-----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, OLG7FGSJE2Y24T21jo+h9c+GPgNQXFwkRFfrJSnB9IZKtnECGW0zvzqrQ94MlGiJ yoA7oFdoQO8cX3UNgwFIGw== 0000950115-99-001347.txt : 19991101 0000950115-99-001347.hdr.sgml : 19991101 ACCESSION NUMBER: 0000950115-99-001347 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 25 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19991028 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GLOBAL TECHNOLOGIES LTD CENTRAL INDEX KEY: 0000932021 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS MANUFACTURING INDUSTRIES [3990] IRS NUMBER: 113197148 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-25668 FILM NUMBER: 99736600 BUSINESS ADDRESS: STREET 1: 1811 CHESTNUT STREET STREET 2: SUITE 120 CITY: PHILADELPHIA STATE: PA ZIP: 19103 BUSINESS PHONE: 2159728191 MAIL ADDRESS: STREET 1: 1811 CHESTNUT STREET STREET 2: SUITE 120 CITY: PHILADELPHIA STATE: PA ZIP: 19103 10KSB 1 ANNUAL REPORT U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB -------------- (Mark One) [ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended [X] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from November 1, 1998 to June 30, 1999 Commission File No. 0-25668 GLOBAL TECHNOLOGIES, LTD. ---------------------------------------------- (Name of Small Business Issuer in Its Charter) DELAWARE 11-3197148 ------------------------------- ---------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 1811 Chestnut Street, Suite 120 Philadelphia, Pennsylvania 19103 ---------------------------------------- (Address of Principal Executive Offices) (215) 972-8191 ------------------------------------------------ (Issuer's Telephone Number, Including Area Code) Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Title of Each Class Name of Each Exchange on Which Registered - ----------------------------------------------- ----------------------------------------- Class A Common Stock, $0.01 par value per share Nasdaq National Market
Check whether the Issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K contained in this form, and no disclosure will be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] The Issuer's revenues for the Transition Period ended June 30, 1999 were $1,582,461. The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant on October 15, 1999 was approximately $17,666,160, based on the closing sales price of the Class A Common Stock on such date as reported by the Nasdaq National Market. The number of shares outstanding of the Registrant's Class A Common Stock, $0.01 par value, on October 15, 1999 was 6,114,217. Transitional Small Business Disclosure Format: Yes No X --- --- DOCUMENTS INCORPORATED BY REFERENCE None. GLOBAL TECHNOLOGIES, LTD. Transition Report on Form 10-KSB TABLE OF CONTENTS PAGE ---- PART I....................................................................... 1 ITEM 1 - DESCRIPTION OF BUSINESS......................................... 1 ITEM 2 - DESCRIPTION OF PROPERTY.........................................21 ITEM 3 - LEGAL PROCEEDINGS...............................................22 ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............24 PART II......................................................................24 ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........24 ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.......26 ITEM 7 - FINANCIAL STATEMENTS............................................43 ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........................................43 PART III.....................................................................43 ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT...............43 ITEM 10 - EXECUTIVE COMPENSATION..........................................45 ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..49 ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................51 ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K................................53 SIGNATURES...................................................................59 PART I ITEM 1 - DESCRIPTION OF BUSINESS The Company Global Technologies, Ltd., a Delaware corporation ("Global," and together with its subsidiaries, the "Company"), is the successor by merger to Interactive Flight Technologies, Inc., a Delaware corporation (see "Recent Events"), which in turn is the successor by merger to In-Flight Entertainment Services Corp., a New York corporation. In May 1998, former management of Global determined to exit the business of developing, assembling, installing and operating a computer-based in-flight entertainment network (the "Entertainment Network") which provided aircraft passengers with the opportunity to view movies, to play computer games and, in certain cases where permitted by applicable law, to gamble through an in-seat video touch screen. The Entertainment Network was capable of supporting interactive advertising, e-commerce and shopping. Global's only agreement for the Entertainment Network was with Swissair VKB ("Swissair"). Pursuant to the Swissair agreement, Global installed and maintained the Entertainment Network in 19 aircraft. On September 2, 1998, Swissair flight 111 crashed near Halifax, Nova Scotia and all passengers and crew were killed. To date, the causes of the accident have not been determined. The Entertainment Network had been installed on the aircraft which crashed. The crash has led to many lawsuits. See Item 3 - "Legal Proceedings" and Item 6 - "Management's Discussion and Analysis or Plan of Operation." On September 28, 1999, the Federal Aviation Administration issued an Airworthiness Directive that prohibits the installation of the Entertainment Network as it was configured on the type of aircraft which crashed. See "Recent Events - FAA Airworthiness Directive (No. 99-20-08)." For reasons unrelated to the Swissair crash, the former management and Board of Directors of Global resigned and the current Board of Directors was elected in September 1998. The current Directors of Global were reelected by the stockholders at the annual meeting on October 30, 1998. The new Board instated the current management team. At the beginning of the last fiscal year, Global's new management was evaluating whether its in-flight entertainment technology was adaptable to alternative markets and how to redeploy its capital to exploit technology-related business opportunities. Ultimately, the new management of Global developed a strategic plan to take advantage of the opportunities associated with Global's technologies and management resources. New management pursued a sale to or a strategic alliance with other entities in the travel and entertainment business to maximize the potential of the Entertainment Network and began to evaluate technology-related businesses that could build upon Global's core competencies, as well as other technology-related business opportunities. Consistent with this vision, through a series of acquisitions, investments and divestitures, Global reorganized itself as a diversified technology-based company. The subsidiaries and affiliates of the Company operate interactive entertainment, gaming, networking solutions, e-commerce, and telecommunications businesses. In connection with the reorganization, Global changed its fiscal year-end from October 31 to June 30. The Company's dry cleaning operation acquired by former management was sold during the Transition Period ended June 30, 1999. A graphical depiction of the Company's current corporate structure (including its affiliate companies) and a description of the Company's business is set forth below. The ownership percentages are as of October 15, 1999. IFT Lottoco, Inc., IFT Subco, Inc., IFT Investments and IFT Leasing Limited were all formed subsequent to June 30, 1999 and had no direct employees as of October 15, 1999. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 2
GLOBAL TECHNOLOGIES, LTD. (a Delaware corporation) | | - ------------------------------------------------------------------------------------------------------------------------------- 80% | 11.15%* | 100% | 100% | 100% | 100% | | | | | | | The Network U.S. Wireless IFT Holdings IFT Lottoco, IFT Subco, Interactive Connection, Corporation Limited Inc. Inc. Flight Inc. (a Delaware (a UK company) (a Delaware (a Delaware Technologies (a Georgia corporation) | corporation) corporation) (Gibraltar) Ltd. corporation) | | | (a Gibraltar | | | company) | | | | | 99%LP | 1%GP | 24.5% | | |_________________| | ___________________________|___________________________ | | 27.5% 100% | 100% | | | | | Inter Lotto(UK) IFT IFT Leasing IFT Donativos, Limited Management Limited Investments S.A. de C.V. (a UK company) Limited (a UK company) (a UK limited (a Mexican (a UK company) partnership) company)
* See discussion below under "The Affiliate Companies - U.S. Wireless Corporation." 3 Recent Events Merger of Interactive Flight Technologies, Inc. into Global Technologies, Ltd. On September 30, 1999, the stockholders of Global approved a reincorporation proposal pursuant to an Agreement and Plan of Merger dated as of August 16, 1999 (the "Merger Agreement"). Pursuant to the Merger Agreement, Interactive Flight Technologies, Inc. ("IFT") merged with and into Global Technologies, Ltd. and all stockholders of the former became stockholders of the latter on a share-for-share basis. The primary purpose of the reincorporation proposal was to remove the restrictions imposed on IFT by Section 203 of the Delaware General Corporation Law. Section 203 prohibited IFT from engaging in certain transactions, as more fully described below. Prior to the merger, Global was a non-operating, wholly-owned subsidiary of IFT formed for the purpose of completing the merger. As a result of the merger, Global currently owns all assets that were owned by IFT, is subject to all of the liabilities of IFT, and conducts all of the business operations previously conducted by IFT. There has been no material change in the business, management, operations or financial statements of the Company as a result of the merger. All of IFT's contracts and other assets vested in Global. The officers and directors of IFT immediately prior to the merger are now the officers and directors of Global. All benefit plans of IFT were adopted by Global. The Certificate of Incorporation of Global is substantially identical to the Amended and Restated Certificate of Incorporation of IFT, except for the name of the Company and a provision electing not to be governed by Section 203. The following is a brief summary of Section 203 and the merger. Subject to certain exceptions, Section 203 prohibits business combinations between corporations and "interested stockholders" for a three-year period following the time that such stockholder becomes an "interested stockholder," unless the Board of Directors gives prior approval to such transaction or unless the business combination is approved by the Board of Directors and the holders of at least 66-2/3% of the outstanding voting stock of the corporation not owned by the "interested stockholder." Section 203, the complete text of which is attached as Exhibit B to the Proxy Statement filed August 17, 1999, defines "interested stockholder" as "any person that (i) [owns or has the right to acquire,] 15% or more of the outstanding voting stock of a corporation or (ii) is an affiliate or associate of the corporation and was the owner of 15% or more of the outstanding voting stock of the corporation at any time within the 3-year period immediately prior to the date on which it is sought to be determined whether such person is an interested stockholder, and the affiliates and the associates of such person..." IFT's Chief Executive Officer, Irwin L. Gross was an "interested stockholder" of IFT pursuant to clause (b) above. As a director and chief executive officer of IFT, Mr. Gross was deemed an affiliate of IFT and, through his control of Ocean Castle Partners, LLC ("Ocean 4 Castle"), he beneficially owned as much as 33.9% of the voting power of IFT within the past three years. Although Section 203 is intended to provide anti-takeover protection for Delaware corporations by imposing supermajority disinterested stockholder voting requirements for certain self-dealing transactions with large stockholders, the Board believed that the potential transactions between Mr. Gross or his affiliates or associates on the one hand and Global on the other hand would be beneficial to both Global and its stockholders (other than Mr. Gross or his affiliates or associates), and that the need to meet the supermajority disinterested stockholder approval requirements under Section 203 for each such transaction would have made it more difficult to pursue potentially attractive business opportunities and more time consuming and expensive to effect them. As a result of the merger, Global, as successor to IFT, will be able to enter into business combinations with Mr. Gross or his affiliates or associates without obtaining the stockholder approval required by Section 203. FAA Airworthiness Directive (No. 99-20-08) On September 28, 1999, the Federal Aviation Administration ("FAA") issued an Airworthiness Directive (the "Directive") applicable to all McDonnell Douglas Model MD-11 series airplanes (the "MD-11"). The Directive prohibits the installation of the Entertainment Network, as it was configured on the MD-11 involved in the Swissair Flight 111 crash. The Directive was prompted by the results of a special certification review of the Entertainment Network installed on the MD-11 that crashed in the Swissair flight 111 accident. The action taken by the FAA by way of the Directive is intended to prevent possible confusion as the flight crew performs its duties in response to a smoke/fumes emergency. Management believes that adjustments to the way the Entertainment Network is installed in MD-11 airplanes necessary to address the FAA concerns could be easily implemented. The Directive provides that no causal factors of the accident have been determined to date. The Company is unaware of any findings that would indicate that the Entertainment Network either caused, or was related to a cause of, the crash. The Company does not believe that the Directive will have a material adverse effect on its business or operations. The Company no longer offers the Entertainment Network for sale to the commercial air transport market. However, the Company has combined the technologies of the Entertainment Network with the system architecture of The Network Connection, Inc.'s (a corporation of which approximately 80% of the capital stock is owned by Global) technologies. The Company is marketing the resulting system, AirView, to original equipment manufacturers ("OEMs") and operators of business jets. See Item 1 -- "Description of Business -- The Affiliate Companies -- The Network Connection Inc. -- TNCi Products and Services." Business Strategy In connection with its reorganization, Global's business strategy is to identify companies capable of being market leaders in the Internet, networking solutions, telecommunications, or gaming industries and which are at a stage of development that would benefit from Global's management support, financing, and market knowledge. Global generally seeks to acquire a large enough stake in an affiliate company to enable Global to have significant influence over the 5 management and policies of the company and to realize a large enough return to compensate Global for it's investment of management time and effort, as well as capital. In assessing the advisability of making an investment in a business in one of these industries, Global focuses on four major criteria: (1) the size of the market opportunity, (2) proprietary aspects of the business that offer strong and sustainable competitive advantages, (3) the quality of the current management team and (4) the ability of Global to create extra value with strategic planning and access to capital. Global gains exposure to emerging companies through management's reputation as successful developers and operators of technology and telecommunications companies, referrals from the investment community, management's relationship with venture capital and private equity funds, and the participation of directors, officers and employees of the Company in various non-profit and charitable organizations. Global considers its access to potential affiliate companies to be good. Global has capital and managerial resources to provide financing and strategic, managerial, and operational support to certain emerging companies. The corporate staff of Global provides hands-on assistance to the managers of its affiliate companies in the areas of management, financial, marketing, tax, risk management, human resources, legal and technical services, based on the affiliate's needs. Global seeks to assist affiliate companies by providing or locating and structuring financing, identifying and implementing strategic initiatives, providing marketing assistance, identifying and recruiting executives and directors, assisting in the development of equity incentive arrangements for executives and employees, and providing assistance in structuring, negotiating, documenting, financing, implementing and integrating mergers and acquisitions. Global's goal is to maximize the value of its affiliate companies for the stockholders of the Company. The Affiliate Companies The Network Connection, Inc. General The Network Connection, Inc., a Georgia corporation ("TNCi") (NASDAQ: TNCX), is engaged in the development, manufacturing and marketing of computer-based entertainment and data networks, which provide users access to information, entertainment, business applications and a wide array of service options, such as movies, shopping for goods and services, computer games, access to the World Wide Web, and gambling where permitted by applicable law. The Company is currently targeting cruise lines, school systems, rail carriers, business jet OEMs and operators, corporations (for training purposes) and hotel operators for sales of TNCi's products. 6 TNCi's systems can support live-feed, closed-circuit and satellite based digital television programs in addition to personal interactive entertainment and video/audio on demand, shopping, multi-player games, gambling, shore excursion/event booking, karaoke and Internet access, all simultaneously, independently and with full user control through a keyboard, wireless television remote control or touch screen display. In addition, attendant or crew interactive training can be provided at the same time. As part of the turnkey solution sought by the transportation industry, the Company may also provide and manage content for use with TNCi's systems on a fee-for-service basis or on a revenue sharing basis. TNCi's products are sold under the names TRIUMPH, Cheetah(TM), and related sub product names. These systems are based upon non-proprietary or open system PC hardware standards and utilize major commercial components and subsystems in order to provide flexibility and reliability. TNCi's products are designed to be compatible with industry standard network operating systems and new network operating systems as they become available. Product design allows compatibility with most applications running in such network environments, and enables TNCi's systems to operate efficiently as servers and work stations for groups of interconnected PCs arranged in LANs, WANs, intranets and the Internet. TNCi has distributed its products worldwide principally through its own internal sales force and strategic resellers. On May 10, 1999, Global acquired from The Shaar Fund, Ltd. ("Shaar") 1,500 shares of TNCi Series B 8% Convertible Preferred Stock, par value $.01 per share, stated value $1,000 per share (the "TNCi Series B Shares"), and cash in the amount of $980,000 (net of $50,000 in legal fees) in exchange for (a) 3,000 shares of Global's Series A 8% Convertible Preferred Stock, par value $.01 per share, stated value $1,000 per share, and (b) warrants to purchase 87,500 shares of Global's Class A Common Stock, par value $.01 per share, at an exercise price of $3.00 per share. In connection with this acquisition, Global also received an assignment of (a) certain registration rights under a Registration Rights Agreement dated October 23, 1998 between TNCi and Shaar (the "Registration Rights Agreement") and (b) certain rights of first refusal held by Shaar with respect to future TNCi financings. Also on May 10, 1999, Global acquired directly from TNCi 800 shares of TNCi Series C 8% Convertible Preferred Stock, par value $.01 per share, stated value $1,000 per share (the "TNCi Series C Shares"), in consideration for Global's waiver of all prior TNCi defaults and arrearages arising out of or related to the TNCi Series B Shares. In connection with the forgoing acquisitions of the TNCi Series B Shares and TNCi Series C Shares, Global also acquired the right to convert a Secured Promissory Note (the "Secured Promissory Note") made by TNCi in January 1999, payable to the order of Global, into additional TNCi Series C Shares at the rate of $1,000 per TNCi Series C Share. The original principal amount of the Secured Promissory Note was $500,000. On May 18, 1999, Global received from TNCi 1,055,745 shares of TNCi's common stock and 2,495,400 shares of TNCi's Series D Convertible Preferred Stock (the "TNCi's Series D Shares") in exchange for $4,250,000 in cash and substantially all the assets and certain liabilities of Global's Interactive Entertainment Division, as defined in the Asset Purchase and Sale 7 Agreement dated as of April 29, 1999, as amended (the "TNCi Transaction"). TNCi did not, however, assume any liability or obligation with respect to claims arising out of the crash of Swissair flight 111 (See Item 3 - "Legal Proceedings"). Each share of TNCi Series D Shares is convertible into 6.05 shares of TNCi common stock. On June 2, 1999, Global acquired from Sigma Designs, Inc. 110,000 shares of TNCi common stock, and a warrant to purchase another 40,000 shares of TNCi common stock with an exercise price based on a formula derived from the average market price for the common stock over a period of time immediately preceding such exercise, for approximately $254,000. On July 16, 1999, Global acquired from third parties certain notes issued by TNCi (collectively, the "TNCi Series A and E Notes"). The TNCi Series A and E Notes had a principal balance of $1,254,082, and interest, redemption premiums, and other charges incurred but unpaid thereon to the date of acquisition totaling $640,925, for a total of $1,895,007. Global agreed to cancel the TNCi Series A and E Notes in exchange for which TNCi increased the balance due under the Secured Promissory Note in a corresponding amount. On August 12, 1999, Global acquired from third parties certain notes issued