-----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, C+5Utg0ZAoDgYmbCCl1HIZgppneflBnWh9NapFrmY/JFbtA6hTDA8uaKwHPFEBNu nP1gtDlSm36nXzm8nvkJbQ== /in/edgar/work/0000351903-00-000048/0000351903-00-000048.txt : 20001017 0000351903-00-000048.hdr.sgml : 20001017 ACCESSION NUMBER: 0000351903-00-000048 CONFORMED SUBMISSION TYPE: SC 13D PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 20001016 SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: INTERWORLD CORP CENTRAL INDEX KEY: 0001060326 STANDARD INDUSTRIAL CLASSIFICATION: [7372 ] IRS NUMBER: 133818716 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D SEC ACT: SEC FILE NUMBER: 005-58131 FILM NUMBER: 740735 BUSINESS ADDRESS: STREET 1: 395 HUDSON STREET STREET 2: 6TH FL CITY: NEW YORK STATE: NY ZIP: 10014 BUSINESS PHONE: 2123012500 MAIL ADDRESS: STREET 1: 395 HUDSON STREET STREET 2: 6TH FL CITY: NEW YORK STATE: NY ZIP: 10014 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: JACKPOT ENTERPRISES INC CENTRAL INDEX KEY: 0000351903 STANDARD INDUSTRIAL CLASSIFICATION: [7990 ] IRS NUMBER: 880169922 STATE OF INCORPORATION: NV FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: SC 13D BUSINESS ADDRESS: STREET 1: 1110 PALMS AIRPORT DR CITY: LAS VEGAS STATE: NV ZIP: 89119 BUSINESS PHONE: 7022635555 MAIL ADDRESS: STREET 1: 1110 PALMS AIRPORT DRIVE STREET 2: 1110 PALMS AIRPORT DRIVE CITY: LAS VEGAS STATE: NV ZIP: 89119 SC 13D 1 0001.txt -------------------------------- OMB APPROVAL -------------------------------- OMB Number Expires: Estimated average burden hours per response ....... 0.5 ------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 SCHEDULE 13D (Rule 13d-101) INFORMATION TO BE INCLUDED IN STATEMENTS FILED PURSUANT TO RULE 13d-1(a) AND AMENDMENTS THERETO FILED PURSUANT TO RULE 13d-2(a) (Amendment No. )(1) INTERWORLD CORPORATION - --------------------------------------------------------------------- (Name of Issuer) Common Stock, $.01 Par Value - --------------------------------------------------------------------- (Title of Class of Securities) 46114Q108 - -------------------------------------------------------------------- (CUSIP Number) Mark W. Hobbs Jackpot Enterprises, Inc. 8750 North Central Expressway, Suite 600 Dallas, Texas 75231 (214) 696-8830 - -------------------------------------------------------------------- (Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications) October 12, 2000 - -------------------------------------------------------------------- (Date of Event which Requires Filing of This Statement) If the filing person has previously filed a statement on Schedule 13G to report the acquisition that is the subject of this Schedule 13D, and is filing this schedule because of Rule 13d-1(e), 13d-1(f) or 13d-1(g), check the following box [_]. Note: Schedules filed in paper format shall include a signed original and five copies of the schedule, including all exhibits. See Rule 13d-7(b) for other parties to whom copies are to be sent. - ---------- (1) The remainder of this cover page shall be filled out for a reporting person's initial filing on this form with respect to the subject class of securities, and for any subsequent amendment containing information which would alter disclosures provided in a prior cover page. The information required on the remainder of this cover page shall not be deemed to be "filed" for the purpose of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes). _____________________________________________________________________ 1 NAME OF REPORTING PERSONS I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY) Jackpot Enterprises, Inc. 88-0169922 _____________________________________________________________________ 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) [_] (b) [X] _____________________________________________________________________ 3 SEC USE ONLY _____________________________________________________________________ 4 SOURCE OF FUNDS* WC _____________________________________________________________________ 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) OR 2(e) [_] _____________________________________________________________________ 6 CITIZENSHIP OR PLACE OF ORGANIZATION State of Nevada _____________________________________________________________________ 7 SOLE VOTING POWER NUMBER OF 5,866,905 shares (includes shares issuable under warrants exercisable through October 12, 2005) SHARES (see Item 5) BENEFICIALLY ___________________________________________________ 8 SHARED VOTING POWER OWNED BY None EACH ___________________________________________________ 9 SOLE DISPOSITIVE POWER REPORTING 5,866,905 shares (includes shares issuable under warrants exercisable through October 12, 2005) (see Item 5) PERSON ___________________________________________________ 10 SHARED DISPOSITIVE POWER WITH None _____________________________________________________________________ 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 5,866,905 shares (includes certain shares issuable under warrants exercisable through October 12, 2005) (see Item 5) _____________________________________________________________________ 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* (see Item 5) [X] _____________________________________________________________________ 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 16.666% _____________________________________________________________________ 14 TYPE OF REPORTING PERSON* CO _____________________________________________________________________ *SEE INSTRUCTIONS BEFORE FILLING OUT! _____________________________________________________________________ Item 1. Security and Issuer. This Schedule 13D relates to the common stock, par value $.01 per share (the "Common Stock"), of InterWorld Corporation (the "Issuer"). The Issuer is a Delaware corporation with its principal executive offices located at 395 Hudson Street, 6th Floor, New York, New York 10014-3669. _____________________________________________________________________ Item 2. Identity and Background. The name of the person filing this statement is Jackpot Enterprises, Inc., a Nevada corporation ("Jackpot" or the "Filing Person"). The address of the principal executive offices of Jackpot is located at 8750 North Central Expressway, Suite 600, Dallas, Texas 75231. The current principal business of Jackpot is to provide internet infrastructure services and manage technology funds. Jackpot is in the process of completing the sale of its gaming machine route operations in Nevada. Schedule A sets forth the name, citizenship, business or residence address and present principal occupation or employment, as well as the name and address of any corporation or other organization in which such occupation or employment is conducted, of each of the directors and executive officers of Jackpot as of the date hereof. During the last five years, neither the Filing Person, nor, to the knowledge of the Filing Person, any person named in Schedule A, has been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors) or has been a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, federal or state securities laws or finding any violation with respect to such laws. During the last five years, neither the Filing Person, nor, to the knowledge of the Filing Person, any person named in Schedule A, was a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, federal or state securities laws or finding any violation with respect to such laws. ______________________________________________________________________ Item 3. Source and Amount of Funds or Other Consideration. This Schedule 13D relates to the purchase of 3,200,000 shares of 8% PIK Series A Convertible Preferred Stock (the "Series A Preferred Stock") that is convertible into shares of Common Stock at an initial conversion price of $6.25 per share. The conversion price is subject to adjustment under certain circumstances as further discussed in Item 4. In addition, Jackpot acquired a warrant to acquire a number of shares of Common Stock equal to 5,866,905 less the number of shares issuable upon conversion of the Series A Preferred Stock at an initial exercise price of $7.25 per share. The exercise price is subject to adjustment under certain circumstances. The Series A Preferred Stock was purchased with working capital, as described in Item 4 below. _____________________________________________________________________ Item 4. Purpose of Transaction. On October 12, 2000, Jackpot and Issuer entered into a Securities Purchase Agreement (the "Purchase Agreement"), which provides that Jackpot, on the date of the First Closing, will purchase $14.9 million in aggregate principal amount of Series A Preferred Stock. The Purchase Agreement further specified that Jackpot would purchase an additional $5.1 million in aggregate principal amount of Series A Preferred Stock not later than ten days following approval under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "Second Closing"). Each share of Series A Preferred Stock is initially convertible into shares of Common Stock at a conversion price of $6.25 per share (the "Conversion Price"), and is subject to adjustment. On the six month anniversary of the date of the First Closing, the Conversion Price shall be adjusted, if lower, to 90% of the average daily closing price of the Issuer's Common Stock for the six-month period from the date of issuance, but in no event less than $2.00 per share. Furthermore, on April 12, 2001, Jackpot, at its sole discretion, shall have the option to require Issuer to redeem the Series A Preferred Stock for cash at 150% of the purchase price; provided that such right will expire if the Issuer consummates a change of control transaction with Jackpot on or prior to such date. In connection with the issuance of the Series A Preferred Stock, Issuer has issued to Jackpot warrants to purchase shares of Common Stock to equal 19.999% of the current outstanding shares of Common Stock less the amount of shares issuable upon the conversion of the Series A Preferred Stock. The exercise price of the warrants shall be $7.25 per share, payable, at the option of Jackpot, in cash or warrant shares; provided such payment shall only be payable in cash to the extent that the Issuer shall have in effect a valid registration statement. The exercise price is subject to adjustment under certain circumstances. The warrants shall be exercisable at any time until October 12, 2005. Jackpot intends to discuss a possible second step transaction with the Issuer; the nature, form and scope of which has not been presently determined and which may range from Jackpot increasing its investment in the Issuer in an undetermined amount to proposing a merger transaction with the Issuer. No assurance can be given that Jackpot will ever make such a proposal and Jackpot reserves the right to sell, assign and otherwise dispose of its interest in the securities of the Issuer. In connection with the transaction Jackpot agreed that until April 12, 2001 without the prior consent of the Board of Directors of the Issuer (excluding any member appointed by the holders of the Series A Preferred Stock), it would not, alone or through or with any other person or entity, in any manner: (i) acquire any additional direct or indirect interest in any securities of the Issuer; (ii) solicit, make, or in any way participate in, directly or indirectly, any "solicitation" of "proxies" (as such terms are used in the proxy rules of the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act")) from the Issuer's stockholders, become a "participant" in any "election contest" (as such terms are defined or used in Rule 14A-11 under the Exchange Act) with respect to the Issuer's Board of Directors, solicit or execute any written consent in lieu of a meeting of holders of voting securities except to support the nominees for directors of the Issuer's Board of Directors or call or seek to have called any meeting of the Issuer's stockholders of the other party or seek to advise or influence in any manner whatever any person or entity with respect to the Issuer; (iii) make any short sales, enter into any hedging, derivative or similar transactions regarding the Issuer's securities; or (iv) publicly announce an intention to do any of the actions restricted or prohibited under clauses (i) through (iii) above. In addition, on October 12, 2000 Jackpot entered into a Loan and Forbearance Agreement with Michael Donahue, Chairman of the Issuer, pursuant to which Jackpot agreed to purchase from Salomon Smith Barney ("SSB") a loan from SSB to Mr. Donahue. The loan is secured by 4,270,406 shares of Common Stock. Pursuant to a Call/Participation Agreement Donahue agreed that Jackpot would share in the profit on a portion of the stock securing the loan once certain conditions, including the repayment of the loan, were met. Mr. Donahue has sole power to vote and dispose of such shares. However, Mr Donahue has agreed that for so long as the loan is outstanding, given the highly leveraged nature of the loan, he would, prior to any vote of the stockholders of Issuer, consult with Jackpot and obtain Jackpot's view with respect to such vote. He also agreed that in the event the Board of Directors of Issuer approves a merger of Jackpot with InterWorld Corporation on or before April 10, 2001, Mr. Donahue will execute an appropriate voting agreement pursuant to which he will agree to vote his stock in favor of such merger. Except as set forth above or in this Item 4, and Item 5 below, Jackpot has not formulated any plans or proposals which would result in: (i) the acquisition by any person of additional securities of the Issuer or the disposition of securities of the Issuer, (ii) an extraordinary corporate transaction involving the Issuer or any of its subsidiaries, (iii) a sale or transfer of a material amount of the assets of the Issuer or any of its subsidiaries, (iv) any change in the present board of directors (other than the designation of two additional board members by Jackpot as a result of its purchase of the Series A Preferred Stock) or management of the Issuer, (v) any material change in the Issuer's capitalization or dividend policy, (vi) any other material change in the Issuer's business or corporate structure, (vii) any change in the Issuer's charter or bylaws or other instrument corresponding thereto or other action which may impede the acquisition of control of the Issuer by any person, (viii) causing a class of the Issuer's securities to be deregistered or delisted, (ix) a class of equity securities of the Issuer becoming eligible for termination of registration or (x) any action similar to any of those enumerated above. _____________________________________________________________________ Item 5. Interest in Securities of the Issuer. To the knowledge of the Filing Person, except as discussed in Item 4 above, neither the Filing Person nor any affiliate of the Filing Person beneficially owns or has acquired or disposed of any shares of Common Stock during the past 60 days. _____________________________________________________________________ Item 6. Contracts, Arrangements, Understandings or Relationships with Respect to Securities of the Issuer. Except as otherwise noted, there are no contracts, arrangements, understandings or relationships (legal or otherwise) between Jackpot and any other person with respect to any securities of the Issuer, including but not limited to transfer or voting of any securities, finder's fees, joint ventures, loan or option arrangements, put or calls, guarantees of profits, division of profits or loss, or the giving or withholding of proxies. _____________________________________________________________________ Item 7. Material to be Filed as Exhibits. Exhibit 99.1 - Securities Purchase Agreement dated October 12, 2000 Exhibit 99.2 - Form of Warrant Exhibit 99.3 - Loan Assumption and Forbearance Agreement dated October 12, 2000 and related documents Exhibit 99.4 - Call/Profit Participation Agreement, dated October 12, 2000 Exhibit 99.5 - Form of Certificate of Designations _____________________________________________________________________ SIGNATURE After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. Dated: October 16, 2000 JACKPOT ENTERPRISES, INC. By: /s/ Mark W. Hobbs ______________________________ Name: Mark W. Hobbs Title: President Schedule A DIRECTORS OF JACKPOT ENTERPRISES, INC. The name, present business address and present principal occupation or employment of each director of Jackpot Enterprises, Inc. are set forth below. Each person listed below is a citizen of the United States of America. Name Present Principal Present Business Occupation/Employment Address ___________________ _____________________ ____________________ Allan R. Tessler Chairman and Chief 4020 West Lake Creek Executive Officer Drive, #100 Wilson, WY 83014 Alan J. Hirschfield Vice Chairman 3490 Clubhouse Drive I-2 Wilson, WY 83014 David R. Markin Chairman of the Board, 2016 North Pitcher Chief Executive Street Officer and President Kalamazoo, MI 49007 of Checker Motors Robert L. McDonald, Senior Partner in the 241 Ridge Street Sr. law firm McDonald Reno, Nevada 89505 Carano Wilson McCune Bergin Frankovich & Hicks LLP EXECUTIVE OFFICERS OF JACKPOT ENTERPRISES, INC. The name, present business address and present principal occupation or employment of each executive officer of Jackpot Enterprises, Inc. are set forth below. Each person listed below is a citizen of the United States of America. Name Present Principal Present Business Occupation/Employment Address ___________________ _____________________ ____________________ Mark W. Hobbs President 8750 North Central Expressway, Suite #600 Dallas, Texas 75231 Steven L. Korby Chief Financial 8750 North Central Officer Expressway, Suite #600 Dallas, Texas 75231 Dallas, Texas 75231 Robert Torkar Senior Vice President- 1110 Palms Airport Finance, Treasurer & Drive Chief Accounting Las Vegas, Nevada Officer 89119 George Congdon Senior Vice President- 1110 Palms Airport Operations Drive Las Vegas, Nevada 89119 EX-99 2 0002.txt EXHIBIT 99.1 EXECUTION COPY SECURITIES PURCHASE AGREEMENT SECURITIES PURCHASE AGREEMENT (this "Agreement"), dated as of October 12, 2000, by and among Interworld Corporation, a Delaware corporation, with headquarters located at 395 Hudson Street, 6th Floor, New York, New York 10014-3669 (the "Company") and Jackpot Enterprises Inc., a Nevada corporation, with headquarters located at 498 Seventh Avenue, New York, New York 10021 (the "Investor"). WHEREAS: A. The Company and Investor are executing and delivering this Agreement in reliance upon Section 4(2) under the Securities Act of 1933, as amended (the "1933 Act"); B. The Company has authorized a new series of preferred stock, designated as Series A Convertible Preferred Stock (the "Series A Preferred Stock"), having the rights, preferences and privileges set forth in the Certificate of Designations, Rights and Preferences attached hereto as Exhibit A (the "Certificate of Designation"); C. The Preferred Shares (as defined below) are convertible into shares of common stock, $.01 par value per share, of the Company (the "Common Stock"), upon the terms and subject to the limitations and conditions set forth in the Certificate of Designation; D. The Company has authorized the issuance to Investor of that number of warrants, in the form attached hereto as Exhibit B, to purchase shares of Common Stock to equal 19.9% of the outstanding shares of Common Stock less the amount of shares issuable upon the Series A Preferred Stock (the "Warrants"). E. Investor desires to purchase and the Company desires to issue and sell, upon the terms and conditions set forth in this Agreement, (i) an aggregate of 3,200,000 shares of Series A Preferred Stock (together with any shares of Series A Preferred Stock issued in replacement thereof or as a dividend thereon or otherwise with respect thereto in accordance with the terms thereof, the "Preferred Shares"), and (ii) the Warrants, for an aggregate purchase price of $20,000,000; and F. Contemporaneous with the execution and delivery of this Agreement, the parties hereto are executing and delivering a Registration Rights Agreement, in the form attached hereto as Exhibit C (the "Registration Rights Agreement"), pursuant to which the Company has agreed to provide certain registration rights under the 1933 Act and the rules and regulations promulgated thereunder, and applicable state securities laws. NOW, THEREFORE, the Company and Investor hereby agree as follows: 1. PURCHASE AND SALE OF PREFERRED SHARES AND WARRANTS. ___________________________________________________ a. Purchase of Preferred Shares and Warrants. __________________________________________ On the date of each of the First Closing and the Second Closing (each as defined below), the Company shall issue and sell to Investor and Investor agrees to purchase from the Company the Preferred Shares and Warrants contemplated herein. b. Form of Payment. On date of each of the ________________ First Closing and the Second Closing (each as defined below), (i) Investor shall pay the portion of the Purchase Price equal to the aggregate face amount of the Preferred Shares and Warrants to be issued and sold to it at each of the First Closing and the Second Closing (each as defined below) (the "Purchase Price") by wire transfer of immediately available funds to the Company, in accordance with the Company's written wiring instructions, against delivery of duly executed certificates representing the number of Preferred Shares and Warrants which Investor is purchasing and (ii) the Company shall deliver such certificates duly executed on behalf of the Company, to Investor, against delivery of such Purchase Price. c. First and Second Closings. __________________________ (i) The purchase and sale of the 2,384,000 Preferred Shares, with an aggregate face amount of $14,900,000, and a proportionate number of the Warrants shall be at 12:00 noon Eastern Standard Time on the fifteenth day following the mailing by the Company of the requisite notice to Nasdaq National Market ("Nasdaq") regarding the issuance of the Preferred Shares and the Warrants or, if such day is not a business day, the next succeeding business day (the "First Closing") at the offices of Greenberg Traurig, LLP 200 Park Avenue, New York, New York 10166, or at such other location as may be agreed to by the parties. (ii) The purchase and sale of the remaining 816,000 Preferred Shares, with an aggregate face amount of $5,100,000, and a proportionate number of the Warrants shall be at 12:00 noon Eastern Standard Time on a date no later than five days following the date on which the requisite waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the rules and regulations promulgated thereunder (the "HSR Act") for the purchase of such Preferred Shares and Warrants has expired or been terminated (the "Second Closing") at the offices of Greenberg Traurig, LLP 200 Park Avenue, New York, New York 10166, or at such other location as may be agreed to by the parties. 2. INVESTOR'S REPRESENTATIONS AND WARRANTIES. __________________________________________ Investor represents and warrants to the Company that: a. Investment Purpose. As of the date hereof, ___________________ Investor is purchasing the Preferred Shares, the shares of Common Stock issuable upon conversion of or otherwise pursuant to the Preferred Shares (including, without limitation, such additional shares of Common Stock as are issuable as a result of the events described in Articles V, VI.D(b) or VI.E of the Certificate of Designation and Section 2(c) of the Registration Rights Agreement (such shares of Common Stock being collectively referred to herein as the "Conversion Shares")), the Warrants and the shares of Common Stock issuable upon exercise or otherwise pursuant to the Warrants (the "Warrant Shares" and, collectively with the Preferred Shares, the Conversion Shares and the Warrants, the "Securities") for its own account and not with a present view towards the public sale or distribution thereof, except pursuant to sales registered or exempted from registration under the 1933 Act. b. Accredited Investor Status. Investor is an ___________________________ "accredited investor" as that term is defined in Rule 501(a) of Regulation D ("Regulation D") as promulgated by the United States Securities and Exchange Commission (the "SEC") under the 1933 Act (an "Accredited Investor"). c. Reliance on Exemptions. Investor understands _______________________ that the Securities are being offered and sold to it in reliance upon specific exemptions from the registration requirements of United States federal and state securities laws and that the Company is relying upon the truth and accuracy of, and Investor's compliance with, the representations, warranties, agreements, acknowledgments and understandings of Investor set forth herein in order to determine the availability of such exemptions and the eligibility of Investor to acquire the Securities. d. Information. Investor and its advisors, if any, ____________ have been furnished with all materials relating to the business, finances and operations of the Company and materials relating to the offer and sale of the Securities which have been requested by Investor or its advisors. Investor and its advisors, if any, have been afforded the opportunity to ask questions of the Company. Neither such inquiries nor any other due diligence investigation conducted by Investor or any of its advisors or representatives shall modify, amend or affect Investor's right to rely on the Company's representations and warranties contained in Section 3 below. Investor understands that its investment in the Securities involves a significant degree of risk. e. Governmental Review. Other than compliance with ____________________ the applicable requirements of the HSR Act, Investor understands that no other United States federal or state agency or any other government or governmental agency has passed upon or made any recommendation or endorsement of the Securities. f. Transfer or Re-sale. Investor understands that ____________________ (i) except as provided in the Registration Rights Agreement, the sale or re-sale of the Securities has not been and is not being registered under the 1933 Act or any applicable state securities laws, and the Securities may not be transferred unless (a) the Securities are sold pursuant to an effective registration statement under the 1933 Act, (b) Investor shall have delivered to the Company an opinion of counsel (which opinion shall be in form, substance and scope customary for opinions of counsel in comparable transactions) to the effect that the Securities to be sold or transferred may be sold or transferred pursuant to an exemption from such registration, (c) the Securities are sold or transferred to an "affiliate" (as defined in Rule 144 promulgated under the 1933 Act (or a successor rule) ("Rule 144")) of Investor who agrees to sell or otherwise transfer the Securities only in accordance with this Section 2(f) and who is an Accredited Investor or (d) the Securities are sold pursuant to Rule 144; (ii) any sale of such Securities made in reliance on Rule 144 may be made only in accordance with the terms of said Rule and further, if said Rule is not applicable, any re-sale of such Securities under circumstances in which the seller (or the person through whom the sale is made) may be deemed to be an underwriter (as that term is defined in the 1933 Act) may require compliance with some other exemption under the 1933 Act or the rules and regulations of the SEC thereunder; and (iii) neither the Company nor any other person is under any obligation to register such Securities under the 1933 Act or any state securities laws or to comply with the terms and conditions of any exemption thereunder (in each case, other than pursuant to the Registration Rights Agreement). Notwithstanding the foregoing or anything else contained herein to the contrary, the Securities may be pledged as collateral in connection with a bona fide margin account or other lending arrangement. ____ ____ g. Legends. Investor understands that the Preferred ________ Shares and Warrants and, until such time as the Conversion Shares and Warrant Shares have been registered under the 1933 Act as contemplated by the Registration Rights Agreement or otherwise may be sold pursuant to Rule 144 without any restriction as to the number of securities as of a particular date that can then be immediately sold, the Conversion Shares and Warrant Shares may bear a restrictive legend in substantially the following form (and a stop-transfer order may be placed against transfer of the certificates for such Securities): "The securities represented by this certificate have not been registered under the Securities Act The securities may not be sold, transferred or assigned in the absence of an effective registration statement for the securities under said Act, or an opinion of counsel, in form, substance and scope customary for opinions of counsel in comparable transactions, that registration is not required under said Act or unless sold pursuant to Rule 144 under said Act." The legend set forth above shall be removed and the Company shall issue a certificate without such legend to the holder of any Security upon which it is stamped, if, unless otherwise required by applicable state securities laws, (a) such Security is registered for sale under an effective registration statement filed under the 1933 Actor otherwise may be sold pursuant to Rule 144 without any restriction as to the number of securities as of a particular date that can then be immediately sold, or (b) such holder provides the Company with an opinion of counsel, in form, substance and scope customary for opinions of counsel in comparable transactions, to the effect that a public sale or transfer of such Security may be made without registration under the 1933 Act and such sale or transfer is effected, or (c) such holder provides the Company with reasonable assurances that such Security can be sold pursuant to Rule 144. Investor agrees to sell all Securities, including those represented by a certificate(s) from which the legend has been removed, in compliance with applicable prospectus delivery requirements, if any. h. Authorization; Enforcement. This Agreement and ___________________________ the Registration Rights Agreement have been duly and validly authorized. This Agreement has been duly executed and delivered on behalf of Investor, and this Agreement constitutes, and upon execution and delivery by Investor of the Registration Rights Agreement, such agreement will constitute, valid and binding agreements of Investor enforceable in accordance with their terms. i. Organization, Good Standing and Qualification. ______________________________________________ Investor is a corporation duly organized, validly existing and in goodstanding under the laws of the State of Nevada. Investor has all requisite power and authority to own and operate its properties and assets and to carry on its business as now conducted and as presently proposed to be conducted. Investor is duly qualified and authorized to transact business and is in good standing as a foreign corporation in each jurisdiction 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 Material Adverse Effect (as defined below). 