Closing Date. 7.6. RESIGNATIONS OF MANAGER AND OFFICERS. The sole manager and any officers of the Company shall have submitted written resignations to the Company with respect to such party's position with the Company. 7.7. CONSENTS. Purchaser shall have received, in writing and in form and substance reasonably acceptable to Purchaser, all consents, approvals, Orders and waivers of, and all filings and registrations with, all Governmental Entities, and applicable parties under Seller's senior credit facility, that are required for the consummation of the Contemplated Transactions. Notwithstanding anything in this Agreement to the contrary, Purchaser's conditions to closing this Agreement pursuant to Sections 7.1, 7.2 and 7.7, as such sections may in any manner relate to contract consents required in order to close the Contemplated Transactions shall be limited to the consent of applicable parties under Seller's senior credit facility. ARTICLE 8 CONDITIONS TO THE OBLIGATIONS OF SELLER The obligations of Seller to effect the Contemplated Transactions are subject to the satisfaction at or before the Closing of all the following conditions, unless waived (to the extent such conditions can be waived) in writing by Seller: 8.1. REPRESENTATIONS AND WARRANTIES TRUE AND COMPLETE AT CLOSING. Purchaser shall deliver a certificate to Seller confirming that all of the representations and warranties of Purchaser contained in this Agreement shall be true and complete in all material respects at and as of the Closing Date with the same effect as if such representations and warranties had been made at and as of the Closing Date. 8.2. PERFORMANCE OF COVENANTS AND AGREEMENTS. Purchaser shall deliver a certificate to Seller confirming that all of the covenants and agreements required to be performed by Purchaser at or before the Closing pursuant to the terms of this Agreement shall have been duly performed in all material respects. 22 8.3. CLOSING DELIVERIES. Seller shall have received duly executed copies of the closing documents set forth in Section 10.1(b) and such documents shall be in full force and effect. 8.4. OPINIONS OF COUNSEL. Seller shall have received the opinion of Gersten, Savage, Kaplowitz, Wolf & Marcus, LLP, counsel to Purchaser, in form and substance attached hereto as EXHIBIT 8.4 dated as of the Closing Date. 8.5. CONSENTS. Seller shall have received, in writing and in form and substance reasonably acceptable to Seller, all consents, approvals, Orders and waivers of, and all filings and registrations with, all Governmental Entities, and the release from any and all remaining liability or obligations under the Company's processing agreement (the "PROCESSING AGREEMENTS") with First Data Merchant Services, Inc. (together with its Affiliates, "FIRST DATA") and Shared Global Systems, Inc. (together with its Affiliates, "SGS"), including any Seller guaranty thereof. Notwithstanding anything in this Agreement to the contrary, Seller's conditions to closing this Agreement pursuant to Sections 8.1, 8.2 and 8.5, as such sections may in any manner relate to contract consents required in order to close the Contemplated Transactions, shall be limited to Seller's release from any and all remaining liability or obligations under the Processing Agreements, including any Seller guaranty thereof, and provided that the letter of credit currently securing the Company's obligations under the Processing Agreement with First Data shall be released, or otherwise addressed, in accordance with Section 9.13. ARTICLE 9 ADDITIONAL AGREEMENTS 9.1. COOPERATION. The InterCept Parties on the one hand, and Purchaser on the other hand, shall cooperate fully with each other and their respective employees, legal counsel, accountants and other representatives and advisers in connection with the steps required to be taken as part of their respective obligations under this Agreement both before and after the Closing; and shall, at any time and from time to time after the Closing, upon the request of the other, do, execute, acknowledge and deliver, or will cause to be done, executed, acknowledged and delivered, all such further acts, deeds, assignments, transfers, conveyances, powers of attorney, receipts, acknowledgments, acceptances and assurances as may be reasonably required to satisfy and perform the obligations of such party hereunder. 9.2. SOFTWARE LICENSE AGREEMENT. At Closing, the Company and Seller or its Affiliates shall enter into a software license agreement in the form attached hereto as EXHIBIT 9.2 (the "SOFTWARE LICENSE AGREEMENT") providing for the royalty-free, non-exclusive, non-transferable, perpetual license of the NexGen and iBill transaction processing and support software from Seller or its Affiliates to the Company. 9.3. TRANSITION SUPPORT SERVICES AGREEMENT. At Closing, the Company or its Affiliates and Seller shall enter into a transition support services agreement in the form attached hereto as EXHIBIT 9.3 (the "TRANSITION SUPPORT AGREEMENT") providing that Seller shall provide to the Company or its Affiliates post-Closing certain services currently performed by Seller for the Company or its Affiliates, as well as for other services Seller or its Affiliates may desire from the Company, for a period not to exceed six months. 9.4. TRANSFER OF CUSTOMERS. Purchaser and Seller agree that Seller shall retain some of the Company's non-adult content customer relationships acquired since April 8, 2002. As such, immediately before Closing, Seller shall cause the Company to transfer the customers listed on PART 9.4 of the Seller 23 Disclosure Letter (the "TRANSFERRED CUSTOMERS") to Seller or an Affiliate of Seller in one of the Asset Transfer Agreements. 9.5. TRANSFER OF CLAIMS. Seller and Purchaser acknowledge and agree that immediately before Closing, the Company will assign to Seller or an Affiliate of Seller all of its rights to the claims as set forth on PART 9.5 of the Seller Disclosure Letter (the "TRANSFERRED CLAIMS") in the Asset Transfer Agreements. The Parties acknowledge that the value of such Claims shall be removed from the Closing Balance Sheet for purposes of all calculations of the Purchase Price Adjustment. 9.6. INSURANCE POLICY. At Closing, to secure Purchaser's indemnification obligations pursuant to Sections 11.2(d) and 11.2 (e), Purchaser shall deliver or cause to be delivered to Seller a validly issued insurance policy (the "INSURANCE POLICY") in the face amount of $20,000,000, in substantially the form attached hereto as EXHIBIT 9.6, which shall be issued by insurance companies satisfactory to Seller in its sole discretion. The Insurance Policy shall have a term of two years and shall provide that Seller as beneficiary thereof which may, from time to time, make a claim against the Insurance Policy by following the procedures set forth therein. Purchaser shall have paid all premiums for the term of the Insurance Policy before Closing and the Insurance Policy shall have no deductible. The face amount of the Insurance Policy will be reduced from $20,000,000 to $5,000,000 on the 375th day following the Closing. 9.7. CONFIDENTIALITY. The InterCept Parties on the one hand and Purchaser on the other hand shall hold in trust and confidence all Confidential Information about the other and shall not make any copies of, distribute, or use any such Confidential Information except as necessary to prepare for the completion of the Contemplated Transactions. After the Closing, neither Seller on the one hand nor Purchaser and the Company on the other hand shall make any unauthorized disclosure of Confidential Information about the other for a period of five years. If the Contemplated Transactions do not occur, then each such party, upon the first request in writing from the other, shall return to the other all Confidential Information in its possession, without retaining any copies thereof, and neither the InterCept Parties on the one hand nor Purchaser on the other hand shall make any unauthorized disclosure of Confidential Information about the other for a period of five years from the date of this Agreement. Notwithstanding the foregoing, any party may disclose Confidential Information to the extent disclosure is mandated by the legal requirements of such party, the Nasdaq Stock Market, or the SEC, as well as to professional advisors, directors and senior executives as reasonably necessary. This Agreement may also be disclosed to third parties if reasonably necessary to secure consents or approvals to consummate the Contemplated Transactions, or, to the extent necessary, to comply with diligence requirements in connection with financing or other transactions that may be proposed by the Company in the future. The parties will cooperate to draft a press release for the announcement of this Agreement as soon as possible after the execution of this Agreement by all parties. The provisions of this Section 9.7 are cumulative with the provisions of the Non-Disclosure Agreement previously signed by Seller and Purchaser, provided that in the event of a conflict between the confidentiality provisions of that agreement and this Agreement, the confidentiality provisions of this Agreement shall govern. Notwithstanding anything in this Agreement or the referenced Non-Disclosure Agreement to the contrary, any party to this Agreement (and any employee, representative, or other agent of any party to this Agreement) may disclose to any and all persons, without limitation of any kind, the tax treatment and tax structure of the transactions contemplated by this Agreement and all materials of any kind (including opinions or other tax analyses) that are provided to it relating to such tax treatment and tax structure. However, any such information relating to the tax treatment or tax structure is required to be kept confidential to the extent necessary to comply with any applicable federal or state securities laws. 24 9.8. ABILITY OF NELSON MULLINS TO REPRESENT SELLER POST-CLOSING IN MATTERS RELATED TO THE COMPANY. The parties to this Agreement agree and acknowledge that Nelson Mullins has represented Seller and the Company pre-Closing and will continue to represent Seller post-Closing. Purchaser agrees, for itself and the Company post-Closing, and after consultation with its own counsel, that the client/attorney relationship that currently exists between Nelson Mullins and the Company shall cease upon Closing, and that the Company hereby waives any conflict that might be deemed to be present between Nelson Mullins and the Company post-Closing arising out of Nelson Mullins' prior representation of the Company. Accordingly, Purchaser agrees, for itself and for the Company post-Closing, that Nelson Mullins may represent Seller in any dispute between Seller on one hand and Purchaser or the Company on the other hand, notwithstanding the client/attorney relationship that currently exists between Nelson Mullins and the Company. 9.9. PAYMENT OF TAXES. (a) Seller shall pay all Taxes relating to or arising from operations of the Company on or before the Closing Date. (b) Seller, the Company and Purchaser agree to furnish, or to cause to be furnished in good faith to each other, such cooperation and assistance as is reasonably necessary to file any future returns, to respond to audits, to negotiate settlements with Governmental Entities and to prosecute and defend against Tax claims. (c) The Purchase Price shall be allocated as set forth on SCHEDULE 9.9(c). Such allocation shall also conform to the requirements of Section 1060 of the Code and the regulations thereunder and any comparable provisions of state or local law. Seller and Purchaser shall jointly complete and separately file Form 8594 with their respective tax returns for the tax year in which the Closing Date occurs in accordance with such allocation. Each of Seller and Purchaser hereby covenants and agrees that it will not take a position on any income, property or other Tax Return, before any Governmental Entity charged with the collection of any income, property or other Tax, or in any judicial proceeding that is in any way inconsistent with the terms of this Agreement. 9.10. PAYMENT OF FINES. Notwithstanding any other provision of this Agreement, if (a) at any time within 180 days following the Closing Date the Company is assessed any fine, assessment, levy or other charge by First Data or any credit card association (any such event, a "FINE") including without limitation in relation to chargebacks or the manner in which the Company's business is conducted, (b) such Fine relates to any period on or before the Closing Date and was not fully reserved against in the Closing Balance Sheet or previously paid in full, and (c) Purchaser notifies Seller in writing of such Fine before the close of business on the 180th day following the Closing Date, then Seller shall remit to the Company the amount of such Fine, net of aggregate reserves or holdbacks reflected in the Closing Date Balance Sheet, in immediately available funds within five business days after Purchaser notifies Seller in writing of such Fine. Purchaser and the Company agree that, contingent upon Seller's payment or reimbursement of such Fine, the Company and Seller hereby assign to Seller the following: (1) all refunds of Fines actually paid by Seller to First Data or card associations before or in respect of periods before Closing; (2) any actual or potential causes of action against any of the Company's processing providers or other vendors by reason of any act or omission that may have resulted in the Company suffering a Fine for activities occurring before Closing, and for which Seller has paid the Fine; and 25 (3) any right to recover from (or pass through to) merchants, consumers, or other Persons any Fines suffered by the Company for activities occurring before Closing; and for which Seller has paid the Fine. If Seller reimburses Purchaser for any Fines in accordance with this Agreement, Purchaser covenants and agrees that it shall use reasonable best efforts to recover the amount of any such Fines from the merchant, consumers, or other Persons whose activities led to the incurrence of the Fines and shall pay any amount so recovered to Seller as reimbursement for amounts previously paid by Seller to Purchaser (or the Company following the Closing). 9.11. CUSTOMER ACCOUNT MAINTENANCE. Purchaser acknowledges and agrees that for a period of one year following the Closing, Purchaser shall cause Company and its Affiliates to maintain all customer accounts consistent with the requirement of each customer agreement, as may be amended from time to time by the Company and such customer, including but not limited to the timely payment of all obligations (whether or not incurred before the Closing Date) and appropriate reserve maintenance. Notwithstanding the foregoing, nothing herein shall prevent the Company from terminating, amending or modifying any customer agreement at any time in accordance with the terms of such agreement. In the event of any termination of a customer agreement by the Company, the Company shall perform all of its obligations under such customer agreement, including the timely payment of all obligations and appropriate reserve maintenance. It is specifically agreed that no customers shall be third party beneficiaries of this provision. 9.12. BANK OF AMERICA CREDIT FACILITY. Notwithstanding any representations, warranties, agreements, or covenants herein to the contrary, all of Seller's and its subsidiaries' assets, including Seller's ownership interests in the Company, are pledged to, or are subject to security interests in favor of, Bank of America, N.A. and other lenders, pursuant to that certain Credit Agreement dated September 19, 2003, as amended (the "CREDIT AGREEMENT"). Additionally, each of Seller's subsidiaries, including the Company, guaranteed Seller's obligations to the lenders in the Credit Agreement. To effect the Contemplated Transactions, Seller must therefore obtain the consent of the lenders pursuant to the terms of the Credit Agreement (the "LENDER CONSENT"), and each representation, warranty, agreement or covenant herein is qualified by this section and to the necessity of obtaining the Lender Consent. 9.13. FIRST DATA LETTER OF CREDIT. On or before April 20, 2004, Purchaser shall cause First Data to release Seller's $3,000,000 letter of credit currently securing the Company's obligations under the Processing Agreements (the "FIRST DATA LETTER OF CREDIT"). If the First Data Letter of Credit is not released on or before April 20, 2004, Purchaser shall pay Seller $3,000,000 (less the aggregate amount of any draws previously paid by Purchaser to Seller as provided in the following sentence) in immediately available funds on or before April 20, 2004. In addition, if a full or partial draw upon the First Data Letter of Credit is made before it is released or before Purchaser shall have paid Seller $3,000,000, Purchaser shall pay Seller the amount of any such draw in immediately available funds within two (2) business days. 9.14. GUARANTY OF NOTE AND FIRST DATA LETTER OF CREDIT. At Closing, Dr. Luis Enrique Molina G. (the "GUARANTOR") shall enter into that certain Guaranty Agreement attached hereto as EXHIBIT 9.14 (the "GUARANTY AGREEMENT") with Seller whereby Guarantor shall guarantee both (i) Purchaser's obligations under the Note, and (ii) Purchaser's obligations under Section 9.13. 26 ARTICLE 10 THE CLOSING 10.1. CLOSING. The closing of the purchase and sale of the Member Interest and the consummation of the Contemplated Transactions (the "CLOSING") shall take place at 10:00 a.m., local time, not later than March 15, 2004 in the offices of Nelson Mullins in Atlanta, Georgia, or at such other location as the parties mutually agree. The Closing will take place as soon as practicable after the satisfaction or waiver (to the extent the same may be waived) of the conditions set forth in Articles 6, 7 and 8. The date on which the Closing takes place is hereinafter referred to as the "CLOSING DATE." The following shall occur on the Closing Date: (a) DELIVERIES BY THE COMPANY AND SELLER. At the Closing, Seller shall deliver or cause to be delivered the following to Purchaser: (1) a certificate in proper form and order for transfer representing the Member Interest; (2) certified copies of the resolutions of the Company's manager and member authorizing and approving this Agreement and the Contemplated Transactions; (3) certified copies of the resolutions of Seller's Board of Directors authorizing and approving this Agreement and the Contemplated Transactions; (4) a certificate of the manager of the Company certifying (i) the Company's Organizational Documents (ii) the incumbency of each officer of the Company executing this Agreement or any agreement, instrument or document contemplated hereby, and (iii) certifying compliance with the conditions set forth in Sections 7.1 and 7.2; (5) a certificate of the Secretary of Seller certifying Seller's Articles of Incorporation and Bylaws and the incumbency of each officer of Seller executing this Agreement or any agreement, instrument or document contemplated hereby; (6) a certificate executed by the President of Seller certifying compliance with the conditions set forth in Sections 7.1 and 7.2; (7) the resignations of the managing members and all officers of the Company; (8) the Software License Agreement (9) the Transition Support Agreement; (10) written evidence of the Asset Transfers; and (11) the legal opinion of Nelson Mullins. (b) DELIVERIES BY PURCHASER. At the Closing, Purchaser shall deliver, or cause to be delivered, the following to the Company and Seller: (1) The Cash Payment; 27 (2) the Note; (3) the Guaranty Agreement; (4) certified copies of the resolutions of Purchaser's board of managers authorizing and approving this Agreement and the Contemplated Transactions; (5) a certificate of the Secretary of Purchaser certifying Purchaser's Organizational Documents and the incumbency of each officer of Purchaser executing this Agreement or any agreement, instrument or document contemplated hereby; (6) a certificate executed by the President of Purchaser certifying compliance with the conditions set forth in Section 8.1 and 8.2; (7) the Software License Agreement; (8) the Transition Support Agreement; (9) the Insurance Policy; and (10) the legal opinion of Gersten, Savage, Kaplowitz, Wolf & Marcus, LLP. ARTICLE 11 INDEMNIFICATION 11.1. INDEMNIFICATION BY SELLER IN FAVOR OF PURCHASER. Seller hereby agrees to indemnify and hold harmless Purchaser for any and all Losses Purchaser may suffer, sustain or incur which, directly or indirectly, arise or result from or are incident or related to: (a) the untruth, inaccuracy or breach of any material representation or warranty of the Company or Seller contained in this Agreement, the Seller Disclosure Letter, or any certificate delivered in connection herewith or therewith; (b) the breach of any material agreement or covenant of the Company or Seller contained in this Agreement, in any other document or agreement listed in Article 10, or in the Seller Disclosure Letter (provided that with respect to the Company, Seller shall be obligated to indemnify and hold harmless Purchaser only with respect to pre-Closing agreements and covenants of the Company and not to any agreement or covenant of the Company post-Closing); (c) any action, suit, Proceeding, demand, assessment or judgment (including, without limitation, those commenced or obtained against Seller) incident to any of the matters indemnified against under clauses (a) or (b) above; or (d) the matters described on EXHIBIT 11.1(d). Seller shall reimburse Purchaser on demand for any Losses Purchaser may suffer at any time after the execution of the Agreement in accordance with this Article 11. Except as provided in this Agreement, consummation of the Contemplated Transactions shall not be deemed or construed to be a waiver of any right or remedy of Purchaser. 28 11.2. INDEMNIFICATION BY PURCHASER AND THE COMPANY IN FAVOR OF SELLER. Purchaser and, after the Closing, the Company agree, jointly and severally, to indemnify and hold harmless Seller for any and all Losses Seller may suffer, sustain, or incur which, directly or indirectly, arise or result from or are incident or related to: (a) the untruth, inaccuracy or breach of any material representation or warranty of Purchaser contained in this Agreement, the Purchaser Disclosure Letter or any certificate delivered in connection herewith or therewith; (b) the breach of any material agreement or covenant of Purchaser contained in this Agreement, in any other document or agreement listed in Article 10, or in the Purchaser Disclosure Letter; (c) after the Closing, the breach of any agreement or covenant of the Company contained in this Agreement or in any other document or agreement listed in Article 10 that apply to the Company (provided that with respect to the Company, Purchaser and Company shall be obligated to indemnify and hold harmless Seller only with respect to post-Closing agreements and covenants of the Company and not to any agreement or covenant of the Company pre-Closing); (d) any sum that any third party asserts that Seller owes under any of the various agreements for which Purchaser has assumed or agreed to obtain Seller's release under this Agreement including, but not limited to, the Company's customer agreements, client payouts, the Deerfield Beach Lease and any other Lease of premises constituting the Leased Real Property, Fines other than those for which Seller is responsible under Section 9.10, and under the Processing Agreements; (e) any Fines, assessments, or other charges made or assessed against the Company by any merchant, customer, acquiring or issuing bank, First Data, any credit card association or any other party in the card payment system and for which payment is sought from Seller (including, but not limited to, any customer holdbacks or any fees, fines, assessments, or other charges made or assessed against the Company), related to periods after the Closing, and related to periods before the Closing Date if such amounts were reserved against in the Closing Balance Sheet; or (f) any action, suit, Proceeding, demand, assessment or judgment (including, without limitation, those commenced or obtained against Purchaser) incident to any of the matters indemnified against under clauses (a), (b), (c), (d) or (e) above. Purchaser and the Company shall reimburse Seller on demand for any Seller Losses at any time after the execution of the Agreement in accordance with this Article 11. Consummation of the Contemplated Transactions shall not be deemed or construed to be a waiver of any right or remedy of Seller. 11.3. NOTICE OF CLAIMS. The party entitled to indemnification under the provisions of this Article 11 (the "CLAIMANT") shall deliver to the party from whom indemnification is sought (the "OBLIGOR") notice in writing within 60 days of Claimant's discovery of any Loss in respect of which the right to indemnification is sought under this Article. This notice shall specify in reasonable detail the nature of the Loss and the amount of the liability arising from the Loss (or if the amount is not known, a reasonable estimate of the amount) (the "CLAIM"). In addition, if the Loss is due to an assertion of a claim by a third party, the written notice shall specify the name of such third party asserting such claim. Notwithstanding the above, the failure to give written notice within such 60 day period shall not result in the waiver or loss of any right to bring such Claim hereunder after such period unless, and only to the extent that, the other party is actually prejudiced by such failure. The Obligor shall satisfy its obligations under this Article within 30 days of receipt of the above described notice. 29 11.4. DEFENSE OF THIRD PARTY CLAIMS. If the facts pertaining to the Loss arise out of the claim of any third party, then the Obligor must assume the defense or prosecution of that claim, including the employment of counsel or accountants, at the Obligor's cost and expense. If representation of both the Obligor and the Claimant by such counsel would be inappropriate due to actual or potential differing interests between the Obligor and the Claimant in such a Proceeding, the Claimant shall have the right, at its expense, to retain separate counsel. The Obligor may settle any such third party claim in its discretion so long as: (1) the Obligor bears the entire financial burden of the settlement, (2) the Claimant is not subjected to any monetary or non-monetary obligations, and (3) the third party agrees to release Claimant from any and all liabilities pertaining to the Loss. Both Obligor and Claimant agree to cooperate in the defense or prosecution of third party claims and shall furnish such records, information, and testimony, and attend such conferences, discovery proceedings, hearings, trials, and appeals, as may be reasonably requested in connection with such third party claims. 11.5. MITIGATION. The Claimant's rights to indemnification under this Agreement are subject to common law principles of mitigation. However, no Claimant will be required to exhaust any remedy against any other person or source (for example, under an insurance policy) as a condition to pursuing or obtaining any indemnification under this Agreement. The Claimant will take commercially reasonable steps to mitigate any Loss after becoming aware of any event that would reasonably be expected to give rise to a Loss for which indemnification may be sought under this Article 11, including timely making any and all available insurance claims and diligently prosecuting such claims; provided that the Claimant will provide at least ten days prior written notice to Obligor of any such steps for which the Claimant may incur any documented out-of-pocket costs exceeding $5,000 in the aggregate, and such expenses will be at the Obligor's expense and funded by the Obligor on a current basis, unless the Obligor instructs the Claimant in writing not to take such steps. If the Claimant receives any payment under an insurance policy to cover a Loss, or is otherwise reimbursed by any third party, then after the date of the receipt of such payment, the Loss under this Agreement will not include the amount of the Loss covered by and equal to such payment; provided, however, that a Loss under this Agreement will still include the amount of any applicable deductible under such insurance policy and any Loss incurred in seeking such insurance payment. To the extent that the Obligor has already paid the Claimant for such Loss on the date the Claimant receives such payment, the Claimant will reimburse the Obligor for any expense incurred by the Obligor related to such Loss, including without limitation defense costs and attorney's fees, up to the amount of the payment actually received by Claimant. 11.6. SURVIVAL OF INDEMNIFICATION OBLIGATIONS. The indemnification obligations of Seller contained in Section 11.1 shall survive the Closing Date by 12 months. The indemnification obligations of Purchaser and the Company contained in Section 11.2 shall survive the Closing Date by 24 months, except that the indemnification obligations of Purchaser and the Company contained in Section 11.2 shall continue in effect: (a) for the duration of any post-Closing covenants of Purchaser or the Company set forth in Article 12, but for such additional period such indemnification obligations shall apply only with respect to those covenants; (b) for the duration of each agreement listed in Article 10, but for such additional period such indemnification obligations shall apply only with respect to such agreement(s); and (c) notwithstanding anything herein to the contrary, including (a) and (b) above, Purchaser's indemnification obligations shall terminate on the date that is no later than 24 months following the Closing Date, and the Insurance Policy securing the indemnification obligations described herein shall immediately and automatically terminate on such date. 30 11.7. INDEMNIFICATION AS PURCHASER'S EXCLUSIVE REMEDY. Purchaser is acquiring the Company on an "as is" basis and has therefore sought minimal representations, warranties and covenants from Seller and from the Company. Purchaser represents and warrants that Seller and the Company have granted Purchaser access to all relevant information necessary to make an informed decision with regard to the purchase of the Company, and Purchaser also represents and warrants that officials of both Seller and Company have met with representatives of Purchaser to answer all of Purchaser's questions regarding the Company. Accordingly, Purchaser hereby agrees that indemnification as provided for in this Article 11 shall be its sole and exclusive remedy for any Claim made pursuant to this Agreement or the Contemplated Transactions. To the extent that any provision of this Agreement may be interpreted to conflict with this Section, this Section shall govern to the exclusion of all others. 11.8. SELLER'S RIGHT TO MAKE CLAIMS AGAINST THE INSURANCE POLICY. If Purchaser and the Company fail to comply with their obligations under Sections 11.2(d) and 11.2(e), such failure shall be deemed to be an "EVENT OF DEFAULT" permitting Seller to make claims against the Insurance Policy; provided that no Event of Default shall be deemed to have occurred for so long as Purchaser is complying diligently and in good faith with its obligations under Section 11.4 and Seller has not been ordered by a court of competent jurisdiction to pay a specific amount to a third party. Seller's exercise of its rights under this provision for Events of Default shall not be construed in any way to limit any other indemnification remedy, including, but not limited to, any direct action against Purchaser or the Company, available to Seller under this Agreement or under applicable Law for such Events of Default or for breaches of the other indemnification obligations of Purchaser and the Company. 