by TNCi (collectively, the "TNCi Series D Notes"). The TNCi Series D Notes had a principal balance of $350,000, and interest, redemption premiums, and other charges incurred but unpaid thereon to the date of acquisition totaling $127,750. Again Global agreed to cancel the TNCi Series D Notes in exchange for which TNCi increased the balance due under the Secured Promissory Note in a corresponding amount. On August 24, 1999, the Board of Directors of Global elected to convert the amounts outstanding under the Secured Promissory Note into TNCi common stock. Such conversion, to the extent it exceeded approximately one million shares of TNCi's common stock on August 24, 1999, was contingent upon receiving shareholder approval to increase the authorized share capital which was subsequently approved on September 17, 1999 at the TNCi shareholder meeting. On August 24, 1999, the Board of Directors of Global approved a $5 million secured revolving credit facility by and among Global and TNCi (the "Facility"). The Facility provides that TNCi may borrow up to $5 million for working capital and general corporate purposes at the prime rate of interest plus 3%. The Facility matures in September 2001. TNCi paid an origination fee of $50,000 to Global and will pay an unused line fee of 0.5% per annum. The Facility is secured by all of the assets of TNCi and is convertible, at Global's option, into shares of TNCi Series C Shares. Global executed the Facility on October 12, 1999. Global's investments in TNCi as of October 15, 1999, aggregate approximately 80% of TNCi's common stock on a fully converted basis. TNCi Business Strategy TNCi's strategy is to position itself as a leading provider of comprehensive interactive information system solutions which are scalable to accommodate small or large user groups and, are based on a high-speed and secure network. TNCi can also offer customized video content options and interfaces with a customer's existing applications and network. Additionally, TNCi 8 will continue to position itself as an integrated browser-based software developer and a content programming, procurement, integration and management service provider. Content programming and procurement can include educational and training products, video entertainment, gaming, e-mail and Internet access, and e-commerce capabilities. Sales, Marketing And Distribution TNCi currently distributes its products principally through the efforts of its internal direct sales force. TNCi also attends trade shows and hosts end user seminars or meetings to promote and market its products. Additionally, TNCi may advertise in trade publications. TNCi plans to continue and accelerate these efforts. Also, TNCi is developing relationships with strategic "partners" capable of providing customer solutions through TNCi's products, or encouraging their customers to purchase TNCi's systems in conjunction with their own products on the basis that overall system or product performance will be enhanced. TNCi will assist these partner-vendors by determining the configuration of TNCi's products that will deliver optimal performance along with the partner-vendor's products. The purchase price for TNCi's "turn-key" packaged systems depends upon various factors, such as the size and type of train or ship, and the requested system features. There can be a relatively long sales cycle for some products, because of the need to evaluate TNCi's technology, to conduct a test installation of each customized system, and to negotiate agreements with other providers. The sales cycle is also dependent upon a number of factors beyond TNCi's control, such as the financial condition of the customer, safety and maintenance concerns, regulatory issues and purchasing patterns of particular operators, and the industry generally. This can result in long and unpredictable buying patterns for TNCi's transportation-related products. See Item 6 - -- "Management's Discussion and Analysis or Plan of Operation." Overview Of The TNCi Markets And Industries The Company is targeting four primary markets for TNCi's products at this time: (1) multimedia servers for education and corporate training; (2) interactive entertainment and information systems for cruise ships; (3) interactive entertainment and information systems for trains; and (4) interactive information systems for business aviation (as contrasted with commercial aviation). Corporate training programs and interactive education for high schools and universities constitute large markets in excess of several billion dollars per year. Indeed, high schools and universities are beginning to seek innovative ways of bringing the Internet and interactive courseware to the classroom. Interactive entertainment and information systems for cruise ships and trains represent large, relatively untapped markets. For example, there currently are more than 70 cruise ships in revenue service with 500 or more guest cabins, and the build schedule for ships of this size shows more than 30 new ships entering revenue service between now and the end of 2001. Only nine ships to date have had interactive entertainment and information systems installed. In the case of commuter trains, no interactive entertainment and information systems have been installed. Finally, OEMs and 9 operators of business jets are just beginning to see the benefits of installing interactive and multimedia servers connected to a high-speed LAN to provide business travelers with an "office-in-the-sky." Although the Company believes these markets are large, relatively untapped, and potentially profitable, no assurances can be given that TNCi will be successful in any of them. TNCi Products And Services Interactive Information Systems For Business Aviation (AirView) AirView is the Company's planned in-flight portal to advertising, shopping, video and similar features, as well as business-related applications. AirView is the combination of the Company's Entertainment Network with TNCi's system architecture, which is intended to be installed on business jets. In April 1998, the Boeing Company identified TNCi's AirView interactive and video server as a key element of an "office-in-the-sky" for the new B737-73Q Business Jet. In November 1998, TNCi received an order from the Raytheon Company, which was contracted by Boeing Company, to equip the Boeing Business Jet (BBJ) B737-73Q "Demonstrator" aircraft with TNCi's AirView interactive and video server and switches. Installation is due to be completed on the Demonstrator aircraft in the quarter ending December 1999. There can be no assurance, however, that any additional business jet orders for TNCi's AirView system will be received. See Item 6- "Management's Discussion and Analysis or Plan of Operation." Interactive Entertainment And Information Systems For Cruise Ships (CruiseView) CruiseView is an advanced cabin entertainment and information management system for the Cruise industry. The CruiseView system is a high bandwidth, high-speed video-enabled intranet, tailored to meet the environmental demands of cruise conditions. With video and data servers connected to cabin set top PCs, via a gigabit digital network backbone for voice, video and data, CruiseView delivers to each cabin, on demand, a unique entertainment and information experience, independent of all other passengers. In September 1998, TNCi entered into a Turnkey Agreement (the "Carnival Agreement") with Carnival Corporation ("Carnival"), a Panamanian registered corporation, for the purchase, installation and maintenance of CruiseView on one Carnival Cruise Lines ship. During the four-year period commencing on the date of the Carnival Agreement, Carnival has the right to designate an unspecified number of additional ships for the installation of CruiseView by TNCi. The cost per cabin for CruiseView purchase and installation on each ship is provided for in the Carnival Agreement. In December 1998, Carnival exercised its right and ordered the installation of CruiseView on one Carnival Cruise Lines Fantasy Class ship. Delivery and installation of CruiseView for this Fantasy Class ship began in December 1998 and has been in operational use, on a test basis, since August 1999. It is expected to begin commercial operation in the quarter ending December 31, 1999. In August 1999, Carnival exercised its right and ordered the installation of CruiseView on one Carnival Cruise Lines Destiny Class ship which is expected to be completed in the quarter ending December 31, 1999. There can be no assurance, however, 10 that Carnival will exercise its right under the Carnival Agreement to order CruiseView for installation on any additional ships. See Item 6 -- "Management's Discussion and Analysis or Plan of Operation -- Liquidity and Capital Resources." CruiseView offers passengers video and music libraries; e-commerce capabilities; casino-style and action games; previews of and the ability to book shore tours; and integration with ship operations, including billing, room service, surveys and customer requests. Interactive Entertainment And Information Systems For Trains (TrainView) Like CruiseView, TrainView is a browser-based information portal, which provides advertising, shopping, route and city information, video features, games and music to the captive train commuter audience. In February 1999, TNCi received an engineering design order from Alstom Transport Limited ("Alstom"), a unit of ALSTOM SA, a worldwide leader in manufacturing high speed passenger trains, to incorporate the design of TrainView, TNCi's advanced Infoactive Business and Entertainment System, into Alstom's concept high-speed train design. The TrainView all-digital system proposed is an adaption of TNCi's existing system currently installed for cruise customers and in the process of being installed for in-flight business customers. The system is expected to deliver personal interactive entertainment, video/audio on demand, e-commerce for shopping, event booking, Internet and business services to the seat through TNCi's TransPORTAL applications. There can be no assurance that Alstom or any of its customers will purchase a TrainView system for installation on any train. In September 1999, TNCi announced the formation of a Passenger Rail Division and the hiring of a Division President, based in the United Kingdom. The focus of the new Division will be to pursue new business opportunities in the world-wide passenger rail market. Corporate Training And Academic Solutions TNCi has developed a high speed multimedia server for use in the education and training markets. Through this product, students and faculty are able to access hundreds of hours of multimedia content, search the Internet, and build interactive courses. In August 1999, TNCi received an order of approximately $5.3 million to manufacture and install its Cheetah(TM) multimedia servers in approximately 193 schools as part of the Georgia Metropolitan Regional Education Services Agency ("MRESA") Net 2000 Project. The award is part of a three year state-wide program, whereby MRESA hopes to bring advanced multimedia learning tools and technology to all 700 Georgia schools K-12, under the guidance of the Georgia MRESA. Installation at all 193 schools was completed by September 30, 1999. There is no assurance that TNCi will receive any further orders in connection with the MRESA Net 2000 Project, or any orders to put its systems in any additional schools or to have its systems installed for corporate training purposes. 11 Product Features and Technology The interactive system's open architecture and compatibility features are believed by management to permit ease of support for new and emerging content options. The system is a proven, all digital, in-room or in-seat interactive system. Dual, fault-tolerant video and file servers serve as the heart of the system. A gigabit LAN backbone provides 100 megabit connectivity to each client. The scaleable architecture is based on Intel processors and Microsoft operating systems. In addition, the core software design allows simple customization of the user interface and integration of third-party software. The system interfaces with both color flat panel and TV displays. Operations, Manufacturing and Suppliers TNCi currently manufactures all of its products in the United States, either at its Phoenix, Arizona facility or at its supplier locations. Final assembly, integration, burn-in, and functional testing are conducted at its facilities in Phoenix, Arizona. TNCi obtains electronic components and finished sub-assemblies for its products "off-the-shelf" from a number of qualified suppliers. TNCi has established a comprehensive testing protocol to ensure that components and sub-assemblies meet TNCi's specifications and standards before final assembly and integration. TNCi has elected to procure off-the-shelf component parts and sub-assemblies from suppliers to ensure better quality control and pricing. TNCi does not have formal purchase contracts for supplies, but instead generally purchases such items under individual purchase orders. To date, TNCi has not experienced interruptions in the supply of such component parts and sub-assemblies, and believes that numerous qualified suppliers are available. The inability of most of TNCi's current suppliers to provide component parts to TNCi would not adversely affect TNCi's operations on a long-term basis. Intellectual Property TNCi relies on a combination of trade secret and other intellectual property law, nondisclosure agreements with all of its employees and other protective measures to establish and protect its proprietary rights in its products. TNCi believes that because of the rapid pace of technological change in the open systems networking industry, legal protection of its proprietary information is less significant to TNCi's competitive position than factors such as TNCi's strategy, the knowledge, ability and experience of TNCi's personnel, new product development, market recognition and ongoing product maintenance and support. Without legal protection, however, it may be possible for third parties to copy aspects of TNCi's products or technology or to obtain and use information that TNCi regards as proprietary. In addition, the laws of some foreign countries do not protect proprietary rights in products and technology to the same extent as do the laws of the United States. Although TNCi continues to implement protective measures and intends to defend its proprietary rights vigorously, there can be no assurance that these efforts will be successful. The failure or inability of TNCi to effectively protect its proprietary information could have an adverse affect on TNCi's business. TNCi does not believe that its 12 technologies infringe on any third-party property rights, but no assurances can be made that it will not be subject to a suit alleging the same. Research And Development The market for TNCi's products is characterized by rapid technological change and evolving industry standards, and it is highly competitive with respect to timely product innovation. The introduction of products embodying new technology and the emergence of new industry standards can render existing products obsolete and unmarketable. TNCi believes that its future success will depend upon its ability to develop, manufacture and market new products and enhancements to existing products on a cost-effective and timely basis. The system architecture for TNCi's interactive entertainment and information products was designed to permit hardware and software upgrades over time. Moreover, the current architecture presents no known limits on a customer's ability to offer compelling content to the user in a rapid and reliable manner. Therefore, a major focus of TNCi's research and development efforts is to reduce the cost of network and client hardware and to enhance the core software of the system to permit even easier integration of new content. If TNCi is unable, for technological or other reasons, to develop new products in a timely manner in response to changes in the industry, or if products or product enhancements that TNCi develops do not achieve market acceptance, TNCi's business will be materially and adversely affected. There can be no assurance that technical or other difficulties in the future will not delay the introduction of new products or enhancements. There can be no assurance that alternative technologies will not be developed in the future which will be capable of providing certain services now performed by network servers. The development of such technologies could reduce the need for network servers and adversely affect TNCi's operating results. TNCi Customers TNCi's products are sold to end users in a wide range of industries. Customers that have purchased TNCi's products are financial institutions, health care companies, academic institutions, communications/broadcasting companies, governmental agencies, entertainment providers, transportation operators and end-users operating in various other industries. TNCi's high-end, high performance, multimedia video capable products currently are targeted to education and corporate skills training providers, hotel, train and ship operators, business jet OEMs and operators, and retail facility information kiosk businesses. Most sales efforts in 1998 and 1999 were focused on larger system sales into niche markets of TNCi's "turn-key" packaged solutions, AirView, CruiseView and TrainView. There can be no assurance that TNCi will successfully negotiate definitive agreements for the purchase of these systems. The markets for these types of products are new and management believes their actual aggregate size is impossible to measure accurately. Although management expects the video server market to experience growth, with the growth to come principally from the high-performance superserver 13 segment of the market, no assurances can be made that TNCi's products will be accepted within the market. Competition The market for the products and services that TNCi offers is very competitive. Factors for TNCi's success include product quality, technical capability, system reliability, price, promptness of program performance, and warranty protection. There are numerous international and U.S. firms that currently compete, or are capable of competing, with TNCi. Many competitors have greater financial and human resources than TNCi. TNCi faces substantial competition from the manufacturers of several different types of products used as network servers. TNCi expects competition to intensify as more firms enter the market and compete for market share. In addition, companies currently in the server market will continue to change product offerings in order to capture further market share. With respect to base configuration, TNCi competes with manufacturers of high-end PCs used as network servers. Competitors offering products in this market include International Business Machines Corporation ("IBM"), Compaq Computer, Inc., Gateway Corporation, and Dell Corporation. One of the principal competitive factors in the market for simple LANs is price, and the economies of scale available to high-end PC manufacturers may permit them to offer their products at a lower price. TNCi expects its competitors to continue to improve the performance, availability, scalability and upgradability features of their products. TNCi expects all of its competitors in the simple LAN market to improve the distribution channels for their products used as servers. With respect to more fully configured high-end video servers for larger and more complex LANs and more sophisticated or business-critical applications, TNCi competes indirectly with manufacturers of mainframes and minicomputers. Manufacturers that promote their products in this market include IBM, Digital Equipment Corporation, Hewlett-Packard Corporation and UNYSIS, Inc. TNCi's operating results could be adversely affected if one or more of these competitors elects to compete more aggressively with respect to price or product features of their mainframes or minicomputers. TNCi competes in the market for complex LANs with other manufacturers of superservers, including Sun, Silicon Graphics and Ncube. TNCi competes in the market for "turn-key" systems for travel-related entertainment with other manufacturers of complete systems, including Rockwell Collins Passenger Systems, BE Aerospace, Sony Transcom, Matsushita, Allin Interactive, and Trans Digital. As many of TNCi's competitors are more established, benefit from greater market recognition, and have greater financial, technological, production and marketing resources than TNCi, establishing and maintaining TNCi's competitive position will require continued investment by TNCi in research and development and sales and marketing. There can be no assurance that TNCi will have sufficient resources to make such investments or survive the sales cycle and support the receivables collection cycle, or that TNCi will be able to make the technological advances necessary for it to be competitive. In addition, if more manufacturers of 14 PCs, mainframes or minicomputers were to develop and market their own superserver class of products, TNCi's operating results could be adversely affected. Government Regulation The installation and use of TNCi's AirView system on any particular aircraft will require prior certification and approvals from the FAA and may require certification and approvals from aeronautical agencies of foreign governments. Other regulatory requirements may apply in the passenger rail, cruise or other markets to which TNCi markets its products that may affect TNCi's ability to deliver or install its products on a timely basis. See Item 6 - "Management's Discussion and Analysis or Plan of Operation." United States law, with certain exceptions, currently prohibits the knowing transportation of gaming devices operated on modes of interstate transportation. In addition, states may prohibit the transportation and use of gaming devices. Federal law also prohibits the installation, transportation or operation of gaming devices by any U.S. or foreign air carrier or for such carriers to permit their use on aircraft operated to or from the United States in foreign air transportation. The laws regarding the transmission of gaming data into, out of, or within United States territory, even where such data was lawfully obtained in another jurisdiction, are unclear. As a result, there can be no assurance that the transmission of such data will not be restricted or prohibited. Because gaming may generate greater revenues and profitability than other entertainment options available on TNCi's products, the inability to offer gaming in certain markets may have a material adverse impact on TNCi's business and on the market acceptance of TNCi's products. TNCi may also be subject to the laws of foreign