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. ______________________________________________ The Company represents and warrants to Investor that, except as disclosed in the SEC Documents (as defined below): a. Organization and Qualification. The Company _______________________________ and each of its subsidiaries (as defined below), if any, is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated, with full power and authority (corporate and other) to own, lease, mortgage, pledge or otherwise encumber, use and operate its properties and to carry on its business as and where now owned, leased, used, operated and conducted. Schedule 3(a) sets forth a list of all of the Subsidiaries of the Company and the jurisdiction in which each is incorporated. The Company and each of its Subsidiaries is duly qualified as a foreign corporation to do business and is in goodstanding in every jurisdiction in which its ownership or use of property or the nature of the business conducted by it makes such qualification necessary except where the failure to be so qualified or in good standing would not have a Material Adverse Effect. "Material Adverse Effect" means any material adverse effect on (i) the Securities, (ii) the business, operations, assets, financial conditioners prospects of the Company and its Subsidiaries, if any, taken as a whole, or (iii) the transactions contemplated hereby or by the agreements or instruments to be entered into in connection herewith. "Subsidiaries" means any corporation or other organization, whether incorporated or unincorporated, that is actively engaged in business and represents more than 2% of the Company's revenues in which the Company beneficially owns a majority of the voting securities. b. Authorization; Enforcement. (i) The Company ___________________________ as all requisite corporate power and authority to file and perform its obligations under the Certificate of Designation and to enter into and perform this Agreement, the Registration Rights Agreement and the warrants and to consummate the transactions contemplated hereby and thereby and to issue the Securities, in accordance with the terms hereof and thereof, (ii) the execution and delivery of this Agreement, the Registration Rights Agreement and the Warrants by the Company and the consummation by it of the transactions contemplated hereby and thereby (including without limitation, the issuance of the Preferred Shares and the Warrants and the issuance and reservation for issuance of the Conversion Shares and the Warrant Shares issuable upon conversion or exercise of or otherwise pursuant to the Preferred Shares and the Warrants) have been duly authorized by the Company's Board of Directors and no further consent or authorization of the Company, its Board of Directors, or its stockholders is required, (iii) this Agreement has been duly executed and delivered by the Company, and (iv) this Agreement constitutes and, upon execution and delivery by the Company of the Registration Rights Agreement and the Warrants and upon execution and filing of the Certificate of Designation, each of such agreements and instruments will constitute, a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms. c. Capitalization. As of the date hereof, the _______________ authorized capital stock of the Company consists of (i) 100,000,000sharesof Common Stock, of which 29,335,993 shares are issued and outstanding, 6,708,187 shares are reserved for issuance pursuant to the Company's stock option plans, 968,850 shares are reserved for issuance pursuant to the Company's employee stock purchase plan, 150,158 shares are reserved for issuance pursuant to securities (other than the Preferred Shares) exercisable for, or convertible into or exchangeable for shares of Common Stock and20,000,000, shares are reserved for issuance upon conversion of the preferred Shares and exercise of the Warrants (subject to adjustment pursuant to the Company's covenant set forth in Section 4(h)below); and (ii) 15,000,000 shares of preferred stock, of which no shares are issued and outstanding. All of such outstanding shares of capital stock are, or upon issuance will be, duly authorized, validly issued, fully paid and nonassessable. No shares of capital stock of the Company are subject to preemptive rights or any other similar rights of the stockholders of the Company or any liens or encumbrances imposed through the actions or failure to act of the Company. Except as disclosed in Schedule 3(c), as of the effective date of this Agreement, (i) there are no outstanding options, warrants, scrip, rights to subscribe for, puts, calls, rights of first refusal, agreements, understandings, claims or other commitments or rights of any character whatsoever relating to, or securities or rights convertible into or exchangeable for any shares of capital stock of the Company or any of its Subsidiaries, or arrangements by which the Company or any of its Subsidiaries is or may become bound to issue additional shares of capital stock of the Company or any of its Subsidiaries, (ii) there are no agreements or arrangements under which the Company or any of its Subsidiaries is obligated to register the sale of any of its or their securities under the 1933 Act (except the Registration Rights Agreement) and (iii)there are no anti-dilution or price adjustment provisions contained in any security issued by the Company (or in any agreement providing rights to security holders) that will be triggered by the issuance of the Preferred Shares, the Conversion Shares, the Warrants or the Warrant Shares. The Company has furnished to Investor true and correct copies of the Company's Certificate of Incorporation as in effect on the date hereof ("Certificate of Incorporation"), the Company's By-laws, as in effect on the date hereof(the "By-laws"), and the terms of all securities convertible into or exercisable for Common Stock of the Company and the material rights of the holders thereof in respect thereto. The Company shall provide Investor with a written update of this representation signed by the Company's Chief Executive or Chief Financial Officer on behalf of the Company as of each of the First Closing and the Second Closing. d. Issuance of Shares. The Preferred Shares ___________________ and the Warrants are duly authorized and, upon issuance in accordance with the terms of this Agreement, will be validly issued, fully paid and non-assessable, and free from all taxes, liens, claims and encumbrances with respect to the issue thereof and shall not be subject to preemptive rights or other similar rights of stockholders of the Company and will not impose personal liability upon the holder thereof. The Conversion Shares and the Warrant Shares are duly authorized and reserved for issuance and, upon conversion of the preferred Shares and exercise of the Warrants in accordance with the terms thereof, will be validly issued, fully paid and non-assessable, and free from all taxes, liens, claims and encumbrances and will not be subject to preemptive rights or other similar rights of stockholders of the Company and will not impose personal liability upon the holder thereof. e. Acknowledgment of Dilution. The Company ___________________________ understands and acknowledges the potentially dilutive effect to the Common Stock upon the issuance of the Conversion Shares upon conversion of or otherwise pursuant to the Preferred Shares and upon issuance of the Warrant Shares upon exercise of or otherwise pursuant to the Warrants. The Company further acknowledges that its obligation to issue Conversion Shares upon conversion of or otherwise pursuant to the Preferred Shares and Warrant Shares upon exercise of or otherwise pursuant to the Warrants in accordance with this Agreement, the Certificate of Designation and the Warrants is absolute, subject only to the terms and conditions set forth in this Agreement, the Warrant and the Certificate of Designation, regardless of the dilutive effect that such issuance may have on the ownership interests of other stockholders of the Company. f. Series of Preferred Stock. The terms, __________________________ designations, powers, preferences and relative, participating and optional or special rights, and the qualifications, limitations and restrictions of each series of preferred stock of the Company (other than the Preferred Shares) are as stated in the Company's Certificate of Incorporation, filed on or prior to the date hereof, and the Bylaws. The terms, designations, powers, preferences and relative, participating and optional or special rights, and the qualifications, limitations and restrictions of the preferred Shares are as stated in the Certificate of Designation. g. No Conflicts; Governmental Consents. ____________________________________ Subject to compliance with the applicable requirements of the HSR Act and any applicable notice or shareholder approval under the rules and regulations of the National Association of Securities Dealers, the execution, delivery and performance of this Agreement, the Registration Rights Agreement and the Warrants by the Company and the consummation by the Company of the transactions contemplated hereby and thereby (including, without limitation, the filing of the Certificate of Designation and the issuance and reservation for essences applicable, of the Preferred Shares, Conversion Shares, Warrants and Warrant Shares) will not (i) conflict with or result in a violation of any provision of the Certificate of Incorporation or By-laws or (ii) violate or conflict with, or result in a breach of any provision of, or constitute a default (or an event which with notice or lapse of time or both could become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture, patent, patent license or instrument to which the Company or any of its Subsidiaries is a party, or (iii) result in a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations and regulations of any self-regulatory organizations to which the Company or its securities are subject) applicable to the Company or any of its subsidiaries or by which any property or asset of the Company or any of its Subsidiaries is bound or affected (except for such conflicts, defaults, terminations, amendments, accelerations, cancellations and violations as would not, individually or in the aggregate, have a Material Adverse Effect). Neither the Company nor any of its Subsidiaries is in violation of its Certificate of Incorporation, By-laws or other organizational documents and neither the Company nor any of its Subsidiaries is in default (and no event has occurred which with notice or lapse of time or both could put the Company or any of its Subsidiaries in default) under, and neither the Company nor any of its Subsidiaries has taken any action or failed to take any action that would give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company or any of its subsidiaries is a party or by which any property or assets of the Company or any of its Subsidiaries is bound or affected, except for possible defaults as would not, individually or in the aggregate, have Material Adverse Effect. The businesses of the Company and its subsidiaries, if any, are not being conducted, and shall not be conducted so long as Investor owns any of the Securities, in violation of any law, ordinance or regulation of any governmental entity. Except as specifically contemplated by this Agreement and as required under the 1933 Act and any applicable state securities laws, the Company is not required to obtain any consent, approval, qualification, authorization or order of, or registration, designation, declaration or make any filing or registration with, any court, governmental agency, regulatory agency, self regulatory organization or stock market or any third party in order for it to execute, deliver or perform any of its obligations under this Agreement, the Registration Rights Agreement or the Warrants in accordance with the terms hereof or thereof or to issue and sell the Preferred Shares and the Warrants in accordance with the terms hereof and to issue the Conversion Shares upon conversion of or otherwise pursuant to the Preferred Shares and the Warrant Shares upon exercise of or otherwise pursuant to the Warrants. Except as described in the first sentence of this subsection (g) or as set forth in Schedule 3(g), all consents, authorizations, orders, filings and registrations which the Company is required to obtain pursuant to the preceding sentence have been obtained or effected on or prior to the date hereof. The Company is not in violation of the listing requirements of the Nasdaq and does not reasonably anticipate that the Common Stock will be delisted by the Nasdaq in the foreseeablefuture. The Company and its Subsidiaries are unaware of any facts or circumstances which might give rise to any of the foregoing. h. SEC Documents; Financial Statements. Since ____________________________________ September 1, 1999, the Company has timely filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC pursuant to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "1934 Act") (all of the foregoing filed prior to the date hereof and all exhibits included therein and financial statements and schedules thereto and documents (other than exhibits to such documents) incorporated by reference therein, being hereinafter referred to herein as the "SEC Documents"). The Company has made available to Investor's true and complete copies of the SEC Documents, except for such exhibits and incorporated documents. As of their respective dates, the SEC DOCUMENTS complied in all material respects with the requirements of the 1934 Act and the rules and regulations of the SEC promulgated thereunder applicable to the SEC Documents, and none of the SEC Documents, at the time they were filed with the SEC, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, except to the extent such documents may have been amended by a subsequent SEC Document. None of the statements made in any such SEC Documents is, or has been, required to be amended or updated under applicable law (except for such statements as have been amended or updated in subsequent filings prior to the date hereof). As of their respective dates, the financial statements of the Company included in the SEC Documents complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto. Such financial statements have been prepared in accordance with United States generally accepted accounting principles, consistently applied, during the periods involved (except (i)as may be otherwise indicated in such financial statements or the notes thereto, or (ii) in the case of unaudited interim statements, to the extent they may not include footnotes or may be condensed or summary statements) and fairly present in all material respects the consolidated financial position of the Company and its consolidated Subsidiaries as of the dates thereof and the consolidated results of their operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). Except as set forth in the financial statements of the Company included in the SEC Documents, the Company has no liabilities, contingent or otherwise, other than (i)liabilities incurred in the ordinary course of business subsequent to December 31, 1999 and (ii) obligations under contracts and commitments incurred in the ordinary course of business and not required under generally accepted accounting principles to be reflected in such financial statements, which, individually or in the aggregate, are not material to the financial condition or operating results of the Company. i. Absence of Certain Changes. Since December ___________________________ 31, 1999 and except as set forth in the SEC Documents filed after such date or as set forth on Schedule 3(i), there has not been: (i) any material adverse change in the assets, liabilities, financial condition or operating results of the Company except changes in the ordinary course of business, that have not been and are not expected to be, individually or in the aggregate, materially adverse; (ii) any damage, destruction or loss, whether or not covered by insurance, materially and adversely affecting the business, properties, or financial condition of the Company (as such business is presently conducted and as it is proposed to be conducted); (iii) any waiver or compromise by the Company of a valuable right or of a material debt owed to it; (iv) any satisfaction or discharge of any lien, claim, or encumbrance or payment of any obligation by the Company, except in the ordinary course of business and that is not material to the business, properties, or financial condition of the Company (as such business is presently conducted and as it is proposed to be conducted); (v) any material change to a material contract or arrangement by which the Company or any of its assets is bound or subject; (vi) any material change in any compensation arrangement or agreement with any employee, officer, director or holder of Common Shares, other than pursuant to the Employment Agreements; (vii) any sale, assignment or transfer of any material patents, trademarks, copyrights, trade secrets or other intangible assets; (viii) any resignation or termination of employment of any officer or key employee of the Company; and the Company does not know of any impending resignation or termination of employment of any such officer or key employee; (ix) receipt of notice that there has been a loss of, or material order cancellation by, any major customer of the Company; (x) any mortgage, pledge, transfer of a security interest in, or lien, created by the Company, with respect to any of its material properties or assets, except liens for taxes not yet due or payable; (xi) any material loans or guarantees made by the Company to or for the benefit of its employees, holders of Common Shares, officers, or directors, or any members of their immediate families, other than travel advances and other advances made in the ordinary course of its business; (xii) any declaration, setting aside, or payment of any dividend or other distribution of the Company's assets in respect of any of the Company's Preferred Stock or Common Stock, or any direct or indirect redemption, purchase, or other acquisition of any of such Preferred Stock or Common Stock by the Company; (xiii) to the best of the Company's knowledge, any other event or condition of any character that is reasonably likely to materially and adversely affect the business, properties, prospects, or financial condition of the Company (as such business is presently conducted and as it is proposed to be conducted), excluding events or conditions having general effect on businesses in the general economy or the Internet industry; or (xiv) any arrangement or commitment by the Company to do any of the things described in this Section 3(i). j. Absence of Litigation. There is no action, suit, ______________________ claim, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the Company or any of its Subsidiaries, threatened against or affecting the Company or any of its Subsidiaries, or their officers or directors in their capacity as such, that could have a Material Adverse Effect. The Company and its Subsidiaries are unaware of any facts or circumstances which might give rise to any of the foregoing. k. Intellectual Property. To the best of the ______________________ Company's knowledge, the Company or its subsidiaries owns or possesses sufficient legal rights to all patents, patent applications, trademarks, service marks, trade names, copyrights, trade secrets, inventions and technology (whether or not patentable), confidential and proprietary information, domain names, licenses, know-how, concepts, computer programs, software, databases and other collections and compilations of data, other technical data, proprietary rights, proprietary processes, and other information and/or intellectual property necessary for their businesses as now conducted and as proposed to be conducted (each such item "Company Intellectual Property") without any conflict with or infringement of the rights of others, and has the right to bring actions for the infringement, dilution, misappropriation or other violation of such Company Intellectual Property, except to the extent that any such conflict or infringement, or the absence of any such right, would not individually or in the aggregate, have a Material Adverse Effect. Schedule 3(k) contains a complete list of patents, patent applications, trademarks, service marks, trade names, copyrights and domain names used or held for use by the Company and its Subsidiaries throughout the world and pending applications therefor and registrations, renewals, extensions and the like thereof, specifying as to each such item, as applicable: (i) the owner of the item, (ii) the jurisdictions in which the item is issued or registered or in which any application for issuance or registration has been filed, (iii) the respective issuance, registration, or application number of the item and (iv) the date of application and issuance or registration of the item. Except for agreements with their own employees or consultants regarding confidentiality and proprietary information, and with the exception of standard end-user license agreements, there are no outstanding options, licenses or agreements of any kind relating to the Company Intellectual Property, nor is the Company or any of its Subsidiaries bound by or a party to any options, licenses or agreements of any kind with respect to the patents, patent applications, trademarks, service marks, trade names, copyrights, trade secrets, inventions and technology (whether or not patentable), confidential and proprietary information, domain names, licenses, know-how, concepts, computer programs, software, databases and other collections and compilations of data, other technical data, proprietary rights, proprietary processes and other information and/or intellectual property of any other person or entity. Schedule 3(k) hereto contains a complete and accurate list of all software owned by the Company and/or any of its Subsidiaries as of the date hereof or at any time within the 36-month period prior to the date hereof (the "Owned Software"). The Company and/or the applicable Subsidiaries own(s) exclusively all right, title and interest in and to the Owned Software and any and all enhancements, modifications, and other additions and/or improvements of or to the Owned Software, free and clear of all liens, including claims or rights of any joint owners or employees, agents, consultants or other persons involved in the development, creation, marketing, maintenance or enhancement of such computer software. All software used by the Company and/or any of its Subsidiaries is either Owned Software or licensed software and is not otherwise owned by any other person (except the ownership by the named licensors of the licensed software). Neither the Company nor any of its Subsidiaries has received any communications alleging infringement, dilution, misappropriation, breach or other violation of, nor does the Company or any of its Subsidiaries have reason to believe that the Company or any of its Subsidiaries has infringed, diluted, misappropriated, breached or otherwise violated or, by conducting their businesses as proposed, would infringe, dilute, misappropriate, breach or otherwise violate, any of the patents, patent applications, trademarks, service marks, trade names, copyrights, trade secrets, inventions and technology (whether or not patentable), confidential and proprietary information, domain names, licenses, know-how, concepts, computer programs, software, databases and other collections and compilations of data, technical data, proprietary rights, proprietary processes and other information and/or intellectual property ("Intellectual Property") of any other person or entity; neither the Company nor any of its Subsidiaries is aware, based on reasonable investigation, of any reasonable basis therefor or threat thereof. To the extent that any works of authorship, materials, products, technology or software have been developed or created independently or jointly by any person other than the Company or any of its Subsidiaries for which the Company or any of its Subsidiaries