11.9. LIMITATIONS. Purchaser will have no Liability (for indemnification or otherwise) for Claims and/or Losses arising under this Agreement or the Contemplated Transactions to the extent such Claims and/or Losses exceed $20 million, and Seller will have no Liability (for indemnification or otherwise) for Claims and/or Losses arising under this Agreement or the Contemplated Transactions to the extent such Claims and/or Losses exceed $5 million. 11.10. SELLER CONTRACT CONSENT MATTERS. Purchaser and Seller agree that the only non-governmental consents Seller is obligated to obtain pursuant to this Agreement are as set forth in Section 7.7. As such, notwithstanding anything in this Agreement to the contrary, Seller's indemnity obligations for any breach of a representation, warranty, covenant or agreement under this Agreement related to contract consent matters shall be limited to obtaining the consents set forth in Section 7.7. ARTICLE 12 NON-COMPETITION AND NON-SOLICITATION COVENNANTS 12.1. NON-COMPETITION BY PURCHASER AND THE COMPANY. Purchaser acknowledges and agrees that Seller and its Affiliates will continue to provide Transaction Services to third parties providing non-Age-Restricted Services (except as noted in Section 12.3 below) following the Closing throughout the world. Accordingly, as an agreement ancillary to the purchase of the Member Interest and as a material inducement to Seller to enter into this Agreement, Purchaser agrees that for three years after the Closing Date (the "NON-COMPETITION PERIOD"), neither Purchaser, the Company, nor any of their Affiliates shall, without Seller's prior written consent, use the software licensed to Purchaser pursuant to the Software License to provide (whether as an owner, operator, manager, employee, officer, director, consultant, advisor, representative or otherwise), directly or indirectly, any Transaction Services to third parties providing non-Age-Restricted Services anywhere in the world; provided, however, that this provision shall not apply to third parties for which non-Age-Restricted Services comprise less than 25% in revenues of the aggregate Transaction Services provided by Purchaser and the Company. 31 12.2. NON-SOLICITATION OF CUSTOMERS BY PURCHASER AND THE COMPANY. During the Non-Competition Period, neither Purchaser, the Company nor their Affiliates shall, without Seller's prior written consent, directly or indirectly, solicit, raid, entice, induce or contact any third party that or who was a customer of Seller or its Affiliates (excluding the Company) on the Closing Date. 12.3. NON-COMPETITION BY SELLER. Seller acknowledges and agrees that Purchaser, the Company and their Affiliates will continue to engage in Transaction Services to third parties providing Age-Restricted Services following the Closing throughout the world. Accordingly, as an agreement ancillary to the purchase of the Member Interest and as a material inducement to Purchaser to enter into this Agreement, Seller agrees that during the Non-Competition Period, neither Seller nor any of its Affiliates shall, without Purchaser's or the Company's prior written consent, engage (whether as an owner, operator, manager, employee, officer, director, consultant, advisor, representative or otherwise), directly or indirectly, in any Transaction Service to third parties providing Age-Restricted Services anywhere in the world, other than (i) third parties that or who are customers of Seller or its Affiliates (excluding the Company) as of the Closing Date and (ii) third parties for which Age-Restricted Services comprise less than 25% in revenues of the aggregate Transaction Services provided by Seller. 12.4. NON-SOLICITATION OF CUSTOMERS BY SELLER. During the Non-Competition Period, neither Seller nor its Affiliates shall, without Purchaser's prior written consent, directly or indirectly, solicit, raid, entice, induce or contact any third party that is who was a customer of the Company on the Closing Date, other than third parties who were also customers of Seller or another of its Affiliates on the Closing Date. 12.5. REMEDIES. Without limiting the right of the parties to pursue all other legal and equitable rights available to it, including without limitation, damages for violations of Sections 12.1 through 12.4, it is agreed that other remedies cannot fully compensate the parties for such violations of the above restrictive covenants and that each party shall be entitled to injunctive relief and/or specific performance to prevent violation or continuing violation thereof, without bond and without the necessity of showing actual monetary damages. It is the intent and understanding of each party hereto that if, in any action before any court or agency legally empowered to enforce the terms of Sections 12.1 through 12.4, any term, restriction, covenant or promise in Sections 12.1 through 12.4 is found to be unreasonable and for that reason unenforceable, then such term, restriction, covenant or promise shall be deemed modified to the extent necessary to make it enforceable by such court or agency. ARTICLE 13 MISCELLANEOUS 13.1. TERMINATION. This Agreement may be terminated at any time before the Closing by: (a) The mutual consent of Purchaser and Seller; or (b) Purchaser or Seller, if the conditions set forth in Article 6 shall not have been satisfied or waived (to the extent they may be waived) by March 16, 2004; or (c) Purchaser, if the conditions set forth in Article 7 shall not have been satisfied or waived (to the extent they may be waived) by March 16, 2004; or (d) Seller, if the conditions set forth in Article 8 shall not have been satisfied or waived (to the extent they may be waived) by March 16, 2004; or 32 (e) Purchaser or Seller, if any permanent injunction, or temporary injunction extending beyond March 16, 2004, or other Order of a court or other competent authority preventing the Closing shall have become final and nonappealable. No party shall be entitled to terminate this Agreement pursuant to Section 13.1(b) through (e) if such party's intentional breach (or, with respect to the Company, intentional breach by Seller) of this Agreement has prevented the satisfaction of a condition. Any termination pursuant to Section 13.1(a) shall be effected by a written instrument signed by Purchaser and Seller, and any other termination pursuant to this Section 13.1 (other than a termination pursuant to Section 13.1(a)) shall be effected by written notice from the party or parties so terminating to the other parties hereto, which notice shall specify the Section hereof pursuant to which this Agreement is being terminated. 13.2. BREAK-UP FEE. A break up fee of $1,000,000 (the "BREAK-UP FEE") shall be payable in the following manner: (a) By Seller to Purchaser if the Closing does not occur by March 16, 2004, except in the case of a termination by March 15, 2004 pursuant to Sections 13.1(a), (b), (d) or (e); or (b) By Purchaser to Seller if the Closing does not occur by March 16, 2004, except in the case of a termination by March 16, 2004 pursuant to Sections 13.1(a), (b), (c) or (e). If the Break-up Fee is payable by Purchaser to Seller pursuant to Section 13.2(b), then Seller shall retain the Initial Deposit. If the Break-up Fee is payable by Seller to Purchaser pursuant to Section 13.2(a), then Seller shall immediately return the Initial Deposit to Purchaser and pay to Purchaser the Break-up Fee within 10 Business Days. Upon payment, the Break-up Fee shall be the receiving party's sole compensation for such termination, the parties agreeing that the actual damages that the receiving party might suffer are impossible to calculate with precision, and that such amount is a good faith estimate of such damages. 13.3. EFFECT OF TERMINATION. In the event of the termination of this Agreement as provided in Section 13.1, this Agreement shall be of no further force or effect, except for Section 9.7, which shall survive the termination of this Agreement; provided, however, that except with regard to a termination in which the Break-up Fee is payable pursuant to Section 13.2, the Liability of any party for any breach by such party of the representations, warranties, covenants or agreements of such party set forth in this Agreement occurring before the termination of this Agreement shall survive the termination of this Agreement and, in addition, in the event of any action for breach of contract in the event of a termination of this Agreement, the prevailing party shall be reimbursed by the other party to the action for reasonable attorneys' fees and expenses relating to such action. 13.4. NOTICES. All notices or other communications pursuant to this Agreement shall be in writing and shall be deemed to be sufficient if delivered personally, telecopied, sent by nationally-recognized, overnight courier or mailed by registered or certified mail (return receipt requested), postage prepaid, to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): 33 If to Seller (or the Company pre-Closing): InterCept, Inc. 3150 Holcomb Bridge Road, Suite 200 Norcross, GA 30071 Attention: Lynn G. Boggs Fax: (770) 662-8399 with a copy to: Charles D. Vaughn, Esq. Nelson Mullins Riley & Scarborough, L.L.P. First Union Plaza, Suite 1400 999 Peachtree Street, N.E. Atlanta, GA 30309 (404) 817-6189 (404) 817-6150 (facsimile) If to Purchaser (or the Company post-Closing): Media Billing, L.L.C. 11 Penn Plaza, 12th Floor New York, NY 10001 ATTN: President - Media Billing with a copy to: Gersten, Savage, Kaplowitz, Wolf & Marcus, LLP 101 East 52nd Street New York, NY 10022-6018 Phone: (212)752-9700 Fax: (212)980-5192 ATTN: Larry Cline, Esq. All such notices and other communications shall be deemed to have been given and received (a) in the case of personal delivery, on the date of such delivery, (b) in the case of delivery by telecopy, on the date of such delivery, (c) in the case of delivery by nationally-recognized, overnight courier, on the Business Day following dispatch, and (d) in the case of mailing by U.S. mail, on the fifth Business Day following such mailing. Any party may change its address from time to time for purposes of notice or other communication hereunder by giving notice to the other parties in accordance with this section. Each notice or other communication shall for all purposes of this Agreement be treated as being effective or having been given upon receipt unless otherwise indicated herein. 13.5. COMMERCIALLY REASONABLE EFFORTS AND FURTHER ASSURANCES. The parties to this Agreement shall use their commercially reasonable efforts to effectuate the Contemplated Transactions. At all times before and after the Closing, each party hereto, at the reasonable request of another party hereto, shall execute and deliver such other instruments and do and perform such other acts and things as may be necessary or desirable for effecting completely the consummation of this Agreement and the Contemplated Transactions. 34 13.6. NO THIRD PARTY BENEFICIARIES; SUCCESSORS AND ASSIGNS. (a) Anything contained herein to the contrary notwithstanding, the representations, warranties, covenants and agreements of the Company and Seller contained in this Agreement (including, without limitation, the Seller Disclosure Letter hereto) (1) are being given by the Company and Seller to Purchaser and (2) are solely for the benefit of Purchaser. Additionally, the representations, warranties, covenants and agreements of Purchaser contained in this Agreement (including, without limitation, the Purchaser Disclosure Letter hereto) (1) are being given by Purchaser to the Company and Seller and (2) are solely for the benefit of Seller. Accordingly, no third party shall be a third party or other beneficiary of such representations, warranties, covenants and agreements, and no such third party shall have any rights of contribution against the Company, Seller or Purchaser with respect to such representations, warranties, covenants or agreements or any matter subject to or resulting in indemnification under this Agreement, or otherwise. (b) Before the Closing, this Agreement may not be assigned by Seller or the Company without the prior written consent of Purchaser, and this Agreement may not be assigned by Purchaser, without the prior written consent of the Company and Seller. After the Closing, this Agreement may not be assigned by Seller without the prior written consent of the Company and Purchaser, and this Agreement may not be assigned by Purchaser or the Company without the prior written consent of Seller. Any attempted assignment without such consent shall be void. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, successors and permitted assigns, as applicable. 13.7. HEADINGS. The headings of the sections of this Agreement are inserted as a matter of convenience and for reference only and in no way define, limit or describe the scope of this Agreement or the meaning of any provision of this Agreement. 13.8. EXTENSION; WAIVER. At any time before the Closing, the parties may (a) extend the time for the performance of any of the obligations or other acts of the other parties, (b) waive any inaccuracies in the representations and warranties contained in this Agreement or in any document delivered pursuant to this Agreement and (c) waive compliance with any of the agreements or conditions contained in this Agreement. Any agreement on the part of a party to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party, and any such waiver shall not operate or be construed as a waiver of any subsequent breach by the other party. 13.9. COUNTERPARTS AND FACSIMILE EXECUTION. 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 one or more counterparts have been signed by each of the parties and delivered (by facsimile or otherwise) to the other party, it being understood that all parties need not sign the same counterpart. Any counterpart or other signature hereupon delivered by facsimile shall be deemed for all purposes as constituting good and valid execution and delivery of this Agreement by such party. 13.10. GOVERNING LAW, PERSONAL JURISDICTION AND VENUE. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE UNITED STATES OF AMERICA AND THE STATE OF GEORGIA, EXCLUDING CHOICE OF LAW PRINCIPLES. All parties to this Agreement hereby agree to submit to the personal jurisdiction and venue of the state and federal courts of Gwinnett County, Georgia. 13.11. REMEDIES. Seller shall have and retain all rights and remedies existing in its favor at law or equity, including, without limitation, any actions for specific performance and/or injunctive or other equitable relief (including, without limitation, the remedy of rescission) to enforce or prevent any violations of the provisions of this Agreement. As detailed in Section 11.7 above, Purchaser agrees that 35 its sole remedy for any alleged breach of this Agreement shall be indemnification as provided for in Article 11. 13.12. AMENDMENT. This Agreement may be amended only by a writing signed by the Company, Purchaser and Seller. 13.13. COMPLETE AGREEMENT. This Agreement and the other documents referenced herein and therein contain the entire agreement of the parties with respect to the subject matter of this Agreement and supersede all prior and contemporaneous negotiations, agreements, arrangements and understandings between them with respect to such subject matter. Notwithstanding the above, the agreements referenced in this document shall survive the Closing and be effective on their own terms without any limitation by this provision. 13.14. MUTUAL CONTRIBUTION. The parties to this Agreement and their counsel have mutually contributed to its drafting. Consequently, no provision of this Agreement shall be construed against any party on the ground that party drafted the provision or caused it to be drafted. 13.15. MUTUAL WAIVER OF JURY TRIAL. The parties hereto waive all right to trial by jury in any action, suit or Proceeding brought to enforce or defend any rights or remedies under this Agreement or any documents related hereto. Nothing about this Section shall be construed to reduce in any way the effect of Sections 11.7 and 13.11. 13.16. ARBITRATION. If a dispute shall arise around this Agreement, the parties agree that they shall submit that dispute to binding arbitration. The party making claim of a dispute (whether Purchaser or Seller) shall first notify the other party in writing of its claim. If the other party fails to respond satisfactory to this notice within 30 days, then the party claiming a dispute may submit the matter to arbitration, under the application of the then prevailing commercial arbitration rules of the American Arbitration Association. Such arbitration shall be held in Atlanta, Georgia before a panel of three (3) arbitrators, one selected by Seller, one selected by Purchaser, and the third selected by mutual agreement of the first two, and all of whom shall be independent and impartial under the rules of the American Arbitration Association. The decision of the arbitrators shall be final and binding as to any matter submitted under this Agreement. Judgment upon any award rendered by the arbitrators may be entered in any court of competent jurisdiction. 13.17. INDEPENDENCE OF COVENANTS AND REPRESENTATIONS AND WARRANTIES. All covenants hereunder shall be given independent effect so that if a certain action or condition constitutes a default under a certain covenant, the fact that such action or condition is permitted by another covenant shall not affect the occurrence of such default, unless expressly permitted under an exception to such initial covenant. In addition, all representations and warranties hereunder shall be given independent effect so that if a particular representation or warranty proves to be incorrect or is breached, the fact that another representation or warranty concerning the same or similar subject matter is correct or is not breached will not affect the incorrectness of or a breach of a representation and warranty hereunder. Each representation, warranty and covenant shall be given independent effect so that if a particular representation, warranty or covenant is breached the fact that another representation, warranty or covenant pertaining to the same or similar subject matter is not breached will not affect the breach or enforceability of such representation, warranty or covenant. [SIGNATURES ON FOLLOWING PAGE] 36 IN WITNESS WHEREOF, the parties hereto have executed this Member Interest Purchase Agreement as of the day and year first above written. "Purchaser" MEDIA BILLING, L.L.C. By: -------------------------------------------- Dr. Luis Enrique Molina G., manager By: -------------------------------------------- Charles L. Samel, manager "Seller" INTERCEPT, INC. By -------------------------------------------- Name: Title: "Company" INTERNET BILLING COMPANY, LLC By: InterCept, Inc., its sole member and manager By: -------------------------------------------- Name: Title: EX-4.01 4 c31878_ex4-01.txt THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO PENTHOUSE INTERNATIONAL, INC. THAT SUCH REGISTRATION IS NOT REQUIRED. AMENDED AND RESTATED CONVERTIBLE TERM NOTE FOR VALUE RECEIVED, PENTHOUSE INTERNATIONAL, INC., a Florida corporation (the "BORROWER"), hereby promises to pay to LAURUS MASTER FUND, LTD., c/o Ironshore Corporate Services Ltd., P.O. Box 1234 G.T., Queensgate House, South Church Street, Grand Cayman, Cayman Islands, Fax: 345-949-9877 (the "HOLDER") or its registered assigns or successors in interest, on order, the sum of TWELVE MILLION DOLLARS ($12,000,000), or such lesser principal amount as may be from time to time owing to the Holder hereunder, together with any accrued and unpaid interest hereon, on February 22, 2007 (the "MATURITY DATE") if not sooner paid. For purposes hereof, a "BUSINESS DAY" means any day on which United States federally chartered banks are open for business and a "TRADING DAY" means each day the applicable Principal Market (as defined in Section 4.7) on which the Common Stock (as defined in Section 2.1) is traded is open and available to trade securities. Capitalized terms used herein without definition shall have the meanings ascribed to such terms in that certain Securities Purchase Agreement dated as of February 23, 2004 (the "Closing Date") between the Borrower and the Holder (as amended, supplemented or modified from time to time, the "PURCHASE AGREEMENT"). The following terms shall apply to this Note: ARTICLE I INTEREST & AMORTIZATION 1.1. INTEREST RATE AND PAYMENT. Subject to Article IV and Section 5.1 hereof, interest payable on this Note shall accrue at a rate per annum equal to the Applicable Rate. For purposes of this Note, the "APPLICABLE RATE" shall mean: (a) the "prime rate" published in THE WALL STREET JOURNAL from time to time, plus three and one-half percent (3.5%), subject to a minimum interest rate of seven and one-half percent (7.5%) per annum and a maximum interest rate of thirteen and one-half percent (13.5%) per annum (the "FLOATING RATE"); (b) the greater of the Floating Rate and ten percent (10%) per annum, unless on or before August 23, 2004, the Holder shall have received evidence that a joint plan of reorganization for General Media, Inc., a Delaware corporation ("GENERAL MEDIA"), General Media Art Holding, Inc., General Media Communications, Inc., General Media Entertainment, Inc., General Media (UK), Ltd., GMCI Internet Operations, Inc., GMI On-Line Ventures, Ltd., Penthouse Images Acquisitions, Ltd. and Pure Entertainment Telecommunications, Inc. (collectively, the "DEBTORS") shall have (i) been confirmed by a final order of the United States Bankruptcy Court of the Southern District of New York which order is not, or is no longer, subject to stay or appeal and (ii) become effective pursuant to its terms which terms, in the Holder's reasonable discretion, do not adversely affect the Holder's rights and/or remedies under this Agreement or any Related Agreement (the "CONFIRMED PLAN OF REORGANIZATION"); and (c) the greater of the Floating Rate and twelve percent (12%) per annum, in the event that on or before February 23, 2005, the Holder shall not have received evidence of a Confirmed Plan of Reorganization. Interest shall be payable monthly in arrears commencing on March 31, 2004, and on the last day of each consecutive calendar month thereafter (each, a "REPAYMENT DATE"), and on the Maturity Date, whether by acceleration or otherwise. 1.2. MONTHLY PRINCIPAL PAYMENTS. Amortizing payments of the aggregate principal amount outstanding under this Note at any time (the "PRINCIPAL AMOUNT") shall begin on September 30, 2004 and shall recur on the last calendar day of each succeeding month thereafter (each, an "AMORTIZATION DATE") until the Maturity Date. The Borrower shall make monthly payments to the Holder as follows: beginning on the first Amortization Date and ending on the Amortization Date of August 31, 2005, the Borrower shall pay to the Holder $200,000 per month on each Repayment Date; beginning on the Amortization Date of September 30, 2005 and ending on the Amortization Date of February 28, 2006, the Borrower shall pay to the Holder $400,000 per month on each Repayment Date; and beginning on the Amortization Date of March 31, 2006 and ending on the Maturity Date, the Borrower shall pay to the Holder $600,000 per month on each Repayment Date, with the remaining principal balance due under this Note, if any, to be paid on the Maturity Date. Each of the aforementioned monthly payments shall be made together with any accrued and unpaid interest to date on such portion of the Principal Amount plus any and all other amounts which are then owing under this Note but have not been paid (collectively, the "MONTHLY AMOUNT"). ARTICLE II BORROWER PAYMENT OPTIONS 2.1. (a) PAYMENT OF MONTHLY AMOUNT IN CASH OR COMMON STOCK. Subject to the terms hereof, the Holder shall have the sole option to determine whether to elect to accept payment of the Monthly Amount on each Repayment Date either in cash or in shares of Borrower's common stock, $0.0025 par value per share (the "COMMON STOCK"), or a combination of both. Each month by the fifth (5th) Business Day prior to each Amortization Date, the Holder shall deliver to Borrower written notice in the form of EXHIBIT B attached hereto of Holder's election to accept payment of the Monthly Amount payable on the next Repayment Date in either cash or Common Stock, or a combination of both (each, a "REPAYMENT ELECTION NOTICE"). Except as provided in Section 2.1(b) below, if a Repayment Election Notice is not delivered by the Holder on or before the applicable Notice Date for such Repayment Date, then the Monthly Amount due on such Repayment Date shall be paid in cash. If the Borrower repays all or a portion of the Monthly Amount in shares of Common Stock, the number of such shares to be issued for such Repayment Date shall be the number determined by dividing (x) the portion of the Monthly Amount to be paid in shares of Common Stock, by (y) the Fixed Conversion Price. For purposes hereof, the "FIXED CONVERSION PRICE" means an amount equal to $0.11 per share of Common Stock. 2 (b) MONTHLY AMOUNT COMMON STOCK PAYMENT GUIDELINES. Subject to Sections 2.2 and 3.4 hereof, the Holder shall elect that all or a portion of any one or more of the next succeeding Monthly Amounts due on each Repayment Date shall be paid in shares of Common Stock if the closing price of the Common Stock as reported by Bloomberg, L.P. on the Principal Market (as defined in Section 4.7 hereof) for the five (5) Trading Days preceding such Repayment Date was greater than 110% of the Fixed Conversion Price. The Holder shall convert that portion of the Monthly Amount due on a Repayment Date into shares of Common Stock, up to that amount of such Common Stock as shall equal twenty five percent (25%) of the aggregate trading volume (as determined by Bloomberg L.P.) of the Common Stock for each of the ten (10) Trading Days immediately preceding the Repayment Date; PROVIDED, that if the closing price of the Common Stock for the ten (10) Trading Days immediately preceding the Repayment Date shall be: (i) two hundred percent (200%) or greater of the Fixed Conversion Price, then the twenty five percent (25%) limit set forth above shall be increased to fifty percent (50%); (ii) three hundred percent (300%) or greater of the Fixed Conversion Price, then the twenty five percent (25%) limit set forth above shall be increased to seventy five percent (75%); and (iii) four hundred percent (400%) or greater of the Fixed Conversion Price, then the twenty five percent (25%) limit set forth above shall be increased to one hundred percent (100%). Any part of one or more of the Monthly Amounts due on such Repayment Date that the Holder has not converted into shares of Common Stock shall be paid by the Borrower in cash on such Repayment Date. Any part of the Monthly Amount due on such Repayment Date which the Holder has converted into shares of Common Stock but which must be paid in cash (because the closing price of the Common Stock on one or more of the ten (10) Trading Days preceding the applicable Repayment Date was less than 110% of the Fixed Conversion Price) shall be paid in cash within three (3) Business Days of the applicable Repayment Date. 2.2. NO EFFECTIVE REGISTRATION. Notwithstanding anything to the contrary herein, the Borrower shall not have the right to direct Holder to convert hereunder unless (i) an effective current Registration Statement (as defined in the Registration Rights Agreement) covering resale of the shares of Common Stock to be issued in connection with satisfaction of such obligations exists, (ii) the Holder is not referred to as an underwriter in the Registration Statement, (iii) no Event of Default hereunder exists and is continuing, unless such Event of Default is cured within any applicable cure period or is otherwise waived in writing by the Holder in whole or in part at the Holder's option, or (iv) an exemption from registration of the Common Stock is available to the Holder pursuant to Rule 144 of the Securities Act. The Registration Statement (as defined in the Registration Rights Agreement) shall not be deemed effective for purposes of this Note (even if so declared by the Securities and Exchange Commission) if the Holder is named as an underwriter thereunder. Any principal amount of this Note which is prepaid pursuant to this Section 2.2 shall be deemed to constitute payments of outstanding principal applying to Monthly Amounts for the remaining Repayment Dates in chronological order of earliest maturing indebtedness. 2.3. OPTIONAL REDEMPTION IN CASH. The Borrower shall not have the option of redeeming or prepaying in cash any Principal Amount on or before August 23, 2004. Thereafter, subject to satisfaction of the Prepayment Conditions (as hereafter defined), the Borrower shall have the option of redeeming or prepaying any Principal Amount of this Note ("OPTIONAL REDEMPTION") by paying to the Holder a sum of money equal to: (i) 110% of the Principal 3 Amount if such redemption or prepayment occurs after August 23, 2004 and on or prior to August 23, 2005; (ii) 105% of the Principal Amount if such redemption or prepayment occurs during the period commencing on the first calendar day following August 25, 2005 and prior to February 23, 2006 and (iii) 100% of the Principal Amount if such redemption or prepayment occurs at any time thereafter. Each such redemption or prepayment made pursuant to this Section 2.4 shall include all accrued and unpaid interest on the Principal Amount so prepaid or redeemed and any and all other sums due, accrued or payable to the Holder arising under this Note or the Purchase Agreement or any Related Document (the "REDEMPTION AMOUNT") outstanding on the day written notice of redemption (the "NOTICE OF REDEMPTION") is given to the Holder. The Notice of Redemption shall specify the date for such Optional Redemption (the "REDEMPTION PAYMENT DATE"), which date shall be seven (7) days after the date of the Notice of Redemption (the "REDEMPTION PERIOD"). A Notice of Redemption shall not be effective with respect to any portion of this Note for which the Holder has a pending election to convert pursuant to Section 3.1, or for conversions elected to be made by the Holder pursuant to Section 3.1 during the Redemption Period. The Redemption Amount shall be determined as if such election to convert had been completed immediately prior to the date of the Notice of Redemption. On the Redemption Payment Date, the Redemption Amount must be paid in good funds to the Holder. In the event the Borrower fails to pay the Redemption Amount by the Redemption Payment Date, then such Redemption Notice will be null and void. The Holder shall have the right to convert the Principal Amount, and any accrued and unpaid interest and any and all other sums due, accrued or payable to the Holder arising under this Note, the Purchase Agreement or any Related Document, at the applicable Fixed Conversion Price during the Redemption Period. For purposes hereof, the term "PREPAYMENT CONDITIONS" means satisfaction of each of the following: (a) the average closing price of the Common Stock on the Principal Market during the forty five (45) consecutive Trading Days immediately prior to the Notice of Redemption is $0.40 or less, and (b) the conditions set forth in Section 2.2 hereof shall have been satisfied. In the event that the average closing price of the Common Stock on the Principal Market during the forty five (45) consecutive Trading Days immediately prior to the Notice of Redemption is greater than $0.40 and (b) the conditions set forth in Section 2.2 hereof shall have been satisfied, then the Borrower shall be able to redeem or prepay this Note in cash only and with the prior written consent of the Holder, such consent to given at the sole and absolute discretion of the Holder. ARTICLE III CONVERSION RIGHTS 3.1. HOLDER'S CONVERSION RIGHTS. The Holder shall have the right, but not the obligation, to convert all or any portion of the then aggregate outstanding principal amount of this Note, together with interest and fees due hereon, into shares of Common Stock subject to the terms and conditions set forth in this Article III. The Holder may exercise such right by delivery to the Borrower of a written notice of conversion not less than one (1) day prior to the date upon which such conversion shall occur. The date upon which such conversion shall occur is (the "CONVERSION DATE"). 