jurisdictions which may similarly restrict or prohibit the gaming or other activities offered on TNCi's products. Backlog Orders And Work-In-Progress As of June 30, 1999, TNCi had no backlog. Work-in-progress consisted of programs with Carnival Cruise Lines ("Carnival") under TNCi's 1998 contract with Carnival. In August 1999, TNCi received an order to manufacture and install its Cheetah(TM) multimedia servers in approximately 193 schools in the State of Georgia. The total sales price of this order was approximately $5.3 million. All product was successfully produced and installed by September 30, 1999. Employees As of June 30, 1999 TNCi had approximately 22 full-time employees, including four executive officers. None of the employees are covered by a collective bargaining agreement. TNCi's success depends to a significant extent upon the performance of its executive officers and other key personnel. TNCi considers its relations with its employees to be good. Warranties TNCi provides a warranty regarding its products for periods ranging from one to three years, depending on the requirements of customers. To date, TNCi has not experienced 15 significant claims under warranties, and its ability to meet the full demands of having a significant number of units sold to customers who require such service has not been tested. TNCi also passes through to end users the warranties that it receives from vendors on any separate hardware, software or component parts that it sells independently of full systems. U.S. Wireless Corporation General U.S. Wireless Corporation, a Delaware corporation ("US Wireless") (NASDAQ: USWC), has developed a geographic location system designed to pinpoint the location of wireless telephone subscribers within a wireless network. The system uses proprietary technology developed by US Wireless. US Wireless believes its system has advantages over competing technologies which are based on triangulation or the global positioning system ("GPS"). The US Wireless system is anticipated to be able to offer to wireless carriers services and applications, including enhanced 911, live navigation assistance, enhanced 411, asset and vehicle tracking, ITS systems and network management systems. Thus far, US Wireless has not generated operating revenues from the sale or licensing of its technology (or from any other source). There are approximately 75 million people using wireless telephones in the United States today. According to the Cellular Telecommunications Industry Association, March 1999, that number will grow to 120 million by the year 2000. In addition, there are many millions of wireless telephone subscribers located outside of the United States. To accommodate the increased consumer demand for wireless services, the industry has aggressively continued its buildup of wireless infrastructure, and has implemented more efficient standards and digital technologies. The introduction of these standards into the market has additionally served as a selling point for manufacturers and service providers in the already extremely competitive arena of telecommunications. The emerging market for value-added services based on location represents an opportunity for wireless carriers to enhance current and future revenue streams. The growth in the demand for wireless communications services during the past decade has resulted in decreased pricing for wireless service, a favorable regulatory environment, increasing competition among service providers and a greater availability of wireless value-added services. In addition, many developing countries are installing wireless telephone networks as an alternative to installing, expanding or upgrading traditional wireline networks. Companies competing for market share in the wireless caller-location industry are typically divided into two categories: those that employ handset-based techniques and those that employ network-based techniques. Handset-based techniques rely on the integration of GPS system receivers into the wireless handsets. GPS-integrated handsets are not currently commercially available. Adding GPS to handsets may create larger, heavier, more expensive telephones with shorter battery life. Additionally, GPS will require retrofitting or replacing the wireless phones currently owned by over 75 million wireless subscribers and therefore makes GPS an unlikely near-term solution to the FCC's E-911 Mandate (see below). 16 Network-based techniques do not rely on the addition of any dedicated equipment to the handset, but operate entirely from the wireless network infrastructure. US Wireless' RadioCamera system falls into the category of network-based solutions. Competing network-based systems rely on triangulation techniques such as Angle of Arrival ("AOA") and Time Difference of Arrival ("TDOA"). The RadioCamera system architecture does not rely on triangulation. Both AOA and TDOA systems require multiple base stations or points of reference from which to triangulate, and both systems are at a disadvantage in urban environments where there are rarely direct lines of sight between a wireless caller and multiple base stations. Due to the lack of line of sight, the subscribers' wireless transmissions bounce off of buildings and other obstacles, reaching the base station antennas via multiple paths. By receiving transmissions from multiple orbiting satellites, GPS units also use triangulation techniques to establish location, and are also challenged in environments such as "urban canyons," where line of sight to the multiple satellites is blocked. As the demand for wireless service increases, so will the need for location-based safety services like wireless E-911. According to Yankee Group (Boston), more than one quarter of all new wireless customers purchase their phones for security reasons. In 1997, over 30 million cellular calls were placed to 911 emergency call centers across the United States. Yet, unlike calls placed from wire-line telephones, calls are not traceable when a caller uses a wireless phone to call for emergency assistance (the emergency operator does not automatically know the location of the caller). In response to this and other safety concerns, the U.S. Federal Communications Commission issued a mandate requiring wireless service providers to have the ability to locate wireless calls for emergency assistance within certain parameters and time schedules. As a result of these and other safety issues, the wireless industry, the Public Safety Answering Point ("PSAP") (a network of regional emergency call centers), members of the E-911 community and the FCC began joint efforts in mid-1994 to solve the technological and policy hurdles in providing location information for wireless 911 calls. In June 1996, the FCC issued a Report and Order in Docket 94-102, formalizing certain performance requirements, and implementing a schedule for wireless service providers to establish geolocation capabilities. In so doing, the FCC ordered that the deployment and integration of wireless E-911 features and functions be accomplished in two phases. The first phase requires wireless service providers to report the callback number and originating cell site and/or sector of a 911 call to PSAP operators. Pursuant to the mandate, commencing in October 1997, the service provider must commence providing such information to qualified requesting PSAPs within six months of a PSAP's request. Service providers have commenced the implementation of products in order to meet this requirement. The second phase requires wireless service providers to pinpoint and report to the PSAPs the location of all 911 callers with an accuracy of 125 meters in 67% of all cases, using root mean square techniques. The FCC has mandated completion of Phase II by October 1, 2001. In December 1998, the FCC's Wireless Telecommunications Bureau released a public notice outlining a filing schedule for requests for waivers of the Phase II E-911 requirements. Various wireless carriers have submitted requests for waivers, and various other parties have subsequently filed comments with the FCC regarding the question of waivers. The issue of waivers and/or modifications of the E-911 Phase II requirements is being reviewed by the FCC in 17 an ongoing public forum. To date, the FCC has not granted any waivers of the Phase II E-911 conditions, nor has it made any modifications to the mandate. US Wireless is working to build upon the promising results of its field trials and complete the development and refinement of the RadioCamera systems that support all cellular/PCS protocols. US Wireless intends to work with wireless carriers, information content providers, and equipment vendors on a nationwide and international basis. In addition to the FCC-mandated E-911 service that requires precise location information, there are additional applications that could provide considerable value in the private and public sectors. US Wireless will seek to establish its leadership position by contracting with strong well-known suppliers and hiring an experienced operations management team. Presently, US Wireless is assessing and evaluating the timing and resource requirements necessary to implement this plan. In March 1999, Global invested $3 million in US Wireless in exchange for 30,000 shares of Series B Preferred Stock ("US Wireless Series B"). Each share of US Wireless Series B is convertible into approximately 67 shares of common stock of US Wireless until March 2000, after which each such share is convertible into 100 shares of common stock of US Wireless. The US Wireless Series B is subject to mandatory conversion into common stock at any time at a conversion rate of 100 shares of common stock of US Wireless in the event the closing price for US Wireless' common stock as reported on NASDAQ is at least $5.00 per share for 30 consecutive trading days. The US Wireless Series B entitles the holder to receive $100 per share liquidation preference before any distributions to the holders of common stock in the event of a liquidation of US Wireless. In addition, the Company and other holders of the US Wireless Series B have, as a separate class, elected one member to US Wireless' Board of Directors and one additional individual as an observer to the Board. The Company elected Irwin L. Gross, Global's Chairman and Chief Executive Officer, to serve on the US Wireless Board. As a condition to making the investment, the Company also obtained certain registration rights relating to the registration under the Securities Act of 1933 of those shares of common stock of US Wireless into which the US Wireless Series B held by the Company is convertible. The Company has waived its registration rights. Based on the foregoing, the Company currently beneficially owns 11.15% of the common stock of US Wireless (based on a conversion rate of 67 shares of common stock per share of US Wireless Series B) and, assuming no further share issuances until March 2000, will beneficially own 15.25% of the common stock of US Wireless at that time (based on a conversion rate of 100 shares of common stock per share of US Wireless Series B). Both percentages assume full conversion of US Wireless Series A preferred stock (into 560,000 shares) and US Wireless Series B (into 3,350,000 and 5,000,000 shares based on conversion at the 67 share rate and 100 share rate, respectively). The fair market value of the Company's investment in US Wireless Series B at June 30, 1999, assuming conversion into 67 shares or 100 shares, of common stock for each share of US Wireless Series B and a discount of 25% (which discount might actually be higher or lower, depending upon market conditions) for potential lack of marketability of the unregistered shares, are estimated to be $5.7 million and $8.6 million, respectively. The corresponding figures as of October 15, 1999 were $6.9 and $10.4 million, respectively. There is no assurance that the Company will realize any gain on its investment in US Wireless. Donativos Donativos, S.A. de C.V. ("Donativos") is a Mexican corporation formed for the purpose of operating an entertainment center in Monterrey, Nuevo Leon, Mexico (the "Center"). The Center is located in a two-story structure containing approximately 16,000 square feet of floor space. The Center offers 332 slot machines and food and beverages. Monterrey is a city of 18 approximately five million people and is located approximately 300 miles south of San Antonio, Texas. Currently customers at the Center are unable under Mexican law to win cash in the games offered. Rather, customers are able to win lottery tickets for the Loteria Nacional or to obtain rights usable for future play at the Center. Donativos is seeking to obtain a secondary prize permit which would also allow customers to win valuable merchandise such as a new car. There is no assurance, however, that Donativos will obtain such a permit. In May 1999, Global, through its wholly-owned subsidiary, Interactive Flight Technologies (Gibraltar) Ltd., a Gibraltar company ("IFT Gibraltar"), loaned approximately $1.6 million to Donativos and acquired a 24.5% equity interest in the venture. In addition to IFT Gibraltar, other partners in the venture include Regal Gaming and Entertainment, Inc., a Minnesota corporation ("Regal Gaming"), which also has a 24.5% equity interest, and a Mexican national, who has a 51% interest. The IFT Gibraltar loan bears interest at an annual rate equal to the prime rate plus three percent (3%) and matures on April 30, 2001. The Company has also provided a letter of credit in the amount of $913,445 to secure payment of the purchase price of the slot machines acquired by IFT Gibraltar, and which are leased to Donativos at the rate of $37,500 per month. In addition to its 24.5% equity interest in Donativos, in consideration for making the loan and providing the letter of credit, the Company will receive 25% of any profits generated by Donativos and, for a term of 10 years, the Company will have an equity interest of at least 10% in any gaming venture in which Regal Gaming, or a subsidiary or affiliate of Regal Gaming, is an investor and which relates to gaming activities in Mexico. The Center was scheduled to open in June 1999, but the opening was delayed until mid-August 1999. In addition, the costs of opening the Center, which were anticipated to approximate $1.6 million and for which the Company's loan was made, in fact were considerably higher. Cost overruns on the Center's construction left insufficient funds for budgeted marketing and promotional activities. The Company does not have complete records at present as to the extent of the cost overrun. Regal Gaming and its three principals and their spouses (all of who are United States nationals) are contractually responsible to Global for the amount of the cost overrun up to a maximum of $500,000, but thus far, the cost overruns have not been paid by Regal Gaming or its principals or their spouses. On October 25, 1999, Global initiated a lawsuit against Regal Gaming, its principals and their spouses with respect to the non-payment by them of these cost overruns. See Item 3 - "Legal Proceedings." The Company is not contractually obligated to fund any cost overruns. See Item 6 - "Management's Discussion and Analysis or Plan of Operation - Liquidity and Capital Resources." Since the Center opened, operating expenses have continuously exceeded revenues by a significant amount of money, and, as a result, the slot machine equipment lease payments owed to the Company by Donativos have not been made, nor has Donativos made the contractually required interest and principal payments on its approximately $1.6 million obligation to the Company. Furthermore, as a result of the cash flow shortfall, it is possible that third party vendors have also not been paid. Management believes that operational shortfalls are not likely to improve significantly unless Donativos is successful in obtaining the secondary prize permit referred to above, and, even if such permit is received, there is no assurance of such improvement. 19 Regal Gaming was responsible for managing the Center under a management agreement. The Company and the majority shareholder of Donativos believe that Regal Gaming failed to perform several material obligations under the management agreement, and further believe that Regal Gaming's financial controls over the construction and opening of the Center and over its operations since opening have been inadequate. As a result, Donativos terminated the management agreement with Regal Gaming effective October 21, 1999. Donativos has identified two potential replacement managers who are believed to be capable of running the Center on behalf of Donativos, and is discussing with each of them the possibility of their engagement as promptly as possible. Until one of these full-time managers is engaged by Donativos, Donativos is operating the Center through the use of qualified consultants. Donativos has commenced legal action in Mexico against Regal Gaming and its principals in connection with these transactions. Inter Lotto In most jurisdictions around the world, the government owns the lottery and subcontracts its management to a service provider. In the United Kingdom, private companies or individuals can secure a license to run a lottery. Currently Camelot Group PLC ("Camelot") holds the exclusive license to run the National Lottery. Separately, the Gaming Board for Great Britain is responsible for issuing a certificate to manage Society or Local Authority lotteries. In 1996-1997 (latest available) the United Kingdom gaming industry was estimated to have had annual gaming revenue of (pound)40.5 billion (approximately $66.4 billion at current exchange rates). In May 1999, Global completed the acquisition of a 27.5% equity interest in Inter Lotto (UK) Limited ("Inter Lotto") through its wholly owned subsidiary, IFT Holdings Limited, a United Kingdom company ("IFT Holdings"). The balance of the shares of Inter Lotto is owned by seven shareholders. The only shareholder with a greater ownership interest than that of IFT Holdings is HGI House & General Investment Foundation, a Liechtenstein foundation, which has a 48.5% equity interest. Inter Lotto was granted a license by the Gaming Board for Great Britain to operate lotteries on behalf of charities throughout the United Kingdom. By way of an Operating Agreement between Inter Lotto and IFT Management Limited ("IFT Management"), a United Kingdom company and wholly-owned subsidiary of IFT Holdings, Inter Lotto appointed IFT Management as Inter Lotto's exclusive service provider in connection with the lotteries. As such, IFT Management has been granted authority to perform substantially all services necessary or appropriate for the conduct of the lotteries subject to the direction and control of Inter Lotto's Board and to the extent permitted by United Kingdom gaming laws. Inter Lotto will retain responsibility for charity recruiting and certain other functions as required under United Kingdom gaming laws. For its services under the Operating Agreement, IFT Management will retain a portion of the revenues generated by the lotteries. IFT Management has engaged two individuals to consult with and assist it in connection with these responsibilities. These two individuals are principals of Regal Gaming. On September 9, 1999, IFT Leasing Limited, a United Kingdom company and wholly-owned subsidiary of IFT Holdings ("IFT Leasing"), entered into an agreement with International 20 Lottery & Totalizator Systems, Inc., a California corporation ("ILTS"), to purchase an on-line lottery system for the operation of the Inter Lotto lotteries. The base sale price of the lottery system purchased from ILTS is $12.3 million. In addition, IFT Management entered into an eight year facilities management agreement with ILTS to provide operational and technology support for the system. Under this agreement, IFT Management is required to make weekly payments to ILTS of $72,000 plus additional amounts based on the number of installed terminals in excess of 3,500 and plus a percentage of the average daily sales. Financing for the gaming operations, including funding for the ILTS equipment, is expected to be provided through several wholly-owned subsidiaries of Global which have been formed for the purpose of providing such financing. IFT Lottoco, Inc. and IFT Subco, Inc., each a Delaware corporation, are partners in a United Kingdom limited partnership, IFT Investments, which is expected to provide funding to IFT Leasing to acquire the equipment necessary for the operation of the lotteries. IFT Leasing is expected to own the gaming equipment, but is expected to lease such equipment to IFT Management for use in operating the lotteries on behalf of Inter Lotto. The funds to purchase the gaming equipment for IFT Leasing are expected to be obtained through debt financing, although no assurances can be made that such financing will be available. If the Company is unable to secure such financing, such inability would have a material adverse effect on Inter Lotto's operations and also on the Company's liquidity. The Inter Lotto lottery operation is expected to begin operations in the first quarter of calendar 2000. Inter Lotto's most significant competition comes from Camelot. Camelot is a consortium of four companies, Cadbury Schweppes (26.67%), Racal (26.67%), De La Rue (26.67%) and ICL (20%), and is responsible for managing the National Lottery. Other In May 1999, the Company completed the sale of Johnny Valet, Inc. for $750,000 in cash less fees and expenses of approximately $50,000. This divestiture terminates the Company's involvement in the dry cleaning business. Employees As of October 15, 1999, Global employed 7 people on a full-time basis and 1 person on a temporary basis. No employee is covered by a collective bargaining agreement. Global considers its relations with its employees to be good. ITEM 2 - DESCRIPTION OF PROPERTY Global's principal executive offices, located in Philadelphia, Pennsylvania, consists of approximately 1,500 square feet of office space. The space is leased to Ocean Castle and Global reimburses Ocean Castle for the rent and related expenses in connection therewith in the approximate monthly amount of $2,700. Ocean Castle is owned by Irwin L. Gross, the Chief Executive Officer and Chairman of the Board of Directors of Global. 