has, directly or indirectly, paid, the Company or the applicable subsidiary has a written agreement with such person with respect thereto, and the Company or the applicable subsidiary thereby has obtained ownership of, and is the exclusive owner of, all Intellectual Property therein or thereto by operation of law or by valid assignment. In each case in which either the Company or any of its Subsidiaries has acquired any Intellectual Property from any person, the Company or the applicable subsidiary has obtained a valid and enforceable assignment sufficient to irrevocably transfer all rights in such Intellectual Property (including the right to seek past and future damages with respect thereto) to the Company or the applicable subsidiary and, to the maximum extent provided for by, and in accordance with, any applicable laws and regulations, the Company has recorded each such assignment with the relevant governmental authorities, including the U.S. Patent and Trademark Office, the U.S. Copyright Office or their respective equivalents in any relevant foreign jurisdiction. Neither the Company nor any of its Subsidiaries is aware that any of its respective employees, agents, consultants or contractors 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 the use of such person's or entity's best efforts to promote the interests of the Company and its Subsidiaries, or that would conflict with the Company's or any of its Subsidiaries' business as proposed to be conducted. Neither the Company nor any of its Subsidiaries is aware of any current or past infringement, dilution, misappropriation, breach or other violation by a third party of any of the Company Intellectual Property. Neither the Company nor any of its Subsidiaries has a plan to utilize, and does not believe it is or will be necessary to utilize, any inventions of any of its employees (or people it currently intends to hire) made prior to their employment or engagement by the Company or any of its Subsidiaries. Except as set forth in Schedule 3(k), the source code for the Owned Software has not been disclosed to any third party and none of the source code for the Owned Software has been placed in escrow or is otherwise not in the full and exclusive control of the Company and/or the applicable Subsidiaries of the Company. No Intellectual Property owned or used by the Company or any of its Subsidiaries is subject to any outstanding decree, order, judgment, settlement agreement or stipulation that restricts in any manner the use, transfer or licensing thereof by the Company or any of its Subsidiaries. All of the patents, trademark and service mark registrations, copyright registrations and domain name registrations indicated in Schedule 3(k) are valid and in full force, are held of record in the name of the Company or the applicable subsidiary free and clear of all liens, encumbrances and other claims, are not the subject of any cancellation or reexamination proceeding or any other proceeding challenging their extent or validity, and all necessary registration, maintenance and renewal fees in connection with such patents and registrations have been paid and all necessary documents and certificates in connection with such patents and registrations have been filed with the relevant patent, copyright, trademark or other authorities in the United States or foreign jurisdictions, as the case may be, for the purposes of maintaining such patents and registrations. The Company and/or the applicable subsidiary is the applicant of record in all patent applications, and applications for trademark, service mark, and copyright registration indicated in Schedule 3(k), and no opposition, extension of time to oppose, interference, final rejection, or final refusal to register has been received in connection with any such application. The Company and each of its Subsidiaries has taken all reasonable steps that are required to protect the Company's rights in material trade secrets, know-how or other confidential or proprietary information (including, without limitation, source code) of the Company and any of its Subsidiaries or provided by any other person to the Company or any applicable Subsidiary. l. No Materially Adverse Contracts, Etc. _____________________________________ (i) Except for agreements explicitly contemplated by this Agreement or purchase, sale or license agreements entered into in the ordinary course of business, there are no agreements, understandings, instruments, contracts or proposed transactions to which the Company or any of its subsidiaries is a party or by which it is bound that involve (i) obligations (contingent or otherwise) of or payments to the Company or any of its subsidiaries in excess of $250,000, (ii) the transfer or license of any patent, copyright, trade secret or other proprietary right to or from the Company or any of its subsidiaries, (iii) the grant of rights to manufacture, produce, assemble, license, market or sell its products or services to any other person or affect the Company's or any of its subsidiaries' exclusive right to develop, manufacture, assemble, distribute, market or sell its products or services, or (iv) indemnification by the Company with respect to infringements of proprietary rights. (ii) Neither the Company nor any of its Subsidiaries has incurred any indebtedness for money borrowed or incurred any other liabilities in excess of $250,000 or sold, exchanged or otherwise disposed of any of its assets or rights, other than the nonexclusive license of software to end-users in the ordinary course of business. (iii) For the purposes of Section 3(l)(i) and (ii) above, the indebtedness, liabilities, agreements, understandings, instruments, contracts and proposed transactions involving the same person shall be aggregated for the purpose of meeting the individual minimum dollar amounts within such subsections. (iv) All the material contracts, agreements and instruments to which the Company or any of its subsidiaries is a party are listed on Schedule 3(l) and such contracts, agreements and instruments are valid, binding and in full force and effect in all material respects, and are enforceable by the Company or any of its subsidiaries in accordance with their respective terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies. Neither the Company nor any of its subsidiaries is in default under any material contract and, to the knowledge of the Company, no other party to any such contract is in default. m. Tax Status. Except as set forth on Schedule ___________ 3(m), the Company and each of its Subsidiaries has made or filed all federal, state and foreign income and all other tax returns, reports and declarations required by any jurisdiction to have been filed to which it is subject (unless and only to the extent that the Company and each of its Subsidiaries has set aside on its books provisions reasonably adequate for the payment of all unpaid and unreported taxes) and has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith, and has set aside on its books provisions reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company know of no basis for any such claim. The Company has not executed a waiver with respect to the statute of limitations relating to the assessment or collection of any foreign, federal, state or local tax. Except as set forth on Schedule 3(m), none of the Company's tax returns is presently being audited by any taxing authority. n. Certain Transactions. Except as set forth on _____________________ Schedule 3(n) and except for arm's length transactions in the ordinary course of business upon terms no less favorable than the Company or any of its Subsidiaries could obtain from third parties and other than the grant of stock options disclosed on Schedule 3(c), none of the officers or directors of the Company is presently a party to any transaction with the Company or any of its Subsidiaries (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any corporation, partnership, trust or other entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner. o. Disclosure. To the best knowledge of the ___________ Company, all information taken together relating to or concerning the Company or any of its Subsidiaries set forth in this Agreement, the schedules hereto and provided to Investors pursuant to Section 2(d) hereof and otherwise in connection with the transactions contemplated hereby is true and correct in all material respects and the Company has not omitted to state any material fact necessary in order to make the statements made herein or therein, in light of the circumstances under which they were made, not misleading. To the best knowledge of the Company, no event or circumstance has occurred or exists with respect to the Company or any of its Subsidiaries or its or their business, properties, prospects, operations or financial conditions, which has not been publicly announced or disclosed but, under applicable law, rule or regulation, requires public disclosure or announcement by the Company (assuming for this purpose that the Company's reports filed under the 1934 Act are being incorporated into an effective registration statement filed by the Company under the 1933 Act). p. Acknowledgment Regarding Investor's Purchase of _______________________________________________ Securities. The Company acknowledges and agrees that Investor is acting __________ solely in the capacity of an arm's length purchaser with respect to this Agreement and the transactions contemplated hereby. The Company further acknowledges that Investor is not acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to this Agreement and the transactions contemplated hereby and that any statement made by Investor or any of its respective representatives or agents in connection with this Agreement and the transactions contemplated hereby is not advice or a recommendation and is merely incidental to Investor's purchase of the Securities and has not been publicly relied upon by the Company, its officers or its directors in any way. q. No Integrated Offering. Except for securities _______________________ offered or sold pursuant to a Registration Statement on Form S-8 and a Registration Statement filed on February 7, 2000 that was subsequently withdrawn, 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 require registration under the 1933 Act of the issuance of the Securities to Investor. The issuance of the Securities to Investor will not be integrated with any other issuance of the Company's securities (past, current or future) for purposes of any stockholder approval provisions applicable to the Company or its securities. r. No Brokers. Except as set forth in Schedule ___________ 3(r), the Company has taken no action which would give rise to any claim by any person for brokerage commissions, finder's fees or similar payments relating to this Agreement or the transactions contemplated hereby. Copies of any such agreements or arrangements set forth on Schedule 3(r) shall be provided to Investor. s. Permits; Compliance. The Company and each of its ____________________ Subsidiaries is in possession of all franchises, grants, authorizations, licenses, permits, easements, variances, exemptions, consents, certificates, approvals and orders necessary to own, lease and operate its properties and to carry on its business as it is now being conducted (collectively, the "Company Permits"), and there is no action pending or, to the knowledge of the Company, threatened regarding suspension or cancellation of any of the Company Permits, except to the extent that any such suspension or cancellation, or the absence of any Company Permits, would not individually or in the aggregate have a Material Adverse Effect. Neither the Company nor any of its Subsidiaries is in conflict with, or in default or violation of, any of the Company Permits, except for any such conflicts, defaults or violations which, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect. Since June 30, 1998, neither the Company nor any of its Subsidiaries has received any notification with respect to possible conflicts, defaults or violations of applicable laws, except for notices relating to possible conflicts, defaults or violations, which conflicts, defaults or violations would not have a Material Adverse Effect. t. Environmental Matters. ______________________ (i) Except as set forth in Schedule 3(t), there are, to the Company's knowledge, with respect to the Company or any of its Subsidiaries or any predecessor of the Company, no past or present material violations of Environmental Laws (as defined below), releases of any Hazardous Materials (as defined below) into the environment or actions, activities, circumstances, conditions, events, incidents, or contractual obligations which may give rise to any material common law environmental liability or any material liability under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 or similar federal, state, local or foreign laws and neither the Company nor any of its Subsidiaries has received any notice with respect to any of the foregoing, nor is any action pending or, to the Company's knowledge, threatened in connection with any of the foregoing. The term "Environmental Laws" means all federal, state, local or foreign laws relating to pollution or protection of human health or the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata), including, without limitation, laws relating to emissions, discharges, releases or threatened releases of chemicals, pollutants contaminants, or toxic or hazardous substances or wastes (collectively, "Hazardous Materials") into the environment, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials, as well as all authorizations, codes, decrees, demands or demand letters, injunctions, judgments, licenses, notices or notice letters, orders, permits, plans or regulations issued, entered, promulgated or approved thereunder. (ii) Other than those that are or were stored, used or disposed of in compliance with applicable law, no Hazardous Materials are contained on or about any real property currently owned, or to the best of the Company's knowledge leased or used, by the Company or any of its Subsidiaries, and no Hazardous Materials were released on or about any real property previously owned, or to the Company's knowledge leased or used, by the Company or any of its Subsidiaries during the period the property was owned, leased or used by the Company or any of its Subsidiaries, except in the normal course of the Company's or any of its Subsidiaries' business. (iii) Except as set forth in Schedule 3(t), there are no underground storage tanks on or under any real property owned, or to the Company's knowledge leased or used, by the Company or any of its Subsidiaries that are not in compliance with applicable law. u. Title to Property. The Company and its __________________ Subsidiaries have good and marketable title in all personal property owned by them which is material to the business of the Company and its Subsidiaries, in each case free and clear of all liens, encumbrances and defects except such as are described in Schedule 3(u) or such as would not have a Material Adverse Effect. Any real property and facilities held under lease by the Company and its Subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as would not have a Material Adverse Effect. v. Insurance. The Company and each of its __________ Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as management of the Company believes to be prudent and customary in the businesses in which the Company and its Subsidiaries are engaged. Neither the Company nor any such Subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not have a Material Adverse Effect. w. Internal Accounting Controls. The Company and _____________________________ each of its Subsidiaries maintain a system of internal accounting controls sufficient, in the judgment of the Company's board of directors, to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management's general or specific authorization and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. x. Foreign Corrupt Practices. Neither the Company, __________________________ nor, to the best knowledge of the Company, any of its Subsidiaries, nor any director, officer, agent, employee or other person acting on behalf of the Company or any Subsidiary has, in the course of his actions for, or on behalf of, the Company, used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expenses relating to political activity; made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds; violated or is in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977 as amended; or made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment to any foreign or domestic government official or employee. y. Solvency. The Company (both before and after _________ giving effect to the transactions contemplated by this Agreement) is solvent (i.e., its assets have a fair market value in excess of the amount required to pay its probable liabilities on its existing debts as they become absolute and matured) and currently the Company has no information that would lead it to reasonably conclude that the Company would not have the ability to, nor does it intend to take any action that would impair its ability to, pay its debts from time to time incurred in connection therewith as such debts mature. z. No Investment Company. The Company is not, and ______________________ upon the issuance and sale of the Securities as contemplated by this Agreement and the Certificate of Designation will not be an "investment company" required to be registered under the Investment Company Act of 1940 (an "Investment Company"). The Company is not controlled by an Investment Company. aa. Form S-3 Eligibility. The Company is currently _____________________ eligible to register the resale of its Common Stock on a registration statement on Form S-3 under the 1933 Act. There exist no facts or circumstances that would prohibit or delay the preparation and filing of a registration statement on Form S-3 with respect to the Registrable Securities (as defined in the Registration Right Agreement) within the time periods referred to therein. bb. Employees. Neither the Company nor any of its __________ subsidiaries is bound by or subject to (and none of their assets or properties are bound by or subject to) any written or oral, express or implied, contract, commitment or arrangement with any labor union, and no labor union has requested or, to the knowledge of the Company, has sought to represent any of the employees, representatives or agents of the Company or any of its subsidiaries. There is no strike, labor dispute or union organization activity pending or threatened between the Company and its employees. Neither the Company nor any of its subsidiaries is a party to or bound by any labor agreement or collective bargaining agreement respecting its employees. The Company and its subsidiaries have complied in all material respects with all applicable federal and state equal opportunity and other laws related to employment. No employee of the Company or any of its subsidiaries is currently in violation of any judgment, decree, order or agreement known to the Company relating to the relationship of any such employee with the Company or any of its subsidiaries, or any other party, due to either (i) the nature of the business of the Company or any of its subsidiaries as conducted presently or proposed to be conducted or (ii) the use by the employee of his or her best efforts with respect to the conduct of such business. Neither the Company nor any of its subsidiaries is a party to or bound by any currently effective employment contract, deferred compensation agreement, bonus plan, incentive plan, profit sharing plan, retirement agreement or other employee compensation agreement. Subject to general principles related to wrongful termination of employees and the terms of the employment contracts set forth in Schedule 3(bb), the employment of each officer and employee of the Company or any of its subsidiaries is terminable at the will of the Company or any of its subsidiaries, with or without cause. cc. Employee Compensation Plans. Neither the ____________________________ Company nor any of its subsidiaries is a party to or bound by any currently effective employment contract, deferred compensation agreement, bonus plan, incentive plan, profit sharing plan, retirement agreement or other employee compensation agreement. dd. Significant Customers and Suppliers. To the ____________________________________ knowledge of the Company, no major customer or supplier has materially reduced or threatened to terminate or materially reduce its purchases from or provision of products or services to the Company or any of its subsidiaries. 4. COVENANTS. __________ a. Best Efforts. The parties shall use their best _____________ efforts to satisfy timely each of the conditions described in Section 6 and 7 of this Agreement. b. Form D; Blue Sky Laws. The Company, if requested ______________________ by Investor, agrees to file a Form D with respect to the Securities as required under Regulation D and to provide a copy thereof to Investor promptly after such filing. The Company shall, on or before the First Closing, take such action as the Company shall reasonably determine is necessary to qualify the Securities for sale to Investor at the First Closing and the Second Closing pursuant to this Agreement under applicable securities or "blue sky" laws of the states of the United States (or to obtain an exemption from such qualification), and shall provide evidence of any such action so taken to Investor on or prior to the First Closing. c. Reporting Status; Eligibility to Use Form S-3. ______________________________________________ The Company's Common Stock is registered under Section 12(g) of the 1934 Act. So long as any Investor beneficially owns the Series A Preferred Stock, the Company shall timely file all reports required to be filed with the SEC pursuant to the 1934 Act, and the Company shall not terminate its status as an issuer required to file reports under the 1934 Act even if the 1934 Act or the rules and regulations thereunder would permit such termination. The Company currently meets, and will take all necessary action to continue to meet, the "registrant eligibility" requirements set forth in the general instructions to Form S-3. d. Use of Proceeds. The Company shall use the ________________ proceeds from the sale of the Preferred Shares in the manner set forth in Schedule 4(d) attached hereto and made a part hereof and, except as set forth in Schedule 4(d), shall not, directly or indirectly, use such proceeds for any loan to or investment in any other corporation, partnership, enterprise or other person (except in connection with its currently existing direct or indirect Subsidiaries). e. Additional Equity Capital. Subject to the __________________________ exceptions described below, for a six-month period commencing from the date hereof, the Company will not enter into definitive agreements with any party to obtain equity or equity-equivalent financing (including debt financing with an equity component) before April 12, 2001 ("Future Offerings") unless it shall have first delivered to Investor, at least ten (10) business days prior to entering into definitive agreements for such Future Offering with any other Person (as defined in Article IV.B of the Certificate of Designation), written notice describing the proposed Future Offering, including the terms and conditions thereof and proposed definitive documentation to be entered into in connection therewith, and providing Investor's an option during the ten (10) day period following delivery of such notice to purchase the securities being offered in the Future Offering on the same terms as contemplated by such Future Offering (the limitations referred to in this sentence and the preceding sentence are collectively referred to as the "Capital Raising Limitations"). In the event the terms and conditions of a proposed Future Offering are amended in any material respect after delivery of the notice to Investor concerning the proposed Future Offering, the Company shall deliver a new notice to Investor's describing the amended terms and conditions of the proposed Future Offering and Investor's thereafter shall have an option during the ten (10) day period following delivery of such new notice to purchase the securities being offered on the same terms as contemplated by such proposed Future Offering, as amended. The foregoing sentence shall apply to successive amendments to the terms and conditions of any proposed Future Offering. The Capital Raising Limitations shall not apply to any transaction involving (i) issuances of securities in a firm commitment underwritten public offering (excluding a continuous offering pursuant to Rule 415 under the 1933 Act), (ii) issuances of securities as consideration for a merger, consolidation or purchase of assets, or in connection with any strategic partnership or joint venture (the primary purpose of which is not to raise equity capital), or in connection with the disposition or acquisition of a business, product or license by the Company or (iii) a private placement, the proceeds of which would be used to redeem the Series A Preferred Stock. The Capital Raising Limitations also shall not apply to the issuance of securities upon exercise or conversion of the Company's options, warrants or other convertible securities outstanding as of the date hereof or to the grant of additional options or warrants, or the issuance of additional securities, under any Company stock option or restricted stock plans approved by the stockholders of the Company. f. Expenses. The Company shall reimburse Investor _________ for all reasonable out-of-pocket expenses incurred by it in connection with the negotiation, preparation, execution, delivery and performance of this Agreement and the other agreements to be executed in connection herewith, including, without limitation, legal and due diligence costs; provided that the fees and expenses of counsel to Investor shall not exceed $100,000 without the consent of the Company. g. Financial Information. So long as the Investor ______________________ owns any shares of Series A Preferred Stock, the Company agrees to send the following reports to Investor until Investor transfers, assigns, or sells all of the Securities: (i) within ten business days after the filing with the SEC, a copy of its Annual Report on Form 10-K, its Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K; (ii) within one business day after release, copies of all press releases issued by the Company or any of its Subsidiaries; (iii) contemporaneously with the making available or giving to the stockholders of the Company, copies of any notices or other information the Company makes available or gives to such stockholders; and (iv) any other financial information as may be reasonably requested by Investor subject to appropriate confidentiality protections. h. Reservation of Shares. As long as the Series A ______________________ Preferred Stock is outstanding the following shall apply: the Company shall at all times have authorized, and reserved for the purpose of issuance, a sufficient number of shares of Common Stock to provide for the full conversion of the outstanding Preferred Shares (based on the Conversion Price (as defined in the Certificate of Designation) in effect from time to time) and the issuance of the Conversion Shares in connection therewith and as otherwise required by the Certificate of Designation and the full exercise of the Warrants and the issuance of the Warrant Shares (based on the exercise price of the Warrants in effect from time to time). The Company shall not reduce