3.2. CONVERSION LIMITATION. Notwithstanding anything contained herein to the contrary, pursuant to the terms of this Note, the Holder shall not be entitled to convert on a Conversion Date (as defined in Section 3.3(a)) that number of shares of Common Stock which 4 would be in excess of the sum (i) the number of shares of Common Stock actually owned by the Holder and its affiliates on a Conversion Date and (ii) the number of shares of Common Stock issuable upon the conversion of this Note and exercise of the warrants held by such Holder and its affiliates with respect to which the determination of this proviso is being made on a Conversion Date, which would result in beneficial ownership by the Holder and its affiliates of more than 4.99% of the outstanding shares of Common Stock of the Borrower on such date. For the purposes of the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Exchange Act and Regulation 13d-3 thereunder. The Holder may void the limitation described in this Section 3.2 upon 75 days prior notice to the Borrower or without any notice requirement upon an Event of Default. 3.3. PROCEDURES FOR CONVERSION. (a) In the event that the Holder elects to convert this Note into Common Stock, the Holder shall give written notice of such election by delivering to the Borrower an executed and completed notice of conversion (the "NOTICE OF CONVERSION"), such Notice of Conversion shall provide a breakdown in reasonable detail of the Principal Amount, accrued interest and fees being converted. On each Conversion Date (as hereinafter defined) and in accordance with the Notice of Conversion, the Holder shall make the appropriate reduction to the Principal Amount, accrued interest and fees as entered in its records and shall provide written notice thereof to the Borrower within two (2) Business Days after the Conversion Date. Each date on which a Notice of Conversion is delivered or telecopied to the Borrower in accordance with the provisions hereof shall be deemed a Conversion Date (the "CONVERSION DATE"). A form of Notice of Conversion to be employed by the Holder is annexed hereto as EXHIBIT A. (b) Pursuant to the terms of the Notice of Conversion, the Borrower will issue instructions to the transfer agent (together with such other documents as the transfer agent may request) within two (2) Business Days of the date of the delivery to Borrower of the Notice of Conversion. If the Registration Statement (as defined in the Registration Rights Agreement) is effective or the Conversion Shares are eligible for sale pursuant to Rule 144 promulgated under the Securities Act of 1933, the Borrower shall cause the transfer agent to transmit the certificates representing the Conversion Shares to the Holder by crediting the account of the Holder's designated broker with the Depository Trust Corporation ("DTC") through its Deposit Withdrawal Agent Commission ("DWAC") system within three (3) Business Days after receipt by the Borrower of the Notice of Conversion (the "DELIVERY DATE"). In the case of the exercise of the conversion rights set forth herein the conversion privilege shall be deemed to have been exercised and the Conversion Shares issuable upon such conversion shall be deemed to have been issued upon the date of receipt by the Borrower of the Notice of Conversion. The Holder shall be treated for all purposes as the record holder of such Common Stock, unless the Holder provides the Borrower written instructions to the contrary. 3.4. CONVERSION MECHANICS. (a) The number of shares of Common Stock to be issued upon each conversion of this Note shall be determined by dividing that portion of the principal and interest and fees to be converted, if any, by the Fixed Conversion Price. In the event of any conversions of the Principal Amount in part pursuant to this Article III, such conversions shall be deemed to constitute conversions of outstanding principal amount applying to Monthly Amounts for the remaining Repayment Dates in chronological order of earliest maturing indebtedness. By way of example, if the original principal amount of this Note is $12,000,000 and the Holder 5 converted $250,000 of such original principal amount prior to the first Amortization Date, then (1) the principal amount of the Monthly Amount due on the first Amortization Date would equal $0, (2) the principal amount of the Monthly Amount due on the second Amortization Date would equal $150,000 and (3) the principal amount of the Monthly Amount due on the third Amortization Date would be $200,000. (b) No fractional shares of Common Stock shall be issued upon any conversion of this Note. In lieu of any fractional share to which Holder would otherwise be entitled, the Borrower shall pay Holder cash equal to the product of such fraction multiplied by the fair market value as of the date of Conversion of a share of Common Stock, as determined in good faith by the Borrower's Board of Directors (the "BOARD"), or an authorized subcommittee thereof. (c) ADJUSTMENT. The Fixed Conversion Price and number and kind of shares or other securities to be issued upon conversion is subject to adjustment from time to time upon the occurrence of certain events, as follows: (i) RECLASSIFICATION, ETC. If the Borrower at any time shall, by reclassification or otherwise, change the Common Stock into the same or a different number of securities of any class or classes, the Principal Amount of this Note, and any accrued and interest thereon and fees incurred hereunder, shall thereafter be deemed to evidence the right to purchase an adjusted number of such securities and kind of securities as would have been issuable as the result of such change with respect to the Common Stock immediately prior to such reclassification or other change. (ii) STOCK SPLITS, COMBINATIONS AND DIVIDENDS. If the shares of Common Stock outstanding at any time after the Closing Date are subdivided or combined into a greater or smaller number of shares of Common Stock, or if a dividend is paid on the Common Stock in shares of Common Stock, the Fixed Conversion Price or the Conversion Price, as the case may be, shall be proportionately reduced in case of subdivision of shares or stock dividend or proportionately increased in the case of combination of shares, in each such case by the ratio which the total number of shares of Common Stock outstanding immediately after such event bears to the total number of shares of Common Stock outstanding immediately prior to such event. (iii) SHARE ISSUANCES. If the Borrower shall at any time prior to the conversion or repayment in full of the Principal Amount issue any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock ("EQUIVALENTS") to a person other than the Holder (except (A) pursuant to Sections 3.4(c) (i) or (ii) hereof; or (B) pursuant to options, warrants, or other obligations to issue shares outstanding on the Closing Date as set forth in the Schedules to the Purchase Agreement (the "NEW SHARES") for a consideration per share or having an exercise, conversion or exchange price (the "OFFER PRICE") less than the Fixed Conversion Price in effect at the time of such issuance), then the Fixed Conversion Price shall be immediately reset to a price determined by (calculated to the nearest tenth of a cent) multiplying such Fixed Conversion Price 6 by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of shares of Common Stock which the aggregate consideration received by the Borrower for the total number of Additional Shares (as defined below) of Common Stock so issued would purchase at such Conversion Price; and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of such Additional Shares of Common Stock so issued. For purposes of this Section, "ADDITIONAL SHARES" of Common Stock shall mean all shares of Common Stock issued by the Borrower after the Closing Date, other than shares of Common Stock issuable at any time: (A) upon conversion or exercise of all options and convertible securities outstanding as of the date hereof, PROVIDED, HOWEVER, that if the conversion or exercise price of any option or convertible security is repriced or otherwise adjusted downward to a conversion or exercise price that is less than the conversion or exercise price of such option or convertible security as of the Closing Date (other than on account of a stock split), the exclusion provided by this subsection 3.4(c)(iii)(A) shall be inoperable in all regards in respect of such options and convertible securities and such options and convertible securities shall be deemed to be issued after the Closing Date and the provisions of subsection 3.4(c)(iii) shall apply in all respects; (B) (x) to officers, directors, and employees of, and consultants to, the Borrower on terms approved by the Board of Directors and/or (y) in connection with business combinations or corporate partnering agreements approved by the Board of Directors, so long as the number of shares issued in connection with subsections 3.4(c)(iii)(B)(x) and 3.4(c)(iii)(B)(y) does not exceed, in the aggregate, five percent (5%) of the Borrower's Common Stock outstanding, on a fully diluted basis, on the Closing Date. For purposes hereof, the issuance of any security of the Borrower convertible into or exercisable or exchangeable for Common Stock shall result in an adjustment to the Fixed Conversion Price at the time of issuance of such securities. (C) In the case of the issuance of New Shares for a consideration in whole or in part for cash, the consideration received by the Borrower upon such issuance will be deemed to be the amount of cash paid therefor plus the value of any property other than cash received by the Borrower, determined as provided in subsection 3.4 (c) (iv)(D) hereof. (D) In the case of the issuance of New Shares for a consideration in whole or in part in property other than cash, the value of such property other than cash will be deemed to be the fair market value of such property as determined by an independent appraiser with experience in such valuations, selected by the Holder at Borrower's sole cost and expense, irrespective of any accounting treatment. 7 (E) In the case of the issuance of Equivalents, the aggregate maximum number of shares of New Stock deliverable upon exercise, exchange or conversion, as the case may be, of such Equivalents will be deemed to have been issued at the time such Equivalents were issued and for a consideration equal to the consideration, if any, received by the Borrower upon the issuance of such Equivalents plus the maximum purchase price provided in such Equivalents (the consideration in each case to be determined in the manner provided in subsections 3.4(c)(iii)(C) and 3.4(c)(iii)(D) hereof); (F) During the period the conversion right exists, the Borrower will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of Common Stock upon the full conversion of this Note. The Borrower represents that upon issuance, such shares will be duly and validly issued, fully paid and non-assessable. The Borrower agrees that its issuance of this Note shall constitute full authority to its officers, agents, and transfer agents who are charged with the duty of executing and issuing stock certificates to execute and issue the necessary certificates for shares of Common Stock upon the conversion of this Note. 3.5. REORGANIZATIONS, CONSOLIDATIONS, ETC. In the event, at any time after the Closing Date, of any capital reorganization, or any reclassification of the capital stock of the Borrower (other than a change in par value or from par value to no par value or from no par value to par value or as a result of a stock dividend or subdivision, split-up or combination of shares), or the consolidation or merger of the Borrower with or into another person (other than a consolidation or merger in which the Borrower is the continuing corporation and which does not result in any change in the powers, designations, preferences and rights (or the qualifications, limitations or restrictions, if any) of the capital stock of the Borrower as amended from time to time) (any such transaction, an "EXTRAORDINARY TRANSACTION"), then all of the amounts owed under this Note shall be exercisable for the kind and number of shares of stock or other securities or property of the Borrower, or of the corporation resulting from or surviving such Extraordinary Transaction, that a holder of the number of shares of Conversion Shares deliverable (immediately prior to the effectiveness of the Extraordinary Transaction) upon conversion of the amounts owed under this Note would have been entitled to receive upon such Extraordinary Transaction. The provisions of Section 3.4(c)(iii) shall similarly apply to successive Extraordinary Transactions. The provisions of this Section 3.5 shall not be deemed Holder's consent to any transaction otherwise prohibited by the terms of the Purchase Agreement or any Related Agreement. ARTICLE IV EVENTS OF DEFAULT Upon the occurrence and continuance of an Event of Default beyond any applicable grace period, the Holder, at its sole and absolute discretion, may make all sums of principal, interest and other fees then remaining unpaid hereon and all other amounts payable hereunder due and 8 payable within five (5) days after written notice from Holder to Borrower (each occurrence being a "DEFAULT NOTICE PERIOD"), PROVIDED, HOWEVER, that such Default Notice Period shall not apply to Sections 4.3, 4.6 and 4.9 below. In the event of such an acceleration, the amount due and owing to the Holder shall be 125% of the outstanding principal amount of the Note (plus accrued and unpaid interest and fees, if any). If, with respect to any Event of Default other than a payment default described in Section 4.1 below, within the Default Notice Period the Borrower cures the Event of Default, the Event of Default will be deemed to no longer exist and any rights and remedies of Holder pertaining to such Event of Default will be of no further force or effect. The occurrence of any of the following events is an "EVENT OF DEFAULT": 4.1. FAILURE TO PAY PRINCIPAL, INTEREST OR OTHER FEES. The Borrower fails to pay when due any installment of principal, interest or other fees hereon in accordance herewith, or the Borrower fails to pay when due any amount due under any other promissory note issued by Borrower, but only to the extent cash collateral pledged by the Borrower to the Holder shall not be sufficient to cover the same. 4.2. BREACH OF COVENANT. The Borrower breaches any material covenant or other term or condition of this Note, the Purchase Agreement, or in any Related Document, in any material respect and such breach, if subject to cure, continues for a period of thirty (30) calendar days after the occurrence thereof. 4.3. BREACH OF REPRESENTATIONS AND WARRANTIES. Any material representation or warranty of the Borrower made herein, in the Purchase Agreement, or in any Related Document shall have been materially false or misleading when made and shall not be cured for a period of fifteen (15) calendar days after the occurrence thereof. 4.4. RECEIVER OR TRUSTEE. The Borrower or any Guarantor 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 a substantial part of its property or business; or such a receiver or trustee shall otherwise be appointed. 4.5. JUDGMENTS. Any money judgment, writ or similar final process shall be entered or filed against the Borrower or any Guarantor or any of its property or other assets for more than $250,000, and shall remain unvacated, unbonded or unstayed for a period of ninety (90) days. 4.6. BANKRUPTCY. Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings or relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Borrower or any Guarantor and in the case of such proceeding instituted against the Borrower or any such Guarantor such proceeding shall not be dismissed, discharged or lifted within sixty (60) calendar days from the initial occurrence of such event. 4.7. STOP TRADE. An SEC stop trade order or Principal Market trading suspension of the Common Stock shall be in effect for five (5) consecutive Trading Days or five (5) Trading Days during a period of ten (10) consecutive Trading Days, excluding in all cases a suspension of all trading on a Principal Market, provided that the Borrower shall not have been able to cure such trading suspension within thirty (30) days of the notice thereof or list the Common Stock on another Principal Market within sixty (60) days of such notice. The "PRINCIPAL MARKET" for the 9 Common Stock shall include the OTC Bulletin Board, NASDAQ SmallCap Market, NASDAQ National Market System, American Stock Exchange, or New York Stock Exchange, whichever of the foregoing is at the time the principal trading exchange or market for the Common Stock, or any securities exchange or other securities market on which the Common Stock is then being listed or traded. 4.8. FAILURE TO DELIVER COMMON STOCK. The Borrower's failure to timely deliver Common Stock to the Holder pursuant to and in the form required by this Note, and Section 9 of the Purchase Agreement, if such failure to timely deliver Common Stock shall not be cured within two (2) calendar days following the occurrence thereof. 4.9. FAILURE TO CAUSE AN EFFECTIVE REGISTRATION STATEMENT TO BE FILED. The Borrower's failure to file and cause to exist a current effective Registration Statement (as defined in the Registration Rights Agreement) by September 30, 2004 covering resale of the shares of Common Stock underlying this Note and the Common Stock Purchase Warrant issued by the Borrower pursuant to the Purchase Agreement (including any common stock purchase warrant issued upon exchange, transfer or split up or any part thereof. 4.10. GUARANTY; PLEDGE; MORTGAGE DOCUMENTATION. (a) If any Guarantor shall repudiate, purport to revoke or fail to perform any of its obligations under any guaranty agreement made by such Guarantor in favor of Holder or (b) if an Event of Default shall have occurred and be continuing under and as defined in any Mortgage Documents or Pledge Document (each as defined hereafter) which shall not have been cured during any applicable cure or grace period. For purposes hereof, (i) "MORTGAGE DOCUMENTS" means the mortgage in favor of the Holder, as agent, on the New York Property or any Substitute Real Property, and (ii) "PLEDGE DOCUMENT" means the Member Pledge Agreement dated as of the Closing Date made by the Borrower in favor of the Holder, as agent, as each of such documents may be amended, modified and supplemented from time to time. 4.11. FURTHER ASSURANCES. If Borrower or any Guarantor shall fail to promptly enter into all such documentation as shall from time to time be reasonably requested by the Holder in connection with the Holder's sale of participating interests in the Purchase Agreement and the Related Agreements and/or sale, assignment or transfer of all or any part of the Holder's rights under this Agreement and the Related Agreements. ARTICLE V DEFAULT RELATED PROVISIONS 5.1. PAYMENT GRACE PERIOD. The Borrower shall have a three (3) Business Day grace period to pay any monetary amounts due under this Note or the Purchase Agreement or any Related Document, after which grace period a default interest rate of five percent (5%) per annum above the then applicable interest rate hereunder shall apply to the monetary amounts due. 5.2. CONVERSION PRIVILEGES. The conversion privileges set forth in Article III shall remain in full force and effect immediately from the Closing Date and until this Note is paid in 10 full or until all of the then outstanding Principal Amount and interest and other fees payable hereunder shall have been converted into shares of Common Stock. ARTICLE VI MISCELLANEOUS 6.1. FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of the Holder hereof 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. All rights and remedies existing hereunder are cumulative to, and not exclusive of, any rights or remedies otherwise available. 6.2. NOTICES. Any notice herein required or permitted to be given shall be in writing and shall be deemed effectively given: (i) upon personal delivery to the party notified, (ii) when sent by confirmed telex or facsimile if sent during normal business hours of the recipient, if not, then on the next Business Day, (iii) five days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (iv) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the Borrower at the address provided in the Purchase Agreement executed in connection herewith, and to the Holder at the address provided in the Purchase Agreement for such Holder, with a copy to Scott J. Giordano, Esq., Loeb & Loeb LLP, 345 Park Avenue, New York, New York 10154 and to John E. Tucker, Esq., 825 Third Avenue , 14th Floor, New York, New York 10022, facsimile number (212) 541-4434, or at such other address as the Borrower or the Holder may designate by ten days advance written notice to the other. A Notice of Conversion shall be deemed given when made to the Borrower pursuant to the Purchase Agreement. 6.3. AMENDMENT PROVISION. The term "Note" and all reference thereto, as used throughout this instrument, shall mean this instrument as originally executed, or if later amended or supplemented, then as so amended or supplemented, and any successor instrument issued pursuant to Section 3.5 hereof, as it may be amended or supplemented. 6.4. ASSIGNABILITY. This Note shall be binding upon the Borrower and its permitted successors and assigns, and shall inure to the benefit of the Holder and its successors and assigns, and may be assigned by the Holder in accordance with the requirements of the Purchase Agreement and applicable federal and state securities laws. 6.5. GOVERNING LAW. (a) This Note cannot be changed or terminated orally, and shall be governed by and construed in accordance with the laws of the State of New York, without regard to principles of conflicts of laws. Any action brought by either party against the other concerning the transactions contemplated by this Note shall be brought only in any state or federal court sitting in the Borough of Manhattan, City of New York; provided that nothing contained in this Note shall be deemed to preclude Holder from bringing suit or taking other legal action in any other court of competent jurisdiction and nothing shall be deemed to preclude the Borrower from 11 asserting any defenses or counterclaims in any such actions. Both the Borrower and the individual executing this Note on behalf of the Borrower agree to submit to the jurisdiction of such courts and waive trial by jury. The Borrower and the individual executing this Note further consent that any summons, subpoena or other process or papers (including, without limitation, any notice or motion or other application to either of the aforementioned courts or a judge thereof) or any notice in connection with any proceedings hereunder, may be served by registered or certified mail, return receipt requested, or by personal service provided a reasonable time for appearance is permitted, or in such other manner as may be permissible under the rules of said courts. The Borrower and the individual executing this Note waive any objection to jurisdiction and venue of any action instituted hereon in the Supreme Court for the State of New York, County of New York or the United States District Court for the Southern District of New York and shall not assert any defense based on lack of jurisdiction or venue or based upon FORUM NON CONVENIENS in any action brought in either such court. (b) The prevailing party shall be entitled to recover from the other party its reasonable attorney's fees and costs. (c) In the event that any provision of this Note 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 such provision which may prove invalid or unenforceable under any law shall not affect the validity or unenforceability of any other provision of this Note. 6.6. MAXIMUM PAYMENTS. Nothing contained herein shall be deemed to establish or require the payment of a rate of interest or other charges in excess of the maximum permitted by applicable law. In the event that the rate of interest required to be paid or other charges hereunder exceed the maximum permitted by such law, any payments in excess of such maximum shall be credited against amounts owed by the Borrower to the Holder and thus refunded to the Borrower. 6.7. SECURITY INTEREST. The holder of this Note, as agent, has been granted a security interest and lien in certain real property assets of the Borrower, as more fully described in the Mortgage Documents. 6.8. CONSTRUCTION. Each party acknowledges that its legal counsel participated in the preparation of this Note and, therefore, stipulates that the rule of construction that ambiguities are to be resolved against the drafting party shall not be applied in the interpretation of this Note to favor any party against the other. 6.9. AMENDMENT AND RESTATEMENT. This Note, together with the Amended and Restated Convertible Term Note dated as of the date hereof made by Borrower in favor of Alexandra Global Master Fund Ltd. (the "Alexandra Note") in the original principal amount of $12,000,000, amends and restates in its entirety (and, together with the Alexandra Note is given in substitution for and not in satisfaction of) the Convertible Promissory Note dated the Closing Date made by Borrower in favor of Holder in the original principal amount of $24,000,000. 12 IN WITNESS WHEREOF, the Borrower has caused this Convertible Term Note to be signed in its name effective as of this ___ day of March, 2004. PENTHOUSE INTERNATIONAL, INC. By:__________________________ Name:________________________ Title:_______________________ WITNESS: ______________________________ 13 EXHIBIT A NOTICE OF CONVERSION (To be executed by the Holder in order to convert all or part of the Note into Common Stock [Name and Address of Holder] The Undersigned hereby elects to convert $_________ of the principal due on [specify applicable Repayment Date] under the Convertible Term Note issued by PENTHOUSE INTERNATIONAL, INC. dated __________________ __, 2004 by delivery of Shares of Common Stock of PENTHOUSE INTERNATIONAL, INC. on and subject to the conditions set forth in Article III of such Note. 1. Date of Conversion _______________________ 2. Shares To Be Delivered: _______________________ Date: ____________ By:_______________________________ Name:_____________________________ Title:____________________________ 14 EXHIBIT B REPAYMENT ELECTION NOTICE Penthouse International, Inc. 11 Penn Plaza New York, New York 10001 LAURUS MASTER FUND, LTD. ("Laurus") hereby elects to accept payment of $______ of the Monthly Amount due on [specify applicable Repayment Date] under the Convertible Term Note issued to it by Penthouse International, Inc. ("Borrower") dated February __, 2004 by delivery of Shares of Borrower's Common Stock to Laurus or the following designee of Laurus, [____], on ____ and subject to the conditions set forth in Article II of such Note. 1. Fixed Conversion Price: $_______________________ 2. Amount to be paid: $_______________________ 3. Shares To Be Delivered (2 divided by 1): __________________ Date: ____________ LAURUS MASTER FUND, LTD. By:_______________________________ Name:_____________________________ Title:____________________________ 15 EX-4.02 5 c31878_ex4-02.txt CERTIFICATE OF DESIGNATION OF PREFERENCES AND RIGHTS OF SERIES D CONVERTIBLE PREFERRED STOCK OF PENTHOUSE INTERNATIONAL, INC. a Florida corporation The undersigned, Claude Bertrin and Stephen A. Weiss, certify that: 1. They are the duly acting Executive Vice President and an Assistant Secretary, respectively, of PENTHOUSE INTERNATIONAL, INC., a corporation organized and existing under the Corporation Code of the State of Florida (the "CORPORATION"). 