21 Similarly, pursuant to an agreement with First Lawrence Capital Corp. ("First Lawrence"), Global occupies approximately 1,500 square feet of office space in Larchmont, New York which is leased to First Lawrence. Global pays monthly rent for the use of such space of approximately $4,100. Global has recently executed a lease for approximately 5,000 square feet of executive office space in New York City. The lease expires in October 2009. The lease provides for monthly rent of approximately $23,500 for the first 5 years, and of approximately $24,300 for the last 5 years. It is expected that activities currently conducted at the Larchmont facility will be transferred to this facility. Global also leases office space, and the assembly and warehouse facilities for the Company, in Phoenix, Arizona. This space contains approximately 17,500 square feet and is occupied pursuant to a lease providing for monthly rent of approximately $9,100. The lease expires in July 2002. Global has no policy regarding investments in real estate or interests in real estate, real estate mortgages or securities of persons primarily engaged in real estate activities. Global currently holds no such investments. ITEM 3 - LEGAL PROCEEDINGS Since September of 1998, claims have been filed by the families of many victims of the Swissair flight 111 crash. These cases are consolidated in the multi-district litigation captioned Swissair/MDL-1269, In re Air Crash Near Peggy's Cove, Nova Scotia, on September 2, 1998. The Swissair MD-11 aircraft involved in the crash was equipped with an Entertainment Network system. Following the crash, investigations were conducted and continue to be conducted by Canadian and United States agencies concerning the cause of the crash. No investigative agency has linked the Entertainment Network, which is certified by the Federal Aviation Administration, to the crash or to a fire on board the aircraft believed to have broken out before the crash. Estates for the victims of the crash have filed lawsuits throughout the United States against Swissair, Boeing, DuPont and various other defendants, including Global. The victims' litigation is a multi-district litigation matter in the United States district courts that is being overseen by the United States District Court for the Eastern District of Pennsylvania. Global denies all liability for the crash. Global is being defended by its aviation insurer in connection with these claims and denies that it has any liability or responsibility for the crash. On September 28, 1999, the FAA issued the Directive. (See Item 1, "Business -- Recent -- Events FAA Airworthiness Directive"). Global does not believe that the Directive will have any material affect on the litigation. On April 7, 1999, a complaint captioned Fidelity and Guaranty Insurance Company v. Interactive Flight Technologies, Inc., CV No. 99-410, was filed in the United States District Court for the District of Minnesota. This is a declaratory judgment action where Global and its insurers are seeking a declaration of the applicability of an excess liability policy to claims made by the estates of victims of the crash of Swissair flight 111. 22 On May 5, 1999, a complaint captioned First Lawrence Capital Corp. v. James Fox, Irwin Gross and Interactive Flight Technologies, Inc., No. 7196/99 was filed in the Supreme Court of the State of New York. This is a claim made against Global arising from the hiring of James Fox, a former First Lawrence employee, by Global. First Lawrence asserts that business opportunities of First Lawrence were diverted to Global by James Fox. This case was settled by the issuance to First Lawrence of 250,000 shares of common stock of Global and the agreement by IFT Holdings to pay First Lawrence 24 monthly installments of $41,667 beginning February 1, 2000. In exchange, First Lawrence will be available to perform management consulting services to IFT Holdings. On May 6, 1999, a complaint captioned Interactive Flight Technologies, Inc. v. Swissair Swiss Air Transport Company, Ltd., et al., No. Civ. 99-0936PHXSMM, was filed in the United States District Court for the District of Arizona. This is a claim by Global against Swissair for $6,773,906, being sums owed by Swissair to Global for equipment and warranty contracts. Global has also asserted claims for business torts arising from the unjustified deactivation of the Entertainment Network systems following the crash of Swissair flight 111. On August 18, 1999, a complaint captioned Eric Schindler ("Schindler") v. Interactive Flight Technologies, Inc. Et Al., case no. 99-V51560685, was filed in the state court for Fulton County, Georgia. The lawsuit names Global and TNCi as defendants. The complaint alleges that TNCi and Global failed to pay severance pay pursuant to a written employment contract following Schindler's resignation as an employee and vice president of TNCi in May 1999. Specifically, the complaint alleges (1) breach of contract (against TNCi), (2) conspiracy and interference with contract rights (against TNCi and Global), and (3) interference with contract rights (against the Company). The Complaint seeks $85,000 in severance pay on the contract claims, unspecified damages for loss of stock options, punitive damages of at least $450,000, attorneys' fees and costs. TNCi and Global deny any liability, intend to defend themselves vigorously and are considering counterclaims. No responsive pleading has yet been filed. In September of 1999, IFT filed a lawsuit against Barrington Capital Group, L.P. in Maricopa County Superior Court, Arizona, seeking a declaratory judgment that no sums were owed to Barrington Capital pursuant to a Financial Advisory Service Agreement dated in October of 1998. In October of 1999, Barrington Capital Group filed a lawsuit on the same contract in the Supreme Court of the State of New York, County of New York, Index No. 99-604606, captioned Barrington Capital Group, L.P. v. Interactive Flight Technologies, Inc., alleging that Barrington is owed $1,750,471 in connection with services alleged to have been performed pursuant to the Financial Advisory Service Agreement. IFT denies all liability and denies that any sums are owed to Barrington. On October 25, 1999, Global filed a lawsuit against Regal Gaming (and its principals and their spouses) in the United States District Court for the Southern District of Florida seeking judgment in favor of Global on the $500,000 promissory note made by Regal Gaming (and guaranteed by its principals and their spouses) to Global. The promissory note was made to secure Regal Gaming's obligations to fund cost overruns at the Center. 23 ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Until October 1, 1999, Global's Class A Common Stock was traded on the Nasdaq National Market under the symbol FLYT, and since such date, under the symbol GTLL. The following table sets forth the high and low last sale prices for Global's Class A Common Stock for each quarter within its last two fiscal years and for the quarter ended September 30, 1999, as reported by the Nasdaq National Market. Class A Common Stock High Low - -------------------- ------ ------ November 1, 1997 through January 31, 1998........... $4.625 $1.875 February 1, 1998 through April 30, 1998............. 3.688 2.375 May 1, 1998 through July 31, 1998................... 3.500 1.875 August 1, 1998 through October 31, 1998............. 3.125 1.875 November 1, 1998 through January 31, 1999........... 3.625 1.313 February 1, 1999 through April 30, 1999............. 4.313 1.813 May 1, 1999 through June 30, 1999................... 4.875 3.594 July 1, 1999 through September 30, 1999............. 4.625 3.000 The closing sales price of the Class A Common Stock on October 15, 1999, as reported by the Nasdaq National Market, was $3.03 per share. As of October 15, 1999, there were approximately 60 record holders and approximately 2,700 beneficial owners of Class A Common Stock. On October 30, 1998, the Global stockholders approved a one-for-three reverse stock split of Global's capital stock. The reverse stock split was effective on November 2, 1998. All references to the number of shares, price per share and stock option data contained in this Transition Report have been restated as appropriate to reflect the effect of the reverse stock split for all periods presented. On December 17, 1997 and October 30, 1998, the Board of Directors authorized Global to repurchase shares of its Class A Common Stock on the open market. Through October 31, 1998, Global had purchased a total of 844,667 shares of its Class A Common Stock in open market activities at a total cost of $2,315,983. All 844,667 shares were retired on January 11, 1999. As of October 15, 1999, Global had repurchased an additional 78,600 shares at prices 24 ranging from $2.47 to $2.94 per share. Global may make additional open market purchases in the future. The Company has not paid any dividends on the common stock of the Company during the last two fiscal years and does not intend to do so in the foreseeable future. Unregistered Issuances In November 1996, Global executed a Strategic Alliance Agreement with Hyatt Ventures, Inc. ("Hyatt"), an affiliate of Hyatt Corporation. The president of Hyatt is also a former director of Global. Under the terms of the Strategic Alliance Agreement, Hyatt, directly and through certain of its affiliates, agreed to use its best commercial efforts to assist Global in advancing Global's business with respect to the Entertainment Network. The Alliance Agreement was terminated in November 1997 as a result of changing market conditions. In January 1997, Global issued 20,000 unregistered shares of Class A common stock to Hyatt in connection with Hyatt's acting as a guarantor on behalf of Global in certain contract negotiations. The issuance was made in private offering pursuant to Section 4(2) of the Securities Act of 1933. On May 11, 1999, Global issued 3,000 shares of its Series A Convertible Preferred Stock and warrants to purchase 87,500 shares of Global's Class A Common Stock to The Shaar Fund, Ltd. In exchange for 1,500 shares of TNCi Series B 8% Convertible Preferred Stock and cash in the amount of $980,000 (net of $50,000 in legal fees). The issuance was made in private offering pursuant to Section 4(2) of the Securities Act of 1933. The Series A Convertible Preferred Stock is convertible into shares of the Company's common stock at a conversion price of $3.00 per share; provided, however, that no conversion is permitted if such conversion would cause the holder of the Series A Convertible Preferred Stock to be converted, on account of such conversion, to be the beneficial owner of more than 19.99% of the outstanding common stock of the Company. On July 16, 1999, Global issued an aggregate of 272,610 shares of its Class A Common Stock and cash in the amount of $555,000 to various holders of TNCi's Series A and Series E Notes in exchange for such Notes. The issuance was made in a private offering pursuant to Section 4(2) of the Securities Act of 1933. On August 9, 1999, Global issued an aggregate of 115,000 shares of its Class A Common Stock to various holders of TNCi's Series D Notes in exchange for such Notes and for warrants to purchase 70,000 shares of TNCi common stock. The issuance was made in a private offering pursuant to Section 4(2) of the Securities Act of 1933. On August 13, 1999, Global issued 250,000 shares of its Class A Common Stock to First Lawrence Capital Corp., pursuant to the terms of a Release and Settlement Agreement executed by First Lawrence, Global, Irwin L. Gross, James W. Fox and IFT Holdings. The issuance was made in private offering pursuant to Section 4(2) of the Securities Act of 1933. 25 ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The following discussion should be read in conjunction with, and is qualified in its entirety by, the Company's Consolidated Financial Statements and the Notes thereto appearing elsewhere herein. Historical results are not necessarily indicative of trends in operating results for any future period. Acquisitions and Investments The Network Connection, Inc. On May 18, 1999, the Company received from The Network Connection, Inc. ("TNCi") 1,055,745 shares of its common stock and 2,495,400 shares of its Series D Convertible Preferred Stock in exchange for $4,250,000 in cash and substantially all the assets and certain liabilities of the Company's Interactive Entertainment Division ("IED"), as defined in the Asset Purchase and Sale Agreement dated April 30, 1999, as amended (the "Transaction"). The Company has consolidated the results of operations of TNCi from the date of the transaction forward. TNCi is a majority-owned subsidiary of the Company whose ownership, through a combination of the Transaction described above and the Company's purchase of Series B 8% preferred stock and 110,000 shares of TNCi's common stock from third-party investors, approximates 80% (as of October 15, 1999) of TNCi on an if-converted common stock basis. In an Agreement dated as of June 19, 1997, TNCi entered into an AirView Purchase Agreement (the "AirView Agreement") with Fairlines, a French corporation engaged in the start-up operation of a commercial airline, for the purchase of up to ten AirView systems for installation on ten Fairlines aircraft. Fairlines filed for bankruptcy under French law in the first quarter of calendar year 1998. Although TNCi does not expect to recover its investment in this program, TNCi is pursuing its remedies, contractual and otherwise, in respect to collection of amounts due and damages incurred under the AirView Agreement. In October, 1997, the Company entered into a revised agreement with Swissair which required the Company to install and maintain the Entertainment Network in the first, business and economy class sections of three aircraft at no cost to Swissair and in the first and business classes of another sixteen aircraft at an average price of $1.7 million per aircraft. As of October 31, 1998, the Company had completed all installations under the initial Swissair program. The Company was responsible for maintenance costs through September 1998 for all nineteen aircraft and specific software and hardware upgrades to the Entertainment Network that are not yet completed. The Swissair agreement also provided for a one-year warranty on the Entertainment Network. The Company entered into a contract dated April 1, 1998 with Swissair for $3,975,000 to extend the warranty on the installed system for a second and third year. Through May 18, 1999, the Company has been paid $707,500 under this contract. No subsequent payments have been received from Swissair. In April 1998 and October 1998, the Company entered into additional contracts with Swissair for a $4.7 million order for first and business class installations on four Swissair MD-11 26 aircraft that are being added to the Swissair fleet. As of February 26, 1999, Swissair has made payments of $1,450,000 on the $4.7 million order for the four installations. On September 2, 1998, Swissair Flight 111 crashed. The aircraft involved in the crash was an MD-11 equipped with the Entertainment Network. Despite the fact that there is no evidence that the Entertainment Network had anything to do with the crash, on October 29, 1998, the Company was notified by Swissair of the airline's decision to deactivate the Entertainment Network on all Swissair aircraft. Until April 1999, the Company and its system integrator/installation contractor had been working closely with Swissair to take the necessary steps that would allow Swissair to reactivate the systems as quickly as possible. However, by April 1999, discussions between the Company and Swissair regarding outstanding financial matters related to current accounts receivable, inventory, purchase commitments and extended warranty obligations, as well as planning discussions for an October 1999 reactivation ceased to be productive. On May 6, 1999, the Company filed a lawsuit against Swissair in the United States District Court for the District of Arizona seeking damages for Swissair's failure to honor its obligations for payment and reactivation of the Company's Entertainment Network. Swissair has failed to make payments to the Company under installation and warranty contracts and has harmed the Company's business and reputation by failing to honor its commitments to reactivate the Entertainment Network on Swissair aircraft. Even though there has been no evidence that the Entertainment Network contributed in any way to the crash of Swissair Flight No. 111 on September 2, 1998, Swissair has continued to use the unfortunate circumstances of the crash as an excuse to avoid its obligations. The Swissair agreements are not assignable to third parties under the terms of such agreements. However, in connection with the Transaction, the Company has agreed to pay to TNCi any net proceeds received from Swissair as a result of the above litigation or otherwise. Further, TNCi, as a subcontractor to the Company, will assume any operational responsibilities of the Swissair agreement in the event that such requirement arises. TNCi has not assumed any liabilities or obligations arising out of the crash of Swissair Flight No. 111. See "Item 3 -- Legal Proceedings." As a result of the above events, management concluded that its only source of future payment, if any, will be through the litigation process. In addition, with the deactivation of the entertainment system and Swissair's breach of its agreements with the Company, TNCi believes it will not be called upon by Swissair to perform any ongoing warranty, maintenance or development services. Swissair's actions have rendered TNCi's accounts receivable, inventory and deposits worthless as of June 30, 1999. Accordingly, TNCi has recognized deferred revenue on equipment sales to the extent of cash received of $876,000; charged off inventory to cost of equipment sales in the amount of $1,517,000; wrote off deposits of $655,000 to special charges; and reversed all warranty and maintenance accruals totaling $5,164,000. TNCi entered into a CruiseView Purchase Agreement, dated as of February 13, 1998 (the "Star Agreement"), with Continuous Network Advisors ("CNA") on behalf of Star Cruises Management Limited ("Star"), an Isle of Man corporation engaged in the operation of a 27 commercial cruise line, for the purchase of CruiseView systems for installation on up to two Star cruise vessels. Certain issues arose during the contract installation period which lead to a settlement agreement between Star and CNA dated June 1999 whereby Star would return the TNCi's equipment by December 31, 1999. No cash payments are required to be made to TNCi pursuant to the settlement agreement. TNCi is objecting to the settlement agreement although TNCi believes modifying such settlement and receiving payment at this time is unlikely. US Wireless Corporation In March 1999, the Company invested $3 million in US Wireless in exchange for 30,000 shares of Series B Preferred Stock ("US Wireless Series B"). As of June 30, 1999, the Company accounts for this investment at cost. Each share of US Wireless Series B is convertible into approximately 67 shares of common stock of US Wireless until March 2000, after which each such share is convertible into 100 shares of common stock of US Wireless. The US Wireless Series B is subject to mandatory conversion into common stock at any time at a conversion rate of 100 shares of common stock of US Wireless in the event the closing price for US Wireless' common stock as reported on NASDAQ is at least $5.00 per share for 30 consecutive trading days. The US Wireless Series B entitles the holder to receive $100 per share liquidation preference before any distributions to the holders of common stock in the event of a liquidation of US Wireless. In addition, the Company and other holders of the US Wireless Series B have, as a separate class, elected one member to US Wireless' Board of Directors and one additional individual as an observer to the Board. As a condition to making the investment, the Company also obtained certain registration rights relating to the registration under the Securities Act of 1933 of those shares of common stock of US Wireless into which the US Wireless Series B held by the Company is convertible. The Company has waived its registration rights. Based on the foregoing, the Company currently beneficially owns 11.15% of the common stock of US Wireless (based on a conversion rate of 67 shares of common stock per share of US Wireless Series B) and, assuming no further share issuances until March 2000, will beneficially own 15.25% of the common stock of US Wireless at that time (based on a conversion rate of 100 28 shares of common stock per share of US Wireless Series B). Both percentages assume full conversion of US Wireless Series A preferred stock (into 560,000 shares) and US Wireless Series B (into 3,350,000 and 5,000,000 shares based on conversion at the 67 share rate and 100 share rate, respectively). The fair market value of the Company's investment in US Wireless Series B at June 30, 1999, assuming conversion into 67 shares or 100 shares, of common stock for each share of US Wireless Series B and a discount of 25% (which discount might actually be higher or lower, depending upon market conditions) for potential lack of marketability of the unregistered shares, are estimated to be $5.7 million and $8.6 million, respectively. The corresponding figures as of October 15, 1999 were $6.9 and $10.4 million, respectively. There is no assurance that the Company will realize any gain on its investment in US Wireless. Inter Lotto (UK) Limited IFT Leasing entered into an agreement with International Lottery & Totalizator Systems, Inc., a California corporation ("ILTS"), to purchase an on-line lottery system for the operation of the Inter Lotto lotteries. The base purchase price of the lottery system purchased from ILTS is $12.3 million. In addition, IFT Management entered into an eight-year facilities management agreement with ILTS to provide operational and technology support for the system. Under this agreement, IFT Management is required to make weekly payments to ILTS of $72,000 plus additional amounts based on the number of installed terminals in excess of 3,500 and plus a percentage of the average daily sales. As of June 30, 1999, the Company's investment in Inter Lotto was $1,050,775 consisting of working capital advances, notes receivable and capitalized acquisition costs. During the Transition Period ended June 30, 1999, the Company recorded its proportionate share of losses of Inter Lotto and equity goodwill amortization of $167,493 which has been recorded as equity in loss of non-consolidated affiliates in the consolidated statement of operations. Donativos In May 1999, the Company, through its wholly-owned subsidiary, Interactive Flight Technology (Gibraltar) Ltd., a Gibraltar company ("IFT Gibraltar"), loaned $1,632,000 to Donativos and acquired a 24.5% interest in the venture. The Company accounts for this investment under the equity method. In addition to IFT Gibraltar, other partners in the venture include Regal Gaming, which also has a 24.5% interest, and Manuel G. Caldera, a Mexican national, who has a 51% interest. The IFT Gibraltar loan bears interest at an annual rate equal to the prime