the number of shares of Common Stock reserved for issuance upon conversion of or otherwise pursuant to the Preferred Shares and the exercise of or otherwise pursuant to the Warrants without the consent of Investor's. Subject to the proviso contained in the first sentence of this Section 4(h), the Company shall use its best efforts at all times to maintain the number of shares of Common Stock so reserved for issuance at no less than the number that is then actually issuable upon full conversion of the Preferred Shares (based on the Conversion Price (as defined in the Certificate of Designation) in effect from time to time) and full exercise of the Warrants (based on the exercise price of the Warrants in effect from time). Subject to the proviso contained in the first sentence of this Section 4(h), if at any time the number of shares of Common Stock authorized and reserved for issuance is below the number of Conversion Shares issued and issuable upon conversion of or otherwise pursuant to the Preferred Shares (based on the Conversion Price (as defined in the Certificate of Designation) in effect from time to time) and Warrant Shares issued and issuable upon exercise of or otherwise pursuant to Warrants (based on the exercise price of the Warrants in effect from time to time), the Company will promptly take all corporate action necessary to authorize and reserve a sufficient number of shares, including, without limitation, calling a special meeting of stockholders to authorize additional shares to meet the Company's obligations under this Section 4(h), in the case of an insufficient number of authorized shares, and using its best efforts to obtain stockholder approval of an increase in such authorized number of shares. i. Registration of Shares. Within 45 days of the _______________________ First Closing the Company will file a Registration Statement on Form S-3 (the "Registration Statement") covering a sufficient number of shares of Common Stock to register all shares issuable in connection with this Agreement. As set forth in the Registration Rights Agreement, if such Registration Statement is not declared effective before the later of (x) 135 days from the First Closing and (y) 90 days of the filing date, or if there are any prolonged suspensions in such effectiveness, the Company will pay Investor 1.5% of the purchase price of the Preferred Shares for each 30 day period thereafter (prorated for partial periods) until such Registration Statement is declared effective. j. Listing. The Company shall undertake to ensure ________ that the Conversion Shares and the Warrant Shares shall have been authorized for quotation on Nasdaq and trading in the Common Stock on Nasdaq shall not have been suspended for any prolonged period of time by the SEC or Nasdaq. The Company shall maintain the listing and trading of its Common Stock on Nasdaq, the Nasdaq SmallCap Market ("Nasdaq SmallCap"), the New York Stock Exchange ("NYSE"), or the American Stock Exchange ("AMEX") and will comply in all respects with the Company's reporting, filing and other obligations under the bylaws or rules of the National Association of Securities Dealers ("NASD") and such exchanges, as applicable. The Company shall promptly provide to Investor's copies of any notices it receives from Nasdaq and any other exchanges or quotation systems on which the Common Stock is then listed regarding the continued eligibility of the Common Stock for listing on such exchanges and quotation systems. k. Corporate Existence. So long as Investor ____________________ beneficially owns any Preferred Shares, the Company shall maintain its corporate existence and shall not merge, consolidate or sell all or substantially all of the Company's assets, except in the event of a merger or consolidation or sale of all or substantially all of the Company's assets, where either (i) the consideration to the Investor is all in cash or (ii)(A) the surviving or successor entity (and, if an entity different from the surviving or successor entity, the entity whose securities into which the Preferred Shares shall become convertible pursuant to Article VI.C(b) of the Certificate of Designation) in such transaction assumes the Company's obligations hereunder and under the agreements and instruments entered into in connection herewith and (B) the entity whose securities into which the Preferred Shares shall become convertible pursuant to Article VI.C(b) of the Certificate of Designation is a publicly traded corporation whose Common Stock is listed for trading on Nasdaq, Nasdaq SmallCap, NYSE or AMEX. l. No Integration. The Company shall not make any _______________ offers or sales of any security (other than the Securities) under circumstances that would require registration of the Securities being offered or sold hereunder under the 1933 Act or cause the offering of Securities to be integrated with any other offering of securities by the Company for the purpose of any stockholder approval provision applicable to the Company or its securities. m. Board Representation. So long as the Investor _____________________ owns any Series A Preferred Stock, the Investor shall have the right to propose nomination for two persons to the Board of Directors of the Company and the Company shall use all reasonable efforts to have such nominees elected; provided that such persons shall be reasonably acceptable to the Board of Directors of the Company. If, however, the Second Closing shall not have occurred, one of such two Investor designees shall promptly resign from the Board of Directors of the Company. n. Standstill. For the period of six months from ___________ the date hereof, without the prior consent of the Board of Directors of the Company (excluding any member appointed by the holders of the Series A Preferred Stock), the Investor shall not, alone or through or with any other person or entity, in any manner: (i) acquire any additional direct or indirect interest in any securities of the Company; (ii) solicit, make, or in any way participate in, directly or indirectly, any "solicitation" of "proxies" (as such terms are used in the proxy rules of the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act")) from the Company's stockholders, become a "participant" in any "election contest" (as such terms are defined or used in Rule 14A-11 under the Exchange Act) with respect to the Company's Board of Directors, solicit or execute any written consent in lieu of a meeting of holders of voting securities except to support the nominees for directors of the Company's Board of Directors or call or seek to have called any meeting of the Company's stockholders of the other party or seek to advise or influence in any manner whatever any person or entity with respect to the Company; (iii) make any short sales, enter into any hedging, derivative or similar transactions regarding the Company's securities; or (iv) publicly announce an intention to do any of the actions restricted or prohibited under clauses (i) through (iii) of this Section 4(n). o. HSR Approval. As promptly as practicable after _____________ the execution of this Agreement, each party shall, in cooperation with the other, file or cause to be filed any reports, notifications or other information that may be required to comply with the applicable requirements of the HSR Act, shall in connection with any such filings, if applicable, request early termination of the relevant waiting period and shall furnish or cause to be furnished to the other all such information in its possession as may be reasonably necessary for the completion of the reports, notifications or submissions to be filed by the other. p. Supplemental Schedules. With respect to facts _______________________ and circumstances that arise after the date of this Agreement, the Company shall supplement the schedules to this Agreement to the extent that such facts and circumstances would have been required to be set forth on such schedules had they existed on the date of this Agreement, and such supplements shall be deemed to be part of the schedules for all purposes hereunder; provided that the Company may not supplement the schedules to reflect facts and circumstances of which it was aware as of the date of this Agreement. Notwithstanding the foregoing sentence, the Company shall be under no obligation to supplement the schedules after the Second Closing. 5. TRANSFER AGENT INSTRUCTIONS. The Company shall issue ____________________________ irrevocable instructions to its transfer agent to issue certificates, registered in the name of Investor or its nominee, for the Conversion Shares and the Warrant Shares in such amounts as specified from time to time by Investor to the Company upon conversion of the Preferred Shares or exercise of the Warrants in accordance with the terms thereof (the "Irrevocable Transfer Agent Instructions"). Prior to registration of the Conversion Shares and the Warrant Shares under the 1933 Act or the date on which the Conversion Shares and the Warrant Shares may be sold pursuant to Rule 144 without any restriction as to the number of securities as of a particular date that can then be immediately sold, all such certificates shall bear the restrictive legend specified in Section 2(g) of this Agreement. The Company warrants that no instruction other than the Irrevocable Transfer Agent Instructions referred to in this Section 5, and stop transfer instructions to give effect to Section 2(f) hereof (in the case of the Conversion Shares and the Warrant Shares, prior to registration of the Conversion Shares and the Warrant Shares under the 1933 Act or the date on which the Conversion Shares and the Warrant Shares may be sold pursuant to Rule 144 without any restriction as to the number of securities as of a particular date that can then be immediately sold), will be given by the Company to its transfer agent and that the Securities shall otherwise be freely transferable on the books and records of the Company as and to the extent provided in this Agreement and the Registration Rights Agreement. Nothing in this Section shall affect in any way Investor's obligations and agreement set forth in Section 2(g) hereof to comply with all applicable prospectus delivery requirements, if any, upon re-sale of the Securities. If Investor provides the Company with (i) an opinion of counsel, in form, substance and scope customary for opinions in comparable transactions, to the effect that a public sale or transfer of such Securities may be made without registration under the 1933 Act and such sale or transfer is effected or (ii) Investor provides reasonable assurances that the Securities can be sold pursuant to Rule 144, the Company shall permit the transfer, and, in the case of the Conversion Shares and the Warrant Shares, promptly instruct its transfer agent to issue one or more certificates, free from any restrictive legend, in such name and in such denominations as specified by Investor. 6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL. The _______________________________________________ obligation of the Company hereunder to issue and sell the Preferred Shares and Warrants to Investor at each of the First Closing and the Second Closing is subject to the satisfaction, at or before each of the First Closing and the Second Closing, of each of the following conditions thereto, provided that these conditions are for the Company's sole benefit and may be waived by the Company at any time in its sole discretion: a. Investor shall have executed this Agreement and the Registration Rights Agreement and delivered the same to the Company. b. Investor shall have delivered the applicable Purchase Price in accordance with Section 1 above. c. The Certificate of Designation shall have been accepted for filing with the Secretary of State of the State of Delaware. d. The representations and warranties of Investor shall be true and correct in all material respects as of the date when made and as of each of the First Closing and Second Closing as though made at that time (except for representations and warranties that speak as of a specific date, which representations and warranties shall be true and correct as of such date), and the applicable Investor shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by Investor at or prior to each of the First Closing and Second Closing. e. No litigation, statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by or in any court or governmental authority of competent jurisdiction or any self-regulatory organization having authority over the matters contemplated hereby which prohibits the consummation of any of the transactions contemplated by this Agreement. f. With respect to the Second Closing, the waiting period under the HSR Act shall have expired or early termination shall have been granted. 7. CONDITIONS TO INVESTOR'S OBLIGATION TO PURCHASE. The ________________________________________________ obligation of Investor's hereunder to purchase the Preferred Shares and the Warrants at each of the First Closing and Second Closing is subject to the satisfaction, at or before each of the First Closing and Second Closing, of each of the following conditions, provided that these conditions are for Investor's sole benefit and may be waived by Investor at any time in its sole discretion: a. The Company shall have executed the Warrant and the Registration Rights Agreement and delivered the same to Investor. b. The Company shall have delivered to Investor duly executed certificates (in such denominations as Investor shall request) representing the Preferred Shares and duly executed Warrants purchased at each of the First Closing and Second Closing in accordance with Section 1(b) above. c. The Certificate of Designation shall have been accepted for filing with the Secretary of State of the State of Delaware, and a copy thereof certified by such Secretary of State shall have been delivered to Investor. d. The Irrevocable Transfer Agent Instructions, in form and substance satisfactory to the Investor, shall have been delivered to and acknowledged in writing by the Company's Transfer Agent. e. The representations and warranties of the Company shall be true and correct in all material respects as of the date when made and as of each of the First Closing and Second Closing as though made at such time (except for representations and warranties that speak as of a specific date, which representations and warranties shall be true and correct as of such date) and the Company shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Company at or prior to each of the First Closing and Second Closing. Investor shall have received a certificate or certificates, executed by the chief executive officer or chief financial officer of the Company, dated as of each of the First Closing and Second Closing, to the foregoing effect and as to such other matters as may be reasonably requested by Investor including, but not limited to certificates with respect to the Company's Certificate of Incorporation, By-laws and Board of Directors' resolutions relating to the transactions contemplated hereby. f. No litigation, statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by or in any court or governmental authority of competent jurisdiction or any self-regulatory organization having authority over the matters contemplated hereby which prohibits the consummation of any of the transactions contemplated by this Agreement. g. Investor shall have received an opinion of the Company's counsel, dated as of each of the First Closing and Second Closing, in form, scope and substance reasonably satisfactory to Investor. h. Investor shall have received an officer's certificate described in Section 3(c) above, dated as of each of the First Closing and Second Closing. i. With respect to the Second Closing, the waiting period under the HSR Act shall have expired or early termination shall have been granted. 8. GOVERNING LAW; MISCELLANEOUS. _____________________________ a. Governing Law. This Agreement shall be governed ______________ by and construed in accordance with the laws of the State of New York applicable to agreements made and to be performed in the State of New York (without regard to principles of conflict of laws). Both parties irrevocably consent to the jurisdiction of the United States federal courts and the state courts located in New York with respect to any suit or proceeding based on or arising under this Agreement, the agreements entered into in connection herewith or the transactions contemplated hereby or thereby and irrevocably agree that all claims in respect of such suit or proceeding may be determined in such courts. Both parties irrevocably waive the defense of an inconvenient forum to the maintenance of such suit or proceeding. Both parties further agree that service of process upon a party mailed by first class mail shall be deemed in every respect effective service of process upon the party in any such suit or proceeding. Nothing herein shall affect either party's right to serve process in any other manner permitted by law. Both parties agree that a final non-appealable judgment in any such suit or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on such judgment or in any other lawful manner. b. Counterparts; Signatures by Facsimile. This _____________________________________ Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party. This Agreement, once executed by a party, may be delivered to the other party hereto by facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement. c. Headings. The headings of this Agreement are for ________ convenience of reference and shall not form part of, or affect the interpretation of, this Agreement. d. Severability. If any provision of this Agreement _____________ shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement or the validity or enforceability of this Agreement in any other jurisdiction. e. Entire Agreement; Amendments. This Agreement, _____________________________ the schedules and exhibits hereto and the instruments referenced herein contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company nor Investor makes any representation, warranty, covenant or undertaking with respect to such matters. This Agreement supercedes Article 8 of the Confidentiality Agreement dated October 6, 2000 between the Company and the Investor. No provision of this Agreement may be waived or amended other than by an instrument in writing signed by the party to be charged with enforcement. f. Notices. Any notices required or permitted to be ________ given under the terms of this Agreement shall be sent by certified or registered mail (return receipt requested) or delivered personally or by courier (including a recognized overnight delivery service) or by facsimile and shall be effective five days after being placed in the mail, if mailed by regular United States mail, or upon receipt, if delivered personally or by courier (including a recognized overnight delivery service) or by facsimile, in each case addressed to a party. The addresses for such communications shall be: If to the Company: Interworld Corporation 395 Hudson Street, 6th Floor New York, New York 10014-3669 Attention: Chairman of the Board Facsimile: (212) 301-2424 With copy to: Covington & Burling 1330 Avenue of the Americas New York, New York 10019 Attention: Stephen A. Infante Facsimile: (212) 841-1010 If to Investor: To the address set forth immediately below Investor's name on the signature pages hereto. Jackpot Enterprises Inc. c/o J Net Venture Partners LLC 498 Seventh Avenue New York, New York 10021 Attention: Keith Meister Facsimile: (212) 502-6396 With copy to: Greenberg Traurig, LLP 200 Park Avenue New York, New York 10166 Attention: Alan I. Annex, Esq. Facsimile: (212) 801-6400 Each party shall provide notice to the other party of any change in address. g. Successors and Assigns. This Agreement shall be _______________________ binding upon and inure to the benefit of the parties and their successors and assigns. Neither the Company nor any Investor shall assign this Agreement or any rights or obligations hereunder without the prior written consent of the other. Notwithstanding the foregoing, subject to Section 2(f), any Investor may assign its rights hereunder to (i) any of its "affiliates," as that term is defined under the 1934 Act and (ii) after the Maximum Share Amount (as defined in the Certificate of Designation) has been issued, any person that purchases Securities in a private transaction from Investor, without the consent of the Company. h. Third Party Beneficiaries. This Agreement is __________________________ intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other person. i. Survival; Indemnification. The representations __________________________ and warranties of the Company and the agreements and covenants set forth in Sections 3, 4, 5 and 8 shall survive the closing hereunder notwithstanding any due diligence investigation conducted by or on behalf of Investor. The Company agrees to indemnify and hold harmless Investors and all their officers, directors, employees and agents for loss or damage arising as a result of or related to any breach or alleged breach by the Company of any of its representations, warranties and covenants set forth in Sections 3 and 4 hereof or any of its covenants and obligations under this Agreement or the Registration Rights Agreement, including advancement of expenses as they are incurred. j. Publicity. The Company and Investor shall have __________ the right to review a reasonable period of time before issuance of any press releases, filings with the SEC, the NASD or any stock exchange or interdealer quotation system, or any other public statements with respect to the transactions contemplated hereby; provided, however, that the Company shall be entitled, without the prior approval of Investor, to make any press release or public filings with respect to such transactions as is required by applicable law and regulations (although Investor shall be consulted by the Company in connection with any such press release prior to its release and shall be provided with a copy thereof and be given an opportunity to comment thereon). k. Further Assurances. Each party shall do and ___________________ perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. l. No Strict Construction. The language used in _______________________ this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party. m. Remedies. The Company acknowledges that a breach _________ by it of its obligations hereunder will cause irreparable harm to Investor by vitiating the intent and purpose of the transactions contemplated hereby. Accordingly, the Company acknowledges that the remedy at law for a breach of its obligations under this Agreement will be inadequate and agrees, in the event of a breach or threatened breach by the Company of the provisions of this Agreement, that Investor shall be entitled, in addition to all other available remedies in law or in equity, to an injunction or injunctions to prevent or cure any breaches of the provisions of this Agreement and to enforce specifically the terms and provisions of this Agreement, without the necessity of showing economic loss and without any bond or other security being required. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the undersigned Investor and the Company have caused this Agreement to be duly executed as of the date first above written. INTERWORLD CORPORATION By: /s/ Jeremy M. Davis _____________________________________ Jeremy M. Davis Chief Executive Officer and President JACKPOT ENTERPRISES, INC By: /s/ Mark W. Hobbs _____________________________________ Mark W. Hobbs President EX-99 3 0003.txt EXHIBIT 99.2 EXHIBIT B TO SECURITIES PURCHASE AGREEMENT On October 12, 2000, Jackpot and Issuer entered into a Securities Purchase Agreement (the "Purchase Agreement"), which provides that Jackpot, on the date of the First Closing, will purchase $14.9 million in aggregate principal amount of Series A Preferred Stock. The Purchase Agreement further specified that Jackpot would purchase an additional $5.1 million in aggregate principal amount of Series A Preferred Stock not later than ten days following approval under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "Second Closing"). Each share of Series A Preferred Stock is initially convertible into shares of Common Stock at a conversion price of $6.25 per share (the "Conversion Price"), and is subject to adjustment. On the six month anniversary of the date of the First Closing, the Conversion Price shall be adjusted, if lower, to 90% of the average daily closing price of the Issuer's Common Stock for the six-month period from the date of issuance, but in no event less than $2.00 per share. Furthermore, on April 12, 2001, Jackpot, at its sole discretion, shall have the option to require Issuer to redeem the Series A Preferred Stock for cash at 150% of the purchase price; provided that such right will expire if the Issuer consummates a change of control transaction with Jackpot on or prior to such date. In connection with the issuance of the Series A Preferred Stock, Issuer has issued to Jackpot warrants to purchase shares of Common Stock to equal 19.999% of the current outstanding shares of Common Stock less the amount of shares issuable upon the conversion of the Series A Preferred Stock. The exercise price of the warrants shall be $7.25 per share, payable, at the option of Jackpot, in cash or warrant shares; provided such payment shall only be payable in cash to the extent that the Issuer shall have in effect a valid registration statement. The exercise price is subject to adjustment under certain circumstances. The warrants shall be exercisable at any time until October 12, 2005. Jackpot intends to discuss a possible second step transaction with the Issuer; the nature, form and scope of which has not been presently determined and which may range from Jackpot increasing its investment in the Issuer in an undetermined amount to proposing a merger transaction with the Issuer. No assurance can be given that Jackpot will ever make such a proposal and Jackpot reserves the right to sell, assign and otherwise dispose of its interest in the securities of the Issuer. In connection with the transaction Jackpot agreed that until April 12, 2001 without the prior consent of the Board of Directors of the Issuer (excluding any member appointed by the holders of the Series A Preferred Stock), it would not, alone or through or with any other person or entity, in any manner: (i) acquire any additional direct or indirect interest in any securities of the Issuer; (ii) solicit, make, or in any way participate in, directly or indirectly, any "solicitation" of "proxies" (as such terms are used in the proxy rules of the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act")) from the Issuer's stockholders, become a "participant" in any "election contest" (as such terms are defined or used in Rule 14A-11 under the Exchange Act) with respect to the Issuer's Board of Directors, solicit or execute any written consent in lieu of a meeting of holders of voting securities except to support the nominees for directors of the Issuer's Board of Directors or call or seek to have called any meeting of the Issuer's stockholders of the other party or seek to advise or influence in any manner whatever any person or entity with respect to the Issuer; (iii) make any short sales, enter into any hedging, derivative or similar transactions regarding the Issuer's securities; or (iv) publicly announce an intention to do any of the actions restricted or prohibited under clauses (i) through (iii) above. In addition, on October 12, 2000 Jackpot entered into a Loan and Forbearance Agreement with Michael Donahue, Chairman of the Issuer, pursuant to which Jackpot agreed to purchase from Salomon Smith Barney ("SSB") a loan from SSB to Mr. Donahue. The loan is secured by 4,270,406 shares of Common Stock. Pursuant to a Call/Participation Agreement Donahue agreed that Jackpot would share in the profit on a portion of the stock securing the loan once certain conditions, including the repayment of the loan, were met. Mr. Donahue has sole power to vote and dispose of such shares. However, Mr Donahue has agreed that for so long as the loan is outstanding, given the highly leveraged nature of the loan, he would, prior to any vote of the stockholders of Issuer, consult with Jackpot and obtain Jackpot's view with respect to such vote. He also agreed that in the event the Board of Directors of Issuer approves a merger of Jackpot with InterWorld Corporation on or before April 10, 2001, Mr. Donahue will execute an appropriate voting agreement pursuant to which he will agree to vote his stock in favor of such merger. Except as set forth above or in this Item 4, and Item 5 below, Jackpot has not formulated any plans or proposals which would result in: (i) the acquisition by any person of additional securities of the Issuer or the disposition of securities of the Issuer, (ii) an extraordinary corporate transaction involving the Issuer or any of its subsidiaries, (iii) a sale or transfer of a material amount of the assets of the Issuer or any of its subsidiaries, (iv) any change in the present board of directors (other than the designation of two additional board members by Jackpot as a result of its purchase of the Series A Preferred Stock) or management of the Issuer, (v) any material change in the Issuer's capitalization or dividend policy, (vi) any other material change in the Issuer's business or corporate structure, (vii) any change in the Issuer's charter or bylaws or other instrument corresponding thereto or other action which may impede the acquisition of control of the Issuer by any person, (viii) causing a class of the Issuer's securities to be deregistered or delisted, (ix) a class of equity securities of the Issuer becoming eligible for termination of registration or (x) any action similar to any of those enumerated above. EX-99 4 0004.txt EXHIBIT 99.3 LOAN ASSUMPTION AND FORBEARANCE AGREEMENT THIS LOAN ASSUMPTION AND FORBEARANCE AGREEMENT (this "Agreement") is made and entered into as of October 12, 2000 by and between MICHAEL DONAHUE, an individual having an address at 395 Hudson Street, 6th Floor, New York, New York 10014 ("Borrower") and JACKPOT ENTERPRISES, INC., a Nevada corporation (the "Lender"). WITNESSETH: ___________ WHEREAS, Borrower is a party to a Loan Agreement, dated October 13, 1999 (the "Loan Agreement), between Salomon Smith Barney Inc. ("SSB") and Borrower, pursuant to which SSB agreed to loan (the "Loan") Donahue, on a demand basis, up to U.S.