2. Pursuant to authority conferred upon the Board of Directors by the Articles of Incorporation of the Corporation, and pursuant to the provisions of Section 607.0602 of the Florida Statutes, said Board of Directors, pursuant to a meeting held March 18, 2004, adopted a resolution establishing the rights, preferences, privileges and restrictions of, and the number of shares comprising, the Corporation's Series D Convertible Preferred Stock, which resolution is as follows: RESOLVED, that a series of Preferred Stock in the Corporation, having the rights, preferences, privileges and restrictions, and the number of shares constituting such series and the designation of such series, set forth below be, and it hereby is, authorized by the Board of Directors of the Corporation pursuant to authority given by the Corporation's Articles of Incorporation. NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby fixes and determines the Determinations of, the number of shares constituting, and the rights, preferences, privileges and restrictions relating to, a new series of Preferred Stock as follows: (a) DETERMINATION. The series of Preferred Stock is hereby designated Series D Convertible Preferred Stock (the "SERIES D PREFERRED STOCK"). (b) AUTHORIZED SHARES. The number of authorized shares constituting the Series D Preferred Stock shall be four million (4,000,0000 shares of such series. (c) DIVIDENDS. Subject to the prior rights of holders of all classes of stock at the time outstanding having prior rights as to dividends, the holder of the Series D Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors, out of any assets of the Corporation legally available therefor, such dividends as may be declared from time to time by the Board of Directors. (d) LIQUIDATION PREFERENCE. (i) PREFERENCE UPON LIQUIDATION, DISSOLUTION OR WINDING UP. In the event of any dissolution or winding up of the Corporation, whether voluntary or involuntary, holders of each outstanding share of Series D Preferred Stock shall be entitled to be paid first out of the assets of the Corporation available for distribution to shareholders, whether such assets are capital, surplus or earnings, an amount equal to $1.00 (the "SERIES D PURCHASE PRICE") per share -1- of Series D Preferred Stock held (as adjusted for any stock splits, stock dividends or recapitalizations of the Series D Preferred Stock) and any declared but unpaid dividends on such share, (A) after all payments shall be made to the holders of any outstanding shares of Series C preferred stock, $0.0025 par value per share and $10.00 liquidation value per share (the "SERIES C PREFERRED STOCK), (B) pari passu and contemporaneous with any payments that are required to be made to the holders of any outstanding shares of Series A preferred stock, $0.0025 par value per share and $1,000.00 liquidation value per share (the "SERIES A PREFERRED STOCK) and Series B preferred stock, $0.0025 par value per share and $1,000.00 liquidation value per share (the "SERIES B PREFERRED STOCK), and (C) before any payment shall be made to the holders of the Common Stock, or any other stock of the Corporation ranking junior to the Series D Preferred Stock with regard to any distribution of assets upon liquidation, dissolution or winding up of the Corporation in accordance with clause (v) of this paragraph (d). The holders of the Series D Preferred Stock shall be entitled to share ratably, in accordance with the respective preferential amounts payable on such stock, in any distribution which is not sufficient to pay in full the aggregate of the amounts payable thereon. If, upon any liquidation, dissolution or winding up of the Corporation, after priority payments made in respect of the Series C Preferred Stock and partial pari passu payments made in respect of the Series A Preferred Stock and/or Series B Preferred Stock, the remaining assets to be distributed to the holders of the Series D Preferred Stock shall be insufficient to permit payment to such holders of the Series D Preferred Stock of the full preferential amounts aforesaid, then all of the remaining assets of the Corporation available for distribution to shareholders shall be distributed to the holders of outstanding shares of the Series A Preferred Stock, Series B Preferred Stock and Series D Preferred Stock, on a pro-rata basis. Each holder of the Series D Preferred Stock shall be entitled to receive that portion of the assets available for distribution as the number of outstanding shares of Series D Preferred Stock held by such holder bears to the total number of shares of Series D Preferred Stock. Such payment shall constitute payment in full to the holders of the Series D Preferred Stock upon the liquidation, dissolution or winding up of the Corporation. After such payment shall have been made in full, or funds necessary for such payment shall have been set aside by the Corporation in trust for the account of the holders of Series D Preferred Stock, so as to be available for such payment, such holders of Series D Preferred Stock shall be entitled to no further participation in the distribution of the assets of the Corporation. (ii) CONSOLIDATION, MERGER AND OTHER CORPORATE EVENTS. A consolidation or merger of the Corporation (except into or with a subsidiary corporation or a corporation otherwise affiliated with The Vector Molina Investment Trust or any other affiliate of Dr. Luis Enrique Molina G.) or a sale, lease, mortgage, pledge, exchange, transfer or other disposition of all or substantially all of the assets of the Corporation or any reclassification of the stock of the Corporation (other than a change in par value or from no par to par, or from par to no par or as the result of an event described in subsections (iv) through (vii) of paragraph (f)), shall be regarded as a liquidation, dissolution or winding up of the affairs of the Corporation within the meaning of this paragraph (d). In no event shall the issuance of new classes of stock, whether senior, junior or on a parity with the Series D Preferred Stock, be deemed a "reclassification" under or otherwise limited by the terms hereof. (iii) DISTRIBUTION OF CASH AND OTHER ASSETS. In the event of a liquidation, dissolution or winding up of the Corporation resulting in the availability of assets other than cash for distribution to the holders of the Series D Preferred Stock, the holders of the Series D -2- Preferred Stock shall be entitled to a distribution of cash and/or assets equal to the value of the liquidation preference stated in subsection (i) of this paragraph (d), which valuation shall be made solely by the Board of Directors, and provided that such Board of Directors was acting in good faith, shall be conclusive. (iv) DISTRIBUTION TO JUNIOR SECURITY HOLDERS. After the payment or distribution to the holders of the Series D Preferred Stock of the full preferential amounts aforesaid, the holders of the Common Stock then outstanding, or any other stock of the Corporation ranking as to assets upon liquidation, dissolution or winding up of the Corporation junior to the Series D Preferred Stock, shall be entitled to receive ratably all of the remaining assets of the Corporation. (v) PREFERENCE; PRIORITY. References to a stock that is "SENIOR" to, on a "PARITY" with or "JUNIOR" to other stock as to liquidation shall refer, respectively, to rights of priority of one series or class of stock over another in the distribution of assets on any liquidation, dissolution or winding up of the Corporation. The Series D Preferred Stock shall be senior to the Common Stock of the Corporation, senior to any subsequent series of Preferred Stock issued by the Corporation, junior to the Corporation's Series C Preferred Stock and pari passu with the Corporation's outstanding Series A Preferred Stock and any shares of Series B Preferred Stock issued subsequent to the date hereof. (e) VOTING RIGHTS. Except as otherwise required by law, the holder of shares of Series D Preferred Stock shall not have the right to vote on matters that come before the shareholders. (f) CONVERSION RIGHTS. The holders of Series D Preferred Stock will have the following conversion rights: (i) RIGHT TO CONVERT. Subject to and in compliance with the provisions of this paragraph (f), any issued and outstanding shares of Series D Preferred Stock may, at the option of the holder, be converted at any time or from time to time into fully paid and nonassessable shares of Common Stock at the conversion rate in effect at the time of conversion, determined as provided herein; PROVIDED, that a holder of Series D Preferred Stock may at any given time convert only up to that number of shares of Series D Preferred Stock so that, upon conversion, the aggregate beneficial ownership of the Corporation's Common Stock (calculated pursuant to Rule 13d-3 of the Securities Exchange Act of 1934, as amended) of such holder and all persons affiliated with such holder is not more than 9.99% of the Corporation's Common Stock then outstanding. (ii) MECHANICS OF CONVERSION. Before any holder of Series D Preferred Stock shall be entitled to convert the same into shares of Common Stock, he shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Common Stock, and shall give written notice to the Corporation at such office that he elects to convert the same and shall state therein the number of shares of Series D Preferred Stock being converted. Thereupon, the Corporation shall promptly issue and deliver at such office to such holder of Series D Preferred Stock a certificate or certificates for the number of shares of Common Stock to which he shall be entitled. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Series D Preferred Stock to be converted, and the person or persons entitled to receive -3- the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. (iii) CONVERSION PRICE. The number of shares of Common Stock into which one share of Series D Preferred Stock shall be convertible shall be determined by dividing the Series D Purchase Price by the then existing Conversion Price, as defined below. The "CONVERSION PRICE" shall equal $0.11, subject to adjustment as set forth below in this paragraph (f). (iv) ADJUSTMENT FOR STOCK SPLITS AND COMBINATIONS. If the Corporation shall at any time, or from time to time after the date shares of the Series D Preferred Stock are first issued (the "ORIGINAL ISSUE DATE"), effect a subdivision of the outstanding Common Stock, the Conversion Price in effect immediately prior thereto shall be proportionately decreased, and conversely, if the Corporation shall at any time or from time to time after the Original Issue Date combine the outstanding shares of Common Stock, the Conversion Price then in effect immediately before the combination shall be proportionately increased. Any adjustment under this paragraph (f)(iv) shall become effective at the close of business on the date the subdivision or combination becomes effective. (v) ADJUSTMENT FOR CERTAIN DIVIDENDS AND DISTRIBUTIONS. In the event the Corporation at any time, or from time to time after the Original Issue Date, shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in additional shares of Common Stock, then and in each such event the Conversion Price then in effect shall be decreased as of the time of such issuance or, in the event such a record date shall have been fixed, as of the close of business on such record date, by multiplying the Conversion Price then in effect by a fraction: (A) the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and (B) the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution; PROVIDED, HOWEVER, if such record date shall have been fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Conversion Price shall be recomputed accordingly as of the close of business on such record date and thereafter, the Conversion Price shall be adjusted pursuant to this paragraph (f)(v) as of the time of actual payment of such dividends or distributions. (iv) ADJUSTMENTS FOR OTHER DIVIDENDS AND DISTRIBUTIONS. In the event the Corporation at any time or from time to time after the Original Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Corporation other than shares of Common Stock, then and in each such event provision shall be made so that the holders of such Series D Preferred Stock shall receive upon conversion thereof in addition to the number of shares of Common Stock receivable thereupon, the amount of securities of the Corporation that -4- they would have received had their Series D Preferred Stock been converted into Common Stock on the date of such event and had thereafter, during the period from the date of such event to and including the conversion date, retained such securities receivable by them as aforesaid during such period giving application to all adjustments called for during such period under this paragraph (f) with respect to the rights of the holders of the Series D Preferred Stock. (vii) ADJUSTMENTS TO CONVERSION PRICE FOR CERTAIN DILUTING ISSUES. (A) SPECIAL DEFINITIONS. For purposes of this paragraph (f)(vii), the following definitions apply: (i) "OPTIONS" shall mean rights, options, or warrants to subscribe for, purchase or otherwise acquire either Common Stock or Convertible Securities (defined below). (ii) "CONVERTIBLE SECURITIES" shall mean any evidences of indebtedness, shares (other than Common Stock and Series D Preferred Stock) or other securities convertible into or exchangeable for Common Stock. (iii) "ADDITIONAL SHARES OF COMMON STOCK" shall mean all shares of Common Stock issued (or, pursuant to paragraph (f)(vii)(C), deemed to be issued) by the Corporation after the Original Issue Date; provided, that "Additional Shares of Common Stock" shall NOT mean or include any shares of Common Stock issued or issuable: 1. upon conversion of shares of Series D Preferred Stock; 2. to officers, directors or employees of, or consultants to, the Corporation pursuant to stock option or stock purchase plans or agreements on terms approved by the Board of Directors, but not exceeding, at any one time, more than five (5%) percent of the fully-diluted shares of Common Stock then issued and outstanding (net of any repurchases of such shares), subject to adjustment for all subdivisions and combinations; 3. in connection with any acquisition, joint venture or similar combination, as full or partial consideration for the assets, securities or properties of any other person, firm or corporation, whether by purchase, exchange, merger, consolidation or like combination; 4. as a dividend or distribution on Series D Preferred Stock; or 5. for which adjustment of the Conversion Price is made pursuant to paragraphs (f)(iv)-(vi). -5- (B) NO ADJUSTMENT OF CONVERSION PRICE. Any provision herein to the contrary notwithstanding, no adjustment in the Conversion Price shall be made in respect of the issuance of Additional Shares of Common Stock unless the consideration per share (determined pursuant to paragraph (f)(vii)(E) hereof) for an Additional Share of Common Stock issued or deemed to be issued by the Corporation is less than the Conversion Price in effect on the date of, and immediately prior to such issue. (C) DEEMED ISSUE OF ADDITIONAL SHARES OF COMMON STOCK. In the event the Corporation at any time or from time to time after the Original Issue Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities then entitled to receive any such Options or Convertible Securities, then the maximum number of shares (as set forth in the instrument relating thereto without regard to any provisions contained therein designed to protect against dilution) of Common Stock issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided further that in any such case in which Additional Shares of Common Stock are deemed to be issued: (i) no further adjustments in the Conversion Price shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities; (ii) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase in the consideration payable to the Corporation, or decrease in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof, the Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities (provided, however, that no such adjustment of the Conversion Price shall effect Common Stock previously issued upon conversion of the Series D Preferred Stock); (iii) Upon the expiration of any such Options or rights, the termination of any such rights to convert or exchange, or the expiration of any rights related to such Convertible Securities, the Conversion Price, to the extent in any way affected by or computed using such Options or Convertible Securities (unless such Options or Convertible Securities were merely deemed to be included in the numerator and denominator for purposes of determining the number of shares of Common Stock outstanding for purposes of (f)(vii)(D)), shall be recomputed to reflect the issuance of only the number of shares of Common Stock (and Convertible Securities that remain in effect) actually issued upon the exercise of such Options or rights related to such Convertible Securities. -6- (iv) no readjustment pursuant to clause (ii) or (iii) above shall have the effect of increasing the Conversion Price to an amount which exceeds the lower of (a) the Conversion Price on the original adjustment date, or (b) the Conversion Price that would have resulted from any issuance of Additional Shares of Common Stock between the original adjustment date and such readjustment date. (D) ADJUSTMENT OF CONVERSION PRICE UPON ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK. In the event this Corporation, at any time after the Original Issue Date shall issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to (f)(vii)(C)) without consideration or for a consideration per share less than the Conversion Price in effect on the date of and immediately prior to such issue, then and in such event, the Conversion Price shall be reduced, concurrently with such issue, to a price (calculated to the nearest cent) determined by multiplying the Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of shares of Common Stock which the aggregate consideration received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at the Conversion Price in effect immediately prior to such issuance, and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of such Additional Shares of Common Stock so issued. For the purpose of the above calculation, the number of shares of Common Stock outstanding immediately prior to such issue shall be calculated on a fully diluted basis, as if all shares of Series D Preferred Stock and all Convertible Securities had been fully converted into shares of Common Stock and any outstanding warrants, options or other rights for the purchase of shares of stock or convertible securities had been fully exercised (and the resulting securities fully converted into shares of Common Stock, if so convertible) as of such date. (E) DETERMINATION OF CONSIDERATION. For purposes of this paragraph (f)(vii), the consideration received by the Corporation for the issue of any Additional Shares of Common Stock shall be computed as follows: (i) CASH AND PROPERTY: Such consideration shall: 1. insofar as it consists of cash, be computed at the aggregate amount of cash received by the Corporation excluding amounts paid or payable for accrued interest or accrued dividends; 2. insofar as it consists of property other than cash, be computed at the fair value thereof at the time of such issue, as determined in good faith by the Board of Directors; and 3. in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Corporation for consideration which -7- covers both, be the proportion of such consideration so received, computed as provided in clauses (1) and (2) above, as determined in good faith by the Board of Directors. (ii) OPTIONS AND CONVERTIBLE SECURITIES. The consideration per share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to paragraph (f)(vii), relating to Options and Convertible Securities shall be determined by dividing 1. the total amount, if any, received or receivable by the Corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein designed to protect against dilution) payable to the Corporation upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities by 2. the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein designed to protect against the dilution) issuable upon the exercise of such Options or conversion or exchange of such Convertible Securities. (viii) ADJUSTMENT FOR RECLASSIFICATION EXCHANGE OR SUBSTITUTION. If the Common Stock issuable upon the conversion of the Series D Preferred Stock shall be changed into the same or a different number of shares of any class or classes of stock, whether by capital reorganization, reclassification or otherwise (other than a subdivision or combination of shares or stock dividend provided for above, or a reorganization, merger, consolidation or sale of assets provided for elsewhere in this paragraph (f)), then and in each such event the holder of each share of Series D Preferred Stock shall have the right thereafter to convert such share into the kind and amount of shares of stock and other securities and property receivable upon such reorganization, reclassification or other change, by holders of the number of shares of Common Stock into which such shares of Series D Preferred Stock might have been converted immediately prior to such reorganization, reclassification, or change, all subject to further adjustment as provided herein. (ix) REORGANIZATION, MERGERS, CONSOLIDATIONS OR SALES OF ASSETS. If at any time or from time to time there shall be a capital reorganization of the Common Stock (other than a subdivision, combination, reclassification or exchange of shares provided for elsewhere in this paragraph (f)) or a merger or consolidation of the Corporation with or into another corporation, or the sale of all or substantially all of the Corporation's properties and assets to any other -8- person, then, as a part of such reorganization, merger, consolidation or sale, provision shall be made so that the holders of the Series D Preferred Stock shall thereafter be entitled to receive upon conversion of such Series D Preferred Stock, the number of shares of stock or other securities or property of the Corporation or of the successor corporation resulting from such merger or consolidation or sale, to which a holder of Common Stock deliverable upon conversion would have been entitled on such capital reorganization, merger, consolidation or sale. In any such case, appropriate adjustment shall be made in the application of the provisions of this paragraph (f) with respect to the rights of the holders of the Series D Preferred Stock after the reorganization, merger, consolidation or sale to the end that the provisions of this paragraph (f) (including adjustment of the Conversion Price then in effect and the number of shares purchasable upon conversion of the Series D Preferred Stock) shall be applicable after that event as nearly equivalent as may be practicable. (x) CERTIFICATE OF ADJUSTMENT. In each case of an adjustment or readjustment of the Conversion Price or the securities issuable upon conversion of the Series D Preferred Stock, the Corporation shall compute such adjustment or readjustment in accordance herewith and the Corporation's Chief Financial Officer shall prepare and sign a certificate showing such adjustment or readjustment, and shall mail such certificate by first class mail, postage prepaid, to each registered holder of the Series D Preferred Stock at the holder's address as shown in the Corporation's books. The certificate shall set forth such adjustment or readjustment, showing in detail the facts upon which such adjustment or readjustment is based. (xi) NOTICES OF RECORD DATE. In the event of (A) any taking by the Corporation of a record of the holders of any class or series of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution or (B) any reclassification or recapitalization of the capital stock of the Corporation, any merger or consolidation of the Corporation or any transfer of all or substantially all of the assets of the Corporation to any other corporation, entity or person, or any voluntary or involuntary dissolution, liquidation or winding up of the Corporation, the Corporation shall mail to each holder of Series D Preferred Stock at least 10 days prior to the record date specified therein, a notice specifying (1) the date on which any such record is to be taken for the purpose of such dividend or distribution and a description of such dividend or distribution, (2) the date on which any such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidation or winding up is expected to become effective and (3) the time, if any is to be fixed, as to when the holders of record of Common Stock (or other securities) shall be entitled to exchange their shares, of Common Stock (or other securities) for securities or other property deliverable upon such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidation or winding up. (xii) FRACTIONAL SHARES. No fractional shares of Common Stock shall be issued upon conversion of the Series D Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall pay cash equal to the product of such fraction multiplied by the fair market value of one share of the Corporation's Common Stock on the date of conversion, as determined in good faith by the Board of Directors. (xiii) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Series D Preferred Stock, -9- such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Series D Preferred Stock, and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of Series D Preferred Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. (xiv) NOTICES. Any notice required by the provisions of this paragraph (f) to be given to the holders of shares of Series D Preferred Stock shall be deemed given (A) if deposited in the United States mail, postage prepaid, or (B) if given by any other reliable or generally accepted means (including by facsimile or by a nationally recognized overnight courier service), in each case addressed to each holder of record at his address (or facsimile number) appearing on the books of the Corporation. (xv) PAYMENT OF TAXES. The Corporation will pay all transfer taxes and other governmental charges that may be imposed in respect of the issue or delivery of shares of Common Stock upon conversion of shares of Series D Preferred Stock. (xvi) NO DILUTION OR IMPAIRMENT. The Corporation shall not amend its Articles of Incorporation or participate in any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, for the purpose of avoiding or seeking to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, without the approval of a majority of the then outstanding Series D Preferred Stock. (g) NO REISSUANCE OF PREFERRED STOCK. Any shares of Series D Preferred Stock acquired by the Corporation by reason of purchase, conversion or otherwise shall be canceled, retired and eliminated from the shares of Series D Preferred Stock that the Corporation shall be authorized to issue. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock subject to the conditions and restrictions on issuance set forth in the Articles of Incorporation or in any certificate of Determination creating a series of Preferred Stock or any similar stock or as otherwise required by law. (h) SEVERABILITY. If any right, preference or limitation of the Series D Preferred Stock set forth herein is invalid, unlawful or incapable of being enforced by reason of any rule, law or public policy, all other rights, preferences and limitations set forth herein that can be given effect without the invalid, unlawful or unenforceable right, preference or limitation shall nevertheless remain in full force and effect, and no right, preference or limitation herein shall be deemed dependent upon any other such right, preference or limitation unless so expressed herein. 3. The number of authorized shares of Preferred Stock of the Corporation is 20,000,000, and the number of shares of Series D Stock, none of which has been issued, is 4,000,000. [the balance of this page intentionally left blank] -10- Each of the undersigned declares under penalty of perjury that the matters set out in the foregoing Certificate are true of his own knowledge. Executed at _______, __________, on this ___ day of March, 2004. _________________________________ Name: Claude Bertrin Title: Executive Vice President _________________________________ Name: ______________________ Title: ______________________ -11- EX-10.01 6 c31878_ex10-01.txt SECURITIES PURCHASE AGREEMENT THIS SECURITIES PURCHASE AGREEMENT (this "AGREEMENT") is made and entered into as of February __, 2004, by and between PENTHOUSE INTERNATIONAL, INC., a Florida corporation (the "COMPANY"), and LAURUS MASTER FUND, LTD., a Cayman Islands company ("LAURUS" or the "PURCHASER"). RECITALS WHEREAS, the Company has authorized the sale to the Purchaser of a Convertible Term Note in the aggregate principal amount of Twenty-Four Million Dollars ($24,000,000) (the "NOTE"), which Note is convertible into shares of the Company's common stock, $.0025 par value per share (the "COMMON STOCK") at the fixed conversion price set forth in the Note ("FIXED CONVERSION PRICE"); WHEREAS, the Company wishes to issue a warrant to the Purchaser to purchase additional shares of the Company's Common Stock in connection with Purchaser's purchase of the Note; WHEREAS, Purchaser desires to purchase the Note and Warrant on the terms and conditions set forth herein; and WHEREAS, the Company desires to issue and sell the Note and Warrant to Purchaser on the terms and conditions set forth herein. AGREEMENT NOW, THEREFORE, in consideration of the foregoing recitals and the mutual promises, representations, warranties and covenants hereinafter set forth and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. AGREEMENT TO SELL AND PURCHASE. Pursuant to the terms and conditions set forth in this Agreement, on the Closing Date (as defined in Section 3), the Company agrees to sell to the Purchaser, and the Purchaser hereby agrees to purchase from the Company a Note in the amount of $24,000,000 convertible in accordance with the terms thereof into shares of the Company's Common Stock in accordance with the terms of the Note and this Agreement. The Note purchased on the Closing Date shall be known as the "Offering." A form of the Note is annexed hereto as Exhibit A. The Note will have a Maturity Date (as defined in the Note) on a date which shall be thirty six (36) months from the date of issuance, subject to acceleration in accordance with the terms thereof. Collectively, the Note and Warrant (as defined in Section 2) and Common Stock issuable in payment of the Note, upon conversion of the Note and upon exercise of the Warrant are referred to as the "Securities". 2. Fees and Warrant. On the Closing Date (a) The Company will issue and deliver to the Purchaser a Warrant to purchase up to [________________] shares of Common Stock in connection with the Offering (the "WARRANT") pursuant to Section 1 hereof. The Warrant shall be delivered on the Closing Date in substantially the form of Warrant annexed hereto as Exhibit B. All the representations, covenants, warranties, undertakings, and indemnification, and other rights made or granted to or for the benefit of the Purchaser by the Company are hereby also made and granted in respect of the Warrant and shares of the Company's Common Stock issuable upon exercise of the Warrant (the "WARRANT SHARES"). (b) Upon execution and delivery of this Agreement by the Company and Purchaser, the Company shall pay to Laurus Capital Management, LLC, manager of Purchaser a closing payment in an amount equal to three and one half percent (3.5%) of the aggregate principal amount of the Note. The foregoing fee is referred to herein as the "CLOSING PAYMENT". (c) The Company shall reimburse the Purchaser for its reasonable legal fees and expenses for services rendered to the Purchaser in preparation of this Agreement and the Related Agreements (as hereinafter defined), and expenses in connection with the Purchaser's due diligence review of the Company and relevant matters. Purchaser's reimbursable due diligence expenses shall not exceed $17,500 without the Company's prior approval. (d) The Company shall pay to the Purchaser the Closing Payment, legal fees and due diligence fees (net of deposits previously paid by the Company) out of funds held pursuant to a Funds Escrow Agreement of even date herewith among the Company, Purchaser, and the escrow agent named therein (the "FUNDS ESCROW AGREEMENT") and a disbursement letter (the "DISBURSEMENT LETTER"). 3. CLOSING, DELIVERY AND PAYMENT. 3.1 CLOSING. Subject to the terms and conditions herein, the closing of the transactions contemplated hereby (the "CLOSING"), shall take place on the date hereof, at such time or place as the Company and Purchaser may mutually agree (such date is hereinafter referred to as the "CLOSING DATE"). 3.2 DELIVERY. Pursuant to the Funds Escrow Agreement in the form attached hereto as Exhibit C, at the Closing on the Closing Date, the Company will deliver to the Purchaser, among other things, a Note in the form attached as Exhibit A representing the principal amount of $24,000,000 and a Warrant in the form attached as Exhibit B in the Purchaser's name representing the Warrant Shares and the Purchaser will deliver to the Company, among other things, the amounts set forth in the Disbursement Letter by certified funds or wire transfer. 4. Representations and Warranties of the Company. The Company hereby represents and warrants to the Purchaser as of the date of this Agreement as set forth below which disclosures are supplemented by, and subject to the 2 Company's filings under the Securities Exchange Act of 1934 (collectively, the "EXCHANGE ACT FILINGS"), copies of which have been provided to the Purchaser. 4.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Florida. The Company has the corporate power and authority to own and operate its properties and assets, to execute and deliver this Agreement, and the Note and the Warrant to be issued in connection with this Agreement, the Real Estate Documentation (as hereafter defined), the Registration Rights Agreement relating to the Securities dated as of the date hereof between the Company and the Purchaser (the "REGISTRATION RIGHTS AGREEMENT") and all other agreements, documents and instruments entered into in connection with the transactions contemplated hereby and thereby (as each of the same may be amended, modified and supplemented from time to time, collectively, the "RELATED AGREEMENTS"), to issue and sell the Note and the shares of Common Stock issuable upon conversion of the Note (the "NOTE SHARES"), to issue and sell the Warrant and the Warrant Shares, and to carry out the provisions of this Agreement and the Related Agreements and to carry on its business as presently conducted. The Company is duly qualified and is authorized to do business and is in good standing as a foreign corporation in all jurisdictions in which the nature of its activities and of its properties (both owned and leased) makes such qualification necessary, except for those jurisdictions in which failure to do so would not have a material adverse effect on the Company or its business. For purposes hereof, the term "REAL ESTATE DOCUMENTATION" shall mean (a) the mortgage dated as of the date hereof made by the Company in favor of the Purchaser covering the real property located at 14-16 East 67th Street, New York, New York (the "REAL PROPERTY") and (b) all documents, instruments and agreements entered into in connection therewith, as each of the same may be amended, modified and supplemented from time to time. 4.2 SUBSIDIARIES. The Company owns (a) all of the issued and outstanding capital stock and membership interests, as applicable, of NYC Realty I LLC, P.H. Realty Associates, L.L.C., Del Sol Investments LLC and Del Sol Investments SA de CV, and (b) 99% of the capital stock of General Media, Inc., General Media Art Holding, Inc., General Media Communications, Inc., General Media Entertainment, Inc., General Media (UK), Ltd., GMCI Internet Operations, Inc., GMI On-Line Ventures, Ltd., Penthouse Images Acquisitions, Ltd. and Pure Entertainment Telecommunications, Inc.; each of which entities set forth in this clause "(b)" are debtors (collectively, the "DEBTORS") in a Chapter 11 bankruptcy case currently pending the United States District Court for the Southern District of New York (the "BANKRUPTCY COURT"). The Company does not own or control any equity security or other interest of any other corporation, limited partnership or other business entity. 