rate plus three percent (3%) and matures on April 30, 2001. The Company has also provided a letter of credit in the amount of $913,445 to secure repayment of the purchase price of certain gaming equipment to be acquired by IFT Gibraltar and leased to Donativos. In addition to its 24.5% equity interest in Donativos, in consideration for making the loan and providing the letter of credit, the Company will receive 25% of any profits generated by Donativos and, for a term of 10 years, the Company will have an equity interest of at least 10% in any gaming venture in which Regal Gaming, or a subsidiary or affiliate of Regal Gaming, is an investor and which relates to gaming activities in Mexico. As of June 30, 1999, the Company's investment in Donativos was $1,664,555 consisting of the $1,632,000 loan receivable and capitalized acquisition costs. During the Transition Period 29 ended June 30, 1999, the Company recorded its proportionate share of losses of Donativos and equity goodwill amortization of $28,211 which has been recorded as equity in loss of non-consolidated affiliates in the consolidated statement of operations. Change in Fiscal Year-End Global elected to change its fiscal year-end from October 31 to June 30. Accordingly, the eight-month period resulting from this change, November 1, 1998 through June 30, 1999, is referred to as the "Transition Period." Results of Operations The unaudited results of operations for the eight months ended June 30, 1998 are as follows and are presented for comparative purposes only. Eight Months Ended June 30, 1998 (Unaudited) ------------------ Revenues $18,383,360 Cost of equipment sales 15,239,568 Cost of service income 13,533 Research and development 1,092,316 General and administrative expenses 4,023,760 Interest expense 8,873 Interest income 1,490,025 Other income 10,679 ----------- Net loss to common stockholders $ 493,986 =========== Revenue for the Transition Period ended June 30, 1999 was $1,582,461, a decrease of $16,800,899 (or 91%) compared to revenue of $18,383,360 (unaudited) for the corresponding period ended June 30, 1998. Revenue for the Transition Period ended June 30, 1999 consisted of equipment sales of $875,957 and service income of $706,504. The decline in revenue is the result of Swissair's refusal to take delivery of additional Entertainment Networks and a lack of new customer orders. The equipment sales were generated from payments received from Swissair for one of four Entertainment Networks billed per the April 1998 contract. The service income was principally generated from the Company's dry cleaning plant which was sold on May 13, 1999. Revenue for the eight-month period ended June 30, 1998 consisted of equipment sales of $17,949,591 (unaudited) and service income of $433,769 (unaudited). The equipment sales were principally generated from the installation of the Entertainment Networks on ten Swissair aircraft. The service income was generated from services provided to Swissair pursuant to the media programming, services agreement, the Company's share of gaming profits generated by the Swissair systems and revenue earned under the Swissair Letter of Intent to extend the warranty. Revenue for the year ended October 31, 1998 was $19,142,961, an increase of $8,042,252 (or 72%) over revenue of $11,100,709 for the year ended October 31, 1997. Revenues in each year consist of equipment sales (principally from the installation of the Entertainment Networks 30 on Swissair aircraft) and service income. During the year ended October 31, 1998, the Company completed installations on-board Swissair aircraft under the initial Swissair program in ten business classes and eighteen first classes whereas installations completed in fiscal 1997 were in nine business classes and one first class. Revenues from equipment sales rose 71% from $10,524,828 in fiscal 1997 to $18,038,619 in fiscal 1998 due to the increased installations in fiscal 1998. Service income of $1,104,342 for the year ended October 31, 1998 was principally generated from programming services provided to Swissair, the Company's share of gaming profits generated by the Swissair systems and revenue earned under the Swissair extended warranty Letter of Intent. Also included in service income for the year ended October 31, 1998 is revenue of $326,000 generated by the Company's dry cleaning operations acquired on July 24, 1998. Service income of $575,881 for the year ended October 31, 1997 was primarily derived from a Product Identification/Product Development Agreement with an airline and entertainment programming services provided to customers. Cost of equipment sales for the Transition Period ended June 30, 1999 was $1,517,323, a decrease of $13,722,245 (or 90%) compared to cost of equipment sales of $15,239,568 (unaudited) for the corresponding period ended June 30, 1998. Cost of equipment sales includes materials, installation and maintenance costs, as well as estimated warranty costs and costs of upgrades. For the eight months ended June 30, 1998 cost of sales resulted from the installation of equipment on ten Swissair aircraft whereas the decreased cost of sales in the Transition Period ended June 30, 1999 resulted from material costs for only four Swissair aircraft. Cost of service income for the Transition Period ended June 30, 1999 was $445,585, an increase of $432,052 compared to cost of service income of $13,533 (unaudited) for the eight months ended June 30, 1998. Cost of service income for the Transition Period ended June 30, 1999 is primarily related to the Company's dry cleaning operation which was acquired on July 24, 1998. Cost of equipment sales and service income for the year ended October 31, 1998 was $15,762,119, a decrease of $9,116,341 (or 37%) over the comparable figure of $24,878,460 for the fiscal year ended October 31, 1997. The decrease in cost of equipment sales is primarily a result of the inclusion of provisions for inventory obsolescence, unusable inventory and rework adjustments of $11,496,748 in cost of equipment sales for fiscal 1997. The 1997 provision for inventory obsolescence was a result of the Company's purchasing inventory for installation in the economy sections of Swissair aircraft but actually completing only three economy installations. The unusable inventory and rework adjustments primarily resulted from the Company's redesign of the tray table used in the Entertainment Networks for the economy section of an aircraft. The decrease in cost of equipment sales for fiscal 1998 is also attributable to reductions in maintenance costs and estimated one-year warranty costs as the reliability of the Entertainment Networks has improved. Additionally, the Company recognized a reduction in installation costs from its subcontractor during fiscal 1998. Included in cost of service income for fiscal 1998 is $225,047 of production costs related to the Company's dry cleaning operations. Provisions for doubtful accounts for the Transition Period ended June 30, 1999 were $30,092 compared to zero (unaudited) for the corresponding period ended June 30, 1998. Fiscal 31 1999 provisions resulted primarily from entertainment programming services provided to Swissair. Provisions for doubtful accounts for the year ended October 31, 1998 were $9,869 compared to $216,820 for the year ended October 31, 1997. Fiscal 1998 provisions resulted from the Company's dry cleaning operations and fiscal 1997 provisions resulted from entertainment programming services provided to a previous customer. Bad debt recoveries of $1,064,284 during the year ended October 31, 1997 resulted from the recovery of accounts receivable under a customer agreement which were reserved for during the Company's fourth quarter of its fiscal year ended October 31, 1996. There were no research and development expenses for the Transition Period ended June 30, 1999, compared to $1,092,316 (unaudited) for the corresponding period ended June 30, 1998. The decrease in expenses reflects the Company's decision not to develop the next generation of the Entertainment Network and the resulting reduction in staff and professional fees. Research and development expenses for the year ended October 31, 1998 were $1,092,316, a decrease of $6,729,324 (or 86%) over expenses of $7,821,640 for the year ended October 31, 1997. The decrease in expenses reflects the Company's decision not to develop the next generation of the Entertainment Network and the resulting reduction in staff and professional fees. The Swissair agreement requires the Company to provide specific upgrades to the Entertainment Network. The Company has ceased development of these upgrades as a result of Swissair's breach of its agreement and does not plan to develop any further upgrades to the Entertainment Network. General and administrative expenses for the Transition Period ended June 30, 1999 were $6,688,813, an increase of $2,665,053 (or 66%) over expenses of $4,023,760 (unaudited) for the corresponding period ended June 30, 1998. Significant components of general and administrative expenses include costs of consulting agreements, legal and professional fees and corporate insurance costs. Significant components attributable to the increase in general and administrative expenses from 1998 to 1999 include legal and consulting fees related to the Donativos and Inter Lotto investments, legal fees related to the investment in TNCi and a 1999 accrual of approximately $1.6 million to write-off certain consulting agreements determined, in the current period, to have no future value. General and administrative expenses for the year ended October 31, 1998 were $11,387,872, a decrease of $1,186,351 (or 9%) over expenses of $12,574,223 for the year ended October 31, 1997. The decrease in expenses reflects the Company's reduction in staff in administrative areas, including production, marketing and program management departments. As of May 29, 1998, the Company terminated almost all sales and marketing efforts related to IED. The decrease in expenses during fiscal 1998 was partly offset by the payment of $3,053,642 in severance to three former executives of the Company. For the Transition Period ended June 30, 1999 the Company recorded warranty, maintenance, commission and support cost accrual adjustments of $5,117,704, $504,409, 32 $303,321 and $1,225,959 respectively. Such adjustments to prior period estimates, which totaled $7,151,393 resulted from an evaluation of specific contractual obligations and discussions between the new management of the Company and other parties related to such contracts. Based on the results of the Company's findings during fiscal 1999, such accruals were no longer considered necessary. If these accruals had not been adjusted, the Company's loss for the Transition Period would have been approximately $9.6 million. Special charges for the Transition Period ended June 30, 1999 were $2,485,660 compared to zero (unaudited) for the corresponding period of the previous fiscal year. Special charges resulted from a $521,590 write-off of accounts receivable and deposits due from Swissair, offset by deferred revenue under the Swissair extended warranty contract. Swissair's actions, as described above, have rendered the Company's accounts receivable and deposits from Swissair worthless as of June 30, 1999 and, accordingly, the Company wrote-off such assets. Also included in special charges are expenses of $1,843,750 and $120,320 for the settlement of litigation matters with First Lawrence Capital Corp. and FortuNet, Inc., respectively Special charges for the year ended October 31, 1998 were $400,024 compared to $19,649,765 for the year ended October 31, 1997. Special charges in fiscal 1998 primarily resulted from equipment write-offs of $1,006,532. The write-offs were for excess computers, furniture and other equipment that the Company is not utilizing in its operations and is in the process of disposing. The equipment write-offs were partly offset by a recovery of special charges expensed in fiscal 1997. During fiscal 1998, a recovery of $190,000 was recognized as a special charge credit as a result of a reduction in the number of Entertainment Networks requiring maintenance. The Company also recognized a recovery of $416,508 related to Swissair's decision to not develop the system for the front row in the economy sections of its aircraft. Special charges in fiscal 1997 primarily resulted from the installment of the Entertainment Networks on three Swissair aircraft and installations required by the Debonair agreement. The Company was responsible for the costs of installing the system on three Swissair aircraft, including materials, installation, upgrades, a one-year warranty and maintenance through September of 1998. The costs for these three systems of $14,292,404 were recorded as a special charge during fiscal 1997. Due to the termination of the Debonair agreement, the costs of the installed system ($956,447) and all inventory on-hand under the Debonair agreement ($2,881,962) were written off as a special charge in fiscal 1997. Additionally, the Company recorded a special charge of $1,518,952 for the write-off of a system integration lab utilized in software development and testing. The lab equipment will not be utilized in the Company's future operations. Expenses associated with investments of $550,000 for the fiscal year ended June 30, 1999 represent $150,000 and $250,000 write-offs of investments deemed to have no value and a $150,000 standstill fee related to the Inter Lotto acquisition. Interest expense was $74,684 for the Transition Period ended June 30, 1999 compared to $8,873 (unaudited) for the period ended June 30, 1998. The 1999 Transition Period expense is attributable principally to long-term debt obligations, whereas the expense for the eight months 33 ended June 30, 1998 is attributable to the Company's capital leases for furniture that expire in September 1999. Interest expense was $11,954 for the year ended October 31, 1998 compared to $13,423 for the year ended October 31, 1997. The expense is attributable to the Company's capital leases for furniture that expired in September of 1999. Interest income for the Transition Period ended June 30, 1999 was $1,060,229, a decrease of $429,796 (or 29%) compared to income of $1,490,025 (unaudited) for the corresponding period ending June 30, 1998. The interest arose principally out of short-term investments of working capital. The decrease in income is due to the lower average cash balance during 1999 compared to 1998. Interest income for the year ended October 31, 1998 was $2,251,055, an increase of $80,380 (or 4%) over income of $2,170,675 for the year ended October 31, 1997. The interest arose principally out of short-term investments of working capital. The increase in income is due to the higher average cash balance during 1998 compared to 1997. Other income for the Transition Period ended June 30, 1999 was $61,252 compared to $10,679 (unaudited) for the corresponding period ended June 30, 1998. Other income in fiscal 1999 represents sublet income for the sublease of office space and proceeds from the sale of office furniture and equipment to employees. Other income in fiscal 1998 represents proceeds from the sale of equipment and scrapped inventory. Other income of $10,179 for the year ended October 31, 1998 represents proceeds from the sale of scrapped inventory. Other expense of $203,649 for the year ended October 31, 1997 represents the loss on disposals of property and equipment. For the Transition Period ended June 30, 1999 the Company recorded a gain of $133,396 on the sale of its dry cleaning operation. The dry cleaning operation was sold in May 1999. For the Transition Period ended June 30, 1999 the Company recorded its proportionate share of its equity interest in losses of Inter Lotto in the amount of $195,704. Liquidity and Capital Resources At June 30, 1999, the Company had cash, cash equivalents, and short-term investments of approximately $19.8 million. Prior to the last fiscal year, the Company's primary source of funding had historically been through equity offerings. Subsequent to June 30, 1999, the Company obtained orders consisting of a $5.3 million purchase order for the manufacture, delivery and installation of 193 Cheetah(TM) multimedia servers to certain Georgia schools, and a service order under the Carnival Agreement for installation of a second CruiseView system. As of October 25, 1999, all 193 servers had been delivered and the Company has received payment. The Company received an installment payment from Carnival in August 1999. Excluding the benefit of the Georgia program, cash, cash equivalents, and short-term investments will continue to decrease as the Company continues to invest in inventory for the 34 Carnival service order, invest in business development and cover overhead expenses, contribute capital into affiliate companies and complete new transactions which may not generate cash flow in the next twelve months. During the Transition Period ended June 30, 1999, the Company used $5.2 million of cash for operating activities, an increase of $2.0 million from the $3.2 million of cash used by operating activities for the fiscal year ended October 31, 1998. Cash utilized in operations during the Transition Period resulted primarily from general and administrative expenses and a reduction in accounts payable. The cash used in operations during the year ended October 31, 1998 is primarily a result of increases in accounts receivable and increases in inventories and an increase in accrued product warranties, offset by decreases in accounts payable and deferred revenue. During the Transition Period ended June 30, 1999, restricted cash increased by $373,000 as a result of payments of $540,000 made under consulting and severance agreements with three former executives of the Company, offset by an increase of $913,000 representing cash collateral posted by the Company to secure its contingent obligation under a letter of credit. Cash flows used in investing activities were $7.7 million during the Transition Period ended June 30, 1999. Investments in affiliates of $7.6 million accounted for the majority of the use of cash. Investments primarily include US Wireless, Inter Lotto and Donativos. Increases in restricted cash and purchases of investment securities in excess of sales and maturities of investment securities, offset by proceeds from the sale of Johnny Valet, Inc., accounted for the balance of the change. Cash provided from financing activities during the Transition Period ended June 30, 1999 of $588,000 resulted primarily from Global's issuance of its Series A 8% Convertible Preferred Stock ("Series A Preferred") offset by payments on notes and purchases of treasury stock. The holder of Series A Preferred is entitled to receive, when, as and if declared by the Board of Directors, an annual cumulative dividend of $80 per share payable quarterly in cash or common stock. Cumulative undeclared and unpaid dividends at June 30, 1999 total $33,333. At the option of the holder, beginning November 6, 1999, each share of Series A Preferred is convertible into common stock at a price equal to $3.00 per share or into Series B Preferred Stock at the rate of 1.19 shares of Series B Preferred Stock for each share of Series A Preferred Stock. Global's Series B Preferred Stock is entitled to one vote for each share of common stock into which it may convert. There are no shares of Series B Preferred Stock outstanding. Global may redeem the Series A Preferred at prices ranging from 115% to 125% of stated value, plus accrued and unpaid dividends at any time between November 6, 1999 and May 4, 2000. If the Series A Preferred is not redeemed or converted into shares of Global's Series A Common Stock by May 5, 2000, then the Series A Preferred automatically converts into shares of Global's Series B 8% Convertible Preferred Stock at the rate of 1.25 shares of Series B Preferred Stock for each share of Series A Preferred Stock. Shares of Series B 8% Convertible Preferred Stock are, in turn, convertible into Class A Common Stock of Global at a price per share equal to the lower of (a) 82% of Market Price (as 35 defined in the Certificate of Rights, Preferences, and Designations of the Series B Preferred Stock) or (b) $3.00 per common share. Because the terms of any such conversion into Series B 8% Convertible Preferred Stock are unfavorable to Global, it is likely that Global will redeem the Series A 8% Convertible Preferred Stock. On November 6, 1999, the redemption price will be approximately 115% of stated value per share ($3,450,000) plus accrued and unpaid dividends, which will be approximately $120,000 at that time. Global may be required to commit additional funds to its affiliate companies, TNCi, Donativos and Inter Lotto, which would come from existing working capital of the Company. Such additional funds, if required, could have a material adverse effect on the Company's ability to acquire new operating companies or make new investments. In particular, because of the cash flow deficit being experienced by Donativos (see Item 1 "Description of Business - Donativos"), the Company will probably be forced to service the obligations associated with its purchase of 332 slot machines without receiving corresponding timely equipment rental payments from Donativos. As of October 15, 1999, the balance due for the slot machines is approximately $856,000. The Company had no purchase commitments as of June 30, 1999. In September 1999, the Company entered into an agreement to purchase $12.3 million of lottery systems in connection with its investment in Inter Lotto. The Company paid $2.8 million towards the purchase price and expects to finance the balance of this commitment with debt financing to be obtained from a financial institution. No assurances can be made that such financing will be available to the Company. If the Company is unable to obtain such financing, such inability would have a material adverse effect on the Company's liquidity. The Company also entered into a facilities management agreement for servicing of the lottery systems. Under this agreement, IFT Management is required to make weekly payments to ILTS of $72,000 plus additional amounts based on the number of installed terminals in excess of 3,500 and plus a percentage of the average daily sales. On August 13, 1999, the Company and two of its officers entered into a Release and Settlement Agreement ("Agreement") with First Lawrence Capital Corp. ("First Lawrence") whereby the Company issued 250,000 shares of its Class A common stock and agreed that its wholly-owned subsidiary, IFT Holdings, will pay First Lawrence 24 consecutive monthly payments of $41,667 each beginning February 1, 2000. In exchange, First Lawrence will be available to perform management consulting services to IFT Holdings. Funding for the consulting services is expected to be derived from operating cash flow of Inter Lotto. Should Inter Lotto not generate sufficient cash flow to IFT Holdings, then the consulting payment may not be made. On August 24, 1999, the Board of Directors of Global approved a $5 million secured revolving credit facility in favor of TNCi ("the Facility"). The Facility provides that TNCi may borrow up to $5 million for working capital and general corporate purposes at an annual interest rate equal to the prime rate plus 3%. The Facility matures in September 2001. TNCi paid an origination fee of $50,000 to the Company and will pay an unused line fee of 0.5% per annum. 