$14 million. WHEREAS, as of the date hereof $12,445,500, remains outstanding under the Loan. WHEREAS, the Loan is presently secured by 4,270,406 shares of common stock of InterWorld Corporation (the "Stock Collateral") owned of record and beneficially by the Borrower, which security interest has been perfected by SSB by virtue of SSB's physical possession. WHEREAS, subject to the terms and conditions hereof, the Lender has agreed to assume the Loan from SSB and to not call a demand under the Loan; NOW, THEREFORE, in consideration of the mutual representations, warranties, covenants and agreements herein contained, the sufficiency of which is hereby acknowledged, the parties hereto represent and agree as follows: 1. Definitions. For purposes of this Agreement the following capitalized terms shall have the meanings set forth below: 1.1 "Additional Collateral" shall have the meaning set forth in Section 3.2 of this Agreement. 1.2 "Business Day" shall mean any day on which commercial banks are not authorized or required to close in New York, New York. 1.3 "Collateral" shall mean the Stock Collateral and the Additional Collateral. 1.4" Contractual Obligation" of any Person shall mean, any indenture, note, security, deed of trust, mortgage, security agreement, lease, guaranty, instrument, contract, agreement or other form of obligation or undertaking to which such Person is a party or by which such Person or any of its property is bound. 1.5 "Default" shall mean any event or circumstance not yet constituting an Event of Default but which, with the giving of any notice or the lapse of any period of time or both, would become an Event of Default. 1.6 "Event of Default" shall have the meaning set forth in Section 7.1 of this Agreement. 1.7 "Governmental Authority" shall mean any domestic or foreign national, state or local government, any political subdivision thereof, any department, agency, authority or bureau of any of the foregoing, or any other entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. 1.8 "Governmental Rule" shall mean any law, rule, regulation, ordinance, order, code interpretation, judgment, decree, directive, guidelines, policy or similar form of decision of any Governmental Authority. 1.9 "Indebtedness" of any Person shall mean and include the aggregate amount of, without duplication (a) all obligations of such Person for borrowed money, (b) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (c) all obligations of such Person to pay the deferred purchase price of property or services (other than accounts payable incurred in the ordinary course of business determined in accordance with generally accepted accounting principles), (d) all obligations under capital leases of such Person, (e) all obligations or liabilities of others secured by alien on any asset of such Person, whether or not such obligation or liability is assumed, (f) all guaranties of such Person of the obligations of another Person;(g) all obligations created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even if the rights and remedies of the seller or lender under such agreement upon an event of default are limited to repossession or sale of such property), (h) net exposure under any interest rate swap, currency swap, forward, cap, floor or other similar contract that is not entered to in connection with a bona fide hedging operation that provides offsetting benefits to such Person, which agreements shall be marked to market on a current basis, (i) all reimbursement and other payment obligations, contingent or otherwise, in respect of letters of credit. 1.10 "Lien" shall mean, with respect to any property, any security interest, mortgage, pledge, lien, claim, charge or other encumbrance in, of, or on such property or the income therefrom, including, without limitation, the interest of a vendor or lessor under a conditional sale agreement, capital lease or other title retention agreement, or any agreement to provide any of the foregoing, and the filing of any financing statement or similar instrument under the Uniform Commercial Code or comparable law of any jurisdiction. 1.11 "Loan" shall have the meaning set forth in the preamble of this Agreement. 1.12 "Obligations" shall mean and include all loans, advances, debts, liabilities, and obligations, owed by Borrower to Lender of every kind and description (whether or not evidenced by any note or instrument and whether or not for the payment of money), now existing or hereafter arising under or pursuant to the terms of this Agreement or the other Operative Documents, including, without limitation, all interest, fees, charges, expenses, attorneys' fees and costs and accountants' fees and costs chargeable to and payable by Debtor hereunder and thereunder, in each case, whether direct or indirect, absolute or contingent, due or to become due, and whether or not arising after the commencement of a proceeding under Title 11 of the United States Code (11 U.S.C. Section 101 et seq.), as amended from time to time (including post-petition interest) and whether or not allowed or allowable as a claim in any such proceeding. 1.13 "Operative Documents" shall mean, collectively, this Agreement and the other documents executed in connection herewith. 1.14 "Permitted Liens" shall mean and include: (a) Liens for taxes or other Governmental Charges not at the time delinquent or thereafter payable without penalty or being contested in good faith, provided provision is made to the reasonable satisfaction of Lender for the eventual payment thereof if subsequently found payable; (b) Liens of carriers, warehousemen, mechanics, material men, vendors, and landlords incurred in the ordinary course of business for sums not overdue or being contested in good faith, provided provision is made to the reasonable satisfaction of Lender for the eventual payment thereof if subsequently found payable; and (c) Liens in favor of Lender. 1.15 "Person" shall mean and include an individual, a partnership, a corporation (including a business trust), a joint stock company, a limited liability company, an unincorporated association, a joint venture or other entity or a Governmental Authority. 1.16 "Requirement of Law" applicable to any Person shall mean (a) the articles or certificate of incorporation, bylaws or other governing documents of such Person, (b) any Governmental Rule applicable to such Person, (c) any license, permit, approval or other authorization granted by any Governmental Authority to or for the benefit of such Person and (d) any judgment, decision or determination of any Governmental Authority or arbitrator, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. 2. Loans; Interest. Lender will assume the Loan from SSB and pay SSB an amount equal to the amount outstanding under the Loan on the date hereof. Lender and Borrower hereby agree that the Loan Agreement is amended and restated in its entirety as provided herein. Interest on the Loan shall accrue at an annual rate equal to 8%, from the date of this Agreement, and be added to the outstanding principal amount at the end of each calendar quarter commencing December 31, 2000 (an "Interest Accrual Date"). 3. Security Interests. 3.1 Continued Security Interest. Borrower acknowledges that Lender shall succeed to SSB's security interest under the Loan Agreement with respect to the Stock Collateral. Borrower further acknowledges that Lender shall undertake to make all necessary filings with state and federal agencies in order to protect such security interest. 3.2 Grant of Additional Security Interest. As additional collateral security for the Obligations, Borrower hereby grants to Lender a continuing security interest in and to the real property of the Borrower listed on Schedule I (the "Additional Collateral"). Borrower shall promptly execute an appropriate mortgage with respect to the Additional Collateral and shall pay the expenses for the filing of such. Borrower agrees to execute any other document reasonable requested by the Lender to perfect its security interest in the collateral. Borrower shall not incur additional indebtedness or further encumber the real property set forth on Schedule II. Nothing contained in this section, however shall give rise to any obligation, or create any security interest, that would constitute a default, or a basis for default, under any existing mortgage or loan to which Borrower is directly or indirectly a party. To the extent that the grant of any additional security interest hereunder requires the Borrower to obtain the consents of any lender, the Borrower shall not be obligated to grant such additional security interest unless and until such consent is obtained. Borrower shall use reasonable efforts to obtain such consents. 3.3 Liabilities Unconditional. Borrower is and shall remain absolutely and unconditionally liable for the performance of its obligations under the Operative Documents, including without limitation any deficiency by reason of the failure of the Collateral to satisfy all amounts due Lender under the Loan or pursuant to any other Operative Document. 4. Representations and Agreements of Borrower. Borrower represents to Lender as follows, and Borrower agrees that the following representations will continue to be true, and that Borrower will comply with all of the following agreements throughout the term of this Agreement: 4.1 Enforceability. Each Operative Document executed, or to be executed, by Borrower has been, or will be, duly executed and delivered by Borrower and constitutes, or will constitute, a legal, valid and binding obligation of Borrower, enforceable against Borrower in accordance with its terms. 4.2 Non-Contravention. To the best of Borrower's knowledge and belief, the execution and delivery by Borrower of the Operative Documents executed by Borrower and the performance and consummation of the transactions contemplated thereby do not and will not (i) violate any Requirement of Law applicable to Borrower; (ii) violate any provision of, or result in the breach or the acceleration of, or entitle any other Person to accelerate (whether after the giving of notice or lapse of time or both), any Contractual Obligation of Borrower; or (iii) result in the creation or imposition of any Lien upon any property, asset or revenue of Borrower (except such Liens as may be created in favor of Lender pursuant to this Agreement or the other Operative Documents). 4.3 Approvals. Broker knows of no consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Authority or other Person (including, without limitation, the shareholders of any Person) required in connection with the execution and delivery of the Operative Documents executed by Borrower and the performance and consummation of the transactions contemplated thereby, other than those which may be required by existing lenders.. 4.4 Name: Places of Residence The name of Borrower set forth in this Agreement is his correct name. The addresses set forth on Schedule II are all of each of the Borrowers residential addresses. Borrower will give Lender at least 15 days prior written notice before locating any of the Additional Collateral at any other location. 4.5 Litigation. No actions (including, without limitation, derivative actions), suits, proceedings or investigations are pending or, to the knowledge of Borrower, threatened against Borrower or Borrower's Subsidiaries at law or in equity in any court or before any other Governmental Authority which if adversely determined (i) could reasonably be expected (alone or in the aggregate) to result in a judgement of $100,000 or more or (ii) seeks to enjoin, either directly or indirectly, the execution, delivery or performance by Borrower of the Operative Documents or the transactions contemplated thereby. 4.6 Title. Borrower has good and marketable title to all Collateral, free and clear of all Liens, other than Permitted Liens. Each item of Additional Collateral constitutes real property. 4.7 Collateral. Lender has and will at all times continue to have a first-priority perfected security interest in all of the Collateral. Borrower will immediately advise Lender in writing of any material loss or damage to any of the Additional Collateral listed on Schedule I hereto. 4.8 Taxes: Compliance with Law. Borrower has filed, and will file, when due, all tax returns and reports required by applicable law, and Borrower has paid, and will pay, when due, all taxes, assessments, deposits and contributions now or in the future owed by Borrower. Borrower has complied, and will comply, in all material respects, with all applicable tax laws, rules and regulations. 4.9 Insurance. Borrower will at all times adequately insure all of the Additional Collateral and name Lender as an additional insured thereon. 4.10 Indebtedness. Borrower has set forth all of his indebtedness in excess of $50,000 on Schedule III hereto. 5. No Call on Demand Note; Prepayment Obligations. Except as set for in this Section 5, or unless an Event of Default has occurred the Lender will not demand payment under the Loan until October 11, 2003; which date shall be reduced to October 11, 2001; if on or before April 11, 2001 InterWorld Corporation does not effect a merger transaction with Lender. Notwithstanding the foregoing, and only for so long as any balance shall remain outstanding on the Loan, Borrower shall be required to make the following payments of principal under the Note in order to reduce any outstanding balance remaining under the Loan: (a) Upon the sale of any of the Stock Collateral (which sale or sales the Borrower may effectuate at his sole discretion), all Net Proceeds (defined below) shall be paid to Lender (b) Upon the sale of any of the Additional Collateral, all Net Proceeds shall be paid to Lender; other than payment due to any taxing authority. Commencing October 11, 2001 the Borrower shall make principal payments of at least $500,000 on or before the date of each interest Accrual Date commencing December 31, 2001. If for any period of ten (10) consecutive trading days the closing price of the Stock Collateral is greater than $20.00 (subject to adjustment for stock splits, stock dividends or the like), then the Borrower shall make principal payments of $4,000,000 on or before the date of each Interest Accrual Date thereafter. "Net Proceeds" shall mean the gross amount received from such sale less any sales commissions less any income taxes applicable to such sales. 6. Call Agreement. As consideration for the purchase of the Loan and the forbearance described herein, Borrower shall enter into a call agreement with the Lender in the form attached hereto as Exhibit A. 7. Voting. For so long as the Loan shall be outstanding, Borrower agrees that due to the highly leveraged nature of the Loan, prior to any vote of the stockholders of Interworld Corporation he shall consult with Lender and obtain Lender's view with respect to such vote. In the event the Board of Directors of InterWorld Corporation approves a merger of the Lender with InterWorld Corporation on or before April 10, 2001, Borrower will execute an appropriate voting agreement pursuant to which he will agree to vote his stock in favor of such merger. 8. Events of Default 8.1 Events of Default and Remedies. The occurrence of any of the following events shall constitute an "Event of Default" under this Agreement: (a) Any material representation, statement, report or certificate given to Lender by Borrower, now or in the future, is untrue or misleading in a material respect; or (b) Borrower fails to comply with the payments due under Section 2 above; or (c) Borrower fails to pay when due any Loan or any interest thereon or any other monetary Obligation; or (d) appointment of a receiver, trustee or custodian, for all or any part of the property of, assignment for the benefit of creditors by, or the commencement of any proceeding by or against Borrower under any reorganization, bankruptcy, insolvency, law or statute of any jurisdiction, now or in the future in effect; or (e) Borrower leaves his position with InterWorld Corporation for any reason; or (f) the for any period of ten (10) consecutive trading days the closing price of the Stock Collateral is less than $2.00 (subject to adjustment for stock splits, stock dividends or the like); or Borrower fails to vote his shares of the Stock Collateral in compliance with Section 7 herein. If an Event of Default occurs, Lender, shall have the right to accelerate and declare all of the Obligations to be immediately due and payable and exercise all rights and remedies recorded by applicable law, except in the case of (f) wherein no acceleration may be made until the expiration of a ten (10) Business Day grace period, and except further in the case of (a) of (c) Lender must give Borrower written notice of any such Event of Default whereupon Borrower shall have ten (10) Business Days to cure such Event of Default. 8.2 Rights of Lender upon Default. Upon the occurrence or existence of any Event of Default for which notice has been provided and no timely cure made, and at any time thereafter during the continuance of such Event of Default, Lender may, by written notice to Borrower, declare all outstanding Obligations payable by Borrower hereunder to be immediately due and payable without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived, anything contained herein or in the Notes to the contrary notwithstanding. Upon the occurrence or existence of any uncured Event of Default described in Section 8.1, immediately and without further notice, all outstanding Obligations payable by Borrower hereunder shall automatically become immediately due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived, anything contained herein or in the Notes to the contrary notwithstanding. 8.3 Rights Regarding Collateral. Borrower agrees that when any uncured Event of Default has occurred and is continuing after any applicable cure or grace period, Lender shall have the rights, options, duties and remedies of a secured party as permitted by law and, in addition to and without limiting the foregoing, Lender may exercise any one or more or all, and in any order, of the remedies herein set forth, including the following: (a) Lender, personally or by agents or attorneys, shall have the right (subject to compliance with any applicable mandatory legal requirements) to require Borrower to assemble the Additional Collateral and make it available to Lender at a place to be designated by Lender located within the State of New York, or to take immediate possession of the Additional Collateral, or any portion thereof, and for that purpose may pursue the same wherever it may be found, and may enter any premises of Borrower, with or without notice, demand, process of law or legal procedure, to the extent permitted by applicable law, and search for, take possession of, remove, keep and store the same, or use and operate or lease the same until sold; (b) Lender may, if at the time such action may be lawful and always subject to compliance with any mandatory legal requirements, either with or without taking possession and either before or after taking possession, without instituting any legal proceedings whatsoever, having first given notice of such sale by registered or certified mail to Borrower once at least ten (10) days prior to the date of such sale, and having first given any other notice which may be required by law, sell and dispose of the Additional Collateral, or any part thereof, at a private sale or at public auction, to the highest bidder, in one lot as an entirety or in separate lots, and either for cash or on credit and on such terms as Lender may determine, and at any place (whether or not it be the location of the Additional Collateral or any part thereof) designated in the notice referred to above. To the extent permitted by applicable law, any such sale or sales may be adjourned from time to time by announcement at the time and place appointed for such sale or sales, or for any such adjourned sale or sales, without further published notice, and Borrower, Lender or the holder or holders of the Note, or of any interest therein, may bid and become the purchaser at any such sale; and (c) Lender may proceed to protect and enforce this Agreement and the other Operative Documents by suit or suits or proceedings in equity, at law or in bankruptcy, and whether for the specific performance of any covenant or agreement herein contained or in execution or aid of any power herein granted; or for foreclosure hereunder, or for the appointment of a receiver or receivers for any real property security or any part thereof, or for the recovery of judgment for the Obligations or for the enforcement of any other proper, legal or equitable remedy available under applicable law. 8.4 Waiver by Borrower. Upon the occurrence of an uncured Event of Default, to the extent permitted by law, Borrower covenants that it will not at any time insist upon or plead, or in any manner whatsoever claim or take any benefit or advantage of, any stay or extension law now or at any time hereafter in force, nor claim, take nor insist upon any benefit or advantage of or from any law now or hereafter in force providing for the valuation or appraisement of the Additional Collateral or any part thereof prior to any sale or sales thereof to be made pursuant to any provision herein contained, or to the decree, judgment or order of any court of competent jurisdiction; nor, after such sale or sales, claim or exercise any right under any statute now or hereafter made or enacted by any state or otherwise to redeem the property so sold or any part thereof, and, to the full extent legally permitted, except as to rights expressly provided herein, hereby expressly waives for itself and on behalf of each and every Person, except decree or judgment creditors of Borrower, acquiring any interest in or title to the Additional Collateral or any part thereof subsequent to the date of this Agreement, all benefit and advantage of any such law or laws, and covenants that it will not invoke or utilize any such law or laws or otherwise hinder, delay or impede the execution of any power herein granted and delegated to Lender, but will suffer and permit the execution of every such power as though no such power, law or laws had been made or enacted. 8.5 Effect of Sale. Any sale, whether under any power of sale available to Lender or by virtue of judicial proceedings, shall operate to divest all right, title, interest, claim and demand whatsoever, either at law or in equity, of Borrower in and to the property sold, and shall be a perpetual bar, both at law and in equity, against Borrower, its successors and assigns, and against any and all persons claiming the property sold or any part thereof under, by or through Borrower, its successors or assigns. 8.6 Application of Collateral Proceeds. The proceeds and/or avails of the Additional Collateral, or any part thereof, and the proceeds and the avails of any remedy hereunder (as well as any other amounts of any kind held by Lender at the time of, or received by Lender after, the occurrence of an uncured Event of Default hereunder) shall be paid to and applied as follows: (a) First, to the payment of reasonable costs and expenses, including all amounts expended to preserve the value of the Additional Collateral, of foreclosure or suit, if any, and of such sale and the exercise of any other rights or remedies, and of all proper fees, expenses, liability and advances, including reasonable legal expenses and attorneys' fees, incurred or made hereunder by Lender; (b) Second, to the payment to Lender of the amount then owing or unpaid on the Note, and in case such proceeds shall be insufficient to pay in full the whole amount so due, owing or unpaid upon the Note, then first, to the unpaid interest thereon, and second, to unpaid principal thereof; such application to be made upon presentation of the Note, and the notation thereon of the payment, if partially paid, or the surrender and cancellation thereof, if fully paid; (c) Third, to the payment of other amounts then payable to Lender under any of the Operative Documents; and (d) Fourth, to the payment of the surplus, if any, to Borrower, his successors and assigns, or to whomsoever may be lawfully entitled to receive the same. 8.7 Reinstatement of Rights. If Lender shall have proceeded to enforce any right under this Agreement or any other Operative Document by foreclosure, sale, entry or otherwise, and such proceedings shall have been discontinued or abandoned for any reason or shall have been determined adversely, then and in every such case (unless otherwise ordered by a court of competent jurisdiction), Lender shall be restored to its former position and rights hereunder with respect to the property subject to the security interest created under this Agreement. 