3 4.3 CAPITALIZATION; VOTING RIGHTS. (a) The authorized capital stock of the Company, as of the date hereof consists of 770,000,000 shares, of which 750,000,000 are shares of Common Stock, par value $0.0025 per share, _________shares of which are issued and outstanding, and 20,000,000 of which are shares of preferred stock, par value $.0025 per share of which 11,555,000 shares are issued outstanding. 5,000 shares of Preferred Stock are designated as Series A Preferred Stock of which 5,000 shares are outstanding and owned by General Media International, Inc.; 5,000 shares of Preferred Stock are designated as Series B Preferred Stock, of which no shares are issued and outstanding; and 11,550,000 shares of Preferred Stock are designated as Series C Preferred Stock of which 11,550,000 are outstanding and of which 10,500,000 shares are owned by Del Sol Investments G.P. and 1,050,00 shares are owned by A & L Capital. The authorized capital stock/membership interests of each guarantor of the Company's obligations to Purchaser (each a "Guarantor" and collectively "Guarantors"), together with the related par value per share and number of issued and outstanding shares/membership interests, in each case, as of the date hereof, are set forth on SCHEDULE 4.3(a). (b) Except as disclosed on SCHEDULE 4.3(b), other than (i) the shares reserved for issuance under the Company's stock option plans; and (ii) shares which may be granted pursuant to this Agreement and the Related Agreements, there are no outstanding options, warrants, rights (including conversion or preemptive rights and rights of first refusal), proxy or stockholder agreements, or arrangements or agreements of any kind for the purchase or acquisition from the Company any of its securities. Except as disclosed on SCHEDULE 4.3(b), neither the offer, issuance or sale of any of the Note or Warrant, or the issuance of any of the Note Shares or Warrant Shares, nor the consummation of any transaction contemplated hereby will result in a change in the price or number of any securities of the Company outstanding, under anti-dilution or other similar provisions contained in or affecting any such securities. (c) All issued and outstanding shares of the Company's Common Stock (i) have been duly authorized and validly issued and are fully paid and nonassessable and (ii) were issued in compliance with all applicable state and federal laws concerning the issuance of securities. (d) The rights, preferences, privileges and restrictions of the shares of the Common Stock are as stated in the Company's Certificate of Incorporation (the "CHARTER"). The Note Shares and Warrant Shares have been duly and validly reserved for issuance. When issued in compliance with the provisions of this Agreement and the Company's Charter, the Securities will be validly issued, fully paid and nonassessable, and will be free of any liens or encumbrances; PROVIDED, HOWEVER, that the Securities may be subject to restrictions on transfer under state and/or federal securities laws as set forth herein or as otherwise required by such laws at the time a transfer is proposed. 4.4 AUTHORIZATION; BINDING OBLIGATIONS. All corporate action on the part of the Company, its officers and directors necessary for the authorization of this Agreement and the Related Agreements, the performance of all obligations of the Company hereunder at the Closing and, the authorization, sale, issuance and delivery of the Note and Warrant has been taken or will be taken prior to the Closing. The Agreement and the Related Agreements, when executed 4 and delivered and to the extent it is a party thereto, will be valid and binding obligations of the Company enforceable in accordance with their terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights, and (b) general principles of equity that restrict the availability of equitable or legal remedies. The sale of the Note and the subsequent conversion of the Note into Note Shares are not and will not be subject to any preemptive rights or rights of first refusal that have not been properly waived or complied with. The issuance of the Warrant and the subsequent exercise of the Warrant for Warrant Shares are not and will not be subject to any preemptive rights or rights of first refusal that have not been properly waived or complied with. 4.5 LIABILITIES. The Company, to the best of its knowledge, has no contingent or other liabilities, except current liabilities incurred in the ordinary course of business and liabilities disclosed in any Exchange Act Filings, or any other liabilities and obligations which, individually or in the aggregate, could reasonably be expected to have a material adverse effect on the business, assets, liabilities, financial condition, prospects or operations of the Company and its subsidiaries, when taken as a consolidated whole (a "MATERIAL ADVERSE EFFECT"). 4.6 AGREEMENTS; ACTION. Except as set forth on SCHEDULE 4.6 or as disclosed in any Exchange Act Filings: (a) Except for the Debtors or where the existence of any of the following could not be reasonably expect to have a Material Adverse Effect, there are no agreements, understandings, instruments, contracts, proposed transactions, judgments, orders, writs or decrees to which the Company or any Guarantor is a party or to its knowledge by which it or any Guarantor is bound which may involve (i) obligations (contingent or otherwise) of, or payments to, the Company and/or any Guarantor in excess of $50,000 in the aggregate for the Company and the Guarantors (other than obligations of, or payments to, the Company and/or any Guarantor arising from purchase or sale agreements entered into in the ordinary course of business), or (ii) the transfer or license of any patent, copyright, trade secret or other proprietary right to or from the Company or any Guarantor (other than licenses arising from the purchase of "off the shelf" or other standard products), or (iii) provisions restricting the development, manufacture or distribution of the Company's or any Guarantor's products or services, or (iv) indemnification by the Company or any Guarantor's with respect to infringements of proprietary rights. (b) Since December 31, 2003, the Company has not (i) declared or paid any dividends, or authorized or made any distribution upon or with respect to any class or series of its capital stock, (ii) incurred any indebtedness for money borrowed or any other liabilities (other than ordinary course obligations) individually in excess of $100,000 or, in the case of indebtedness and/or liabilities individually less than $100,000, in excess of $250,000 in the aggregate, (iii) made any loans or advances to any person not in excess, individually or in the aggregate, of $50,000, other than ordinary advances for travel expenses, or (iv) sold, exchanged or otherwise disposed of any of its assets or rights, other than the sale of its inventory in the ordinary course of business. 5 (c) For the purposes of subsections (a) and (b) above, all indebtedness, liabilities, agreements, understandings, instruments, contracts and proposed transactions involving the same person or entity (including persons or entities the Company has reason to believe are affiliated therewith) shall be aggregated for the purpose of meeting the individual minimum dollar amounts of such subsections. 4.7 OBLIGATIONS TO RELATED PARTIES. Except as set forth on SCHEDULE 4.7 or as disclosed in the Exchange Act Filings, there are no obligations of the Company to officers, directors, stockholders or employees of the Company other than (a) for payment of salary for services rendered and for bonus payments, (b) reimbursement for reasonable expenses incurred on behalf of the Company, (c) for other standard employee benefits made generally available to all employees (including stock option agreements outstanding under any stock option plan approved by the Board of Directors of the Company) and (d) obligations listed in the Company's financial statements or disclosed in any of its Exchange Act Filings. Except as described above or set forth on SCHEDULE 4.7, none of the officers, directors or, to the best of the Company's knowledge, key employees or stockholders of the Company or any members of their immediate families, are indebted to the Company, individually or in the aggregate, in excess of $50,000 or have any direct or indirect ownership interest in any firm or corporation with which the Company is affiliated or with which the Company has a business relationship, or any firm or corporation which competes with the Company, other than passive investments in publicly traded companies (representing less than 1% of such company) which may compete with the Company. Except as described above, no officer, director or stockholder, or any member of their immediate families, is, directly or indirectly, interested in any material contract with the Company and no agreements, understandings or proposed transactions are contemplated between the Company and any such person. Except as set forth on SCHEDULE 4.7 or as disclosed in the Exchange Act Filings, the Company is not a guarantor or indemnitor of any indebtedness of any other person, firm or corporation. 4.8 CHANGES. Since December 31, 2003, except as disclosed in any Exchange Act Filing or in any Schedule to this Agreement or to any of the Related Agreements, there has not been: (a) Any change in the assets, liabilities, financial condition, prospects or operations of the Company, other than changes in the ordinary course of business, none of which individually or in the aggregate has had or could reasonably be expected to have a Material Adverse Effect; (b) Any resignation or termination of any officer, key employee or group of employees of the Company; (c) Any material change, except in the ordinary course of business, in the contingent obligations of the Company by way of guaranty, endorsement, indemnity, warranty or otherwise; (d) Any damage, destruction or loss, whether or not covered by insurance, which could reasonably be expected to have a Material Adverse Effect; 6 (e) Any waiver by the Company of a valuable right or of a material debt owed to it; (f) Any direct or indirect material loans made by the Company to any stockholder, employee, officer or director of the Company, other than advances made in the ordinary course of business; (g) Any material change in any compensation arrangement or agreement with any employee, officer, director or stockholder; (h) Any declaration or payment of any dividend or other distribution of the assets of the Company; (i) Any labor organization activity related to the Company; (j) Any debt, obligation or liability incurred, assumed or guaranteed by the Company, except those for immaterial amounts and for current liabilities incurred in the ordinary course of business; (k) Any sale, assignment or transfer of any patents, trademarks, copyrights, trade secrets or other intangible assets; (l) Any change in any material agreement to which the Company is a party or by which it is bound which may materially and adversely affect the business, assets, liabilities, financial condition, operations or prospects of the Company; (m) Any other event or condition of any character that, either individually or cumulatively, could reasonably be expected to have a Material Adverse Effect; or (n) Any arrangement or commitment by the Company to do any of the acts described in subsection (a) through (m) above. 4.9 TITLE TO PROPERTIES AND ASSETS; LIENS, ETC. Except as set forth on SCHEDULE 4.9, the Company has good and marketable title to its properties and assets, and good title to its leasehold estates, in each case subject to no mortgage, pledge, lien, lease, encumbrance or charge, other than (a) those resulting from taxes which have not yet become delinquent, (b) minor liens and encumbrances which do not materially detract from the value of the property subject thereto or materially impair the operations of the Company, and (c) those that have otherwise arisen in the ordinary course of business. All facilities, machinery, equipment, fixtures, vehicles and other properties owned, leased or used by the Company are in good operating condition and repair and are reasonably fit and usable for the purposes for which they are being used. Except as set forth on SCHEDULE 4.9, the Company is in compliance with all material terms of each lease to which it is a party or is otherwise bound. 4.10 INTELLECTUAL PROPERTY. (a) Except where a breach of the representations contained in this Section 4.10 could not reasonably be expected to have a Material Adverse Effect, (i) the Company owns 7 or possesses sufficient legal rights to all patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information and other proprietary rights and processes necessary for its business as now conducted and to the Company's knowledge as presently proposed to be conducted (the "INTELLECTUAL PROPERTY"), without any known infringement of the rights of others; and (ii) there are no outstanding options, licenses or agreements of any kind relating to the foregoing proprietary rights, nor is the Company bound by or a party to any options, licenses or agreements of any kind with respect to the patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information and other proprietary rights and processes of any other person or entity other than such licenses or agreements arising from the purchase of "off the shelf" or standard products. (b) Except as set forth in SCHEDULE 4.10(b), the Company has not received any communications alleging that the Company has violated any of the patents, trademarks, service marks, trade names, copyrights or trade secrets or other proprietary rights of any other person or entity, nor is the Company aware of any basis therefor. (c) The Company does not believe it is or will be necessary to utilize any inventions, trade secrets or proprietary information of any of its employees made prior to their employment by the Company, except for inventions, trade secrets or proprietary information that have been rightfully assigned to the Company. 4.11 COMPLIANCE WITH OTHER INSTRUMENTS. Except as set forth on SCHEDULE 4.11 or as disclosed in the Exchange Act Filings, the Company is not in violation or default of any term of its Charter or Bylaws, or of any material provision of any mortgage, indenture, contract, agreement, instrument or contract to which it is party or by which it is bound or of any judgment, decree, order or writ. The execution, delivery and performance of and compliance with this Agreement and the Related Agreements to which it is a party, and the issuance and sale of the Note by the Company and the other Securities by the Company each pursuant hereto, will not, with or without the passage of time or giving of notice, result in any such material violation, or be in conflict with or constitute a default under any such term or provision, or result in the creation of any mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of the Company or the suspension, revocation, impairment, forfeiture or nonrenewal of any permit, license, authorization or approval applicable to the Company, its business or operations or any of its assets or properties. 4.12 LITIGATION. Except as set forth on SCHEDULE 4.12 or as disclosed in the Exchange Act Filings, there is no action, suit, proceeding or investigation pending or, to the Company's knowledge, currently threatened against the Company that prevents the Company to enter into this Agreement or the Related Agreements, or to consummate the transactions contemplated hereby or thereby, or which might result, either individually or in the aggregate, in any material adverse change in the assets, condition, affairs or prospects of the Company, financially or otherwise, or any change in the current equity ownership of the Company, nor is the Company aware that there is any basis for any of the foregoing. The Company is not a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. There is no action, suit, proceeding or investigation by the Company currently pending or which the Company intends to initiate. 8 4.13 TAX RETURNS AND PAYMENTS. The Company has timely filed all tax returns (federal, state and local) required to be filed by it. All taxes shown to be due and payable on such returns, any assessments imposed, and to the Company's knowledge all other taxes due and payable by the Company on or before the Closing, have been paid or will be paid prior to the time they become delinquent. Except as set forth on SCHEDULE 4.13 or disclosed in the Exchange Act Filings, the Company has not been advised (a) that any of its returns, federal, state or other, have been or are being audited as of the date hereof, or (b) of any deficiency in assessment or proposed judgment to its federal, state or other taxes. The Company has no knowledge of any liability of any tax to be imposed upon its properties or assets as of the date of this Agreement that is not adequately provided for. 4.14 EMPLOYEES. Except as set forth on SCHEDULE 4.14, the Company has no collective bargaining agreements with any of its employees. There is no labor union organizing activity pending or, to the Company's knowledge, threatened with respect to the Company. Except as disclosed in the Exchange Act Filings or on SCHEDULE 4.14, the Company is not a party to or bound by any currently effective employment contract, deferred compensation arrangement, bonus plan, incentive plan, profit sharing plan, retirement agreement or other employee compensation plan or agreement. Except where a breach of the following could not reasonably be expected to have a Material Adverse Effect, to the Company's knowledge, (i) no employee of the Company, nor any consultant with whom the Company has contracted, is in violation of any term of any employment contract, proprietary information agreement or any other agreement relating to the right of any such individual to be employed by, or to contract with, the Company because of the nature of the business to be conducted by the Company; and to the Company's knowledge the continued employment by the Company of its present employees, and the performance of the Company's contracts with its independent contractors, will not result in any such violation, (ii) the Company is not aware that any of its employees is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with their duties to the Company, (iii) the Company has not received any notice alleging that any such violation has occurred, and (iv) except for employees who have a current effective employment agreement with the Company, no employee of the Company has been granted the right to continued employment by the Company or to any material compensation following termination of employment with the Company. Except as disclosed in Exchange Act Filings or as set forth on SCHEDULE 4.14, the Company is not aware that any officer, key employee or group of employees intends to terminate his, her or their employment with the Company, nor does the Company have a present intention to terminate the employment of any officer, key employee or group of employees. 4.15 REGISTRATION RIGHTS AND VOTING RIGHTS. Except as set forth on SCHEDULE 4.15 and except as disclosed in Exchange Act Filings, the Company is presently not under any obligation, and has not granted any rights, to register any of the Company's presently outstanding securities or any of its securities that may hereafter be issued. Except as set forth on SCHEDULE 4.15 and except as disclosed in Exchange Act Filings, to the Company's knowledge, no stockholder of the Company has entered into any agreement with respect to the voting of equity securities of the Company. 9 4.16 COMPLIANCE WITH LAWS; PERMITS. Except as set forth on SCHEDULE 4.16 or as disclosed in the Exchange Act Filings, to its knowledge, the Company is not in violation in any material respect of any applicable statute, rule, regulation, order or restriction of any domestic or foreign government or any instrumentality or agency thereof in respect of the conduct of its business or the ownership of its properties which violation could reasonably be expected to have a Material Adverse Effect. No governmental orders, permissions, consents, approvals or authorizations are required to be obtained and no registrations or declarations are required to be filed in connection with the execution and delivery of this Agreement and the issuance of any of the Securities, except such as has been duly and validly obtained or filed, or with respect to any filings that must be made after the Closing, as will be filed in a timely manner. The Company has all material franchises, permits, licenses and any similar authority necessary for the conduct of its business as now being conducted by it, the lack of which could reasonably be expected to have a Material Adverse Effect. 4.17 ENVIRONMENTAL AND SAFETY LAWS. The Company is not in violation of any applicable statute, law or regulation relating to the environment or occupational health and safety, and to its knowledge, no material expenditures are or will be required in order to comply with any such existing statute, law or regulation. Except as set forth on SCHEDULE 4.17, no Hazardous Materials (as defined below) are used or have been used, stored, or disposed of by the Company or, to the Company's knowledge, by any other person or entity on any property owned, leased or used by the Company. For the purposes of the preceding sentence, "HAZARDOUS MATERIALS" shall mean (a) materials which are listed or otherwise defined as "HAZARDOUS" or "TOXIC" under any applicable local, state, federal and/or foreign laws and regulations that govern the existence and/or remedy of contamination on property, the protection of the environment from contamination, the control of hazardous wastes, or other activities involving hazardous substances, including building materials, or (b) any petroleum products or nuclear materials. 4.18 VALID OFFERING. Assuming the accuracy of the representations and warranties of the Purchaser contained in this Agreement, the offer, sale and issuance of the Securities will be exempt from the registration requirements of the Securities Act of 1933, as amended (the "SECURITIES ACT"), and will have been registered or qualified (or are exempt from registration and qualification) under the registration, permit or qualification requirements of all applicable state securities laws. 4.19 FULL DISCLOSURE. The Company has provided the Purchaser with all information requested by the Purchaser in connection with its decision to purchase the Note and Warrant, including all information the Company believes is reasonably necessary to make such investment decision. Neither this Agreement, the exhibits and schedules hereto, the Related Agreements nor any other document delivered by the Company to Purchaser or its attorneys or agents in connection herewith or therewith or with the transactions contemplated hereby or thereby, contain any untrue statement of a material fact nor omit to state a material fact necessary in order to make the statements contained herein or therein, in light of the circumstances in which they are made, not misleading. Any financial projections and other estimates provided to the Purchaser by the Company were based on the Company's experience in the industry and on assumptions of fact and opinion as to future events which the Company, at the date of the issuance of such projections or estimates, believed to be reasonable. 10 4.20 INSURANCE. The Company has general commercial, product liability, fire and casualty insurance policies with coverages which the Company believes are customary for companies similarly situated to the Company in the same or similar business. 4.21 SEC REPORTS. Except as set forth on SCHEDULE 4.21, the Company has filed all proxy statements, reports and other documents required to be filed by it under the Exchange Act. The Company has furnished the Purchaser with copies of (i) its Annual Report on Form 10-K(SB) for the fiscal year ended December 31, 2002 and (ii) its Quarterly Reports on Form 10-Q(SB) for the fiscal quarters ended March 31, 2003, June 30, 2003 and September 30, 2003, and the Form 8-K filings which it has made during 2003 to date (collectively, the "SEC REPORTS"). Except as set forth on SCHEDULE 4.21, each SEC Report was, at the time of its filing, in substantial compliance with the requirements of its respective form and none of the SEC Reports, nor the financial statements (and the notes thereto) included in the SEC Reports, as of their respective filing dates, contained any untrue statement of a material fact or omitted 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. 4.22 LISTING. The Company's Common Stock is listed for trading on the OTC BB and satisfies all requirements for the continuation of such listing. The Company has not received any notice that its Common Stock will be delisted from the OTC BB or that its Common Stock does not meet all requirements for listing. 4.23 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 offers to buy any security under circumstances that would cause the offering of the Securities pursuant to this Agreement to be integrated with prior offerings by the Company for purposes of the Securities Act which would prevent the Company from selling the Securities pursuant to Rule 506 under the Securities Act, or any applicable exchange-related stockholder approval provisions, nor will the Company or any of its affiliates or subsidiaries take any action or steps that would cause the offering of the Securities to be integrated with other offerings. 4.24 STOP TRANSFER. The Securities are restricted securities as of the date of this Agreement. The Company will not issue any stop transfer order or other order impeding the sale and delivery of any of the Securities at such time as the Securities are registered for public sale or an exemption from registration is available, except as required by state and federal securities laws. 4.25 DILUTION. The Company specifically acknowledges that its obligation to issue the shares of Common Stock upon conversion of the Note and exercise of the Warrant is binding upon the Company and enforceable regardless of the dilution such issuance may have on the ownership interests of other shareholders of the Company. 11 5. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The Purchaser hereby represents and warrants to the Company as follows (such representations and warranties do not lessen or obviate the representations and warranties of the Company set forth in this Agreement): 5.1 NO SHORTING. Neither the Purchaser nor any of its affiliates and investment partners will or will cause any person or entity, directly or indirectly, to engage in "short sales" of the Company's Common Stock or any "hedging" transactions involving such Common Stock for as long as the Note remains outstanding. 5.2 REQUISITE POWER AND AUTHORITY. Purchaser has all necessary power and authority under all applicable provisions of law to execute and deliver this Agreement and the Related Agreements and to carry out their provisions. All corporate action on Purchaser's part required for the lawful execution and delivery of this Agreement and the Related Agreements have been or will be effectively taken prior to the Closing. Upon their execution and delivery, this Agreement and the Related Agreements will be valid and binding obligations of Purchaser, enforceable in accordance with their terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights, and (b) as limited by general principles of equity that restrict the availability of equitable and legal remedies. 5.3 INVESTMENT REPRESENTATIONS. Purchaser understands that the Securities are being offered and sold pursuant to an exemption from registration contained in the Securities Act based in part upon Purchaser's representations contained in the Agreement, including, without limitation, that the Purchaser is an "accredited investor" within the meaning of Regulation D under the Securities Act of 1933, as amended (the "SECURITIES ACT"). The Purchaser confirms that it has received or has had full access to all the information it considers necessary or appropriate to make an informed investment decision with respect to the Note and the Warrant to be purchased by it under this Agreement and the Note Shares and the Warrant Shares acquired by it upon the conversion of the Note and the exercise of the Warrant, respectively. The Purchaser further confirms that it has had an opportunity to ask questions and receive answers from the Company regarding the Company's business, management and financial affairs and the terms and conditions of the Offering, the Note, the Warrant and the Securities and to obtain additional information (to the extent the Company possessed such information or could acquire it without unreasonable effort or expense) necessary to verify any information furnished to the Purchaser or to which the Purchaser had access. 5.4 PURCHASER BEARS ECONOMIC RISK. Purchaser has substantial experience in evaluating and investing in private placement transactions of securities in companies similar to the Company so that it is capable of evaluating the merits and risks of its investment in the Company and has the capacity to protect its own interests. Purchaser must bear the economic risk of this investment until the Securities are sold pursuant to (i) an effective registration statement under the Securities Act, or (ii) an exemption from registration is available with respect to such sale. 12 5.5 ACQUISITION FOR OWN ACCOUNT. Purchaser is acquiring the Note and Warrant and the Note Shares and the Warrant Shares for Purchaser's own account for investment only, and not as a nominee or agent and not with a view towards or for resale in connection with their distribution. 5.6 PURCHASER CAN PROTECT ITS INTEREST. Purchaser represents that by reason of its, or of its management's, business and financial experience, Purchaser has the capacity to evaluate the merits and risks of its investment in the Note, the Warrant and the Securities and to protect its own interests in connection with the transactions contemplated in this Agreement, and the Related Agreements. Further, Purchaser is aware of no publication of any advertisement in connection with the transactions contemplated in the Agreement or the Related Agreements. 5.7 ACCREDITED INVESTOR. Purchaser represents that it is an accredited investor within the meaning of Regulation D under the Securities Act. 5.8 LEGENDS. (a) The Note shall bear substantially the following legend: "THIS NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE, STATE SECURITIES LAWS. THIS NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE OR SUCH SHARES UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO PENTHOUSE INTERNATIONAL, INC. THAT SUCH REGISTRATION IS NOT REQUIRED." (b) The Note Shares and the Warrant Shares, if not issued by DWAC system (as hereinafter defined), shall bear a legend which shall be in substantially the following form until such shares are covered by an effective registration statement filed with the SEC: "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE, STATE SECURITIES LAWS. THESE SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT AND APPLICABLE STATE LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO PENTHOUSE 13 INTERNATIONAL, INC. THAT SUCH REGISTRATION IS NOT REQUIRED." (c) The Warrant shall bear substantially the following legend: "THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS. THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT OR THE UNDERLYING SHARES OF COMMON STOCK UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO PENTHOUSE INTERNATIONAL, INC. THAT SUCH REGISTRATION IS NOT REQUIRED." 6. COVENANTS OF THE COMPANY. The Company covenants and agrees with the Purchaser as follows: 6.1 STOP-ORDERS. The Company will advise the Purchaser, promptly after it receives notice of issuance by the Securities and Exchange Commission (the "SEC"), any state securities commission or any other regulatory authority of any stop order or of any order preventing or suspending any offering of any securities of the Company, or of the suspension of the qualification of the Common Stock of the Company for offering or sale in any jurisdiction, or the initiation of any proceeding for any such purpose. 6.2 LISTING. The Company shall promptly secure the listing of the shares of Common Stock issuable upon conversion of the Note and upon the exercise of the Warrant on the OTC BB (the "PRINCIPAL MARKET") upon which shares of Common Stock are listed (subject to official notice of issuance) and shall maintain such listing so long as any other shares of Common Stock shall be so listed. The Company will maintain the listing of its Common Stock on the Principal Market, and will comply in all material respects with the Company's reporting, filing and other obligations under the bylaws or rules of the National Association of Securities Dealers ("NASD") and such exchanges, as applicable. 6.3 MARKET REGULATIONS. The Company shall notify the SEC, NASD and applicable state authorities, in accordance with their requirements, of the transactions contemplated by this Agreement, and shall take all other necessary action and proceedings as may be required and permitted by applicable law, rule and regulation, for the legal and valid issuance of the Securities to Purchaser and promptly provide copies thereof to Purchaser. 6.4 REPORTING REQUIREMENTS. The Company will timely file with the SEC all reports required to be filed pursuant to the Exchange Act and refrain from terminating its status as 14 an issuer required by the Exchange Act to file reports thereunder even if the Exchange Act or the rules or regulations thereunder would permit such termination. 6.5 USE OF FUNDS. The Company agrees that it will use the proceeds of the sale of the Note and Warrant only to (a) retire indebtedness encumbering the Real Property held by the lenders set forth in SCHEDULE 6.5 and (b) enable the Company to purchase the Real Property; provided, that if on or after the Closing Date the Company provides the Holder with a guaranty or other collateral (other than cash collateral) acceptable to the Holder and its counsel in their sole and absolute discretion, in an amount significant to cover not less than the first twelve months of payments of principal and accrued interest due under the Note and taxes and insurance payable in connection with the Real Property, the Holder shall either not require at the Closing the cash collateral referred to in the Cash Collateral Deposit Letter, or release such cash collateral and terminate the Cash Collateral Deposit Letter following the Closing Date. 6.6 ACCESS TO FACILITIES. The Company will permit and cause the Guarantors to permit any representatives designated by the Purchaser (or any successor of the Purchaser), upon reasonable notice and during normal business hours, at such person's expense and accompanied by a representative of the Company and/or the Guarantors, as applicable, to (a) visit and inspect any of the properties of the Company and/or the Guarantors, (b) examine the corporate and financial records of the Company and/or the Guarantors (unless such examination is not permitted by federal, state or local law or by contract) and make copies thereof or extracts therefrom and (c) discuss the affairs, finances and accounts of the Company and/or the Guarantors with the directors, officers and independent accountants of the Company and/or the Guarantors, as applicable. Notwithstanding the foregoing, neither the Company nor any Guarantor shall be required to provide any material, non-public information to the Purchaser unless the Purchaser signs a confidentiality agreement and otherwise complies with Regulation FD, under the federal securities laws. 6.7 TAXES. The Company will and will cause the Guarantors to promptly pay and discharge, or cause to be paid and discharged, when due and payable, all lawful taxes, assessments and governmental charges or levies imposed upon the income, profits, property or business of the Company and the Guarantors, as applicable; provided, however, that any such tax, assessment, charge or levy need not be paid if the validity thereof shall currently be contested in good faith by appropriate proceedings and if the Company and the Guarantors, as applicable, shall have set aside on its books adequate reserves with respect thereto, and provided, further, that the Company and the Guarantors, as applicable, will pay all such taxes, assessments, charges or levies forthwith upon the commencement of proceedings to foreclose any lien which may have attached as security therefor. 6.8 INSURANCE. The Company will and will cause the Guarantors to keep its and their respective assets which are of an insurable character insured by financially sound and reputable insurers against loss or damage by fire, explosion and other risks customarily insured against by companies in similar business similarly situated as the Company and the Guarantors, as applicable; and the Company will and will cause the Guarantors to maintain, with financially sound and reputable insurers, insurance against other hazards and risks and liability to persons and property to the extent and in the manner which the Company and the Guarantors, as applicable, reasonably believe is customary for companies in similar business similarly situated 15 as the Company and the Guarantors, as applicable, and to the extent available on commercially reasonable terms. 6.9 INTELLECTUAL PROPERTY. The Company shall and shall cause the Guarantors to maintain in full force and effect its and their respective corporate existences, rights and franchises and all licenses and other rights to use Intellectual Property owned or possessed by them and reasonably deemed to be necessary to the conduct of their respective businesses. 6.10 PROPERTIES. The Company will keep and cause the Guarantors to keep their respective properties in good repair, working order and condition, reasonable wear and tear excepted, and from time to time make all needful and proper repairs, renewals, replacements, additions and improvements thereto; and the Company will and will cause the Guarantors to at all times comply with each provision of all leases to which they are a party or under which they occupy property if the breach of such provision could reasonably be expected to have a material adverse effect. 6.11 CONFIDENTIALITY. The Company agrees that it will not disclose, and will not include in any public announcement, the name of the Purchaser, unless expressly agreed to by the Purchaser or unless and until such disclosure is required by law or applicable regulation, and then only to the extent of such requirement. 6.12 REQUIRED APPROVALS. For so long as the Note is outstanding, the Company, without the prior written consent of the Purchaser, shall not and shall not cause any Guarantor to: (a) directly or indirectly declare or pay any dividends, other than dividends with respect to its preferred stock; (b) liquidate, dissolve or effect a material reorganization; (c) become subject to (including, without limitation, by way of amendment to or modification of) any agreement or instrument which by its terms would (under any circumstances) restrict the Company's and/or any Guarantor's right to perform the provisions of this Agreement or any of the agreements contemplated thereby; or (d) materially alter or change the scope of the business of the Company and/or any Guarantor. 6.13 REISSUANCE OF SECURITIES. The Company agrees to reissue certificates representing the Securities without the legends set forth in Section 5.7 above at such time as (a) the holder thereof is permitted to dispose of such Securities pursuant to Rule 144(k) under the Securities Act, or (b) upon resale subject to an effective registration statement after such Securities are registered under the Securities Act. The Company agrees to cooperate with the Purchaser in connection with all resales pursuant to Rule 144(d) and Rule 144(k) and provide legal opinions necessary to allow such resales provided the Company and its counsel receive reasonably requested representations from the selling Purchaser and broker, if any. 16 6.14 OPINION. On the Closing Date, the Company will deliver to the Purchaser an opinion acceptable to the Purchaser from the Company's and Guarantors' legal counsel. The Company will provide, at the Company's expense, such other legal opinions in the future as are reasonably necessary for the conversion of the Note and exercise of the Warrant. 7. COVENANTS OF THE PURCHASER. The Purchaser covenants and agrees with the Company as follows: 7.1 CONFIDENTIALITY. The Purchaser agrees that it will not disclose, and will not include in any public announcement, the name of the Company, unless expressly agreed to by the Company or unless and until such disclosure is required by law or applicable regulation, and then only to the extent of such requirement. 7.2 NON-PUBLIC INFORMATION. The Purchaser agrees not to effect any sales in the shares of the Company's Common Stock while in possession of material, non-public information regarding the Company if such sales would violate applicable securities law. 7.3 RIGHT TO SUBSTITUTE COLLATERAL. So long as no Event of Default shall have occurred and be continuing under and as defined in the Note or under any other Related Agreement, the Purchaser and each Holder of the Notes agree that the Company or its affiliates, including Guarantors, may substitute for the pledge of the members interests of the Guarantors and mortgages on the NYC Real Property, the pledge of the equity of the Del Sol Investments, LLC and Del Sol Investments SA de CV subsidiaries of the Company and first priority mortgage liens on the real estate assets located in Mexico currently owned by Del Sol Investments, LLC and Del Sol Investments SA de CV (the "SUBSTITUTE COLLATERAL"); provided, that (a) the then current appraised value (as determined by an appraisal firm acceptable to the Purchaser in it sole discretion) of such Substitute Collateral shall be not less than 400% of the then outstanding principal amount of the Notes, (b) there shall be no title or potential environmental liability related to such Substitute Collateral, (c) the Purchaser shall have received a legal opinion of recognized counsel, acceptable to the Purchaser and its counsel in their sole discretion, covering such matters as the Purchaser and its counsel shall request, including, without limitation, opinions covering the valid, first priority lien of the Purchaser in and to such Substitute Collateral, and the absence of fraudulent conveyance and preference risks associated with the conveyance to the Purchaser of such Substitute Collateral, (d) the Purchaser shall have received a deed in lieu of foreclosure relating to the Substitute Collateral in form and substance acceptable to the Purchaser and its counsel in their sole discretion and (e) the Purchaser shall have determined that the acceptance of the Substitute Collateral does not in any manner whatsoever adversely affect the collateral positions of the Purchaser as in effect immediately prior to the date such Substitute Collateral is intended to be pledged to the Purchaser. 8. COVENANTS OF THE COMPANY AND PURCHASER REGARDING INDEMNIFICATION. 8.1 COMPANY INDEMNIFICATION. The Company agrees to indemnify, hold harmless, reimburse and defend Purchaser, each of Purchaser's officers, directors, agents, affiliates, control persons, and principal shareholders, against any claim, cost, expense, liability, obligation, loss or damage (including reasonable legal fees) of any nature, incurred by or 17 imposed upon the Purchaser which results, arises out of or is based upon (i) any misrepresentation by Company and/or any Guarantor or breach of any warranty by Company and/or any Guarantor in this Agreement or in any exhibits or schedules attached hereto or any Related Agreement, or (ii) any breach or default in performance by Company and/or any Guarantor of any covenant or undertaking to be performed by Company and/or any Guarantor hereunder, or any other agreement entered into by the Company and Purchaser and/or the Company and any Guarantor relating hereto. 8.2 PURCHASER'S INDEMNIFICATION. Purchaser agrees to indemnify, hold harmless, reimburse and defend the Company and each of the Company's officers, directors, agents, affiliates, control persons and principal shareholders, at all times against any claim, cost, expense, liability, obligation, loss or damage (including reasonable legal fees) of any nature, incurred by or imposed upon the Company which results, arises out of or is based upon (i) any misrepresentation by Purchaser or breach of any warranty by Purchaser in this Agreement or in any exhibits or schedules attached hereto or any Related Agreement; or (ii) any breach or default in performance by Purchaser of any covenant or undertaking to be performed by Purchaser hereunder, or any other agreement entered into by the Company and Purchaser relating hereto. 8.3 PROCEDURES. The procedures and limitations set forth in Section 10.2(c) and (d) shall apply to the indemnifications set forth in Sections 8.1 and 8.2 above. 9. CONVERSION OF CONVERTIBLE NOTE. 9.1 MECHANICS OF CONVERSION. (a) Provided the Purchaser has notified the Company of the Purchaser's intention to sell the Note Shares and the Note Shares are included in an effective registration statement or are otherwise exempt from registration when sold: (i) Upon the conversion of the Note or part thereof, the Company shall, at its own cost and expense, take all necessary action (including the issuance of an opinion of counsel) to assure that the Company's transfer agent shall issue shares of the Company's Common Stock in the name of the Purchaser (or its nominee) or such other persons as designated by the Purchaser in accordance with Section 9.1(b) hereof and in such denominations to be specified representing the number of Note Shares issuable upon such conversion; and (ii) The Company warrants that no instructions other than these instructions have been or will be given to the transfer agent of the Company's Common Stock and that after the Effective Date (as hereinafter defined) the Note Shares issued will be freely transferable subject to the prospectus delivery requirements of the Securities Act and the provisions of this Agreement, and will not contain a legend restricting the resale or transferability of the Note Shares. (b) Purchaser will give notice of its decision to exercise its right to convert the Note or part thereof by telecopying or otherwise delivering an executed and completed notice of the number of shares to be converted to the Company (the "NOTICE OF CONVERSION"). The Purchaser will not be required to surrender the Note until the Purchaser receives a credit to the account of the Purchaser's prime broker through the DWAC system (as defined below), representing the Note Shares or until the Note has been fully satisfied. Each date on which a Notice of Conversion is telecopied or delivered to the Company in accordance with the 18 provisions hereof shall be deemed a "CONVERSION DATE." Pursuant to the terms of the Notice of Conversion, the Borrower will issue instructions to the transfer agent accompanied by an opinion of counsel within two (2) Business Days of the date of the delivery to Borrower of the Notice of Conversion and shall cause the transfer agent to transmit the certificates representing the Conversion Shares to the Holder by crediting the account of the Purchaser's prime broker with the Depository Trust Company ("DTC") through its Deposit Withdrawal Agent Commission ("DWAC") system within three (3) business days after receipt by the Company of the Notice of Conversion (the "DELIVERY DATE"). (c) The Company understands that a delay in the delivery of the Note Shares in the form required pursuant to Section 9 hereof beyond the Delivery Date could result in economic loss to the Purchaser. In the event that the Company fails to direct its transfer agent to deliver the Note Shares to the Purchaser via the DWAC system within the time frame set forth in Section 9.1(b) above and the Note Shares are not delivered to the Purchaser by the Delivery Date, as compensation to the Purchaser for such loss, the Company agrees to pay late payments to the Purchaser for late issuance of the Note Shares in the form required pursuant to Section 9 hereof upon conversion of the Note in the amount equal to the greater of (i) $500 per business day after the Delivery Date or (ii) the Purchaser's actual damages from such delayed delivery. Notwithstanding the foregoing, the Company will not owe the Purchaser any late payments if the delay in the delivery of the Note Shares beyond the Delivery Date is solely out of the control of the Company and the Company is actively trying to cure the cause of the delay. The Company shall pay any payments incurred under this Section in immediately available funds upon demand and, in the case of actual damages, accompanied by reasonable documentation of the amount of such damages. Such documentation shall show the number of shares of Common Stock the Purchaser is forced to purchase (in an open market transaction) which the Purchaser anticipated receiving upon such conversion, and shall be calculated as the amount by which (A) the Purchaser's total purchase price (including customary brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (B) the aggregate principal and/or interest amount of the Note, for which such Conversion Notice was not timely honored. Nothing contained herein or in any document referred to herein or delivered in connection herewith shall be deemed to establish or require the payment of a rate of interest or other charges in excess of the maximum permitted by applicable law. In the event that the rate of interest or dividends required to be paid or other charges hereunder exceed the maximum amount permitted by such law, any payments in excess of such maximum shall be credited against amounts owed by the Company to a Purchaser and thus refunded to the Company. 9.2 MAXIMUM CONVERSION. The Purchaser shall not be entitled to convert on a Conversion Date, nor shall the Company be permitted to require the Purchaser to accept, that amount of a Note in connection with that number of shares of Common Stock which would be in excess of the sum of (i) the number of shares of Common Stock beneficially owned by the Purchaser on a Conversion Date, and (ii) the number of shares of Common Stock issuable upon the conversion of the Note with respect to which the determination of this proviso is being made on a Conversion Date, which would result in beneficial ownership by the Purchaser of more than 4.99% of the outstanding shares of Common Stock of the Company on such Conversion Date. For the purposes of the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Exchange Act and Regulation 13d-3 19 thereunder. The Purchaser may void the foregoing conversion limitation upon 75 days prior notice to the Company or without any notice requirement upon the occurrence of an Event of Default. 10. REGISTRATION RIGHTS. 10.1 REGISTRATION RIGHTS GRANTED. The Company hereby grants registration rights to the Purchaser pursuant to a Registration Rights Agreement dated as of even date herewith between the Company and the Purchaser. 10.2 INDEMNIFICATION. (a) In the event of a registration of any Registrable Securities under the Securities Act pursuant to the Registration Rights Agreement, the Company will indemnify and hold harmless the Purchaser, and its officers, directors and each other person, if any, who controls the Purchaser within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which the Purchaser, or such persons may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such Registrable Securities were registered under the Securities Act pursuant to the Registration Rights Agreement, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Purchaser, and each such person for any reasonable legal or other expenses incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case if and to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished by or on behalf of the Purchaser or any such person in writing specifically for use in any such document. (b) In the event of a registration of the Registrable Securities under the Securities Act pursuant to the Registration Rights Agreement, the Purchaser will indemnify and hold harmless the Company, and its officers, directors and each other person, if any, who controls the Company within the meaning of the Securities Act, against all losses, claims, damages or liabilities, joint or several, to which the Company or such persons may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the registration statement under which such Registrable Securities were registered under the Securities Act pursuant to the Registration Rights Agreement, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company and each such person for any reasonable legal or other expenses incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action, provided, however, that the Purchaser 20 will be liable in any such case if and only to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished in writing to the Company by or on behalf of the Purchaser specifically for use in any such document. (c) Promptly after receipt by an indemnified party hereunder of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party hereunder, notify the indemnifying party in writing thereof, but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to such indemnified party other than under this Section 10.2(c) and shall only relieve it from any liability which it may have to such indemnified party under this Section 10.2(c) if and to the extent the indemnifying party is prejudiced by such omission. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in and, to the extent it shall wish, to assume and undertake 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 and undertake the defense thereof, the indemnifying party shall not be liable to such indemnified party under this Section 10.2(c) for any legal expenses subsequently incurred by such indemnified party in connection with the defense thereof; if the indemnified party retains its own counsel, then the indemnified party shall pay all fees, costs and expenses of such counsel, provided, however, that, if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be reasonable defenses available to it which are different from or additional to those available to the indemnifying party or if the interests of the indemnified party reasonably may be deemed to conflict with the interests of the indemnifying party, the indemnified party shall have the right to select one separate counsel and to assume such legal defenses and otherwise to participate in the defense of such action, with the reasonable expenses and fees of such separate counsel and other expenses related to such participation to be reimbursed by the indemnifying party as incurred. (d) In order to provide for just and equitable contribution in the event of joint liability under the Securities Act in any case in which either (i) the Purchaser, or any controlling person of the Purchaser, makes a claim for indemnification pursuant to this Section 10.2 but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Section 10.2 provides for indemnification in such case, or (ii) contribution under the Securities Act may be required on the part of the Purchaser or controlling person of the Purchaser in circumstances for which indemnification is provided under this Section 10.2; then, and in each such case, the Company and the Purchaser will contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) in such proportion so that the Purchaser is responsible only for the portion represented by the percentage that the public offering price of its securities offered by the registration statement bears to the public offering price of all securities offered by such registration statement, provided, however, that, in any such case, (A) the Purchaser will not be required to contribute any amount in excess of the public offering price of all such securities offered by it pursuant to such registration statement; and (B) no person or entity guilty of fraudulent misrepresentation 21 (within the meaning of Section 10 of the Act) will be entitled to contribution from any person or entity who was not guilty of such fraudulent misrepresentation. 10.3 OFFERING RESTRICTIONS. Except as previously disclosed in the SEC Reports or in the Exchange Act Filings, or stock or stock options granted to employees or directors of the Company; or shares of preferred stock issued to pay dividends in respect of the Company's preferred stock; or equity or debt issued in connection with an acquisition of a business or assets by the Company; or the issuance by the Company of stock in connection with the establishment of a joint venture partnership or licensing arrangement, the Company will not issue any securities with a continuously variable/floating conversion feature which are or could be (by conversion or registration) free-trading securities (i.e. common stock subject to a registration statement) prior to the full repayment or conversion of the Note. 11. MISCELLANEOUS. 11.1 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. ANY ACTION BROUGHT BY EITHER PARTY AGAINST THE OTHER CONCERNING THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT SHALL BE BROUGHT ONLY IN THE STATE COURTS OF NEW YORK OR IN THE FEDERAL COURTS LOCATED IN THE STATE OF NEW YORK. BOTH PARTIES AND THE INDIVIDUALS EXECUTING THIS AGREEMENT AND OTHER AGREEMENTS ON BEHALF OF THE COMPANY AGREE TO SUBMIT TO THE JURISDICTION OF SUCH COURTS AND WAIVE TRIAL BY JURY. IN THE EVENT THAT ANY PROVISION OF THIS AGREEMENT OR ANY OTHER AGREEMENT DELIVERED IN CONNECTION HEREWITH 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 SUCH PROVISION WHICH MAY PROVE INVALID OR UNENFORCEABLE UNDER ANY LAW SHALL NOT AFFECT THE VALIDITY OR ENFORCEABILITY OF ANY OTHER PROVISION OF ANY AGREEMENT. 11.2 SURVIVAL. The representations, warranties, covenants and agreements made herein shall survive any investigation made by the Purchaser and the closing of the transactions contemplated hereby to the extent provided therein. All statements as to factual matters contained in any certificate or other instrument delivered by or on behalf of the Company pursuant hereto in connection with the transactions contemplated hereby shall be deemed to be representations and warranties by the Company hereunder solely as of the date of such certificate or instrument. 11.3 SUCCESSORS. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, heirs, executors and administrators of the parties hereto and shall inure to the benefit of and be enforceable by each person who shall be a holder of the Securities from time to time, other than the holders of Common Stock which has been sold by the Purchaser pursuant to Rule 144 or an 22 effective registration statement. Purchaser may not assign its rights hereunder to a competitor of the Company. The Company acknowledges that the Purchaser may at any time and from time to time sell participating interests in this Agreement and the Related Agreements and/or sell, assign or transfer all or any part of its rights under this Agreement and the Related Agreements to third party transferees. 11.4 ENTIRE AGREEMENT. This Agreement, the exhibits and schedules hereto, the Related Agreements and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and no party shall be liable or bound to any other in any manner by any representations, warranties, covenants and agreements except as specifically set forth herein and therein. 11.5 SEVERABILITY. In case any provision of the Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 11.6 AMENDMENT AND WAIVER. (a) This Agreement may be amended or modified only upon the written consent of the Company and the Purchaser. (b) The obligations of the Company and the rights of the Purchaser under this Agreement may be waived only with the written consent of the Purchaser. (c) The obligations of the Purchaser and the rights of the Company under this Agreement may be waived only with the written consent of the Company. 11.7 DELAYS OR OMISSIONS. It is agreed that no delay or omission to exercise any right, power or remedy accruing to any party, upon any breach, default or noncompliance by another party under this Agreement or the Related Agreements, shall impair any such right, power or remedy, nor shall it be construed to be a waiver of any such breach, default or noncompliance, or any acquiescence therein, or of or in any similar breach, default or noncompliance thereafter occurring. All remedies, either under this Agreement, the Note or the Related Agreements, by law or otherwise afforded to any party, shall be cumulative and not alternative. 11.8 NOTICES. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified, (b) when sent by confirmed facsimile if sent during normal business hours of the recipient, if not, then on the next business day, (c) three (3) business days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (d) one day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the Company at the address as set forth on the signature page hereof, to the Purchaser at the address set forth on the signature page hereto for such Purchaser, with a copy in the case of the Purchaser to Scott J. Giordano, Loeb & Loeb LLP, 345 Park Avenue, New York, NY 10154, facsimile number (212) 407-4990 and to John Tucker, 825 Third Ave. 14th Floor, New York, NY 10022, or at such other address as the Company or the 23 Purchaser may designate by written notice to the other parties hereto given in accordance herewith. 11.9 ATTORNEYS' FEES. In the event that any suit or action is instituted to enforce any provision in this Agreement, the prevailing party in such dispute shall be entitled to recover from the losing party all fees, costs and expenses of enforcing any right of such prevailing party under or with respect to this Agreement, including, without limitation, such reasonable fees and expenses of attorneys and accountants, which shall include, without limitation, all fees, costs and expenses of appeals. 11.10 TITLES AND SUBTITLES. The titles of the sections and subsections of the Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 11.11 FACSIMILE SIGNATURES; COUNTERPARTS. This Agreement may be executed by facsimile signatures and in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 11.12 BROKER'S FEES. Except as set forth on SCHEDULE 11.12 hereof, each party hereto represents and warrants that no agent, broker, investment banker, person or firm acting on behalf of or under the authority of such party hereto is or will be entitled to any broker's or finder's fee or any other commission directly or indirectly in connection with the transactions contemplated herein. Each party hereto further agrees to indemnify each other party for any claims, losses or expenses incurred by such other party as a result of the representation in this Section 11.12 being untrue. 