9. Preservation of Additional Collateral by Lender. Should Borrower fail or refuse to make any payment, perform or observe any other covenant, condition or obligation, or take any other action which Borrower is obligated under any Operative Document to make, perform, observe, take or do at the time or in the manner provided in any Operative Document, then at Lender's sole and absolute discretion, without notice to or demand upon Borrower and without releasing Borrower from any obligation, covenant or condition in any Operative Document, Lender may make, perform, observe, take or do the same in such manner and to such extent as Lender may deem necessary to protect its security interest in or the value of the Additional Collateral, and Borrower shall be liable to Lender for all costs and expenses incurred by Lender in connection therewith. 10. Miscellaneous. 10.1 Modifications, Amendments or Waivers. The provisions of any Operative Document may be modified, amended or waived only by a written instrument signed by the parties thereto. 10.2 No Implied Waivers; Cumulative Remedies; Writing Required. No delay or failure of Lender in exercising any right, power or remedy hereunder shall affect or operate as a waiver thereof; nor shall any single or partial exercise thereof or any abandonment or discontinuance of steps to enforce such a right, power or remedy preclude any further exercise thereof or of any other right, power or remedy. The rights and remedies hereunder of Lender are cumulative and not exclusive of any rights or remedies which it would otherwise have. Any waiver, permit, consent or approval of any kind or character on the part of Lender of any breach or default under this Agreement or any such waiver of any provision or condition of this Agreement must be in writing and shall be effective only in the specified instance and to the extent specifically set forth in such writing. 10.3 Expenses; Indemnification. Borrower agrees upon demand to pay or reimburse Lender for all liabilities, obligations and out-of-pocket expenses, including reasonable fees and expenses of counsel for Lender, from time to time arising in connection with the enforcement or collection of sums due under the Operative Documents. Borrower shall indemnify, reimburse and hold Lender and its permitted assigns, each of Lender's or its permitted assigns' partners, and each of their respective successors, assigns, agents, officers, directors, shareholders, servants, agents and employees harmless from and against all liabilities, losses, damages, actions, suits, demands, claims of any kind and nature (including claims relating to environmental discharge, cleanup or compliance), all costs and expenses whatsoever to the extent they may be incurred or suffered by such indemnified party in connection therewith(including reasonable attorneys' fees and expenses), fines, penalties (and other charges of applicable governmental authorities), licensing fees relating to any item of Collateral, damage to or loss of use of property (including consequential or special damages to third parties or damages to Borrower's property), or bodily injury to or death of any person (including any agent or employee of Borrower) (each, a "Claim"), directly or indirectly relating to or arising out of the use of the proceeds of the Loan, including acquisition, use, ownership, operation, possession, control, storage, return or condition of any item of Equipment constituting Collateral (regardless of whether such item of Equipment is at the time in the possession of Borrower), the falsity of any representation or warranty of Borrower or Borrower's failure to comply with the terms of this Agreement or any other Operative Document during the Term. The foregoing indemnity shall cover, without limitation, (i) any Claim in connection with a design or other defect (latent or patent) in any item of Equipment constituting Collateral, (ii) any Claim for infringement of any patent, copyright, trademark or other intellectual property right, (iii) any Claim resulting from the presence on or under or the escape, seepage, leakage, spillage, discharge, emission or release of any Hazardous Materials from any item of Equipment financed by a Loan or constituting Collateral, including any Claims asserted or arising under any Environmental Law, or (iv) any Claim for negligence or strict or absolute liability in tort; provided, however, that Borrower shall not indemnify Lender for any liability incurred by Lender as a direct and sole result of Lender's gross negligence or willful misconduct. Such indemnities shall continue in full force and effect, notwithstanding the expiration or termination of this Agreement. Upon Lender's written demand, Borrower shall assume and diligently conduct, at its sole cost and expense, the entire defense of Lender and its permitted assigns, each of Lender's or its permitted assigns' partners, and each of their respective successors, assigns, agents, officers, directors, shareholders, servants, agents and employees against any indemnified Claim described in this Section 9.3. Borrower shall not settle or compromise any Claim against or involving Lender without first obtaining Lender's written consent thereto, which consent shall not be unreasonably withheld. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS AGREEMENT OR ANYWHERE ELSE, BORROWER AGREES THAT IT SHALL NOT SEEK FROM LENDER UNDER ANY THEORY OF LIABILITY (INCLUDING ANY THEORY IN TORTS), ANY SPECIAL, INDIRECT, CONSEQUENTIAL OR PUNITIVE DAMAGES. 10.4 Notices; Payments. All notices and other communications given to or made upon any party hereto in connection with this Agreement shall be in writing (including telexed, telecopied or telegraphic communication) and mailed (by certified or registered mail), telexed, telegraphed, telecopied or delivered to the respective parties, as follows: Borrower: 395 Hudson Street, 6th Floor, New York, New York 10014, with a copy to Hale & Dorr, 405 Lexington Avenue, New York, New York 10174, Attention: Peter MacDonald; Lender c/o J Net Partners LLC: 498 Seventh Avenue, New York, New York 10021, Attention: Keith Meister, with a copy to Greenberg Traurig, LLP, 200 Park Avenue, New York, New York 10166, Attention: Alan I. Annex, Esq. or in accordance with any subsequent written direction from either party to the other. All such notices and other communications shall, except as otherwise expressly herein provided, be effective when received; or in the case of delivery by messenger or overnight delivery service, when left at the appropriate address. 10.5 Severability. If any provision of any Operative Document is held invalid or unenforceable to any extent or in any application, the remainder of such Operative Document and all other Operative Documents, or the application of such provision to different Persons or circumstances or in different jurisdictions, shall not be affected thereby. 10.6 Survival. All representations, warranties, covenants and agreements of Borrower contained herein or made in writing in connection herewith shall survive the execution and delivery of the Operative Documents and the granting of security. 10.7 Governing Law. This Agreement, the other Operative Documents and the rights and obligations of the parties hereto and thereto together with matters arising in connection therewith, shall be governed by and construed and enforced in accordance with the laws of the State of New York. Any action to enforce this Agreement against Borrower may be brought in New York or, with regard to Collateral, may also be brought wherever such Collateral is located. 10.8 Successors and Assigns. This Agreement and the other Operative Documents shall be binding upon and inure to the benefit of Lender, all future holders of the Note, Borrower and their respective successors and permitted assigns, except that Borrower may not assign or transfer its rights hereunder or thereunder or any interest herein or therein without the prior written consent of Lender. 10.9 Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which, when so executed and delivered, shall be an original, but all such counterparts shall together constitute one and the same instrument. 10.10 Further Assurances. Borrower will, at its own expense, from time to time do, execute, acknowledge and deliver all and every further acts, deeds, conveyances, transfers and assurances, and all financing and continuation statements and similar notices, reasonably necessary or proper for the perfection of the security interest being herein provided for in the Collateral, whether now owned or hereafter acquired. 10.11 Power of Attorney in Respect of the Collateral. Borrower does hereby irrevocably appoint Lender (which appointment is coupled with an interest), the true and lawful attorney-in-fact of Borrower with full power of substitution, for it and in its name (a) to perform (but Lender shall not be obligated to and shall incur no liability to Borrower or any third party for failure to perform)any act which Borrower is obligated by this Agreement to perform, (b) to ask, demand, collect, receive, receipt for, sue for, compound and give acquittance for any and all rents, issues, profits, avails, distributions, income, payment draws and other sums in which a security interest is granted under Section 3.1with full power to settle, adjust or compromise any claim thereunder as fully as if Lender were Borrower itself, (c) to receive payment of and to endorse the name of Borrower to any items of Additional Collateral (including checks, drafts and other orders for the payment of money) that come into Lender's possession or under Lender's control, (d) to make all demands, consents and waivers, or take any other action with respect to, the Additional Collateral, (e) in Lender's discretion, to file any claim or take any other action or institute proceedings, either in its own name or in the name of Borrower or otherwise, which Lender may reasonably deem necessary or appropriate to protect and preserve the right, title and interest of Lender in and to the Additional Collateral, and (f) to otherwise act with respect thereto as though Lender were the outright owner of the Additional Collateral; provided, however, that the power of attorney herein granted shall be exercisable only upon the occurrence and during the continuation of an Event of Default unless in Lender's reasonable opinion immediate action is necessary to preserve or protect the Additional Collateral. Borrower agrees to reimburse Lender upon demand for all reasonable costs and expenses, including attorneys' fees and expenses, which Lender may incur while acting as Borrower's attorney in fact hereunder, all of which costs and expenses are included within the Obligations. 10.12 Entire Agreement. This Agreement and each of the other Operative Documents, taken together, constitute and contain the entire agreement of Borrower and Lender and supersede any and all prior agreements, negotiations, correspondence, understandings and communications among the parties, whether written or oral, respecting the subject matter hereof. Borrower: /s/ Michael J. Donahue ________________________________ MICHAEL J. DONAHUE Lender: JACKPOT ENTERPRISES, INC. By: /s/ Mark W. Hobbs _____________________ Name: Mark W. Hobbs Title: President SCHEDULE I Farm 13659 South 52nd Place Wellington, FL 33414 SCHEDULE II Home 1000 North Lake Way Palm Beach, FL 33480 SCHEDULE III 1999 Tax $2 million 2000 Tax $1 million 5 million - Bank of America 2.8 million - Citibank EX-99 5 0005.txt EXHIBIT 99.4 CALL/PROFIT PARTICIPATION AGREEMENT This agreement (the "Agreement") is made as of the 12th day of October, 2000, by and between Michael J. Donahue ("Donahue") and Jackpot Enterprises, Inc. ("JEI"). WHEREAS, Salomon Smith Barney Inc. ("SSB") is a party to a Loan Agreement, dated October 13, 1999 (the "Loan Agreement), between SSB and Donahue, pursuant to which SSB agreed to loan (the "Loan") Donahue, on a demand basis, up to U.S. $14 million. WHEREAS, as of the date hereof $12,445,500, remains outstanding under the Loan. WHEREAS, the Loan is presently secured by 4,270,406 shares of common stock of InterWorld Corporation (the "Stock Collateral") owned of record and beneficially by Donahue, which security interest has been perfected by SSB by virtue of SSB's physical possession of the Stock Collateral. WHEREAS, pursuant to a Loan Assumption and Forbearance Agreement dated as of the date hereof (the "Loan Assumption Agreement"), JEI and Donahue have agreed, subject to the terms thereof that JEI would acquire the Loan from SSB in consideration for the payment of the full amount outstanding under the Loan as of the date hereof. NOW, THEREFORE, for good and valuable consideration and intending to be legally bound hereby, the parties agree as follows: 1. The recitals are hereby made part of and incorporated into this Agreement. 2. Capitalized terms used herein but not otherwise defined shall have the meanings set forth in the Loan Assumption Agreement. 3. Prior to the exercise of the Call Option (as defined below), upon the sale by Donahue of any of the shares of the Stock Collateral, Donahue shall retain such proceeds and use the proceeds in accordance with the Loan Assumption Agreement. So long as this applies the proceeds as provided for in the Loan Assumption Agreement, there shall be no restriction on Donahue's ability to sell shares of the Stock Collateral. Once the Loan is repaid in full Donahue shall pay JEI 1/2 of the total amount received upon the sale, after the payment of any commissions, of any of the remaining Stock Collateral. 4. Commencing upon the date of the repayment of the Loan in full and ending on October 11, 2003, JEI may exercise a single call (the "Call Option") pursuant to which Donahue shall sell to JEI and JEI shall acquire from Donahue one half of the amount of the then outstanding Stock Collateral for an aggregate consideration of $1.00 In the event JEI enters into an agreement to effect a merger with InterWorld Corporation it may at its option distribute such Call Option to its stockholders prior to such merger. 5. This Agreement shall for all purposes be governed by and construed in accordance with the laws of the State of New York. 6. If any provision of this Agreement or the application of any provision hereof to any person or circumstances is held invalid, the remainder of this Agreement and the application of such provision to other persons or circumstances shall not be affected unless the provision held invalid shall substantially impair the benefits of the remaining portions of this Agreement. 6. In the event that a dispute arises in connection with this Agreement the parties agree that the reasonable costs, expenses, and attorneys fees incurred by the prevailing party shall be paid by the other party to the dispute. 7. The parties agree that the Call Option has nominal value. 8. All notices, offers, acceptances and consents (collectively, "Communications") provided for in this Agreement shall be in writing and shall be given to a party at the address set forth below or at such other address as such party may hereafter specify in writing: If to Donahue: C/o InterWorld Corporation 395 Hudson, Street New York, New York 10014 with a copy to: Hale & Dorr 405 Lexington Avenue New York, New York 10174 Attention: Peter MacDonald, Esq. If to JEI: Jackpot Enterprises, Inc. c/o J Net Partners LLC 498 Seventh Avenue New York, New York 10021 Attention: Keith Meister with a copy to: Greenberg Traurig, LLP 200 Park Avenue New York, New York 10166 Attention: Alan I. Annex Such Communication shall be mailed by United States registered or certified mail, return receipt requested, postage prepaid, deposited in a United States post office or a depository for the receipt of mail regularly maintained by the post office or (ii) sent by Federal Express or other nationally recognized courier that regularly provides proof of delivery, or (iii) personally delivered. If mailed by United States mail, then such Communication shall be deemed to have been received by the addressee on the third day following the date of such mailing. If delivered by Federal Express or other courier service, or if personally delivered, then such Communication shall be deemed to have been given upon the date of such delivery. 9. This Agreement may be signed in counterparts, all of which when taken together shall constitute one original instrument. IN WITNESS WHEREOF, JEI and Donahue have executed this Agreement as of the date first written above. Michael J. Donahue Jackpot Enterpises, Inc. By: Name: Title: EX-99 6 0006.txt EXHIBIT 99.5 EXHIBIT A TO SECURITIES PURCHASE AGREEMENT CERTIFICATE OF DESIGNATIONS, PREFERENCES, AND RIGHTS of SERIES A CONVERTIBLE PREFERRED STOCK of INTERWORLD CORPORATION (Pursuant to Section 151 of the Delaware General Corporation Law) INTERWORLD CORPORATION, a corporation organized and existing under the Delaware General Corporation Law (the "Corporation"), hereby certifies that the following resolutions were adopted by the Board of Directors of the Corporation on October __, 2000 pursuant to authority of the Board of Directors as required by Section 151 of the Delaware General Corporation Law ("DGCL"): RESOLVED, that pursuant to the authority granted to and vested in the Board of Directors of this Corporation (the "Board of Directors" or the "Board") in accordance with the provisions of its Certificate of Incorporation, the Board of Directors hereby authorizes a series of the Corporation's previously authorized Preferred Stock, par value $.01 per share (the "Preferred Stock"), and hereby states the designation and number of shares, and fixes the relative rights, preferences, privileges, powers and restrictions thereof as follows: Series A Convertible Preferred Stock: I. DESIGNATION AND AMOUNT ______________________ The designation of this series, which consists of Five Million Five Hundred Thousand (5,500,000) shares of 8% PIK Preferred Stock, is Series A Convertible Preferred Stock (the "Series A Preferred Stock") and the stated value shall be Six Dollars and Twenty-Five Cents ($6.25) per share (the "Stated Value"). II. RANK ____ The Series A Preferred Stock shall rank (i) prior to the Corporation's common stock, par value $.01 per share (the "Common Stock"); (ii) prior to any class or series of capital stock of the Corporation hereafter created (unless, with the consent of the holders of Series A Preferred Stock obtained in accordance with Article IX hereof, such class or series of capital stock specifically, by its terms, ranks senior to or pari passu with the ____ _____ Series A Preferred Stock) (collectively, with the Common Stock, "Junior Securities"); (iii) pari passu with any class or series of ____ _____ capital stock of the Corporation hereafter created (with the consent of the holders of Series A Preferred Stock obtained in accordance with Article IX hereof) specifically ranking, by its terms, on parity with the Series A Preferred Stock ("Pari Passu Securities"); and (iv) ____ _____ junior to any class or series of capital stock of the Corporation hereafter created (with the consent of the holders of Series A Preferred Stock obtained in accordance with Article IX hereof) specifically ranking, by its terms, senior to the Series A Preferred Stock ("Senior Securities"), in each case as to distribution of assets upon liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary. III. DIVIDENDS _________ The holders of the Series A Preferred Stock shall be entitled to receive dividends on a quarterly basis at a rate of 8% per annum per share, payable out of any assets or funds legally available therefor. Such dividends shall be cumulative and shall accrue, whether or not declared by the Board of Directors, but shall be payable only when, as and if declared by the Board of Directors. If, at any time, the Market Price (as defined in Article VI) of the Common Stock falls below the Floor Price (as defined in Article VI), then the rate will increase to 12% for such time as the Market Price remains below the Floor Price. Accrued but unpaid dividends will be paid upon conversion of the Series A Preferred Stock. The Corporation shall have the option to pay such dividends on the Series A Preferred Stock in additional Series A Preferred Stock or in cash; provided that the dividends which accrued during each quarterly period shall be payable in cash only if the Corporation provides written notice to each holder of Series A Preferred Stock at least five days prior to the relevant dividend payment date. In no event, so long as any Series A Preferred Stock shall remain outstanding, shall any dividend whatsoever be declared or paid upon, nor shall any distribution be made upon, any Junior Securities, nor shall any shares of Junior Securities be purchased or redeemed by the Corporation nor shall any moneys be paid to or made available for a sinking fund for the purchase or redemption of any Junior Securities (other than a distribution of Junior Securities), without, in each such case, the written consent of the holders of a majority of the outstanding shares of Series A Preferred Stock, voting together as a class. IV. LIQUIDATION PREFERENCE ______________________ A. Liquidation Event. If the Corporation shall commence a voluntary case under the Federal bankruptcy laws or any other applicable Federal or State bankruptcy, insolvency or similar law, or consent to the entry of an order for relief in an involuntary case under any law or to the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other similar official) of the Corporation or of any substantial part of its property, or make an assignment for the benefit of its creditors, or admit in writing its inability to pay its debts generally as they become due, or if a decree or order for relief in respect of the Corporation shall be entered by a court having jurisdiction in the premises in an involuntary case under the Federal bankruptcy laws or any other applicable Federal or state bankruptcy, insolvency or similar law resulting in the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other similar official) of the Corporation or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and any such decree or order shall be unstayed and in effect for a period of sixty (60) consecutive days and, on account of any such event, the Corporation shall liquidate, dissolve or wind up, or if the Corporation shall otherwise liquidate, dissolve or wind up (each such event being considered a "Liquidation Event"), no distribution shall be made to the holders of any shares of capital stock of the Corporation (other than Senior Securities) upon liquidation, dissolution or winding up unless prior thereto, the holders of shares of Series A Preferred Stock, subject to Article VI, shall have received the Liquidation Preference (as defined in Article IV.C) with respect to each share. If upon the occurrence of a Liquidation Event, the assets and funds available for distribution among the holders of the Series A Preferred Stock and holders of Pari Passu ____ _____ Securities (including any dividends or distribution paid on any Pari ____ Passu Securities after the date of filing of this Certificate of _____ Designation) shall be insufficient to permit the payment to such holders of the preferential amounts payable thereon, then the entire assets and funds of the Corporation legally available for distribution to the Series A Preferred Stock and the Pari Passu ____ _____ Securities shall be distributed ratably among such shares in proportion to the ratio that the Liquidation Preference payable on each such share bears to the aggregate liquidation preference payable on all such shares. Any prior dividends or distributions made after the date of filing of this Certificate of Designation shall offset, dollar for dollar, the amount payable to the class or series to which such distribution was made. B. Certain Acts Deemed Special Liquidation Event. At the option of any holder of Series A Preferred Stock, a Change of Control Transaction (as defined in Article VI) shall either: (i) be deemed to be a liquidation, dissolution or winding up of the Corporation pursuant to which the Corporation shall, at the option of the holders of the Series A Preferred Stock, be required to distribute upon consummation of and as a condition to such transaction an amount equal to 150% of the Liquidation Preference with respect to each outstanding share of Series A Preferred Stock or (ii) be treated pursuant to Article VI.C(b) hereof. C. Liquidation Preference. For purposes hereof, the _______________________ "Liquidation Preference" with respect to each share of the Series A Preferred Stock shall mean an amount equal to the sum of (i) the Stated Value thereof plus (ii) an amount (the "Premium Amount") equal to all accrued but unpaid dividends as set forth in Article III for the period beginning on the date of issuance of the Series A Preferred Stock (the "Issue Date") and ending on the date of final distribution to the holder thereof (prorated for any portion of such period), plus (iii) all Conversion Default Payments (as defined in Article VI.E below), Delivery Default Payments (as defined in Article VI.D below) and any other amounts owed to such holder pursuant to Section 2(c) of the Registration Rights Agreement. The liquidation preference with respect to any Pari Passu Securities shall be as set forth in the Certificate of Designation filed in respect thereof. V. REDEMPTION __________ A. Mandatory Redemption. If any of the following _____________________ events (each, a "Mandatory Redemption Event") shall occur: (i) The Corporation (a) fails to issue shares of Common Stock to the holders of Series A Preferred Stock upon exercise by the holders of their conversion rights in accordance with the terms of this Certificate of Designation if such failure is solely as a result of the circumstances governed by the second paragraph of Article VI.E below and the Corporation is using its best efforts to authorize a sufficient number of shares of Common Stock as soon as practicable, (b) fails to transfer or to cause its transfer agent to transfer (electronically or in certificated form) any certificate for shares of Common Stock issued to the holders upon conversion of the Series A Preferred Stock as and when required by this Certificate of Designation or the Registration Rights Agreement, dated as of October __, 2000, by and among the Corporation and the other signatories thereto (the "Registration Rights Agreement") or (c) fails to remove any restrictive legend (or to withdraw any stop transfer instructions in respect thereof) on any certificate or any shares of Common Stock issued to the holders of Series A Preferred Stock upon conversion of the Series A Preferred Stock as and when required by this Certificate of Designation, the Securities Purchase Agreement dated as of October 12, 2000, by and between the Corporation and the other signatories thereto (the "Purchase Agreement") or the Registration Rights Agreement. (ii) If on or before April 12, 2001 the Corporation has not entered into a Change of Control Transaction with the holder of a majority of the outstanding shares of Series A Preferred Stock; (iii) The corporation or any subsidiary of the Corporation shall make an assignment for the benefit of creditors, or apply for or consent to the appointment of a receiver or trustee for it or for all or substantially all of its property or business; or such a receiver or trustee shall otherwise be appointed; or (iv) Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Corporation or any subsidiary of the Corporation; then, upon the occurrence and during the continuation of any Mandatory Redemption Event specified in subparagraphs (i) or (ii), at the option of the holders of at least 50% of the then outstanding shares of Series A Preferred Stock exercisable by delivery of written notice (the "Mandatory Redemption Notice") to the Corporation of such