11.13 CONSTRUCTION. Each party acknowledges that its legal counsel participated in the preparation of this Agreement and the Related Agreements and, therefore, stipulates that the rule of construction that ambiguities are to be resolved against the drafting party shall not be applied in the interpretation of this Agreement to favor any party against the other. [Balance of page intentionally left blank; signature page follows.] 24 IN WITNESS WHEREOF, the parties hereto have executed the SECURITIES PURCHASE AGREEMENT as of the date set forth in the first paragraph hereof. COMPANY: PURCHASER: PENTHOUSE INTERNATIONAL, INC. LAURUS MASTER FUND, LTD. By: By: ------------------------------ ------------------------------ Name: Name: ---------------------------- ----------------------------- Title: Title: --------------------------- ---------------------------- Address: 11 Penn Plaza Address: c/o Ironshore Corporate Services Ltd. New York, New York 10001 P.O. Box 1234 G.T. Queensgate House, South Church Street Grand Cayman, Cayman Islands 25 LIST OF EXHIBITS Form of Convertible Term Note Exhibit A Form of Warrant Exhibit B Form of Opinion Exhibit C Form of Escrow Agreement Exhibit D 26 EXHIBIT A FORM OF CONVERTIBLE NOTE A-1 EXHIBIT B FORM OF WARRANT B-1 EXHIBIT C FORM OF OPINION C-3 EX-10.02 7 c31878_ex10-02.txt PENTHOUSE INTERNATIONAL, INC. SECURITIES PURCHASE AGREEMENT FEBRUARY __, 2004 TABLE OF CONTENTS PAGE 1. Agreement to Sell and Purchase. .........................................1 2. Fees and Warrant..........................................................2 3. Closing, Delivery and Payment.............................................2 3.1 Closing..........................................................2 3.2 Delivery.........................................................2 4. Representations and Warranties of the Company.............................2 4.1 Organization, Good Standing and Qualification....................3 4.2 Subsidiaries.....................................................3 4.3 Capitalization; Voting Rights....................................4 4.4 Authorization; Binding Obligations...............................4 4.5 Liabilities......................................................5 4.6 Agreements; Action...............................................5 4.7 Obligations to Related Parties...................................6 4.8 Changes..........................................................6 4.9 Title to Properties and Assets; Liens, Etc.......................7 4.10 Intellectual Property............................................7 4.11 Compliance with Other Instruments................................8 4.12 Litigation.......................................................8 4.13 Tax Returns and Payments.........................................9 4.14 Employees........................................................9 4.15 Registration Rights and Voting Rights............................9 i PAGE(S) 4.16 Compliance with Laws; Permits...................................10 4.17 Environmental and Safety Laws...................................10 4.18 Valid Offering..................................................10 4.19 Full Disclosure.................................................10 4.20 Insurance.......................................................11 4.21 SEC Reports.....................................................11 4.22 Listing.........................................................11 4.23 No Integrated Offering..........................................11 4.24 Stop Transfer...................................................11 4.25 Dilution........................................................11 5. Representations and Warranties of the Purchaser..........................12 5.1 No Shorting.....................................................12 5.2 Requisite Power and Authority...................................12 5.3 Investment Representations......................................12 5.4 Purchaser Bears Economic Risk...................................12 5.5 Acquisition for Own Account.....................................13 5.6 Purchaser Can Protect Its Interest..............................13 5.7 Accredited Investor.............................................13 5.8 Legends.........................................................13 6. Covenants of the Company.................................................14 6.1 Stop-Orders.....................................................14 6.2 Listing.........................................................14 6.3 Market Regulations..............................................14 6.4 Reporting Requirements..........................................14 ii PAGE(S) 6.5 Use of Funds....................................................15 6.6 Access to Facilities............................................15 6.7 Taxes...........................................................15 6.8 Insurance.......................................................15 6.9 Intellectual Property...........................................16 6.10 Properties......................................................16 6.11 Confidentiality.................................................16 6.12 Required Approvals..............................................16 6.13 Reissuance of Securities........................................16 6.14 Opinion.........................................................17 7. Covenants of the Purchaser...............................................17 7.1 Confidentiality.................................................17 7.2 Non-Public Information..........................................17 7.3 Right to Substitute Collateral..................................17 8. Covenants of the Company and Purchaser Regarding Indemnification.........17 8.1 Company Indemnification.........................................17 8.2 Purchaser's Indemnification.....................................18 8.3 Procedures......................................................18 9. Conversion of Convertible Note...........................................18 9.1 Mechanics of Conversion.........................................18 9.2 Maximum Conversion..............................................19 10. Registration Rights......................................................20 10.1 Registration Rights Granted.....................................20 10.2 Indemnification.................................................20 iii PAGE(S) 10.3 OFFERING RESTRICTIONS...........................................22 11. Miscellaneous............................................................22 11.1 Governing Law...................................................22 11.2 Survival........................................................22 11.3 Successors......................................................22 11.4 Entire Agreement................................................23 11.5 Severability....................................................23 11.6 Amendment and Waiver............................................23 11.7 Delays or Omissions.............................................23 11.8 Notices.........................................................23 11.9 Attorneys' Fees.................................................24 11.10 Titles and Subtitles............................................24 11.11 Facsimile Signatures; Counterparts..............................24 11.12 Broker's Fees...................................................24 11.13 Construction....................................................24 iv 10.02 Mercator Sub Agmt PENTHOUSE INTERNATIONAL, INC. SHARES OF SERIES D CONVERTIBLE PREFERRED STOCK AND COMMON STOCK WARRANTS SUBSCRIPTION AGREEMENT March 19, 2004 Mercator Advisory Group LLC Mercator Momentum Fund, LP Mercator Momentum Fund III, LP 555 South Flower Street, Suite 4500 Los Angeles, California 90071 Ladies and Gentlemen: Penthouse International, Inc., a Florida corporation (the "COMPANY"), hereby confirms its agreement with you (the "PURCHASERS"), as set forth below. 1. THE SECURITIES. Subject to the terms and conditions herein contained, the Company proposes to issue and sell to the Purchasers an aggregate of: (a) 4,000,000 shares (the "SHARES") of its Series D Convertible Preferred Stock (the "SERIES D STOCK"), which shall be convertible into shares (the "CONVERSION SHARES") of the Company's Common Stock (the "COMMON STOCK") in accordance with the formula set forth in the Certificate of Determination further described below and (b) three warrants, substantially in the form attached hereto at EXHIBIT A (the "WARRANTS"), to acquire up to 12,000,000 shares of Common Stock (the "WARRANT SHARES"). The rights, preferences and privileges of the Series D Stock are as set forth in the Certificate of Determination of Series D Preferred Stock as filed with the Secretary of State of the State of California (the "CERTIFICATE OF DETERMINATION") in the form attached hereto as EXHIBIT B. The numbers of Conversion Shares and Warrant Shares that any Purchaser may acquire at any time are subject to limitation in the Certificate of Determination and in the Warrants, respectively, so that the aggregate number of shares of Common Stock of which such Purchaser and all persons affiliated with such Purchaser have beneficial ownership (calculated pursuant to Rule 13d-3 of the Securities Exchange Act of 1934, as amended) does not at any time exceed 9.99% of the Company's then outstanding Common Stock. The Shares and the Warrants are sometimes herein collectively referred to as the "SECURITIES." This Agreement and the Warrants are sometimes herein collectively referred to as the "TRANSACTION DOCUMENTS." The Securities will be offered and sold to the Purchasers without such offers and sales being registered under the Securities Act of 1933, as amended (together with the rules and regulations of the Securities and Exchange Commission (the "SEC") promulgated thereunder, the "SECURITIES ACT"), in reliance on exemptions therefrom. In connection with the sale of the Securities, the Company has made available (including electronically via the Commission's EDGAR system) to Purchasers its periodic and current -1- 10.02 Mercator Sub Agmt reports, forms, schedules, proxy statements and other documents (including exhibits and all other information incorporated by reference) filed with the SEC under the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT") since January 1, 2000. These reports, forms, schedules, statements, documents, filings and amendments, are collectively referred to as the "DISCLOSURE DOCUMENTS." All references in this Agreement to financial statements and schedules and other information which is "contained," "included" or "stated" in the Disclosure Documents (or other references of like import) shall be deemed to mean and include all such financial statements and schedules, documents, exhibits and other information which is incorporated by reference in the Disclosure Documents. 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to and agrees with Purchasers and Mercator Advisory Group, LLC ("MAG" and, with the Purchasers, the "MERCATOR GROUP") as follows; PROVIDED, HOWEVER, that each member of the Mercator Group acknowledges that (a) the following direct and indirect Subsidiaries of the Company; namely, General Media, Inc. and its direct and indirect subsidiaries, General Media Art Holding, Inc., General Media Communications, Inc., General Media Entertainment, Inc., General Media (UK), Ltd., GMCI Internet Operations, Inc., GMI On-Line Ventures, Ltd., Penthouse Images Acquisitions, Ltd. and Pure Entertainment Telecommunications, Inc. (collectively the "GENERAL MEDIA GROUP"), are all debtors in a Chapter 11 bankruptcy case pending iin the United States Bankruptcy Court for the Southern District of New York (the "BANKRUPTCY CASE"), (b) the Mercator Group and its representatives have been furnished copies of Debtors' First Amended Joint Plan of Reorganization, dated March 4, 2004 (the "Proposed Plan") and have had and opportunity to ask questions of the Company and its bankruptcy counsel, and (c) all representations and warranties of the Company, to the extent related to the General Media Group, are qualified in their entirety by reference to the status of the Bankruptcy Case: (a) The Disclosure Documents as of their respective dates did not, and will not (after giving effect to any updated disclosures therein) as of the Closing Date as defined in Section 3 below, contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. The Disclosure Documents and the documents incorporated or deemed to be incorporated by reference therein, at the time they were filed or hereafter are filed with the Commission, complied and will comply, at the time of filing, in all material respects with the requirements of the Securities Act and/or the Exchange Act, as the case may be, as applicable. (b) SCHEDULE A attached hereto sets forth a complete list of the subsidiaries of the Company (the "SUBSIDIARIES"). Each of the Company and its Subsidiaries has been duly incorporated and each of the Company and the Subsidiaries is validly existing in good standing as a corporation under the laws of its jurisdiction of incorporation, with the requisite corporate power and authority to own its properties and conduct its business as now conducted as described in the Disclosure Documents and is duly qualified to do business as a foreign corporation in good standing in all other jurisdictions where the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified would not, individually or in the aggregate, have a material adverse effect on the business, condition (financial or other), properties, prospects or results of operations of the Company and the Subsidiaries, taken as a whole (any such event, a "MATERIAL ADVERSE EFFECT"); as of the Closing Date, the Company will have the authorized, issued and outstanding capitalization set forth in on SCHEDULE B attached hereto (the "COMPANY CAPITALIZATION"); except as set forth in the Disclosure Documents or on SCHEDULE A, the Company -2- 10.02 Mercator Sub Agmt does not have any subsidiaries or own directly or indirectly any of the capital stock or other equity or long-term debt securities of or have any equity interest in any other person; all of the outstanding shares of capital stock of the Company and the Subsidiaries have been duly authorized and validly issued, are fully paid and nonassessable and were not issued in violation of any preemptive or similar rights and are owned free and clear of all liens, encumbrances, equities, and restrictions on transferability (other than those imposed by the Securities Act and the state securities or "Blue Sky" laws) or voting; except as set forth in the Disclosure Documents, all of the outstanding shares of capital stock of the Subsidiaries are owned, directly or indirectly, by the Company; except as set forth in the Disclosure Documents, no options, warrants or other rights to purchase from the Company or any Subsidiary, agreements or other obligations of the Company or any Subsidiary to issue or other rights to convert any obligation into, or exchange any securities for, shares of capital stock of or ownership interests in the Company or any Subsidiary are outstanding; and except as set forth in the Disclosure Documents or on SCHEDULE C, there is no agreement, understanding or arrangement among the Company or any Subsidiary and each of their respective stockholders or any other person relating to the ownership or disposition of any capital stock of the Company or any Subsidiary or the election of directors of the Company or any Subsidiary or the governance of the Company's or any Subsidiary's affairs, and, if any, such agreements, understandings and arrangements will not be breached or violated as a result of the execution and delivery of, or the consummation of the transactions contemplated by, the Transaction Documents. (c) The Company has the requisite corporate power and authority to execute, deliver and perform its obligations under the Transaction Documents. Each of the Transaction Documents has been duly and validly authorized by the Company and, when executed and delivered by the Company, will constitute a valid and legally binding agreement of the Company, enforceable against the Company in accordance with its terms except as the enforcement thereof may be limited by (A) bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other similar laws now or hereafter in effect relating to or affecting creditors' rights generally or (B) general principles of equity and the discretion of the court before which any proceeding therefore may be brought (regardless of whether such enforcement is considered in a proceeding at law or in equity) (collectively, the "ENFORCEABILITY EXCEPTIONS"). (d) The Shares and the Warrants have been duly authorized and, when issued upon payment thereof in accordance with this Agreement, will have been validly issued, fully paid and nonassessable. The Conversion Shares issuable have been duly authorized and validly reserved for issuance, and when issued upon conversion of the Shares in accordance with the terms of the Certificate of Determination, will have been validly issued, fully paid and nonassessable. The Warrant Shares have been duly authorized and validly reserved for issuance, and when issued upon exercise of the Warrants in accordance with the terms thereof, will have been validly issued, fully paid and nonassessable. The Common Stock of the Company conforms to the description thereof contained in the Disclosure Documents. The stockholders of the Company have no preemptive or similar rights with respect to the Common Stock. (e) No consent, approval, authorization, license, qualification, exemption or order of any court or governmental agency or body or third party is required for the performance of the Transaction Documents by the Company or for the consummation by the Company of any of the transactions contemplated thereby, or the application of the proceeds of the issuance of the Securities -3- 10.02 Mercator Sub Agmt as described in this Agreement, except for such consents, approvals, authorizations, licenses, qualifications, exemptions or orders (i) as have been obtained on or prior to the Closing Date, (ii) as are not required to be obtained on or prior to the Closing Date that will be obtained when required, or (iii) the failure to obtain which would not, individually or in the aggregate, have a Material Adverse Effect. (f) Except as set forth on SCHEDULE D, none of the Company or the Subsidiaries is (i) in material violation of its articles of incorporation or bylaws (or similar organizational document), (ii) in breach or violation of any statute, judgment, decree, order, rule or regulation applicable to it or any of its properties or assets, which breach or violation would, individually or in the aggregate, have a Material Adverse Effect, or (iii) except as described in the Disclosure Documents, in default (nor has any event occurred which with notice or passage of time, or both, would constitute a default) in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, deed of trust, loan agreement, note, lease, license, franchise agreement, permit, certificate or agreement or instrument to which it is a party or to which it is subject, which default would, individually or in the aggregate, have a Material Adverse Effect. (g) The execution, delivery and performance by the Company of the Transaction Documents and the consummation by the Company of the transactions contemplated thereby and the fulfillment of the terms thereof will not (a) violate, conflict with or constitute or result in a breach of or a default under (or an event that, with notice or lapse of time, or both, would constitute a breach of or a default under) any of (i) the terms or provisions of any contract, indenture, mortgage, deed of trust, loan agreement, note, lease, license, franchise agreement, permit, certificate or agreement or instrument to which any of the Company or the Subsidiaries is a party or to which any of their respective properties or assets are subject, (ii) the articles of incorporation or bylaws of any of the Company or the Subsidiaries (or similar organizational document) or (iii) any statute, judgment, decree, order, rule or regulation of any court or governmental agency or other body applicable to the Company or the Subsidiaries or any of their respective properties or assets or (b) result in the imposition of any lien upon or with respect to any of the properties or assets now owned or hereafter acquired by the Company or any of the Subsidiaries; which violation, conflict, breach, default or lien would, individually or in the aggregate, have a Material Adverse Effect. (h) The audited consolidated financial statements included in the Disclosure Documents present fairly the consolidated financial position, results of operations, cash flows and changes in shareholders' equity of the entities, at the dates and for the periods to which they relate and have been prepared in accordance with generally accepted accounting principles applied on a consistent basis; the interim unaudited consolidated financial statements included in the Disclosure Documents present fairly the consolidated financial position, results of operations and cash flows of the entities, at the dates and for the periods to which they relate subject to year-end audit adjustments and have been prepared in accordance with generally accepted accounting principles applied on a consistent basis with the audited consolidated financial statements included therein; the selected financial and statistical data included in the Disclosure Documents present fairly the information shown therein and have been prepared and compiled on a basis consistent with the audited financial statements included therein, except as otherwise stated therein; and each of the auditors previously -4- 10.02 Mercator Sub Agmt engaged by the Company or to be engaged in the future by the Company is an independent certified public accountant as required by the Securities Act for an offering registered thereunder. (i) Except as described in the Disclosure Documents, there is not pending or, to the knowledge of the Company, threatened any action, suit, proceeding, inquiry or investigation, governmental or otherwise, to which any of the Company or the Subsidiaries is a party, or to which their respective properties or assets are subject, before or brought by any court, arbitrator or governmental agency or body, that, if determined adversely to the Company or any such Subsidiary, would, individually or in the aggregate, have a Material Adverse Effect or that seeks to restrain, enjoin, prevent the consummation of or otherwise challenge the issuance or sale of the Securities to be sold hereunder or the application of the proceeds therefrom or the other transactions described in the Disclosure Documents. (j) The Company and the Subsidiaries own or possess adequate licenses or other rights to use all patents, trademarks, service marks, trade names, copyrights and know-how that are necessary to conduct their businesses as described in the Disclosure Documents. None of the Company or the Subsidiaries has received any written notice of infringement of (or knows of any such infringement of) asserted rights of others with respect to any patents, trademarks, service marks, trade names, copyrights or know-how that, if such assertion of infringement or conflict were sustained, would, individually or in the aggregate, have a Material Adverse Effect. (k) Each of the Company and the Subsidiaries possesses all licenses, permits, certificates, consents, orders, approvals and other authorizations from, and has made all declarations and filings with, all federal, state, local and other governmental authorities, all self-regulatory organizations and all courts and other tribunals presently required or necessary to own or lease, as the case may be, and to operate its respective properties and to carry on its respective businesses as now or proposed to be conducted as set forth in the Disclosure Documents ("PERMITS"), except where the failure to obtain such Permits would not, individually or in the aggregate, have a Material Adverse Effect and none of the Company or the Subsidiaries has received any notice of any proceeding relating to revocation or modification of any such Permit, except as described in the Disclosure Documents and except where such revocation or modification would not, individually or in the aggregate, have a Material Adverse Effect. (l) Subsequent to the respective dates as of which information is given in the Disclosure Documents and except as described therein, (i) the Company and the Subsidiaries have not incurred any material liabilities or obligations, direct or contingent, or entered into any material transactions not in the ordinary course of business or (ii) the Company and the Subsidiaries have not purchased any of their respective outstanding capital stock, or declared, paid or otherwise made any dividend or distribution of any kind on any of their respective capital stock or otherwise (other than, with respect to any of such Subsidiaries, the purchase of capital stock by the Company), (iii) there has not been any material increase in the long-term indebtedness of the Company or any of the Subsidiaries, (iv) there has not occurred any event or condition, individually or in the aggregate, that has a Material Adverse Effect, and (v) the Company and the Subsidiaries have not sustained any material loss or interference with respect to their respective businesses or properties from fire, flood, hurricane, earthquake, accident or other calamity, whether or not covered by insurance, or from any labor dispute or any legal or governmental proceeding. -5- 10.02 Mercator Sub Agmt (m) There are no material legal or governmental proceedings nor are there any material contracts or other documents required by the Securities Act to be described in a prospectus that are not described in the Disclosure Documents. Except as described in the Disclosure Documents, none of the Company or the Subsidiaries is in default under any of the contracts described in the Disclosure Documents, has received a notice or claim of any such default or has knowledge of any breach of such contracts by the other party or parties thereto, except for such defaults or breaches as would not, individually or in the aggregate, have a Material Adverse Effect. (n) Each of the Company and the Subsidiaries has good and marketable title to all real property described in the Disclosure Documents as being owned by it and good and marketable title to the leasehold estate in the real property described therein as being leased by it, free and clear of all liens, charges, encumbrances or restrictions, except, in each case, as described in the Disclosure Documents or such as would not, individually or in the aggregate, have a Material Adverse Effect. All material leases, contracts and agreements to which the Company or any of the Subsidiaries is a party or by which any of them is bound are valid and enforceable against the Company or any such Subsidiary, are, to the knowledge of the Company, valid and enforceable against the other party or parties thereto and are in full force and effect. (o) Each of the Company and the Subsidiaries has filed all necessary federal, state and foreign income and franchise tax returns, except where the failure to so file such returns would not, individually or in the aggregate, have a Material Adverse Effect, and has paid all taxes shown as due thereon; and other than tax deficiencies which the Company or any Subsidiary is contesting in good faith and for which adequate reserves have been provided in accordance with generally accepted accounting principles, there is no tax deficiency that has been asserted against the Company or any Subsidiary that would, individually or in the aggregate, have a Material Adverse Effect. (p) None of the Company or the Subsidiaries is, or immediately after the Closing Date will be, required to register as an "investment company" or a company "controlled by" an "investment company" within the meaning of the Investment Company Act of 1940, as amended (the "INVESTMENT COMPANY ACT"). (q) None of the Company or the Subsidiaries or, to the knowledge of any of such entities' directors, officers, employees, agents or controlling persons, has taken, directly or indirectly, any action designed, or that might reasonably be expected, to cause or result in the stabilization or manipulation of the price of the Common Stock. (r) None of the Company, the Subsidiaries or any of their respective Affiliates (as defined in Rule 501(b) of Regulation D under the Securities Act) directly, or through any agent, engaged in any form of general solicitation or general advertising (as those terms are used in Regulation D under the Securities Act) in connection with the offering of the Securities or engaged in any other conduct that would cause such offering to be constitute a public offering within the meaning of Section 4(2) of the Securities Act. Assuming the accuracy of the representations and warranties of the Purchasers in Section 6 hereof, it is not necessary in connection with the offer, sale and delivery of the Securities to the Purchasers in the manner contemplated by this Agreement to register any of the Securities under the Securities Act. -6- 10.02 Mercator Sub Agmt (s) Except as set forth in the Disclosure Documents, there is no strike, labor dispute, slowdown or work stoppage with the employees of the Company or any of the Subsidiaries which is pending or, to the knowledge of the Company or any of the Subsidiaries, threatened. (t) Each of the Company and the Subsidiaries carries general liability insurance coverage comparable to other companies of its size and similar business. (u) Each of the Company and the Subsidiaries maintains internal accounting controls which provide reasonable assurance that (A) transactions are executed in accordance with management's authorization, (B) transactions are recorded as necessary to permit preparation of its financial statements and to maintain accountability for its assets, (C) access to its material assets is permitted only in accordance with management's authorization and (D) the values and amounts reported for its material assets are compared with its existing assets at reasonable intervals. (v) Except for a fee payable to Mercator Advisory Group, the Company does not know of any claims for services, either in the nature of a finder's fee or financial advisory fee, with respect to the offering of the Shares and the transactions contemplated by the Transaction Documents. (w) The Common Stock is listed on the National Association of Securities Dealers, Inc. OTC Bulletin Board (the "NASD OTC-BB"). Except as described in the Disclosure Documents, the Company currently is not in violation of, and the consummation of the transactions contemplated by the Transaction Documents will not violate, any rule of the National Association of Securities Dealers. (x) The Company is eligible to use Form S-1 or SB-2 for the resale of the Conversion Shares and the Warrant Shares by Purchasers or their transferees and the Warrant Shares by MAG or its transferees. The Company has no reason to believe that it is not capable of satisfying the registration or qualification requirements (or an exemption therefrom) necessary to permit the resale of the Conversion Shares and the Warrant Shares under the securities or "blue sky" laws of any jurisdiction within the United States that is the residence or domicile of any Purchaser. 3. PURCHASE, SALE AND DELIVERY OF THE SHARES. On the basis of the representations, warranties, agreements and covenants herein contained and subject to the terms and conditions herein set forth, the Company agrees to issue and sell to the Purchasers, and Purchasers agree to purchase from the Company, 4,000,000 Shares of Series D Stock at $1.00 per Share in the amounts shown on the signature page hereto. In connection with the purchase and sale of Shares, for no additional consideration, the Purchasers will receive Warrants to purchase up to an aggregate of 3,000,000 shares of Common Stock, and MAG will receive Warrants to purchase up to an aggregate of 9,000,000 shares of Common Stock, subject to adjustment as set forth in the Warrants. One or more certificates in definitive form for the Shares that the Purchasers have agreed to purchase, as well as the Warrants, shall be delivered by or on behalf of the Company, against payment by or on behalf of the Purchasers, of the purchase price therefor by wire transfer of immediately available funds to the account of the Company previously designated by it in writing. Such delivery of and payment for the Shares and the Warrants shall be made at the offices of Sheppard, Mullin, Richter & Hampton, LLP, 333 South Hope Street, Los Angeles, California 90071, -7- 10.02 Mercator Sub Agmt at not later than 12:00 noon (Los Angeles time) on March 19, 2004 (the "CLOSING"), or at such date as the Purchasers and the Company may agree upon, such time and date of delivery against payment being herein referred to as the "CLOSING DATE." At the Closing or not later than five (5) days after completion of the Closing, the Company agrees to pay to Mercator Advisory Group, LLC a Due Diligence fee of $240,000, payable by wire transfer of immediately available funds to an account of MAG previously designated by it in writing. 4. CERTAIN COVENANTS OF THE COMPANY. The Company covenants and agrees with each Purchaser as follows: (a) $3,550,000 of the gross proceeds received from the sale of the Securities shall be wired to the attorneys' escrow account of Messrs. Nelson Mullins Riley & Scarborough, L.L.P., counsel for Intercept, Inc., in order to enable Media Billing, L.L.C., a 99% owned Subsidiary of the Company to consummate its acquisition of the members interest of Internet Billing Company, LLC (the "INTERNET BILLING ACQUISITION"). (b) None of the Company or any of its Affiliates will sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any "security" (as defined in the Securities Act) which could be integrated with the sale of the Securities in a manner which would require the registration under the Securities Act of the Securities. (c) The Company will not become, at any time prior to the expiration of three years after the Closing Date, an open-end investment company, unit investment trust, closed-end investment company or face-amount certificate company that is or is required to be registered under the Investment Company Act. (d) None of the proceeds of the Series D Stock will be used to reduce or retire any insider note or convertible debt held by an officer or director of the Company. (e) Subject to Section 10 of this Agreement, the Conversion Shares and the Warrant Shares will be listed on the NASD OTC-BB, or such market on which the Company's shares are subsequently listed or traded, immediately following their issuance. (f) The Company shall ensure that no officer or director of the Company sells any shares of Company Common Stock from the Closing Date until the date that is 90 days following the effective date of the First Registration Statement, as defined in Section 9 below. (g) The Company will use its best efforts to do and perform all things required to be done and performed by it under this Agreement and the other Transaction Documents and to satisfy all conditions precedent on its part to the obligations of the Purchasers to purchase and accept delivery of the Securities. (h) The Company will pay to Vincent J. Franzone a cash finders fee of $125,000 and within ten days of the Closing issue to Vincent J. Franzone a warrant, substantially identical to the Warrants, entitling such person or his designee to purchase 500,000 shares of Company Common Stock at the same per share exercise price as set forth in the Warrants. -8- 10.02 Mercator Sub Agmt 5. CONDITIONS OF THE PURCHASERS' OBLIGATIONS. The obligation of each Purchaser to purchase and pay for the Securities is subject to the following conditions unless waived in writing by the Purchaser: (a) The representations and warranties of the Company contained in this Agreement shall be true and correct in all material respects (other than representations and warranties with a Material Adverse Effect qualifier, which shall be true and correct as written) on and as of the Closing Date; the Company shall have complied in all material respects with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder at or prior to the Closing Date. (b) None of the issuance and sale of the Securities pursuant to this Agreement or any of the transactions contemplated by any of the other Transaction Documents shall be enjoined (temporarily or permanently) and no restraining order or other injunctive order shall have been issued in respect thereof; and there shall not have been any legal action, order, decree or other administrative proceeding instituted or, to the Company's knowledge, threatened against the Company or against any Purchaser relating to the issuance of the Securities or any Purchaser's activities in connection therewith or any other transactions contemplated by this Agreement, the other Transaction Documents or the Disclosure Documents. (c) The Purchasers shall have received certificates, dated the Closing Date and signed by the Chief Executive Officer and the Chief Financial Officer of the Company, to the effect of paragraphs 5(a) and (b). (d) The Purchasers shall have received an opinion of Gersten Savage Kaplowitz Wolf & Marcus, LLP, counsel to the Company, and/or Florida counsel reasonably satisfactory to the Purchasers, with respect to the authorization of the Shares, the Warrants and the Warrant Shares and other customary matters in the form attached hereto as EXHIBIT C. (e) The Internet Billing Acquisition shall be consummated with the proceeds from the sale of the Securities acquired by the Purchasers. (f) The closing bid price of the Company Common Stock on the Closing Date is equal to or in excess of $0.065 per share. (g) The Common Stock Purchase Agreement between the Purchaser and The Molina-Vector Investment Trust (the "TRUST") shall have been executed and performed by all parties thereto, and all the conditions to the obligations of the Trust to sell to the Purchasers those shares referenced in such Common Stock Purchase Agreement shall have been satisfied. 6. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. (a) Each Purchaser represents and warrants to the Company that the Securities to be acquired by it hereunder (including the Conversion Shares and the Warrant Shares that it may acquire upon conversion or exercise thereof, as the case may be) are being acquired for its own account for investment and with no intention of distributing or reselling such Securities (including the Conversion Shares and the Warrant Shares that it may acquire upon conversion or exercise thereof, as -9- 10.02 Mercator Sub Agmt the case may be) or any part thereof or interest therein in any transaction which would be in violation of the securities laws of the United States of America or any State. Nothing in this Agreement, however, shall prejudice or otherwise limit a Purchaser's right to sell or otherwise dispose of all or any part of such Conversion Shares or Warrant Shares under an effective registration statement under the Securities Act and in compliance with applicable state securities laws or under an exemption from such registration. By executing this Agreement, each Purchaser further represents that such Purchaser does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participation to any Person with respect to any of the Securities. (b) Each Purchaser understands that the Securities (including the Conversion Shares and the Warrant Shares that it may acquire upon conversion or exercise thereof, as the case may be) have not been registered under the Securities Act and may not be offered, resold, pledged or otherwise transferred except (a) pursuant to an exemption from registration under the Securities Act (and, if requested by the Company, based upon an opinion of counsel acceptable to the Company) or pursuant to an effective registration statement under the Securities Act and (b) in accordance with all applicable securities laws of the states of the United States and other jurisdictions. Each Purchaser agrees to the imprinting, so long as appropriate, of the following legend on the Securities (including the Conversion Shares and the Warrant Shares that it may acquire upon conversion or exercise thereof, as the case may be): THE SHARES OF STOCK EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED ("TRANSFERRED") IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. IN THE ABSENCE OF SUCH REGISTRATION, SUCH SHARES MAY NOT BE TRANSFERRED UNLESS, IF THE COMPANY REQUESTS, THE COMPANY HAS RECEIVED A WRITTEN OPINION FROM COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE COMPANY STATING THAT SUCH TRANSFER IS BEING MADE IN COMPLIANCE WITH ALL APPLICABLE FEDERAL AND STATE SECURITIES LAWS. The legend set forth above may be removed if and when the Conversion Shares or the Warrant Shares, as the case may be, are disposed of pursuant to an effective registration statement under the Securities Act or in the opinion of counsel to the Company experienced in the area of United States Federal securities laws such legends are no longer required under applicable requirements of the Securities Act. The Shares, the Warrants, the Conversion Shares and the Warrant Shares shall also bear any other legends required by applicable Federal or state securities laws, which legends may be removed when in the opinion of counsel to the Company experienced in the applicable securities laws, the same are no longer required under the applicable requirements of such securities laws. The Company agrees that it will provide each Purchaser, upon request, with a substitute certificate, not bearing such legend at such time as such legend is no longer applicable. Each Purchaser agrees that, in connection with any transfer of the Conversion Shares or the Warrant Shares by it pursuant to an effective registration statement under the Securities Act, such Purchaser will comply with all prospectus delivery requirements of the Securities Act. The Company makes no representation, warranty or agreement as to the availability of any exemption from registration under the Securities Act with respect to any resale of the Shares, the Conversion Shares or the Warrant Shares. -10- 10.02 Mercator Sub Agmt (c) Each Purchaser is an "accredited investor" within the meaning of Rule 501(a) of Regulation D under the Securities Act. No Purchaser learned of the opportunity to purchase Shares or any other security issuable by the Company through any form of general advertising or public solicitation. (d) Each Purchaser represents and warrants to the Company that it has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the prospective investment in the Securities, having been represented by counsel, and has so evaluated the merits and risks of such investment and is able to bear the economic risk of such investment and, at the present time, is able to afford a complete loss of such investment. (e) Each Purchaser represents and warrants to the Company that (i) the purchase of the Securities to be purchased by it has been duly and properly authorized and this Agreement has been duly executed and delivered by it or on its behalf and constitutes the valid and legally binding obligation of the Purchaser, enforceable against the Purchaser in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights generally and to general principles of equity; (ii) the purchase of the Securities to be purchased by it does not conflict with or violate its charter, by-laws or any law, regulation or court order applicable to it; and (iii) the purchase of the Securities to be purchased by it does not impose any penalty or other onerous condition on the Purchaser under or pursuant to any applicable law or governmental regulation. (f) Each Purchaser represents and warrants to the Company that neither it nor any of its directors, officers, employees, agents, partners, members, or controlling persons has taken, directly or indirectly, any actions designed, or might reasonably be expected to cause or result in the stabilization or manipulation of the price of the Common Stock. (g) Each Purchaser acknowledges it or its representatives have reviewed the Disclosure Documents and further acknowledges that it or its representatives have been afforded (i) the opportunity to ask such questions as it has deemed necessary of, and to receive answers from, representatives of the Company concerning the terms and conditions of the offering of the Securities and the merits and risks of investing in the Securities; (ii) access to information about the Company and the Company's financial condition, results of operations, business, properties, management and prospects sufficient to enable it to evaluate its investment in the Securities; and (iii) the opportunity to obtain such additional information which the Company possesses or can acquire without unreasonable effort or expense that is necessary to verify the accuracy and completeness of the information contained in the Disclosure Documents. (h) Each Purchaser represents and warrants to the Company that it has based its investment decision solely upon the information contained in the Disclosure Documents and such other information as may have been provided to it or its representatives by the Company in response to their inquiries, and has not based its investment decision on any research or other report regarding the Company prepared by any third party ("THIRD PARTY REPORTS"). Each Purchaser understands and acknowledges that (i) the Company does not endorse any Third Party Reports and (ii) its actual results may differ materially from those projected in any Third Party Report. -11- 10.02 Mercator Sub Agmt (i) Each Purchaser understands and acknowledges that (i) any forward-looking information included in the Disclosure Documents supplied to Purchaser by the Company or its management is subject to risks and uncertainties, including those risks and uncertainties set forth in the Disclosure Documents; and (ii) the Company's actual results may differ materially from those projected by the Company or its management in such forward-looking information. (j) Each Purchaser understands and acknowledges that (i) the Securities are offered and sold without registration under the Securities Act in a private placement that is exempt from the registration provisions of the Securities Act and (ii) the availability of such exemption depends in part on, and that the Company and its counsel will rely upon, the accuracy and truthfulness of the foregoing representations and Purchaser hereby consents to such reliance. 7. COVENANTS OF PURCHASERS NOT TO SHORT STOCK. Each Purchaser and its affiliates and assigns agree: (i) not to short the Company Common Stock as long as shares of the Series D Stock are outstanding; and (ii) to limit its sales of the Company's Common Stock in the open market to approximately 10-15% of the Company's average dollar trading volume or less. 8. TERMINATION. (a) This Agreement may be terminated in the sole discretion of the Company by notice to each Purchaser if at the Closing Date: (i) the representations and warranties made by any Purchaser in Section 6 are not true and correct in all material respects; or (ii) as to the Company, the sale of the Securities hereunder (i) is prohibited or enjoined by any applicable law or governmental regulation or (ii) subjects the Company to any penalty, or in its reasonable judgment, other onerous condition under or pursuant to any applicable law or government regulation that would materially reduce the benefits to the Company of the sale of the Securities to such Purchaser, so long as such regulation, law or onerous condition was not in effect in such form at the date of this Agreement. (b) This Agreement may be terminated in the sole discretion of either Purchaser by notice to the Company given in the event that the Company shall have failed, refused or been unable to satisfy all conditions on its part to be performed or satisfied hereunder on or prior to the Closing Date, or if after the execution and delivery of this Agreement and immediately prior to the Closing Date, trading in securities of the Company or in securities generally on the New York Stock Exchange, the American Stock Exchange, the Nasdaq National or Small Cap Market or the OTC Bulletin Board shall have been suspended or minimum or maximum prices shall have been established on any such exchange. (c) This Agreement may be terminated by mutual written consent of all parties. 9. REGISTRATION. Within 60, days from the Closing Date, the Company shall prepare and file with the SEC a Registration Statement covering the resale of the maximum number of Conversion Shares issuable upon conversion of the Shares and the Warrant Shares as well as the -12- 10.02 Mercator Sub Agmt shares purchased from the Molina-Vector Investment Trust (collectively, the "REGISTRABLE SECURITIES") as set forth in the Registration Rights Agreement attached hereto as EXHIBIT C. 10. EVENT OF DEFAULT. If an Event of Default (as defined below) occurs and remains uncured for a period of 5 days, the Purchasers shall have the right to (i) exercise any or all of the rights given to the Purchasers relating to the Securities, as further described in the Certificate of Determination or (ii) immediately convert any or all of the Series D Stock into shares of Common Stock. In addition, from and including the day following the date on which an Event of Default occurs, until the date on which the Company has cured all such situations as have arisen, the Company shall pay liquidated damages to Holder equal to two percent (2.00%) of the $4,000,000 purchase price for each complete month or partial month during which such situation exists. Any amounts to be paid as liquidated damages shall be paid in cash monthly in arrears on or before the 10th day following the end of the month or partial month to which they relate. The Holder need not provide and the Company hereby waives any presentment, demand, protest or other notice of any kind, and the Holder may immediately and without expiration of any grace period enforce any and all of its rights and remedies hereunder and all other remedies available to it under applicable law. Such declaration may be rescinded and annulled by Holder at any time prior to payment hereunder. No such rescission or annulment shall affect any subsequent Event of Default or impair any right consequent thereon. An "EVENT OF DEFAULT" shall include the commencement by the Company of a voluntary case or proceeding under the bankruptcy laws or the Company's failure to: (i) discharge or stay a bankruptcy proceeding within 60 days of such action being taken against the Company, (ii) file the Registration Statement with the SEC within 60 days after the Closing Date, other than due to a delay caused by the review process of the SEC and not by the Company, (iii) the de-listing of the Company's Common Stock from the NASD OTC-BB except for any periods when the stock is listed on the NASDAQ Small Stock Market, the NASDAQ National Stock Market, the AMEX or the NYSE, or (iv) pay the expenses referred to below or the Due Diligence Fee within five (5) days of the Closing. Notwithstanding the foregoing, Purchasers acknowledge that General Media, Inc. (a 99.5% owned subsidiary of the Company) and subsidiaries of General Media, Inc., are debtors in a Chapter 11 bankruptcy case currently pending in the United States Bankruptcy Court for the Southern District of New York. 11. NOTICES. All communications hereunder shall be in writing and shall be hand delivered, mailed by first-class mail, couriered by next-day air courier or by facsimile and confirmed in writing (i) if to the Company, at the addresses set forth below, or (ii) if to a Purchaser or MAG, to the address set forth for such party on the signature page hereto. If to the Company: Penthouse International, Inc. 11 Penn Plaza New York, New York 10001 Attention: Milton Polland, Acting Chairman & CEO Telephone: (212) 702-6000 Facsimile: (212) -13- 10.02 Mercator Sub Agmt with a copy to: Gertsten Savage Kaplowitz Wolf & Marcus, LLP 101 East 52nd Street, New York, New York 10022 Attn: Stephen A. Weiss, Esq. Telephone: (212) 752-9700 Facsimile: (212) 980-5192 All such notices and communications shall be deemed to have been duly given: (i) when delivered by hand, if personally delivered; (ii) five business days after being deposited in the mail, postage prepaid, if mailed certified mail, return receipt requested; (iii) one business day after being timely delivered to a next-day air courier guaranteeing overnight delivery; (iv) the date of transmission if sent via facsimile to the facsimile number as set forth in this Section or the signature page hereof prior to 6:00 p.m. on a business day, or (v) the business day following the date of transmission if sent via facsimile at a facsimile number set forth in this Section or on the signature page hereof after 6:00 p.m. or on a date that is not a business day. Change of a party's address or facsimile number may be designated hereunder by giving notice to all of the other parties hereto in accordance with this Section. 12. SURVIVAL CLAUSE. The respective representations, warranties, agreements and covenants of the Company and the Purchasers set forth in this Agreement shall survive until the first anniversary of the Closing. 13. FEES AND EXPENSES. Within five (5) days of Closing, the Company agrees to pay Purchasers' out-of-pocket expenses (including legal fees of Sheppard Mullin, Richter & Hampton, LLP incurred in connection with the preparation and negotiation of the Transaction Documents up to $50,000. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the Warrants or the Certificate of Determination, the prevailing party or parties shall be entitled to receive from the other party or parties reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which the prevailing party or parties may be entitled. 14. SUCCESSORS. This Agreement shall inure to the benefit of and be binding upon Purchasers, MAG and the Company and their respective successors and legal representatives, and nothing expressed or mentioned in this Agreement is intended or shall be construed to give any other person any legal or equitable right, remedy or claim under or in respect of this Agreement, or any provisions herein contained; this Agreement and all conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of such persons and for the benefit of no other person. Neither the Company nor any Purchaser may assign this Agreement or any rights or obligation hereunder without the prior written consent of the other party. 15. NO WAIVER; MODIFICATIONS IN WRITING. No failure or delay on the part of the Company, MAG or any Purchaser in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude -14- 10.02 Mercator Sub Agmt any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies provided for herein are cumulative and are not exclusive of any remedies that may be available to the Company, MAG or any Purchaser at law or in equity or otherwise. No waiver of or consent to any departure by the Company, MAG or any Purchaser from any provision of this Agreement shall be effective unless signed in writing by the party entitled to the benefit thereof, provided that notice of any such waiver shall be given to each party hereto as set forth below. Except as otherwise provided herein, no amendment, modification or termination of any provision of this Agreement shall be effective unless signed in writing by or on behalf of each of the Company, MAG and the Purchasers. Any amendment, supplement or modification of or to any provision of this Agreement, any waiver of any provision of this Agreement, and any consent to any departure by the Company, MAG or any Purchaser from the terms of any provision of this Agreement shall be effective only in the specific instance and for the specific purpose for which made or given. Except where notice is specifically required by this Agreement, no notice to or demand on the Company in any case shall entitle the Company to any other or further notice or demand in similar or other circumstances. 16. ENTIRE AGREEMENT. This Agreement, together with Transaction Documents, constitutes the entire agreement among the parties hereto and supersedes all prior agreements, understandings and arrangements, oral or written, among the parties hereto with respect to the subject matter hereof and thereof. 17. SEVERABILITY. If any provision of this Agreement is held to be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Agreement shall not in any way be affected or impaired thereby. 18. APPLICABLE LAW. THE VALIDITY AND INTERPRETATION OF THIS AGREEMENT, AND THE TERMS AND CONDITIONS SET FORTH HEREIN SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT GIVING EFFECT TO PROVISIONS RELATING TO CONFLICTS OF LAW TO THE EXTENT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY. THE PARTIES HEREBY IRREVOCABLY AND UNCONDITIONALLY AGREE THAT ACTIONS, SUITS OR PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT MAY BE BROUGHT ONLY IN STATE OR FEDERAL COURTS LOCATED IN THE CITY OF LOS ANGELES, CALIFORNIA AND HEREBY SUBMIT TO THE EXCLUSIVE JURISDICTION OF SUCH COURTS FOR SUCH PURPOSE. 19. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. -15- 10.02 Mercator Sub Agmt If the foregoing correctly sets forth our understanding, please indicate your acceptance thereof in the space provided below for that purpose, whereupon this Agreement shall constitute a binding agreement among the Company, the Purchasers and MAG. Very truly yours, Penthouse International, Inc. By: ___________________________ Name: Claude Bertin Title: Vice President ACCEPTED AND AGREED: Mercator Momentum Fund, LP Mercator Momentum Fund III, LP By: Mercator Advisory Group LLC By: Mercator Advisory Group LLC Its: General Partner Its: General Partner _______________________ _______________________ David Firestone David Firestone Managing Member Managing Member Number of Shares Purchased at Number of Shares Purchased at Closing: __________ Closing: ________ Purchase Price: $_________ Purchase Price: $_________ Mercator Advisory Group LLC ___________________________ By: David Firestone Its: Managing Member -16- 10.02 Mercator Sub Agmt Addresses for Notice: Mercator Advisory Group, LLC 555 South Flower Street, Suite 4500 Los Angeles, California 90071 Attention: David Firestone Facsimile: (213) 533-8285 with copy to: David C. Ulich, Esq. Sheppard, Mullin, Richter & Hampton LLP 333 South Hope Street, 48th Floor Los Angeles, California 90071 Facsimile: (213) 620-1398 -17- 10.02 Mercator Sub Agmt SCHEDULE A Direct and Indirect Subsidiaries of Penthouse International, Inc. General Media, Inc. Del Sol Investments, LLC PH Realty Associates Media Billing LLC SUBSIDIARIES OF GENERAL MEDIA, INC.: General Media Art Holding, Inc., General Media Communications, Inc., General Media Entertainment, Inc., General Media (UK), Ltd., GMCI Internet Operations, Inc., GMI On-Line Ventures, Ltd., Penthouse Images Acquisitions, Ltd. and Pure Entertainment Telecommunications, Inc. SUBSIDIARY OF DEL SOL INVESTMENTS, LLC: Del Sol Investments SA de CV (Mexico) SUBSIDIARY OF MEDIA BILLING, LLC Internet Billing Company, LLC (proposed) Schedule A EXHIBIT A Warrant (attached hereto) Exhibit A EXHIBIT B Certificate of Determination of Series D Convertible Preferred Stock of Penthouse International, Inc. Exhibit B EXHIBIT C Form of Legal Opinion 1. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Florida, with corporate power to own its properties and to conduct its business. 2. The Company has the corporate power to execute, deliver and perform the Transaction Documents. The Transaction Documents have been duly authorized by all requisite corporate action by the Company and constitute the valid and binding obligations of the Company, enforceable in accordance with their terms (subject to bankruptcy, equitable principles and other customary exceptions). 3. (a) The authorized capital stock of the Company consists of 20,000,000 shares of Preferred Stock, and 750,000,000 shares of Common Stock. (b) The shares of the Company's Series D Stock have been duly authorized and, upon issuance, delivery, and payment therefor as described in the Subscription Agreement, will be validly issued, fully paid and nonassessable. (c) The shares of the Company's Common Stock initially issuable upon conversion of the shares of Series D Stock sold have been duly authorized and reserved for issuance and, upon issuance and delivery upon conversion of the Shares as described in the Certificate of Determination, will be validly issued, fully paid and nonassessable. (d) The shares of the Company's Common Stock issuable upon exercise of the Warrants have been duly authorized and reserved for issuance, and upon issuance, delivery, and payment therefor in accordance with the Warrants, will be validly issued, fully paid and nonassessable. 4. The Company's execution and delivery of the Transaction Documents and the issue and sale of the Shares and the Warrants, on the terms and conditions set forth in the Subscription Agreement, will not violate any law of the United States or the State of Florida, any rule or regulation of any governmental authority or regulatory body of the United States or the State of Florida or any provision of the Company's Amended and Restated Articles of Incorporation or Bylaws. 5. No consent, approval, order or authorization of, and no notice to or filing with, any governmental agency or body or any court is required to be obtained or made by the Company for the issuance and sale of the Shares sold and the Warrants pursuant to the Transaction Documents, except such as have been obtained or made and such as may be required under applicable securities laws. -1- 6. On the assumption that the representations of the Purchasers in the Subscription Agreement are correct and complete, the offer and sale of the Shares and the Warrants pursuant to the terms of the Subscription Agreement are exempt from the registration requirements of Section 5 of the Securities Act of 1933, as amended, and from the qualification requirements of California securities statutes and regulations, and, under such securities laws as they presently exist, the issuance of the Company's Common Stock upon conversion of the Shares and exercise of the Warrants would also be exempt from such registration and qualification requirements. 7. We know of no pending or overtly threatened action, proceeding or governmental investigation with respect to the Company's sale of Series D Stock and Warrants pursuant to the Transaction Documents. -2- EX-16 8 c31878_ex16.txt Exhibit 16 April 6, 2004 U.S. Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Ladies and Gentlemen: On April 5, 2004, the undersigned firm received a copy of a Current Report on Form 8-K (the "Form 8-K") to be filed by Penthouse International, Inc (the "Registrant") reporting among other things a change in the Registrant's certifying public accountant under Item 4 of such form. We agree with such statements made regarding our firm. We have no basis to agree or disagree with other statements made in the Form 8-K. Yours very truly, /s/ Weinberg & Company, P.A. - ---------------------------- Weinberg & Company, P.A. -----END PRIVACY-ENHANCED MESSAGE-----