Mandatory Redemption Event, or upon the occurrence of any Mandatory Redemption Event specified in subparagraph (iii) or (iv), the then outstanding shares of Series A Preferred Stock shall become immediately redeemable and the Corporation shall purchase each holder's outstanding shares of Series A Preferred Stock for an amount per share equal to the sum of (a) 150% multiplied by the Stated Value per share of the shares to be redeemed plus (b) an amount equal to 150% multiplied by the Premium Amount per share of the shares being redeemed plus (c) all Conversion Default Payments (as defined in Article VI.E below) payable with respect to each such share, Delivery Default Payments (as defined in Article VI.D below) payable with respect to each such share and any other amounts owed with respect to each such share to such holder pursuant to Section 2(c) of the Registration Rights Agreement (the "Mandatory Redemption Amount"). B. Trading Market Redemption. If the Series A __________________________ Preferred Stock ceases to be convertible by any holder as a result of the limitations described in Article VI.A(b) below (a "Trading Market Redemption Event"), and the Corporation has not, prior to, or within forty-five (45) days of, the date that such Trading Market Redemption Event arises, (i) obtained the Stockholder Approval (as defined in Article VI.A(b)) or (ii) eliminated any prohibitions under applicable law or the rules or regulations of any stock exchange, interdealer quotation system or other self-regulatory organization with jurisdiction over the Corporation or any of its securities on the Corporation's ability to issue shares of Common Stock in excess of the Maximum Share Amount (as defined in Article VI.A(b)), then the Corporation shall be obligated to redeem immediately all of the then outstanding Series A Preferred Stock, in accordance with this Article V.B. An irrevocable redemption notice (the "Trading Market Redemption Notice") shall be delivered promptly to the holders of Series A Preferred Stock at their registered address appearing on the records of the Corporation and shall state (i) that the Maximum Share Amount (as defined in Article VI.A) has been issued upon conversion of the Series A Preferred Stock, (ii) that the Corporation is obligated to redeem all of the outstanding Series A Preferred Stock and (iii) a specified date (the "Mandatory Redemption Date"), which shall be a date within five (5) business days of the earlier of (a) the date of the Trading Market Redemption Notice or (b) the date on which the holders of the Series A Preferred Stock notify the Corporation of the occurrence of a Trading Market Redemption Event. On the Mandatory Redemption Date, the Corporation shall make a cash payment for each share required to be redeemed equal to the greater of (i) the Mandatory Redemption Amount (as defined in Article V.A above) per share required to be redeemed or (ii) 150% of the Market Price (as defined in Article VI) on the day a Trading Market Redemption Notice is given. C. Failure to Pay Redemption Amounts. In the case of a __________________________________ Mandatory Redemption Event, if the Corporation fails to pay the Mandatory Redemption Amount, within five (5) business days of written notice that such amount is due and payable, then (assuming there are sufficient authorized shares) in addition to all other available remedies, each holder of Series A Preferred Stock shall have the right at any time, so long as the Mandatory Redemption Event continues, to require the Corporation, upon written notice, to immediately issue (in accordance with and subject to the terms of Article VI below), in lieu of the Mandatory Redemption Amount, the number of shares of Common Stock of the Corporation equal to such applicable redemption amount divided by the lesser of the Conversion Price, the Floor Price, or 65% of the Market Price (as defined below), as chosen in the sole discretion of the holder of Series A Preferred Stock, in effect from the date of the Mandatory Redemption Event until the date such holder elects to exercise its rights pursuant to this Article V.E. In addition the Corporation shall immediately nominate and recommend a slate of members of its Board of Directors a majority of which would constitute persons selected by the holders of a majority of the outstanding Series A Preferred Stock and shall call a meeting of its stockholders to approve the election of such slate. VI. CONVERSION AT THE OPTION OF THE HOLDER ______________________________________ A. Optional Conversion ___________________ (a) Conversion Amount. Each holder of shares of __________________ Series A Preferred Stock may, at its option at any time and from time to time, upon surrender of the certificates therefor, convert any or all of its shares of Series A Preferred Stock into Common Stock as set forth below (an "Optional Conversion"). Each share of Series A Preferred Stock shall be convertible into such number of fully paid and nonassessable shares of Common Stock as such Common Stock exists on the Issue Date, or any other shares of capital stock or other securities of the Corporation into which such Common Stock is thereafter changed or reclassified, as is determined by dividing (1) the sum of (a) the total Stated Value per share to be converted plus (b) the Premium Amount per share to be converted by (2) the then effective Conversion Price (as defined below); provided, however, ________ _______ that in no event (other than pursuant to the Automatic Conversion (as defined in Article VII)) shall a holder of shares of Series A Preferred Stock be entitled to convert any such shares in excess of that number of shares upon conversion of which the sum of (x) the number of shares of Common Stock beneficially owned by all of the holders as a result of the ownership of the Series A Preferred Stock and the Warrants (as defined below) and any Common Stock issued or issuable thereunder (other than shares of Common Stock which may be deemed beneficially owned through the ownership of the unconverted portion of the shares of Series A Preferred Stock or the unexercised or unconverted portion of any other securities of the Corporation (including, without limitation, the warrants issued by the Corporation pursuant to the Purchase Agreement (the "Warrants")) subject to a limitation on conversion or exercise analogous to the limitations contained herein) and (y) the number of shares of Common Stock issuable upon the conversion of the shares of Series A Preferred Stock with respect to which the determination of this proviso is being made, would result in beneficial ownership by all of such holders and such holders' affiliates of more than 19.999% of the outstanding shares of Common Stock. For purposes of the proviso to the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and Regulation 13D-G thereunder, except as otherwise provided in clause (x) of such proviso. (b) Trading Market Limitation. Unless the __________________________ Corporation either (i) is permitted by the applicable rules and regulations of the principal securities market on which the Common Stock is listed or traded or (ii) has obtained approval of the issuance of the Common Stock upon conversion of or otherwise pursuant to the Series A Preferred Stock in accordance with applicable law and the rules and regulations of any stock exchange, interdealer quotation system or other self-regulatory organization with jurisdiction over the Corporation or any of its securities (the "Stockholder Approval"), in no event shall the total number of shares of Common Stock issued upon conversion of or otherwise pursuant to the Series A Preferred Stock (including any shares of capital stock or rights to acquire shares of capital stock issued by the Corporation which are aggregated or integrated with the Common Stock issued or issuable upon conversion of or otherwise pursuant to the Series A Preferred Stock for purposes of any such rule or regulation) exceed the maximum number of shares of Common Stock that the Corporation can so issue pursuant to any rule of the principal United States securities market on which the Common Stock trades (including Rule 4460 of the Nasdaq or any successor rule)(the "Maximum Share Amount") which, as of the Issue Date, shall be 5,866,905 (19.999% of the total shares of Common Stock outstanding on the Issue Date), subject to equitable adjustments from time to time for stock splits, stock dividends, combinations, capital reorganizations and similar events relating to the Common Stock occurring after the Issue Date. With respect to each holder of Series A Preferred Stock, the Maximum Share Amount shall refer to such holder's pro rata share thereof ___ ____ determined in accordance with Article X below. In the event that the sum of (x) the aggregate number of shares of Common Stock actually issued upon conversion of or otherwise pursuant to the outstanding Series A Preferred Stock plus (y) the aggregate number of shares of Common Stock that remain issuable upon conversion of or otherwise pursuant to the Series A Preferred Stock at the then effective Conversion Price, represents at least one hundred percent (100%) of the Maximum Share Amount (the "Triggering Event"), the Corporation will use its best efforts to seek and obtain Stockholder Approval (or obtain such other relief as will allow conversions hereunder in excess of the Maximum Share Amount) as soon as practicable following the Triggering Event. B. Conversion Price. The "Conversion Price" as _________________ used herein, shall initially be $6.25 per share and shall be subject to adjustment as set forth in this Certificate. All such adjustments shall be successive. On the six month anniversary of the Issue Date, the Conversion Price shall be adjusted, if lower, to 90% of the average Closing Price of the Common Stock for each Trading Day during the six month period from the date of issuance, but in no event shall such adjustment reduce the Conversion Price below Two Dollars ($2.00) (subject to adjustment for stock splits, stock dividends and similar events prior to the end of such period (the "Floor Price). C. Adjustments to Conversion Price. The ________________________________ Conversion Price shall be subject to the following provisions: (a) Adjustment to Conversion Price Due to _____________________________________ Stock Split, Stock Dividend, Etc. If at any time when Series A _________________________________ Preferred Stock is issued and outstanding, the number of outstanding shares of Common Stock is increased or decreased by a stock split, stock dividend, combination, reclassification, rights offering below the Trading Price (as defined below) to all holders of Common Stock or other similar event, then the Conversion Price shall be calculated giving appropriate effect to the stock split, stock dividend, combination, reclassification, rights offering below the Trading Price or other similar event. In such event, the Corporation shall notify the Transfer Agent of such change on or before the effective date thereof. "Trading Price," which shall be measured as of the record date in respect of the rights offering, means (i) the average of the last reported sale prices for the shares of Common Stock on Nasdaq as reported by Bloomberg, as applicable, for the five (5) Trading Days immediately preceding such date, or (ii) if Nasdaq is not the principal trading market for the shares of Common Stock, the average of the last reported sale prices on the principal trading market for the Common Stock during the same period as reported by Bloomberg, or (iii) if market value cannot be calculated as of such date on any of the foregoing bases, the Trading Price shall be the fair market value as reasonably determined in good faith by (a) the Board of Directors of the Corporation or, (b) at the option of a majority-in-interest of the holders of the outstanding Series A Preferred Stock by an independent investment bank of nationally recognized standing in the valuation of businesses similar to the business of the Corporation. (b) Adjustment Due to Merger, _________________________ Consolidation, Etc. If, at any time when Series A Preferred Stock is ___________________ issued and outstanding and prior to the conversion of all Series A Preferred Stock, there shall be any merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event, as a result of which shares of Common Stock of the Corporation shall be changed into the same or a different number of shares of another class or classes of stock or securities of the Corporation or another entity, or in case of any sale or conveyance of all or substantially all of the assets of the Corporation other than in connection with a plan of complete liquidation of the Corporation (each, a "Change of Control Transaction"), then the holders of Series A Preferred Stock shall thereafter have the right to receive upon conversion of the Series A Preferred Stock, upon the basis and upon the terms and conditions specified herein and in lieu of the shares of Common Stock immediately theretofore issuable upon conversion, such stock, securities or assets which the holders of Series A Preferred Stock would have been entitled to receive in such transaction had the Series A Preferred Stock been converted in full immediately prior to such transaction (without regard to any limitations on conversion contained herein), and in any such case appropriate provisions shall be made with respect to the rights and interests of the holders of Series A Preferred Stock to the end that the provisions hereof (including, without limitation, provisions for adjustment of the Conversion Price and of the number of shares of Common Stock issuable upon conversion of the Series A Preferred Stock) shall thereafter be applicable, as nearly as may be practicable in relation to any securities or assets thereafter deliverable upon the conversion of Series A Preferred Stock. The Corporation shall not effect any transaction described in this subsection (b) unless (a) it first gives, to the extent practical, thirty (30) days' prior written notice (but in any event at least fifteen (15) business days prior written notice) of the record date of the special meeting of stockholders to approve, or if there is no such record date, the date of consummation of, such Change of Control Transaction (during which time the holders of Series A Preferred Stock shall be entitled to convert the Series A Preferred Stock) and (b) the resulting successor or acquiring entity (if not the Corporation) and, if an entity different from the successor or acquiring entity, the entity whose capital stock or assets the holders of the Common Stock are entitled to receive as a result of such Change of Control Transaction, assumes by written instrument the obligations of this Certificate of Designation (including this subsection (b)); provided, if such Change of Control Transaction occurs prior to April 10, 2001, it shall at the option of the holder be a deemed Liquidation Event under Section IVB. The above provisions shall similarly apply to successive consolidations, mergers, sales, transfers or share exchanges. (c) Adjustment Due to Distribution. _______________________________ Subject to Article III, if the Corporation shall declare or make any distribution of its assets (or rights to acquire its assets) to holders of Common Stock as a dividend, stock repurchase, by way of return of capital or otherwise (including any dividend or distribution to the Corporation's shareholders in cash or shares (or rights to acquire shares) of capital stock of a subsidiary (i.e., a spin-off)) (a "Distribution"), then the holders of Series A Preferred Stock shall be entitled, upon any conversion of shares of Series A Preferred Stock after the date of record for determining shareholders entitled to such Distribution, to receive the amount of such assets which would have been payable to the holder with respect to the shares of Common Stock issuable upon such conversion had such holder been the holder of such shares of Common Stock on the record date for the determination of shareholders entitled to such Distribution. (d) Purchase Rights. Subject to Article ________________ III, if at any time when any Series A Preferred Stock is issued and outstanding, the Corporation issues any convertible securities or rights to purchase stock, warrants, securities or other property (the "Purchase Rights") pro rata to the record holders of any class of Common Stock, then the holders of Series A Preferred Stock will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such holder could have acquired if such holder had held the number of shares of Common Stock acquirable upon complete conversion of the Series A Preferred Stock (without regard to any limitations on conversion contained herein) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights. (e) Antidilution Provisions. The ________________________ Conversion Price shall be subject to adjustment from time to time as provided below: (i) Adjustment of Conversion Price. _______________________________ If and whenever on or after the Issue Date, the Corporation is deemed to have issued or sold, any shares of Common Stock for no consideration or for a consideration per share (before deduction of reasonable expenses or commissions or underwriting discounts or allowances in connection therewith) less than the Market Price (a "Dilutive Issuance"), then immediately upon the Dilutive Issuance, the Conversion Price will be reduced to a price determined by multiplying the Conversion Price in effect immediately prior to the Dilutive Issuance by a fraction, (I) the numerator of which is an amount equal to the sum of (x) the number of shares of Common Stock actually outstanding immediately prior to the Dilutive Issuance, plus (y) the quotient of the aggregate consideration, calculated as set forth in subsection (ii) below, received by the Corporation upon such Dilutive Issuance divided by the Market Price in effect immediately prior to the Dilutive Issuance, and (II) the denominator of which is the total number of shares of Common Stock Deemed Outstanding (as defined below) immediately prior to such Dilutive Issuance. (ii) Effect on Conversion Price of _____________________________ Certain Events. For purposes of determining the adjusted Conversion _______________ Price, the following will be applicable: (A) Issuance of Rights or _____________________ Options. If the Corporation in any manner issues or grants any ________ warrants, rights or options, whether or not immediately exercisable, to subscribe for or to purchase Common Stock or other securities convertible into or exchangeable for Common Stock ("Convertible Securities") (such warrants, rights and options to purchase Common Stock or Convertible Securities are hereinafter referred to as "Options") and the price per share for which Common Stock is issuable upon the exercise of such Options is less than the Market Price, then the Conversion Price shall be adjusted in the manner set forth in subsection (e)(i) above. For purposes of the preceding sentence, the "price per share for which Common Stock is issuable upon the exercise of such Options" is determined by dividing (i) the total amount, if any, received or receivable by the Corporation as consideration for the issuance or granting of all such Options, plus the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the exercise of all such Options, plus, in the case of Convertible Securities issuable upon the exercise of such Options, the minimum aggregate amount of additional consideration payable upon the conversion or exchange thereof at the time such Convertible Securities first become convertible or exchangeable, by (ii) the number of shares of Common Stock issuable upon the exercise of all such Options (assuming full conversion of Convertible Securities, if applicable). No further adjustment to the Conversion Price will be made upon the actual issuance of such Common Stock upon the exercise of such Options or upon the conversion or exchange of Convertible Securities issuable upon exercise of such Options. (B) Issuance of ___________ Convertible Securities. If the Corporation in any manner issues or _______________________ sells any Convertible Securities, whether or not immediately convertible (other than where the same are issuable upon the exercise of Options) and the price per share for which Common Stock is issuable upon such conversion or exchange is less than the Market Price, then the Conversion Price shall be adjusted in the manner set forth in subsection (e)(i) above. For the purposes of the preceding sentence, the "price per share for which Common Stock is issuable upon such conversion or exchange" is determined by dividing (i) the total amount, if any, received or receivable by the Corporation as consideration for the issuance or sale of all such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the conversion or exchange thereof at the time such Convertible Securities first become convertible or exchangeable, by (ii) the number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities. No further adjustment to the Conversion Price will be made upon the actual issuance of such Common Stock upon conversion or exchange of such Convertible Securities. (C) Change in Option ________________ Price or Conversion Rate. If there is a change at any time in (i) _________________________ the amount of additional consideration payable to the Corporation upon the exercise of any Options; (ii) the amount of additional consideration, if any, payable to the Corporation upon the conversion or exchange of any Convertible Securities; or (iii) the rate at which any Convertible Securities are convertible into or exchangeable for Common Stock (other than under or by reason of provisions designed to protect against dilution or to automatically adjust for stock splits, stock dividends, combinations, reclassifications or other similar events), the Conversion Price in effect at the time of such change will be readjusted to the Conversion Price which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold. (D) Treatment of Expired ____________________ Options and Unexercised Convertible Securities. If, in any case, the _______________________________________________ total number of shares of Common Stock issuable upon exercise of any Option or upon conversion or exchange of any Convertible Securities is not, in fact, issued and the rights to exercise such Option or to convert or exchange such Convertible Securities shall have expired or terminated, the Conversion Price then in effect will be readjusted to the Conversion Price which would have been in effect at the time of such expiration or termination had such Option or Convertible Securities, to the extent outstanding immediately prior to such expiration or termination (other than in respect of the actual number of shares of Common Stock issued upon exercise or conversion thereof), never been issued. (E) Calculation of ______________ Consideration Received. If any Common Stock, Options or Convertible _______________________ Securities are issued, granted or sold for cash, the consideration received therefor will be the amount received by the Corporation therefor, before deduction of reasonable commissions, underwriting discounts or allowances or other reasonable expenses paid or incurred by the Corporation in connection with such issuance, grant or sale. In case any Common Stock, Options or Convertible Securities are issued or sold for a consideration part or all of which shall be other than cash, the amount of the consideration other than cash received by the Corporation will be the fair value of such consideration, except where such consideration consists of securities, in which case the amount of consideration received by the Corporation will be the Market Price thereof as of the date of receipt. In case any Common Stock, Options or Convertible Securities are issued in connection with any acquisition, merger or consolidation in which the Corporation is the surviving corporation, the amount of consideration therefor will be deemed to be the fair value of such portion of the net assets and business of the non- Surviving corporation as is attributable to such Common Stock, Options or Convertible Securities, as the case may be. The fair value of any consideration other than cash or securities will be determined in good faith by the Board of Directors of the Corporation. (F) Exceptions to _____________ Adjustment of Conversion Price. No adjustment to the Conversion _______________________________ Price will be made (i) upon the exercise of any warrants, options or convertible securities granted, issued and outstanding on the Issue Date, including the Series A Preferred Stock or the Warrants; (ii) upon the payment of any dividends on the Series A Preferred Stock and any conversions thereof; or (iii) upon the grant or exercise of any stock or options which may hereafter be granted or exercised under any employee benefit plan of the Corporation now existing or to be implemented in the future, so long as in the case of any grant in the future the issuance of such stock or options is approved by a majority of the independent members of the Board of Directors of the Corporation or a majority of the members of a committee of independent directors established for such purpose. (iii) Certain Definitions. ____________________ (A) As used in this certificate, "Common Stock" includes the Common Stock, par value $.01 _____________ per share, and any additional class of stock of the Corporation having no preference as to dividends or distributions on liquidation, provided that the shares issuable pursuant to the Series A Preferred Stock shall include only shares of Common Stock, par value $.01 per share, in respect of which the Series A Preferred Stock is convertible, or shares resulting from any subdivision or combination of such Common Stock, or in the case of any reorganization, reclassification, consolidation, merger, or sale of the character referred to above hereof, the stock or other securities or property provided for in such paragraph. (B) "Closing Price ," as of any date, (i) means the reported closing price for the shares of Common Stock on Nasdaq as reported by Bloomberg Financial Markets or an equivalent reliable reporting service mutually acceptable to and hereafter designated by the holder and the Corporation ("Bloomberg"), or (ii) if Nasdaq is not the principal trading market for the shares of Common Stock, the average of the reported closing price on the principal trading market for the Common Stock during the same period as reported by Bloomberg, or (iii) if closing price cannot be calculated as of such date on any of the foregoing bases, the Closing Price shall be the fair market value as reasonably determined in good faith by (a) the Board of Directors of the Corporation or, at the option of a majority-in-interest of the holders of the Series A Preferred Stock, by (b) an independent investment bank of nationally recognized standing in the valuation of businesses similar to the business of the Corporation. The manner of determining the Closing Price of the Common Stock set forth in the foregoing definition shall apply with respect to any other security in respect of which a determination as to market value must be made hereunder. (C) "Market Price," ______________ as of any date, (i) means the average reported closing prices for the shares of Common Stock on Nasdaq for the five (5) Trading Days immediately preceding such date as reported by Bloomberg, or (ii) if Nasdaq is not the principal trading market for the shares of Common Stock, the average of the last reported closing prices on the principal trading market for the Common Stock during the same period as reported by Bloomberg, or (iii) if market value cannot be calculated as of such date on any of the foregoing bases, the Market Price shall be the fair market value as reasonably determined in good faith by (a) the Board of Directors of the Corporation or, at the option of a majority-in-interest of the holders of the Series A Preferred Stock, by (b) an independent investment bank of nationally recognized standing in the valuation of businesses similar to the business of the Corporation. The manner of determining the Market Price of the Common Stock set forth in the foregoing definition shall apply with respect to any other security in respect of which a determination as to market value must be made hereunder. (D) "Trading Day" shall mean any day on which the Common Stock is traded for any period on Nasdaq, or on the principal securities exchange or other securities market on which the Common Stock is then being traded. D. Mechanics of Conversion. In order to convert Series ________________________ A Preferred Stock into full shares of Common Stock, a holder of Series A Preferred Stock shall: (i) submit a copy of the fully executed notice of conversion in the form attached hereto as Exhibit _______ A ("Notice of Conversion") to the Corporation by facsimile dispatched _ prior to Midnight, New York City time (the "Conversion Notice Deadline") on the date specified therein as the Conversion Date (as defined in Article VI.D(d)) (or by other means resulting in, or reasonably expected to result in, notice to the Corporation on the Conversion Date) to the office of the Corporation or its designated Transfer Agent for the Series A Preferred Stock, which notice shall specify the number of shares of Series A Preferred Stock to be converted, the Conversion Price and a calculation of the number of shares of Common Stock issuable upon such conversion (together with a copy of the first page of each certificate to be converted); and (ii) surrender the original certificates representing the Series A Preferred Stock being converted (the "Preferred Stock Certificates"), duly endorsed, along with a copy of the Notice of Conversion to the office of the Corporation or the Transfer Agent for the Series A Preferred Stock as soon as practicable thereafter. The Corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such conversion, unless either the Preferred Stock Certificates are delivered to the Corporation or its Transfer Agent as provided above, or the holder notifies the Corporation or its Transfer Agent that such certificates have been lost, stolen or destroyed (subject to the requirements of subparagraph (a) below). In the case of a dispute as to the calculation of the Conversion Price, the Corporation shall promptly issue such number of shares of Common Stock that are not disputed in accordance with subparagraph (b) below. The Corporation shall submit the disputed calculations to its outside accountant via facsimile within two (2) business days of receipt of the Notice of Conversion. The accountant shall review the calculations and notify the Corporation and the holder of the results no later than 48 hours from the time it receives the disputed calculations. The accountant's calculation shall be deemed conclusive absent manifest error. (a) Lost or Stolen Certificates. Upon receipt ____________________________ by the Corporation of evidence of the loss, theft, destruction or mutilation of any Preferred Stock Certificates representing shares of Series A Preferred Stock, and (in the case of loss, theft or destruction) of indemnity reasonably satisfactory to the Corporation, and upon surrender and cancellation of the Preferred Stock Certificate(s), if mutilated, the Corporation shall execute and deliver new Preferred Stock Certificate(s) of like tenor and date. (b) Delivery of Common Stock Upon Conversion. _________________________________________ Upon the surrender of certificates as described above together with a Notice of Conversion, the Corporation shall issue and, within five (5) business days after such surrender (or, in the case of lost, stolen or destroyed certificates, after provision of agreement and indemnification pursuant to subparagraph (a) above) (the "Delivery Period"), deliver (or cause its Transfer Agent to so issue and deliver) in accordance with the terms hereof and the Purchase Agreement (including, without limitation, in accordance with the requirements of Section 2(g) of the Purchase Agreement) to or upon the order of the holder (i) that number of shares of Common Stock for the portion of the shares of Series A Preferred Stock converted as shall be determined in accordance herewith and (ii) a certificate representing the balance of the shares of Series A Preferred Stock not converted, if any. In addition to any other remedies available to the holder, including actual damages and/or equitable relief, the Corporation shall pay to a holder $1,000 per day in cash for each day beyond a two (2) day grace period following the Delivery Period that the Corporation fails to deliver Common Stock (a "Delivery Default") issuable upon surrender of shares of Series A Preferred Stock with a Notice of Conversion until such time as the Corporation has delivered all such Common Stock (the "Delivery Default Payments"). Such Delivery Default Payments shall be paid to such holder by the fifth day of the month following the month in which it has accrued. In lieu of delivering physical certificates representing the Common Stock issuable upon conversion, provided the Corporation's Transfer Agent is participating in the Depository Trust Company ("DTC") Fast Automated Securities Transfer ("FAST") program, upon request of the holder and its compliance with the provisions contained in Article VI.A and in this Article VI.D, the Corporation shall use its reasonable best efforts to cause its Transfer Agent to electronically transmit the Common Stock issuable upon conversion to the holder by crediting the account of holder's Prime Broker with DTC through its Deposit Withdrawal Agent Commission ("DWAC") system. The time periods for delivery and penalties described in the immediately preceding paragraph shall apply to the electronic transmittals described herein. (c) No Fractional Shares. If any conversion of _____________________ Series A Preferred Stock would result in a fractional share of Common Stock or the right to acquire a fractional share of Common Stock, such fractional share shall be disregarded and the number of shares of Common Stock issuable upon Conversion of the Series A Preferred Stock shall be rounded down to the next highest number of shares. (d) Conversion Date. The "Conversion Date" ________________ shall be the date specified in the Notice of Conversion, provided that the Notice of Conversion is submitted by facsimile (or by other means resulting in, or reasonably expected to result in, notice) to the Corporation or its Transfer Agent before 12:00 noon, New York City time, on the date so specified, otherwise the Conversion Date shall be the first business day after the date so specified on which the Notice of Conversion is actually received by the Corporation or its Transfer Agent. The person or persons entitled to receive the shares of Common Stock issuable upon conversion shall be treated for all purposes as the record holder or holders of such securities as of the Conversion Date and all rights with respect to the shares of Series A Preferred Stock surrendered shall forthwith terminate except the right to receive the shares of Common Stock or other securities or property issuable on such conversion and except that the holders preferential rights as a holder of Series A Preferred Stock shall survive to the extent the Corporation fails to deliver such securities. E. Reservation of Shares. A number of shares of the ______________________ authorized but unissued Common Stock sufficient to provide for the conversion of the Series A Preferred Stock outstanding (based on the Conversion Price then in effect) shall at all times be reserved by the Corporation, free from preemptive rights, for such conversion or exercise. As of the date of issuance of the Series A Preferred Stock, 20,000,000 authorized and unissued shares of Common Stock have been duly reserved for issuance upon conversion of the Series A Preferred Stock (the "Reserved Amount"). The Reserved Amount shall be increased from time to time in accordance with the Corporation's obligations pursuant to Section 4(h) of the Purchase Agreement. In addition, if the Corporation shall issue any securities or make any change in its capital structure which would change the number of shares of Common Stock into which each share of the Series A Preferred Stock shall be convertible, the Corporation shall at the same time also make proper provision so that thereafter there shall be a sufficient number of shares of Common Stock authorized and reserved, free from preemptive rights, for conversion of the outstanding Series A Preferred Stock. If at any time a holder of shares of Series A Preferred Stock submits a Notice of Conversion, and the Corporation does not have sufficient authorized but unissued shares of Common Stock available to effect such conversion in accordance with the provisions of this Article VI (a "Conversion Default"), subject to Article X, the Corporation shall issue to the holder all of the shares of Common Stock which are available to effect such conversion. The number of shares of Series A Preferred Stock included in the Notice of Conversion which exceeds the amount which is then convertible into available shares of Common Stock (the "Excess Amount") shall, notwithstanding anything to the contrary contained herein, not be convertible into Common Stock in accordance with the terms hereof until (and at the holder's option at any time after) the date additional shares of Common Stock are authorized by the Corporation to permit such conversion, at which time the Conversion Price in respect thereof shall be the lesser of (i) the Conversion Price on the Conversion Default Date (as defined below) and (ii) the Conversion Price on the Conversion Date elected by the holder in respect thereof. The Corporation shall use its reasonable best efforts to effect an increase in the authorized number of shares of Common Stock as soon as possible following the earlier of (i) such time that a holder of Series A Preferred Stock notifies the Corporation or that the Corporation otherwise becomes aware that there are or likely will be insufficient authorized and unissued shares to allow full conversion thereof and (ii) a Conversion Default. In addition, the Corporation shall pay to the holder payments ("Conversion Default Payments") for a Conversion Default in the amount of (a) .24 multiplied by (b) the sum of (x) the Stated Value of the shares held by such holder through the Authorization Date (as defined below) plus (y) the Premium Amount with respect to the Shares held by such holder through the Authorization Date, multiplied by (c) (N/365), where N equals the number of days from the day the holder submits a Notice of Conversion giving rise to a Conversion Default (the "Conversion Default Date") to the date (the "Authorization Date") that the Corporation authorizes a sufficient number of shares of Common Stock to effect conversion of the full number of shares of Series A Preferred Stock. The Corporation shall send notice to the holder of the authorization of additional shares of Common Stock, the Authorization Date and the amount of holder's accrued Conversion Default Payments. The accrued Conversion Default Payment for each calendar month shall be paid in cash or shall be convertible into Common Stock at the applicable Conversion Price, at the holder's option, as follows: (a) In the event the holder elects to take such payment in cash, cash payment shall be made to holder by the fifth day of the month following the month in which it has accrued; and (b) In the event the holder elects to take such payment in Common Stock, the holder may convert such payment amount into Common Stock at the Conversion Price (as in effect at the time of Conversion) at any time after the fifth day of the month following the month in which it has accrued in accordance with the terms of this Article VI (so long as there is then a sufficient number of authorized shares of Common Stock). The holder's election shall be made in writing to the Corporation at any time prior to 9:00 p.m., New York City Time, on the third (3rd) day of the month following the month in which Conversion Default payments have accrued. If no election is made, the holder shall be deemed to have elected to receive cash. Nothing herein shall limit the holder's right to pursue actual damages (to the extent in excess of the Conversion Default Payments) for the Corporation's failure to maintain a sufficient number of authorized shares of Common Stock, and each holder shall have the right to pursue all remedies available at law or in equity (including a decree of specific performance and/or injunctive relief). F. Notice of Conversion Price Adjustments. Upon the _______________________________________ occurrence of each adjustment or readjustment of the Conversion Price pursuant to this Article VI, the Corporation, at its expense, shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Series A Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of Series A Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustment or readjustment, (ii) the Conversion Price at the time in effect and (iii) the number of shares of Common Stock and the amount, if any, of other securities or property which at the time would be received upon conversion of a share of Series A Preferred Stock. G. Status as Stockholders. Upon submission of a Notice _______________________ of Conversion by a holder of Series A Preferred Stock, (i) the shares covered thereby (other than the shares, if any, which cannot be issued because their issuance would exceed such holder's allocated portion of the Reserved Amount or Maximum Share Amount) shall be deemed converted into shares of Common Stock and (ii) the holder's rights as a holder of such converted shares of Series A Preferred Stock shall cease and terminate, excepting only the right to receive certificates for such shares of Common Stock and to any remedies provided herein or otherwise available at law or in equity to such holder because of a failure by the Corporation to comply with the terms of this Certificate of Designation. Notwithstanding the foregoing, if a holder has not received certificates for all shares of Common Stock prior to the tenth (10th) business day after the expiration of the Delivery Period with respect to a conversion of shares of Series A Preferred Stock for any reason, then (unless the holder otherwise elects to retain its status as a holder of Common Stock by so notifying the Corporation) the holder shall regain the rights of a holder of such shares of Series A Preferred Stock with respect to such unconverted shares of Series A Preferred Stock and the Corporation shall, as soon as practicable, return such unconverted shares of Series A Preferred Stock to the holder or, if such shares of Series A Preferred Stock have not been surrendered, adjust its records to reflect that such shares of Series A Preferred Stock have not been converted. In all cases, the holder shall retain all of its rights and remedies (including, without limitation, (i) the right to receive Delivery Default Payments pursuant to Article VI.E to the extent required thereby for such Delivery Default and any subsequent Delivery Default and (ii) the right to have the Conversion Price with respect to subsequent conversions determined in accordance with Article VI.E.) for the Corporation's failure to convert the Series A Preferred Stock. VII. REDEMPTION OR CONVERSION AT MATURITY ____________________________________ So long as (i) all of the shares of Common Stock issuable upon conversion of all outstanding shares of Series A Preferred Stock are then (x) authorized and reserved for issuance, (y) registered for re-sale under the 1933 Act by the holders of the Series A Preferred Stock (or may otherwise be resold publicly without restriction) and (z) eligible to be traded on Nasdaq, the NYSE, the AMEX or Nasdaq SmallCap and (ii) there is not then a continuing Mandatory Redemption Event or Trading Market Redemption Event, each share of Series A Preferred Stock issued and outstanding on October 10, 2004 (the "Maturity Date"), shall be either (i) redeemed in cash by the Corporation for the Liquidation Preference or (ii) at the option of the holder, converted into shares of Common Stock on such date at a Conversion Price equal to the lesser of 85% of the Market Price or the Conversion Price as of the Maturity Date. After the initial Maturity Date, the Maturity Date shall be delayed by one (1) Trading Day for each Trading Day occurring prior thereto and prior to the full conversion of the Series A Preferred Stock that (i) any Registration Statement required to be filed and to be effective pursuant to the Registration Rights Agreement is not effective or sales of all of the Registrable Securities otherwise cannot be made thereunder during the Registration Period (as defined in the Registration Rights Agreement) (whether by reason of the Corporation's failure to properly supplement or amend the prospectus included therein in accordance with the terms of the Registration Rights Agreement or otherwise, including during any Allowed Delays (as defined in Section 3(f) of the Registration Rights Agreement)), (ii) any Mandatory Redemption Event or Trading Market Redemption Event exists, without regard to whether any cure periods shall have run or (iii) that the Corporation is in breach of any of its obligations pursuant to Section 4(h) of the Purchase Agreement. VIII VOTING RIGHTS _____________ The holders of the Series A Preferred Stock will vote on an as converted basis together with the shares of Common Stock, except as otherwise provided by the Delaware General Corporation Law ("DGCL"), in this Article VIII, and in Article IX below. For so long as at least 25% of the Series A Preferred Stock remains outstanding, the holders of the Series A Preferred Stock, voting together as a single class, shall be entitled to elect two (2) directors. Notwithstanding the above, the Corporation shall provide each holder of Series A Preferred Stock with prior notification of any meeting of the Corporation's shareholders (and copies of proxy materials and other information sent to shareholders). In the event of any taking by the Corporation of a record of its shareholders for the purpose of determining shareholders who are entitled to receive payment of any dividend or other distribution, any right to subscribe for, purchase or otherwise acquire (including by way of merger, consolidation or recapitalization) any share of any class or any other securities or property, or to receive any other right, or for the purpose of determining shareholders who are entitled to vote in connection with any proposed sale, lease or conveyance of all or substantially all of the assets of the Corporation, or any proposed liquidation, dissolution or winding up of the Corporation, the Corporation shall mail a notice to each holder, at least five (5) days prior to the record date specified therein (or fifteen (15) days prior to the consummation of the transaction or event, whichever is earlier), of the date on which any such record is to be taken for the purpose of such dividend, distribution, right or other event, and a brief statement regarding the amount and character of such dividend, distribution, right or other event to the extent known at such time. To the extent that under the DGCL the vote of the holders of the Series A Preferred Stock, voting separately as a class or series as applicable, is required to authorize a given action of the Corporation, the affirmative vote or consent of the holders of at least a majority of the shares of the Series A Preferred Stock represented at a duly held meeting at which a quorum is present or by written consent of a majority of the shares of Series A Preferred Stock (except as otherwise may be required under the DGCL) shall constitute the approval of such action by the class. To the extent that under the DGCL holders of the Series A Preferred Stock are entitled to vote on a matter with holders of Common Stock, voting together as one class, each share of Series A Preferred Stock shall be entitled to a number of votes equal to the number of shares of Common Stock into which it is then convertible using the record date for the taking of such vote of shareholders as the date as of which the Conversion Price is calculated. Holders of the Series A Preferred Stock shall be entitled to notice of all shareholder meetings or written consents (and copies of proxy materials and other information sent to shareholders) with respect to which they would be entitled to vote, which notice would be provided pursuant to the Corporation's bylaws and the DGCL. IX PROTECTIVE PROVISIONS _____________________ So long as shares of Series A Preferred Stock are outstanding, the Corporation shall not, without first obtaining the approval (by vote or written consent, as provided by the DGCL) of the holders of at least a majority of the then outstanding shares of Series A Preferred Stock: (a) alter, amend or repeal (whether by merger, consolidation or otherwise) the rights, preferences or privileges of the Series A Preferred Stock or any capital stock of the Corporation so as to affect adversely the Series A Preferred Stock; (b) create any new class or series of capital stock having a preference over the Series A Preferred Stock as to distribution of assets upon liquidation, dissolution or winding up of the Corporation (as previously defined in Article II hereof, "Senior Securities"); (c) create any new class or series of capital stock ranking pari passu with the Series A Preferred Stock as to ____ _____ distribution of assets upon liquidation, dissolution or winding up of the Corporation (as previously defined in Article II hereof, "Pari ____ Passu Securities"); _____ (d) increase the authorized number of shares of Series A Preferred Stock; (e) issue any Senior Securities or Pari Passu ____ _____ Securities; (f) increase the par value of the Common Stock, or (g) do any act or thing not authorized or contemplated by this Certificate of Designation which would result in taxation of the holders of shares of the Series A Preferred Stock under Section 305 of the Internal Revenue Code of 1986, as amended (or any comparable provision of the Internal Revenue Code as hereafter from time to time amended). X PRO RATA ALLOCATIONS ____________________ The Maximum Share Amount and the Reserved Amount (including any increases thereto) shall be allocated by the Corporation pro rata among the holders of Series A Preferred Stock based on the number of shares of Series A Preferred Stock issued to each holder. Each increase to the Maximum Share Amount and the Reserved Amount shall be allocated pro rata among the holders of Series A Preferred Stock based on the number of shares of Series A Preferred Stock held by each holder at the time of the increase in the Maximum Share Amount or Reserved Amount. In the event a holder shall sell or otherwise transfer any of such holder's shares of Series A Preferred Stock, each transferee shall be allocated a pro rata portion of such transferor's Maximum Share Amount and Reserved Amount. Any portion of the Maximum Share Amount or Reserved Amount which remains allocated to any person or entity which does not hold any Series A Preferred Stock shall be allocated to the remaining holders of shares of Series A Preferred Stock, pro rata based on the number of shares of Series A Preferred Stock then held by such holders. [REMAINDER OF PAGE LEFT BLANK INTENTIONALLY] IN WITNESS WHEREOF, this Certificate of Designation is executed on behalf of the Corporation this ___ day of October 2000. INTERWORLD CORPORATION By: Jeremy M. Davis, President and Chief Executive Officer EXHIBIT A NOTICE OF CONVERSION (To be Executed by the Registered Holder in order to Convert the Series A Preferred Stock) The undersigned hereby irrevocably elects to convert ______ shares of Series A Preferred Stock, represented by stock certificate No(s). __________ (the "Preferred Stock Certificates") into shares of common stock ("Common Stock") of INTERWORLD CORPORATION, a Delaware corporation (the "Corporation") according to the conditions of the Certificate of Designation of Series A Preferred Stock, as of the date written below. If securities are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates. No fee will be charged to the Holder for any conversion, except for transfer taxes, if any. A copy of each Preferred Stock Certificate is attached hereto (or evidence of loss, theft or destruction thereof). The undersigned hereby irrevocably elects to convert $___________ in Conversion Default Payments, $__________ in Delivery Default Payments and/or $___________ in payments pursuant to Section 2(c) of the Registration Rights Agreement at the Conversion Price set forth below. The Corporation shall electronically transmit the Common Stock issuable pursuant to this Notice of Conversion to the account of the undersigned or its nominee with DTC through its Deposit Withdrawal Agent Commission system ("DWAC Transfer"). _______________ Name of DTC Prime Broker:____________________________________ Account Number:______________________________________________ [ ] In lieu of receiving shares of Common Stock issuable pursuant to this Notice of Conversion by way of a DWAC Transfer, the undersigned hereby requests that the Corporation issue a certificate or certificates for the number of shares of Common Stock set forth above (which numbers are based on the Holder's calculation attached hereto) in the name(s) specified immediately below or, if additional space is necessary, on an attachment hereto: Name:________________________________________________________ Address:______________________________________________________ ______________________________________________________ The undersigned represents and warrants that all offers and sales by the undersigned of the securities issuable to the undersigned upon conversion of the Series A Preferred Stock shall be made pursuant to registration of the securities under the Securities Act of 1933, as amended (the "Act"), or pursuant to an exemption from registration under the Act. Date of Conversion:__________________________________________ Conversion Price:____________________________________________ Number of Shares of Common Stock to be Issued pursuant to: (i) Conversion of Series A Preferred Stock: __________________________________________ (ii) Conversion of Conversion Default Payments, Delivery Default Payments and/or payments pursuant to Section 2(c) of the Registration Rights Agreement: _____________________________________________________ Signature:___________________________________________ Name:________________________________________________ Address:_____________________________________________ _____________________________________________ *The Corporation is not required to issue shares of Common Stock until the original Series A Preferred Stock Certificate(s) (or evidence of loss, theft or destruction thereof) to be converted are received by the Corporation or its Transfer Agent. The Corporation shall issue and deliver shares of Common Stock to an overnight courier not later than two (2) business days following receipt of the original Preferred Stock Certificate(s) to be converted, and shall make payments pursuant to the Certificate of Designation for the number of business days such issuance and delivery is late. -----END PRIVACY-ENHANCED MESSAGE-----