36 The Facility is secured by all of the assets of TNCi and is convertible, at the Company's option, into shares of the Series C preferred Stock or TNCi Common Stock. A note payable of TNCi due September 5, 1999 was in default at June 30, 1999. Subsequent to year-end, the note was converted into 200,000 shares of TNCi's common stock. The terms of the Carnival Agreement provide that Carnival may return the CruiseView system within the Acceptance Period, as defined in the Carnival Agreement. For the Fantasy Class ship on which CruiseView was installed in December 1998, the Acceptance Period is 12 months. As of June 30, 1999, the Company recorded deferred revenue of $365,851, reflecting amounts paid by Carnival. As of June 30, 1999, the Company has not recognized any revenue in association with the Carnival Agreement. The Company is required to provide a performance bond or standby letter of credit in favor of Carnival ensuring Carnival's ability to be repaid amounts previously paid to the Company in the event Carnival determines not to accept the system as permitted under the Carnival Agreement. The Company has not provided a bond or letter of credit. If Carnival requires the Company to do so, the Company may be required to provide cash collateral to a financial institution to secure such a financial instrument. Moreover, if Carnival does not accept the system the Company will be obliged to return the purchase price, which would have a material effect on liquidity. Cautionary Factors That May Affect Future Results In addition to the risks articulated elsewhere in this report with respect to Donativos, Inter Lotto, and US Wireless, the following risks are associated with TNCi. Risks Inherent In Development Of New Products And Markets. TNCi's strategy includes developing new applications for its interactive entertainment and information technologies and entering new markets, such as the train industry. This strategy presents risks inherent in assessing the value of development opportunities, in committing capital in unproven markets and in integrating and managing new technologies and applications. Within these new markets, TNCi will encounter competition from a variety of sources. It is also possible that TNCi will experience unexpected delays or setbacks in developing new applications of its technology. There can be no assurance that TNCi's new products and applications will generate additional revenue for TNCi or that TNCi will successfully penetrate these additional markets. Risk Of Technological Obsolescence. The ability of TNCi to maintain a standard of technological competitiveness is a significant factor in TNCi's strategy to maintain and expand its customer base, enter new markets and generate revenue. While TNCi believes that its systems are currently technologically competitive, TNCi's continued success will depend in part upon its ability to identify promising emerging technologies and to develop, refine and introduce high quality services in a timely manner and on competitive terms. There can be no assurance that future technological advances by direct competitors or other providers will not result in improved 37 systems that could adversely affect TNCi's business, financial condition and results of operations. Additionally, TNCi may fail to identify emerging technologies. Management Of Growth. TNCi's growth strategy will require its management to conduct operations and respond to changes in technology and the market, while substantially expanding operations and personnel. If TNCi's management is unable to manage growth effectively, its business, financial condition and results of operations will be materially adversely affected. Risk Of System Failure Or Inadequacy. The failure of one of TNCi's systems at any particular time could occur as a result of component malfunction, operator error or some other reason. Although system interruptions historically have been inconsequential, any system failure could harm TNCi's reputation, cause a loss or delay in market acceptance of TNCi's systems, and have a material adverse effect on TNCi's business, financial condition and results of operations. To reduce the risk of system failure, TNCi performs extensive testing of its systems and engages in ongoing quality assurance efforts involving the use of redundant systems and sophisticated diagnostic tools to aid in system maintenance and trouble-shooting. Despite these measures, there can be no assurance that system failures or interruptions will not occur. Dependence On Key Personnel. TNCi's success is dependent on a number of key management, research and operational personnel for the management of operations, development of new products and timely installation of its systems. The loss of one or more of these individuals could have an adverse effect on TNCi's business and results of operations. TNCi depends on its continued ability to attract and retain highly skilled and qualified personnel. There can be no assurance that TNCi will be successful in attracting and retaining such personnel. Dependence On Transportation Industry And Continued Operation Of Transportation Industry Customers. A substantial portion of TNCi's revenue is expected to be generated in the near term from its transportation industry operations, thereby making TNCi's business dependent upon the transportation industry in general and the continued operations of TNCi's transportation industry customers. A significant reduction in the operations of any of these customers could, depending on the extent of the reduction, have a material adverse effect on TNCi. Additionally, the transportation industry is dependent on customers having disposable income. Therefore, a general economic downturn or a recession could negatively impact the transportation industry before affecting other segments of the economy, even though transportation providers typically offer promotional pricing and incentives during recessionary periods to ensure a steady occupancy rate. Concentration of Customer Base. TNCi has only two principal customers - Carnival in the transportation industry and MRESA in the educational industry. If TNCi is unable to maintain good relations with these customers or expand its customer base, or if either customer determines not to continue purchasing servers at all, there is a risk that results of operations will be materially adversely affected. Competition. The market for entertainment networks is rapidly evolving and highly competitive. Many of TNCi's current and potential competitors have longer operating histories 38 and significantly greater financial, technical, marketing and other resources than TNCi and therefore may be able to respond more quickly to new or changing opportunities, technologies and customer requirements. Although TNCi's business strategy targets certain markets which it believes offer a competitive advantage, there can be no assurance that TNCi will be able to compete effectively with current or future competitors or that the competitive pressures faced by TNCi will not have a material adverse effect on TNCi's business, financial condition and results of operations. Government Regulation And Legal Uncertainties. TNCi is subject, both directly or indirectly, to various laws and governmental regulations relating to its business. TNCi believes that it is currently in compliance with such laws and that they do not have a material impact on its operations. However, as a result of rapid technology growth and other related factors, laws and regulations may be adopted which significantly impact TNCi's business. Long Sales Cycles; Lack Of Existing Backlog. The sales cycle for TNCi's systems is relatively long because it involves the evaluation of TNCi's technology for each project, a test installation of each customized system, and negotiation of related agreements from other providers such as movie and Internet access providers and computer gaming operators. All of these items requires a large investment on the part of TNCi and occurs before a contract is signed with an end-user. The long sales cycles for TNCi's products, combined with the fact that TNCi had no backlog orders as of June 30, 1999, could place a significant strain on TNCi's financial and other resources. The failure by TNCi to build a backlog of orders in the future would have a material adverse effect on TNCi's financial condition. Unproven Business Strategy. In connection with the acquisition of IED, TNCi has retained a new management team. TNCi's new management has shifted TNCi's business strategy to position itself as a provider of comprehensive systems solutions and as an integrated browser-based software developer and content programming, procurement, integration and management service provider. Moreover, TNCi has recently begun focusing its sales efforts on the business jet, train and cruise transportation industries and on the training and academic solution provider industry. Since this new strategy has been implemented recently, TNCi has a minimal operating history to reflect the results of this strategy. Therefore, there can be no assurance that TNCi will succeed in implementing its strategy or that it will obtain financial returns sufficient to justify its investment in the markets in which it plans to participate. Insurance And Potential Excess Liability. The Company maintains liability insurance to protect against claims arising for it. These policies have limits of up to $10 million in the aggregate and insures against both property damage and personal injury. The policies are written on an "occurrence" basis, which provides coverage for insured risks that occur during the policy period, irrespective of when a claim is made. Higher policy limits are sometimes purchased for individual projects when contractually required. If the Company incurs liability in excess of the Company's policy coverage, the Company's financial condition could be adversely affected. Economic And General Risks Of Business. The Company's success will depend upon factors that are beyond its control and that cannot clearly be predicted at this time. Such factors include general economic conditions, both nationally and internationally, changes in tax laws, 39 fluctuating operating expenses, changes in governmental regulations, changes in technology, and trade laws. Inflation and Seasonality The Company does not believe it is significantly affected by inflation. Company operations are not seasonal in nature, except to extent fluctuations in quarterly operating results occur due to the specifically cyclical nature of government funding to be obtained in connection with education programs. Risks Associated With Year 2000 The commonly referred to Year 2000 ("Y2K") problem results from the fact that many existing computer programs and systems use only two digits to identify the year in the date field. These programs were designed and developed without considering the impact of a change in the century designation. If not corrected, computer applications that use a two-digit format could fail or create erroneous results in any computer calculation or other processing involving the Year 2000 or a later date. The Company has identified two main areas of Y2K risk: 1. Internal computer systems or embedded chips could be disrupted or fail, causing an interruption or decrease in productivity in the Company's operations, and 2. Computer systems or embedded chips of third parties including (without limitation) financial institutions, suppliers, vendors, landlords, customers and service providers and others ("material third parties") could be disrupted or fail, causing an interruption or decrease in the Company's ability to continue operations. The Company has developed, or is in the process of developing, plans for implementation and testing of any necessary modifications to its key computer systems and equipment with embedded chips to ensure that it is Y2K compliant. The Company believes that its internal systems are Y2K compliant. The Company believes that the Y2K issue will not pose significant operational problems for it. However, if the modifications and conversions made are not sufficient, Y2K could have a material impact on its operations. The Company has performed an assessment of its TRIUMPH products for Y2K issues. The TRIUMPH products use a four-digit identifier and, therefore, the Company believes the TRIUMPH products are Y2K compliant. The Company's cost of addressing Y2K has been insignificant to date. The financial impact of making any additional systems changes, or other remediation efforts, if any, cannot be known precisely at this time, but it is not expected to be material to the Company's financial position, results of operations, or cash flows. In addition, the Company has identified and is communicating with material third parties to determine their Y2K status and any possible affect on the Company as a result of dealing with them. The Company will continue to track and evaluate its long-term relationships with material third parties based on the responses it receives and on information learned from other sources. If any of the Company's material third parties are not Y2K ready and such non-compliance causes a 40 material disruption to any of their respective businesses, the Company's business could be materially adversely affected. Disruptions could include, among other things: the failure of a material third party's business; a financial institution's inability to take and transfer funds; an interruption in delivery of supplies from vendors; a loss of voice and data connections; a loss of power to the Company's facilities; and other interruptions in the normal course of the Company's operations, the nature and extent of which the Company cannot foresee. The Company will continue to evaluate the nature of these risks, but at this time the Company is unable to determine the probability that any such risk will occur, or if it does occur, what the nature, length or other effects, if any, that it may have on the Company. If a significant number of material third parties experience failures in their computer systems or operations due to Y2K non-compliance, it could affect the Company's ability to process transactions or otherwise engage in similar normal business activities. For example, while the Company expects its internal systems to be Y2K ready, the Company and its customers will be dependent upon the Y2K readiness of many providers of communications services and in turn, those providers' vendors and suppliers. If, for example, such providers and others are not Y2K ready, the Company and its customers may not be able to send and receive data and electronic transmissions, which would have a material adverse effect on the business and revenues of the Company and its customers. While many of these risks are outside the Company's control, the Company has instituted a process to identify material third parties and to address any non-compliance issues. Although the Company believes that it is adequately addressing the Y2K issue, there can be no assurance that its Y2K analysis will be completed on a timely basis, or that the cost and liabilities associated with the Y2K issue will not materially adversely impact its business, prospects, revenues or financial position. The Company is uncertain as to its most reasonably likely worst case Y2K scenario, and it has not yet developed a contingency plan to handle a worst case scenario. Forward-Looking Information This Report contains certain forward-looking statements and information within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The cautionary statements made in this Report should be read as being applicable to all related forward-looking statements wherever they appear in this Report. Forward-looking statements, by their very nature, include risks and uncertainties. Accordingly, the Company's actual results could differ materially from those discussed herein. A wide variety of factors could cause or contribute to such differences and could adversely impact revenues, profitability, cash flows and capital needs. Such factors, many of which are beyond the control of the Company, include, without limitation, the following: resolution of the Swissair-related litigation; maintenance of the Donativos permit for operation of the Center; obtaining a secondary prize permit by Donativos for use at the Center; obtaining financing for the Inter Lotto gaming equipment; remedying or improving dramatically the cash shortfall in Donativos' operations; the inability to cover the obligations to ILTS from the operations of a start-up venture in an untried game in the UK market; the Company's success in obtaining new contracts; the volume and type of work orders that are received under such contracts; the accuracy of the cost estimates for the projects; the Company's ability to complete its projects on time and within budget; levels of, and ability to 41 collect accounts receivable; availability of trained personnel and utilization of the Company's capacity to complete work; competition and competitive pressures on pricing; and economic conditions in the United States and in other regions served by the Company. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes standards for the accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. This statement generally requires recognition of gains and losses on hedging instruments, based on changes in fair value or the earnings effect of forecasted transactions. As issued, SFAS No. 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133--An Amendment of FASB Statement No. 133," which deferred the effective date of SFAS No. 133 until June 15, 2000. The Company is currently evaluating the impact of SFAS No. 133. On November 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and presentation of comprehensive income and its components in a full set of financial statements. Comprehensive income consists of net income and unrealized gains and losses on investment securities net of taxes and is presented in the consolidated statements of stockholders' equity and comprehensive income; it does not affect the Company's financial position or results of operations. On November 1, 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise" replacing the "industry segment" approach with the "management" approach. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. SFAS No. 131 also requires disclosure about products and services, geographical areas, and major customers. The adoption of SFAS No. 131 does not affect results of operations or financial position but does affect the disclosure of segment information. On November 1, 1998, the Company adopted Statement of Position (SOP) 98-5 "Reporting on the Costs of Start-Up Activities" issued by the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants. SOP 98-5 provides guidance on the financial reporting of start-up costs and organization costs. The SOP requires start-up activities and organization costs to be expensed as incurred. The adoption of SOP 98-5 did not have a material impact on the Company's results of operations. 42 ITEM 7 - FINANCIAL STATEMENTS The audited consolidated financial statements of the Company for the Transition Period ended June 30, 1999 are located beginning at page F-1 of this Transition Report. ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There are no items or circumstances to be disclosed under this Item 8. PART III ITEM 9 - Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act. The following sets forth biographical information about each of Global's directors and executive officers as of June 30, 1999: Name Age Position/Office - ---- --- --------------- Irwin L. Gross 55 Chief Executive Officer and Chairman of the Board James W. Fox 49 President, Chief Operating Officer and Director Morris C. Aaron 35 Vice President and Chief Financial Officer David N. Shevrin 37 Vice President and Secretary M. Moshe Porat 52 Director Charles T. Condy 59 Director Stephen Schachman 55 Director Irwin L. Gross has been the Chairman of the Board of Directors and Chief Executive Officer of Global since September 1998 and Chairman of the Board of Directors and Chief Executive Officer of TNCi since May 18, 1999. He is a founder of Rare Medium, Inc., a publicly held company listed on the NASDAQ National Market, and was Chairman and a Director of Rare Medium, Inc. from 1984 to 1998. In addition, Mr. Gross served as the Chief Executive Officer of Engelhard/ICC, a joint venture between Rare Medium and Engelhard. In December of 1998, Mr. Gross became a director of ORBIT/FR, a publicly held company specializing in the design and manufacture of sophisticated automated microwave test measurement systems for the wireless communication, satellite and aerospace industries. Mr. Gross has served as a consultant to, investor in and director of, numerous publicly held and private companies. Mr. Gross also serves on the board of directors of several charitable organizations. Mr. Gross has a Bachelor of Science degree in Accounting from Temple University and a Juris Doctor degree from Villanova University James W. Fox is the President and Chief Operating Officer of Global. He was formerly the Managing Partner of First Lawrence, and was responsible for the firm's management and the 43 growth of its mergers and acquisitions advisory and principal investment activities. From 1989 to 1996, Mr. Fox was a director with national practice development and management responsibility with Coopers & Lybrand in New York, with primary responsibility for mergers and acquisitions activities. He has held senior mergers and acquisitions positions with General Foods Corp., Arthur Young and W.R. Grace Co. Mr. Fox has a Bachelor of Arts degree in Mathematics and History from Amherst College and an M.B.A. in Finance from the University of Pennsylvania's Wharton School. Morris C. Aaron, is the Chief Financial Officer of Global. Since May 18, 1999, Mr. Aaron has also served as an executive officer and a Director of TNCi. Prior to his involvement in Global, from January 1996 to September 1998, Mr. Aaron was the Chief Financial Officer and Treasurer of Employee Solutions, Inc., a publicly-held company listed on the NASDAQ National Market. From 1986 to 1996, Mr. Aaron was with the firm of Arthur Andersen, LLC in the corporate finance and corporate restructuring group. Mr. Aaron holds a Bachelors Degree in Accounting from Pennsylvania State University, an M.B.A. from Columbia University and is a Certified Public Accountant in the State of New York. David N. Shevrin, has served as Vice President and Secretary of the Company since September 1998, with primary responsibility for business development and analysis. Prior thereto, from July 1998, Mr. Shevrin was Vice President of Ocean Castle Investments, LLC, another affiliate of Irwin L. Gross. His responsibilities there were also in the areas of business development and analysis. From November 1994 to July 1998, Mr. Shevrin was Assistant to the Chairman and Chief Executive Officer of Rare Medium, Inc. Before then, Mr. Shevrin served as a Product Manager with Kraft General Foods. M. Moshe Porat has been a Director of Global since September 1998 and a Director of TNCi since May 18, 1999. Since September 1996, Dr. Porat has served as the Dean of the School of Business and Management at Temple University. He is the Chairholder of the Joseph E. Boettner Professorship in Risk Management and Insurance. From 1988 to 1996 he was Chairman of the Risk Management, Insurance and Actuarial Science Department at Temple University. He received his undergraduate degree in economics and statistics (with distinction) from Tel Aviv University. His M.B.A. (Magna Cum Laude) is from the Recanati Graduate School of Management at Tel Aviv University. He completed his doctoral work at Temple University. Prior to his academic work, Dr. Porat served as deputy general manager of a large international insurance brokerage firm and insurance company as an economic and financial consultant. Dr. Porat has authored several monographs on captive insurance companies and their use in risk management, has published numerous articles on captive insurance companies, self insurance and other financial and risk topics, has served as an expert witness and has won several awards. Dr. Porat holds the CPCU professional designation and is a member of ARIA (American 25 Risk and Insurance Association), IIS (International Insurance Society), RIMS (Risk and Insurance Management Society) and Society of CPCU. Charles T. Condy has been a Director of Global since September 1998 and has been a director of Rare Medium, Inc. since June 1996. Mr. Condy is the founder, chairman and chief executive officer of Next Century Restaurants, Inc., a private company which is the owner of Aqua, and 44 Charles of Nob Hill, both of which are in San Francisco, and Aqua of Las Vegas. He is founder and has been chairman and chief executive officer of Proven Alternatives, Inc., a privately held international energy management company, since 1991. Mr. Condy was chairman and chief executive officer of California Energy Company, Inc., a geothermal energy company which he founded in 1971, and which become the largest geothermal energy company in the world. Prior to founding California Energy Company, Mr. Condy was executive vice president--Western region of John Nuveen and Company, members of the New York Stock Exchange. In the public policy area, Mr. Condy helped found and has served as a board member of the Business Council for a Sustainable Energy Future and the Coalition for Energy Efficiency and Renewable Technologies. Mr. Condy currently advises the U.S. Department of Energy, the U.S. Agency for International Development, and the U.S. Asian Environmental Partnership on energy efficiency technology transfer and related funding to developing economies. Stephen Schachman has been a Director of Global since September 1998. Mr. Schachman became a Director of TNCi on May 18, 1999 and currently is a consultant to TNCi. Since 1995, Mr. Schachman has been the owner of his own consulting firm, Public Affairs Management, which is located in the suburban Philadelphia area. From 1992 to 1995, Mr. Schachman was an executive officer and consultant to Penn Fuel Gas Company, a supplier of natural gas products. Prior thereto, he was an attorney with the Philadelphia law firm Dilworth, Paxson, Kalish & Kaufman. Mr. Schachman was also an Executive Vice President of Bell Atlantic Mobile System and prior thereto, President of the Philadelphia Gas Works, the largest municipally owned gas company in the United States. Mr. Schachman has a Bachelor of Arts degree from the University of Pennsylvania and Juris Doctor degree from the Georgetown University Law School. Officers serve at the discretion of the Board of Directors, subject to rights, if any, under contracts of employment. Compliance With Section 16(a) Of The Securities Exchange Act Of 1934 The SEC has comprehensive rules relating to the reporting of securities transactions by directors, officers and stockholders who beneficially own more than 10% of Global's Class A Common Stock (collectively, the "Reporting Persons"). These rules are complex and difficult to interpret. Based solely on a review of Section 16 reports received by Global from Reporting Persons, Global believes that no Reporting Person has failed to file a Section 16 report on a timely basis during the most recent fiscal year. ITEM 10 - EXECUTIVE COMPENSATION. The summary compensation table below sets forth the aggregate compensation paid or accrued by Global for the Transition Period ended June 30, 1999 and Global's last two fiscal years ended October 31, 1998 and October 31, 1997 to (i) the Chief Executive Officer (the "CEO"), (ii) Global's most highly paid executive officers other than the CEO who were serving as executive officers at the end of the last completed fiscal year and whose total annual salary and bonus exceeded $100,000, and (iii) one other employee for whom such information would have been disclosed pursuant to the preceding clause, but for the fact that such employee was not an executive officer at the end of the last completed fiscal year (collectively, the "Named Executives"). 45
Long Term Compensation Annual Compensation Sec. Underlying ---------------------------- Stock Option Name And Principal Position Year Salary ($) Bonus ($) Awards (#) --------------------------- ---- --------- --------- ---------------- Irwin L. Gross, 1999 -- -- -- Chief Executive Officer 1998 -- -- -- 1997 -- -- -- James W. Fox, President (1) 1999 104,718 -- 70,000 1998 -- -- 30,000 1997 -- -- -- Morris C. Aaron, 1999 130,289 -- 50,000 Chief Financial Officer (2) 1998 18,590 -- -- 1997 -- -- -- David Shevrin, Secretary (3) 1999 71,924 -- 50,000 1998 8,462 -- -- 1997 -- -- -- Frank Gomer, President, 1999 101,042 43,797 -- Interactive Entertainment Division (4) 1998 153,686 54,445 7,667 1997 90,658 20,000 9,000
- ------------ (1) Mr. Fox started employment with Global on January 1, 1999. (2) Mr. Aaron started employment with Global on September 25, 1998. (3) Mr. Shevrin started employment with Global on September 15, 1998. (4) Dr. Gomer started employment with Global on February 10, 1997. The amount for the annual bonus during the 1997 fiscal year represents a signing bonus. Option Grants In Fiscal Year The following table sets forth the stock option grants made during the Transition Period to the Named Executives:
Number of Percent of Total Securities Options Granted To Underlying Options Employees In Exercise Price Name Granted (#) Transition Period (1) ($/Share) Expiration Date ---- ------------------ --------------------- -------------- --------------- Irwin L. Gross -- -- -- -- James W. Fox (2) 70,000 33.2% 2.50 01/01/2009 Morris C. Aaron (3) 50,000 23.7% 1.69 12/12/2008 David Shevrin (4) 50,000 23.7% 1.69 12/12/2008 Frank Gomer (5) 4,500 2.2% 2.63 02/19/2008
- ---------- (1) Based on a total of 210,698 options granted to employees during the 1999 fiscal year. (2) 14,000 options are immediately exercisable, and 14,000 become exercisable on each of January 1, 2000, December 31, 2000, January 1, 2002 and December 31, 2002. 46 (3) 10,000 options are immediately exercisable, and 10,000 become exercisable on each of December 12, 1999, 2000, 2001 and 2002. (4) 16,667 options become exercisable on each of December 12, 1999, 2000 and 2001. (5) Represents 2,000 and 2,500 options repriced from $21.94 and $13.50, respectively, on April 10, 1999. Option Exercises In Last Fiscal Year And Fiscal Year-End Values The following table sets forth the stock options exercises made during the Transition Period by the Named Executives, as well as the value of their unexercised stock options as of the end of the Transition Period:
Number of Securities Underlying Unexercised Value of Unexercised Shares Options at In-The-Money Options at Acquired on Value June 30, 1999 June 30, 1999 Name Exercise (#) Realized ($) Exercisable/Unexercisable (1) Exercisable/Unexercisable ($) ---- ------------ ------------ ----------------------------- ----------------------------- Irwin L. Gross -- -- -- -- James W. Fox -- -- 14,000/86,000 24,500/172,750 Morris C. Aaron -- -- 10,000/40,000 25,620/102,480 David Shevrin -- -- --/50,000 --/128,100 Frank Gomer -- -- 7,065/9,102 11,481/18,541
- ---------- (1) Subject to reduction as described above under "Option Grants in Fiscal Year," all of these options had an exercise price less than the closing bid price per share of Global's Class A Common Stock on the Nasdaq National Market of $4.25 at June 30, 1999. Director Compensation Outside directors receive $1,000 for each meeting of the Board of Directors, and $500 for each committee meeting, attended in person or by telephone. In addition, all directors are reimbursed for expenses actually incurred in connection with each meeting of the Board of Directors or any Committee thereof attended. Each director has also received grants of options under the Company's 1997 Stock Option Plan. Global's 1994 Stock Option Plan (the "1994 Plan") provides for the automatic grant of non-qualified stock options to directors of Global who are not employees or principal stockholders of the Company ("Eligible Directors") to purchase shares of common stock ("Director Options"). On the date an Eligible Director becomes a director of Global, he or she is granted Director Options to purchase 10,000 shares of Global's Class A Common Stock (the "Initial Director Options"). On the day immediately following the date of the annual meeting of stockholders for Global for each fiscal year, each Eligible Director, other than directors who received Initial Director Options since Global's prior annual meeting, is granted Director Options to purchase 1,000 shares of Global's Class A Common Stock (each an "Automatic Grant"), as long as such director is a member of the Board of Directors on such day. The exercise price for each share subject to a Director Option shall be equal to the fair market value of the Class A 47 Common Stock on the date of grant, except for directors who receive incentive options and who own more than 10% of the voting power, in which case the exercise price shall be not less than 110% of the fair market value on the date of grant. Director Options are exercisable in four equal annual installments, commencing one year from the date of grant. Director Options will expire the earlier of 10 years after the date of grant or 90 days after the termination of the director's service on the Board of Directors. The 1994 Plan and Global's 1997 Stock Option Plan (the "1997 Plan") also allow grants to directors in addition to or in lieu of an Automatic Grant. During the Transition Period, Messrs. Gross, Fox, Porat, Condy and Schachman each received an Automatic Grant. No Initial Director Options were granted. Employment And Severance Agreements Dr. Frank Gomer serves as President and Chief Operating Officer of TNCi pursuant to the terms of an employment agreement that terminates on June 10, 2001. Dr. Gomer receives a minimum annual base salary of $215,000. Beginning June 11, 1999 and ending June 11, 2003, Dr. Gomer also receives 50,000 10-year options under the Company's Stock Option Plan, which vest in increments of 10,000 options per year pursuant to the terms and conditions of the employment agreement. The employment agreement also provides for a severance payment in the event that the Company terminates Dr. Gomer other than for "cause" as defined in the employment agreement. The severance payment would be equal to two times the remaining balance of his base salary for the remainder of the then current term. The employment agreement also provides a payment in the event the Company terminates Dr. Gomer due to a termination of the Company's business as defined in the employment agreement or upon termination without cause following a change in control. In either such event, Dr. Gomer would receive an amount equal to two times his remaining base salary for the then current term, but not less than his annual base salary for one year. The employment agreement also provides that the company may pay other incentive compensation as may be set by the Board of Directors from time to time, and for such other fringe benefits as are paid to other executive officers of the Company. Such fringe benefits take the form of medical and dental coverage and an automobile allowance of $500 per month. Morris C. Aaron serves as Executive Vice President and Chief Financial Officer of TNCi pursuant to the terms of an employment agreement that terminates on June 10, 2001. Mr. Aaron receives a minimum annual base salary of $215,000. Beginning June 11, 1999 and ending June 11, 2003, Mr. Aaron also receives 50,000 10-year options under the Company's Stock Option Plan, which vest in increments of 10,000 options per year pursuant to the terms of the employment agreement. The employment agreement provides for a severance payment in the event that the Company terminates Mr. Aaron other than for "cause" as defined in the employment agreement. The severance payment would be equal to two times the remaining balance of his base salary for the remainder of the then current term. The employment agreement also provides a payment in the event the Company terminates Mr. Aaron due to a termination of the Company's business as defined in the employment agreement. In the event of the termination of the Company's business, Mr. Aaron would receive an amount equal to two times his remaining base salary for the then current term, but not less than his annual base salary for one year. The 48 employment agreement also provides that the company may pay other incentive compensation as may be set by the Board of Directors from time to time, and for such other fringe benefits as are paid to other executive officers of the Company. Such fringe benefits take the form of medical and dental coverage and an automobile allowance of $500 per month. James W. Fox serves as President and Chief Operating Officer pursuant to the terms of an employment agreement that terminates on December 31, 2000. Mr. Fox receives a minimum annual base salary of $225,000 and, subject to the achievement of assigned goals, bonuses of not less than 20% of his annual salary. Mr. Fox also received 70,000 10-year options under the Company's 1997 Stock Option Plan, which vest in increments of 14,000 options per year pursuant to the terms of the employment agreement. The employment agreement provides for a severance payment in the event that the Company terminates Mr. Fox other than for "cause" as defined in the employment agreement. The severance payment would be equal to two times the remaining balance of his base salary for the remainder of the then current term. The employment agreement also provides a payment in the event the Company terminates Mr. Fox due to a termination of the Company's business as defined in the employment agreement. In the event of the termination of the Company's business, Mr. Fox would receive an amount equal to two times his remaining base salary for the then current term, but not less than his annual base salary for one year. The employment agreement also provides that the company may pay other incentive compensation as may be set by the Board of Directors from time to time, and for such other fringe benefits as are paid to other executive officers of the Company. Such fringe benefits take the form of medical and dental coverage and an automobile allowance of $450 per month. Stock Option Repricings On February 10, 1998, Global's former Board of Directors adopted a plan to reduce the exercise price on the stock options under the 1994 Plan and the 1997 Plan. The exercise price on one-half of each outstanding option was reduced to $2.625 per share (the closing price for Global's stock on February 10, 1998) on October 10, 1998, and on the other half of each outstanding option on April 10, 1999, provided the option holder was still employed by Global on such dates. The plan amendment was approved by the Board of Directors to retain key employees, retain appropriate levels of incentive and maintain competitive compensation levels. As a result of this action, 4,000 options and 5,000 options held by Dr. Gomer with exercise prices of $21.939 and $13.50, respectively, were repriced to $2.625. ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth certain information as of October 15, 1999 regarding the ownership of Global's Class A Common Stock and Series A Preferred Stock and of TNCi's common stock by (i) each person known by Global to own beneficially more than five percent of any class of Global's voting securities, (ii) each director of Global, (iii) each executive officer of Global and (iv) all executive officers and directors of Global as a group. 49
Series A Class A Convertible TNCi Common Stock Preferred Stock Common Stock -------------------------- --------------------- ---------------------- Name and Address of Number of Percent of Number Percent Number Percent Beneficial Owner (1) Shares Class (2) of Shares of Class of Shares of Class - -------------------- ----------- ---------- --------- -------- --------- -------- Irwin L. Gross Ocean Castle Partners, LLC 522,874 (3) 8.3% -- -- 66,667 1% Charles T. Condy 13,750 (4) * -- -- -- -- Stephen M. Schachman 10,000 (5) * -- -- -- -- M. Moshe Porat 652,610 (6) 10.7% -- -- -- -- David N. Shevrin 16,667 (7) * -- -- -- -- Morris C. Aaron 24,100 (8) * -- -- 10,000(13) -- James W. Fox 24,000 (9) * -- -- -- -- The Shaar Fund, Ltd. 87,500 (10) 1.4% 3,000 100% -- -- Ruki Renov 431,014 (11) 7.0% -- -- -- -- Esther Stahler 381,781 (12) 6.2% -- -- All executive officers and direcors of the Company as a group (7 persons) 1,264,001 19.6% -- --- 76,667 1%
- ------------------- * Less than 1%. (1) Unless otherwise noted, all persons named in the table have sole voting and investment power with respect to all shares beneficially owned by them. Except as otherwise indicated below, the address of each beneficial owner is c/o Global Technologies, Ltd., 1811 Chestnut Street, Philadelphia, Pennsylvania 19103. (2) Based on 6,114,217 shares of Class A Common Stock outstanding, except that shares underlying options and warrants to purchase Class A Common Stock exercisable within sixty (60) days are deemed to be outstanding for purposes of calculating the percentage owned by the holder(s) of such options and warrants. (3) Includes 99,542 shares owned by Ocean Castle Partners, LLC, an entity controlled by Mr. Gross, and 33,963 shares owned by trusts for the benefit of Mr. Gross' children as to which Mr. Gross disclaims beneficial ownership. Also includes 250,000 shares issuable to Mr. Gross upon exercise of options exercisable within 60 days. (4) Includes 10,000 shares issuable to Mr. Condy upon exercise of options exercisable within 60 days. (5) Represents 10,000 shares issuable to Mr. Schachman upon exercise of options exercisable within 60 days. (6) Includes 637,610 shares owned by third parties over which Mr. Porat retains voting power pursuant to certain proxy agreements, and 10,000 shares issuable to Mr. Porat upon exercise of options exercisable within 60 days. (7) Represents 16,667 shares issuable to Mr. Shevrin upon exercise of options exercisable within 60 days. (8) Includes 20,000 shares issuable to Mr. Aaron upon exercise of options exercisable within 60 days. (9) Represents 24,000 shares issuable to Mr. Fox upon exercise of options exercisable within 60 days. (10) Represents 87,500 shares issuable to The Shaar Fund, Ltd. upon exercise of a Warrant exercisable within 60 days. The address of The Shaar Fund, Ltd. is c/o Shaar Fund Advisory Services, Ltd., 62 King George Road, Apartment 4F, Jerusalem, Israel. 50 (11) According to Amendment No. 2 to Schedule 13G dated September 29, 1999 filed by Ruki Renov, Mrs. Renov's address is 172 Broadway, Lawrence, NY 11559. Mrs. Renov has sole voting power over 9,000 shares owned directly by her, and options to purchase 86,332 additional shares, which options are exercisable within 60 days. Mrs. Renov also has shared voting power over 250,000 shares which are owned by an entity of which she is a director. Mrs. Renov may also be deemed to be the beneficial owner of 34,566 shares owned by a family limited partnership controlled by her, 42,783 shares owned jointly by Mrs. Renov and her spouse, and 9,333 shares owned by her spouse. (12) According Amendment No. 1 to Schedule 13G dated September 29, 1999 filed by Esther Stahler, Mrs. Stahler's address is 10 Lakeside Drive, Lawrence, NY 11559. Mrs. Stahler has sole voting power over 3,666 shares owned directly by her, and options to purchase 86,332 additional shares, which options are exercisable within 60 days. Mrs. Stahler also has shared voting power over 250,000 shares which are owned by an entity of which she is a director, and may also be deemed to be the beneficial owner of 41,783 shares owned jointly by her and her spouse. (13) Represents 10,000 shares issuable to Mr. Aaron upon exercise of options exercisable within 60 days. ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. CONSULTING ARRANGEMENTS Global's Chief Executive Officer is a principal of Ocean Castle Partners, LLC which maintains administrative offices for Global's Chief Executive Officer, Corporate Secretary and certain other employees. During the year ended October 31, 1998, Ocean Castle executed consulting agreements with two principal stockholders of Global. The rights and obligations of Ocean Castle under the agreements were assumed by TNCi in connection with the TNCi Transaction. The consulting agreements require payments aggregating $1,000,000 to each of the consultants through December 2003 in exchange for advisory services. Each of the consultants also received stock options to purchase 33,333 shares of Global's Class A Common Stock at an exercise price of $4.50. As of June 30, 1999, TNCi determined that the consulting agreements had no future value due to TNCi's shift away from in-flight entertainment into alternative markets such as leisure cruise and passenger rail transport. Only limited services were provided in 1999 and no future services will by utilized. Accordingly, TNCi recorded a charge to general and administrative expenses in the Transition Period of $1.6 million representing the balance due under such contracts. The Company has entered into a consulting agreement with First Lawrence Capital Corp. to perform various financial advisory services related to ongoing business development and management. The former managing director of First Lawrence was also a director of the Company. The Company retained, on a full time basis as President and Chief Operating Officer, the services of the former managing director of First Lawrence effective December 12, 1998. Accordingly, the Company has entered into an employment contract with such individual. During the year ended October 31, 1998, the Company paid $11,846 under the First Lawrence consulting agreement. The Company executed a consulting agreement with the Whitestone Group, LLC, a shareholder of First Lawrence. Pursuant to the agreement, the Company paid $250,000 for consulting services received during fiscal 1998. On September 15, 1998, Global entered into consulting agreements with Messrs. Michail Itkis, Thomas M. Metzler and John W. Alderfer in connection with Global's agreements with Swissair. In consideration for such services, Global has paid Mr. Itkis $200,000 through September 15, 1999, Mr. Metzler $300,000 through June 15, 1999 and Mr. Alderfer $235,000 through March 15, 1999. 51 FORTUNET LICENSE In October 1994, Global entered into an Intellectual Property License and Support Services Agreement with FortuNet, Inc. ("FortuNet"), which was amended and restated on November 7, 1996 (as amended, the "FortuNet License"). The FortuNet License grants Global a worldwide, perpetual license to FortuNet's current and future patents, copyrights, trade secrets and related know-how covering a computerized system for use in all fields other than bingo halls. Further, this license is exclusive to Global within the airline industry. As consideration, Global must pay FortuNet an annual license fee of $100,000 in monthly installments through November 2002. Global was previously also required to compensate FortuNet for certain development, support and maintenance services, but this obligation has been terminated. Further, the restated version of the FortuNet License no longer prohibits Global from engaging in any gaming activities outside of airplanes. In exchange for these amendments to the FortuNet License and certain other modifications, on November 7, 1996, Global issued to FortuNet a warrant to purchase 16,667 shares of Class A Common Stock at a price of $29.25 per share, which was repriced on January 6, 1997 to $24.00 per share. Under the FortuNet License, an aggregate of $100,000 was paid to FortuNet in fiscal 1998. Subsequent to June 30, 1999, the Company agreed to a termination of this agreement and paid FortuNet $100,000 plus legal fees. During the Transition Period ended June 30, 1999, the Company had revised its estimated accrual to $200,000 which is included in accrued liabilities in the consolidated balance sheet at June 30, 1999. Additionally, the Company repriced the exercise price of the stock purchase warrants to $4.50 per share. Yuri Itkis, a former director of Global, is the President and sole stockholder of FortuNet and Boris Itkis, a former director of Global and a son of Yuri Itkis, is an employee of FortuNet. Michail Itkis, the former Chief Executive Officer and a former director of Global, is also a son of Yuri Itkis and was an employee of FortuNet until October 1994. STOCKHOLDERS' AGREEMENT In October 1994, Global entered into a stockholders' agreement with Yuri Itkis, Michail Itkis, Boris Itkis, Steven M. Fieldman, Donald H. Goldman and Lance Fieldman (the "Stockholders' Agreement"). In connection with the May 1996 and November 1996 resignations of Messrs. Goldman, Steven Fieldman and Lance Fieldman, and in connection with the execution of the Strategic Alliance Agreement with Hyatt, the parties to the Stockholders' Agreement entered into agreements which terminated the Stockholders' Agreement as to Messrs. Goldman, Steven Fieldman and Lance Fieldman, added Hyatt as a Stockholder under the Stockholders' Agreement, and amended certain terms of the Stockholders' Agreement. On November 10, 1997 with the termination of the Alliance Agreement with Hyatt, the Stockholders' Agreement was amended again to terminate Hyatt's rights. As amended, the Stockholders' Agreement provided that Michail Itkis and Yuri Itkis shall each be entitled to designate one nominee to Global's Board of Directors. No other parties had any continuing right under the Stockholders' Agreement to nominate a director. Each stockholder who was a party to the Stockholders' Agreement agreed to vote all the shares of Common Stock owned by him for the election of the directors so nominated and not to take any action to remove 52 any director so elected (except for the director(s) nominated by such stockholder). The Stockholders' Agreement was terminated on September 15, 1998. PURCHASE OF SHARES Pursuant to the settlement of various lawsuits and other claims instituted by Barrington Capital Group, L.P. ("Barrington") against Global, Ocean Castle and others, Ocean Castle purchased from Barrington 99,542 shares of Class A Common Stock of Global at $4.50 per share on October 21, 1998. Global temporarily loaned the funds to Ocean Castle to effectuate such purchase and Ocean Castle has subsequently repaid such loan. EMPLOYMENT MATTERS Global has employment agreements with certain of its executive officers and has granted such officers options to purchase shares of Class A Common Stock. See Item 10 -- "Executive Compensation -- Employment and Severance Agreements". ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K The following Index to Exhibits lists the Exhibits filed as part of this Annual Report on Form 10-KSB. Where so indicated, Exhibits which were previously filed are incorporated by reference. Documents filed herewith are denoted with an asterix (*). 53 Exhibit Number Description - ------- ----------- 2.1 Asset Purchase and Sale Agreement dated as of April 29, 1999 between the Registrant and TNCi. (8) 2.2 First Amendment to Asset Purchase and Sale Agreement dated as of May 14, 1999 between the Registrant and TNCi. (8) 3.1 Certificate of Ownership and Merger. (1) 3.2 Amended and Restated Certificate of Incorporation of the Registrant. (1) 3.3 Certificate of Amendment of Amended and Restated Certificate of Incorporation of Registrant dated November 2, 1998. (9) 3.4 Certificate of Designations, Preferences, and Rights of Series A Convertible Preferred Stock of the Registrant. (9) 3.5 Certificate of Designations, Preferences, and Rights of Series B Convertible Preferred Stock of the Registrant. (9) 3.6 By-laws of the Registrant. (1) 4.1 Warrant Agreement, dated as of March 7, 1995 among the Registrant, D. H. Blair Investment Banking Corp. and American Stock Transfer & Trust Company. (1) 4.2 Amendment to March 7, 1995 Warrant Agreement, among the Registrant, D. H. Blair Investment Banking Corp. and American Stock Transfer & Trust Company. (4) 4.3 Warrant Agreement dated as of October 24, 1996 among the Registrant, D. H. Blair Investment Banking Corp. and American Stock Transfer & Trust Company. (4) 4.4 Amendment to October 24, 1996 Warrant Agreement, among the Registrant, D. H. Blair Investment Banking Corp., and American Stock Transfer & Trust Company. (4) 4.5 Form of Underwriter's Unit Purchase Option. (1) 4.6 Stock Purchase Warrant dated as of November 7, 1996 issued to FortuNet, Inc. (4) 4.7 Stock Purchase Warrant dated as of November 12, 1996 issued to Houlihan Lokey Howard & Zukin. (4) 4.8* Form of Warrant issued to The Shaar Fund Ltd. dated May 10, 1999 4.9* Registration Rights Agreement dated May 6, 1999 between the Registrant and The Shaar Fund Ltd. 54 Exhibit Number Description - ------- ----------- 10.1 Amended and Restated 1994 Stock Option Plan. (3) 10.2 Employment Agreement between the Registrant and Michail Itkis dated as of October 31, 1994. (l) 10.3 Employment Agreement between the Registrant and John Alderfer dated as of October 2, 1996. (4) 10.4 Severance Agreement between the Registrant and Lance Fieldman dated as of November 4, 1996. (4) 10.5 Amended and Restated Shareholders' Agreement by dated as of October 6, 1994 Yuri Itkis, Michail Itkis, Boris Itkis, Steven M. Fieldman, Donald H. Goldman, Lance Fieldman and Registrant [still applicable]. (l) 10.6 Amended and Restated Intellectual Property License and Support Services Agreement dated as of November 7, 1996 between FortuNet, Inc. and Registrant. (4) 10.7 Amended and Restated Escrow Agreement between the Registrant, American Stock Transfer & Trust Company, Yuri Itkis, Michail Itkis, Boris Itkis, Steven M. Fieldman, Donald H. Goldman and Lance Fieldman. (1) 10.8 Sublease and Consent dated July 16, 1996 between the Registrant and AGF 4041 Limited Partnership. (4) 10.9 Office Lease dated July 15, 1996 between the Registrant and AGF 4041 Limited Partnership. (4) 10.10 Standard Industrial/Commercial Single-Tenant Lease-Net, dated as of June 27, 1996, between the Registrant and 44th Street and Van Buren Limited Partnership. (4) 10.11 Form of Indemnification Agreement. (1) 10.12 Strategic Alliance Agreement dated as of November 12, 1996 between the Registrant and Hyatt Ventures, Inc. (4) 10.13 Registration Rights Agreement dated as of November 12, 1996 between the Registrant and Hyatt Ventures, Inc. (4) 10.14 Amendment No. 2 to Amended and Restated Shareholders' Agreement dated as of November 12, 1996. (4) 10.15 Employment Agreement between the Registrant and Thomas Metzler dated as of November 18, 1996. (5) 10.16 Termination Agreement dated November 10, 1997 between the Registrant and Hyatt Ventures, Inc. 10.17 Lease Surrender Agreement dated as of May 12, 1998. (6) 55 Exhibit Number Description - ------- ----------- 10.18 Amendment to Severance Compensation Agreement dated as of August 28, 1998 between the Registrant and Michail Itkis. (7) 10.19 Second Amendment to Employment Agreement dated as of August 28, 1998 between the Registrant and John Alderfer. (7) 10.20 Second Amendment to Employment Agreement dated as of August 28, 1998 Between the Registrant and Thomas Metzler. (7) 10.21* Office Lease dated as of September 10, 1999 between the Registrant and 135 East 57th Street LLC. 10.22 Securities Purchase Agreement dated as of May 10, 1999 between the Registrant and The Shaar Fund, Ltd. (9) 10.23* Assignment dated May 10, 1999 of rights under the Securities Purchase Agreement and the Registration Rights Agreement, both dated October 23, 1998 between TNCi and the Shaar Fund Ltd. to the Registrant. 10.24* Amendment dated May 10, 1999 to Registration Rights Agreement dated October 23, 1998 between Registrant and TNCi. 10.25* Securities Purchase Agreement dated as of May 10, 1999 between TNCi and the Registrant for TNCi Series C Convertible Preferred Stock. 10.26* Form of Securities Purchase Agreement dated as of June 25, 1999. 10.27* Registration Rights Agreement dated July 1999 respecting shares issued pursuant to the Securities Purchase Agreement dated as of June 25, 1999, for the purchase of TNCi Series A and Series E Notes 10.28* Form of Put/Call Agreement dated July 1999. 10.29* Securities Purchase Agreement dated August 9, 1999 for the purchase of TNCi Series D Notes. 10.30* Form of Warrant Purchase Agreement dated August 9, 1999 between Registrant and certain TNCi Warrant holders. 10.31* Registration Rights Agreement dated August 12, 1999 among the Registrant, XCEL Capital, LLC and Elaine Martin. 10.32* Registration Rights Agreement dated August 12, 1999 among the Registrant, Robert E. Benninger, Jr., Sara Anne Benninger, Will Brantley and Elaine Martin. 10.33* Form of Put/Call Agreement dated August 12, 1999 respecting shares issued pursuant to the Warrant Purchase Agreement between the Registrant and certain TNCi Warrant holders. 10.34* Employment Agreement between the Registrant and James W. Fox. 56 Exhibit Number Description - ------- ----------- 23* Consent of KPMG 27* Financial Data Schedule 99.1 Certificate of Designations of Series B Convertible Preferred Stock of TNCi dated October 23, 1998. (8) 99.2 Amendment dated as of April 29, 1999 to Certificate of Designations of Series B Convertible Preferred Stock of TNCi. (8) 99.3 Certificate of Designations of Series C Convertible Preferred Stock of TNCi dated as of April 30, 1999. (8) 99.4 Certificate of Designations of Series D Convertible Preferred Stock of TNCi dated as of May 5, 1999. (8) 99.5* Agreement for the Sale and Purchase of Shares in Inter Lotto (UK) Limited dated April 29, 1999 between Crown Leisure Sales Limited and IFT Holdings Limited. 99.6* Shareholders Agreement dated April 29, 1999 by and between Norman Feinstein & Others and IFT Holdings Limited and Inter Lotto (UK) Limited. 99.7* Operating Agreement dated April 29, 1999 between Inter Lotto (UK) Limited and IFT Management Limited. 99.8 Secured Promissory Note dated January 29, 1999 made by TNCi and payable to the order of the Company. (8) 99.9 Allonge to Secured Promissory Note dated January 29, 1999. (8) 99.10 Second Allonge to Secured Promissory Note dated March 19, 1999. (8) 99.11 Third Allonge to Secured Promissory Note dated March 24, 1999. (8) 99.12 Fourth Allonge to Secured Promissory Note dated May 10, 1999. (8) 99.13* Fifth Allonge to Secured Promissory Note dated July 16, 1999. 99.14* Sixth Allonge to Secured Promissory Note dated August 9, 1999. 99.15* Seventh Allonge to Secured Promissory Note dated August 24, 1999. 99.15 Opinion of ValueMetrics, Inc. addressed to TNCi dated May 14, 1999. (8) - ---------- (1) Incorporated by reference from the Registrant's Registration Statement on Form SB-2, Registration No. 33-86928. (2) Incorporated by reference from the Registrant's Quarterly Report on Form 10-QSB for the fiscal period ended July 31, 1996, filed with the Securities and Exchange commission on September 16, 1996, File No. 0-25668. (3) Incorporated by reference from the Registrant's Registration Statement on Form SB-2, Registration No. 333-02044. (4) Incorporated by reference from the Registrant's Registration Statement on Form S-3, Registration No. 333-14013. (5) Incorporated by reference from the Registrant's Quarterly Report on Form 10-QSB for the fiscal quarter ended January 31, 1997, filed with the Securities and Exchange Commission on March 17, 1997, File No. 0-25668. 57 (6) Incorporated by reference from the Registrant's Quarterly Report on Form 10-QSB for the fiscal quarter ended April 30, 1998, filed with the Securities and Exchange Commission on June 5, 1998, File No. 0-25668. (7) Incorporated by reference from the Registrant's Quarterly Report on Form 10-QSB for the fiscal quarter ended July 31, 1998, filed with the Securities and Exchange Commission on September 15, 1998, File No. 0-25668. (8) Incorporated by reference from the Registrant's Current Report on Form 8-K dated May 17, 1999, filed with the Securities and Exchange Commission on June 1, 1999, File No. 0-25668. (9) Incorporated by reference from the Registrant's Quarterly Report on Form 10-QSB for the fiscal quarter ended April 30, 1999, filed with the Securities and Exchange Commission on June 14, 1999, File No. 0-25668. (10) Incorporated by reference from the Registrant's Annual Report on Form 10-K for the fiscal year ended October 31, 1998, filed with the Securities and Exchange Commission on January 20, 1999, File No. 0-25668. Reports on Form 8-K. On May 17, 1999 Global filed a report on Form 8-K regarding the sale of the Interactive Entertainment Division to TNCi, the acquisition of the TNCi Series B Preferred Stock from The Shaar Fund, Limited and the Fourth Allonge to the Secured Promissory Note from TNCi. This filing was amended on August 2, 1999 to provide certain pro forma financial information with respect to the transaction with TNCi. 58 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GLOBAL TECHNOLOGIES, LTD. Dated: October 26, 1999 By: /s/ IRWIN L. GROSS ----------------------- Irwin L. Gross, Chief Executive Officer In accordance with the Exchange Act, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Irwin L. Gross Chief Executive Officer October 26, 1999 - ------------------------------------ and Director Irwin L. Gross /s/ James W. Fox President and Director October 26, 1999 - ------------------------------------ James W. Fox /s/ Morris C. Aaron Chief Financial Officer October 26, 1999 - ------------------------------------ (Principal Financial Officer) Morris C. Aaron /s/ Director October __, 1999 - ------------------------------------ Charles T. Condy /s/ Stephen Schachman Director October 26, 1999 - ------------------------------------ Stephen Schachman Director October __, 1999 - ------------------------------------ M. Moshe Porat
GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Independent Auditors' Report........................................................................ F-2 Consolidated Balance Sheets as of June 30, 1999 and October 31, 1998................................ F-3 Consolidated Statements of Operations for the Transition Period Ended June 30, 1999 and the Years Ended October 31, 1998 and 1997.............................................. F-4 Consolidated Statements of Stockholders' Equity and Comprehensive Income for the Transition Period Ended June 30, 1999 and the Years Ended October 31, 1998 and 1997.................................................................. F-5 Consolidated Statements of Cash Flows for the Transition Period Ended June 30, 1999 and the Years Ended October 31, 1998 and 1997 ............................................. F-6 Notes to Consolidated Financial Statements ................................................. F-7 to F-35
F-1 INDEPENDENT AUDITORS' REPORT The Stockholders and Board of Directors Global Technologies, Ltd. and subsidiaries: We have audited the accompanying consolidated balance sheets of Global Technologies, Ltd. and subsidiaries as of June 30, 1999 and October 31, 1998 and the related consolidated statements of operations, changes in stockholders' equity and comprehensive income and cash flows for the Transition Period ended June 30, 1999 and each of the years in the two-year period ended October 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above, present fairly, in all material respects, the financial position of Global Technologies, Ltd. and subsidiaries as of June 30, 1999 and October 31, 1998 and the results of their operations and their cash flows for the Transition Period ended June 30, 1999 and each of the years in the two-year period ended October 31, 1998, in conformity with generally accepted accounting principles. /s/ KPMG LLP Phoenix, Arizona October 22, 1999 F-2 GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
JUNE 30, OCTOBER 31, ASSETS 1999 1998 ------------- ------------- Current assets: Cash and cash equivalents $ 15,521,275 $ 27,914,551 Restricted cash 1,412,736 1,039,311 Investments 4,594,751 3,690,604 Accounts receivable, net 128,489 1,135,342 Notes receivable from related parties 98,932 447,939 Inventories, net 1,400,000 1,005,427 Prepaid expenses 607,900 567,601 Assets held for use -- 699,196 Assets held for sale 800,000 -- Other current assets 470,273 379,046 ------------- ------------- Total current assets 25,034,356 36,879,017 Investments 5,752,599 -- Note receivable from related party 75,000 -- Property and equipment, net 1,369,392 780,035 Intangibles, net 7,119,806 -- Other assets 61,468 605,150 ------------- ------------- Total assets $ 39,412,621 $ 38,264,202 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,530,675 $ 1,447,815 Accrued liabilities 2,292,609 3,939,633 Deferred revenue 365,851 453,022 Accrued product warranties -- 5,369,008 Current maturities of notes payable 24,391 76,840 Notes payable to related parties 68,836 125,000 ------------- ------------- Total current liabilities 5,282,362 11,411,318 Notes payable 3,467,045 -- Accrued litigation settlement 1,843,750 -- ------------- ------------- Total liabilities 10,593,157 11,411,318 ------------- ------------- Minority interest 1,165,098 -- Commitments and contingencies Stockholders' equity: Preferred stock, par value $0.01 per share, 5,000,000 shares authorized Series A 8% Convertible preferred stock, 3,000 shares designated, issued and outstanding (liquidation preference of $1,200 per share) 30 -- Series B 8% Convertible preferred stock, 3,000 shares designated, zero shares issued and outstanding -- -- Class A common stock, one vote per share, par value $0.01 per share, 40,000,000 shares authorized;5,460,636 and 6,125,908 shares issued and outstanding, respectively 54,606 61,259 Class B common stock, six votes per share, par value $0.01 per share, 4,000,000 shares authorized; 0 and 1,225,445 shares issued and outstanding, respectively. The latter including 1,066,667 shares placed in escrow -- 12,445 Additional paid-in capital 113,462,394 112,371,141 Accumulated other comprehensive income: Net unrealized gain (loss) on investment securities (10,107) 6,754 Accumulated deficit (85,658,567) (83,282,732) Treasury stock, at cost; 78,600 and 844,667 shares respectively (193,990) (2,315,983) ------------- ------------- Total stockholders' equity 27,654,366 26,852,884 ------------- ------------- Total liabilities and stockholders' equity $ 39,412,621 $ 38,264,202 ============= =============
See accompanying notes to consolidated financial statements F-3 GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
TRANSITION PERIOD ENDED JUNE 30, YEAR ENDED OCTOBER 31, 1999 1998 1997 ------------ ------------ ------------ Revenue: Equipment sales $ 875,957 $ 18,038,619 $ 10,524,828 Service income 706,504 1,104,342 575,881 ------------ ------------ ------------ 1,582,461 19,142,961 11,100,709 ------------ ------------ ------------ Costs and expenses: Cost of equipment sales 1,517,323 15,523,282 24,646,334 Cost of service income 445,585 238,837 232,126 Provision for doubtful accounts 30,092 9,869 216,820 Research and development expenses -- 1,092,316 7,821,640 General and administrative expenses 6,688,813 11,387,872 12,574,223 Special charges 2,485,660 400,024 19,649,765 Expenses associated with investments 550,000 -- -- Reversal of warranty, maintenance and commission accruals (7,151,393) -- -- Bad debt recoveries -- -- (1,064,284) ------------ ------------ ------------ 4,566,080 28,652,200 64,076,624 ------------ ------------ ------------ Operating loss (2,983,619) (9,509,239) (52,975,915) Other: Interest expense (74,684) (11,954) (13,423) Interest income 1,060,229 2,251,055 2,170,675 Equity in loss of nonconsolidated affiliates (195,704) -- -- Gain on sale of assets 133,396 -- -- Other income (expense) 61,252 10,179 (203,649) ------------ ------------ ------------ Net loss before minority interest and preferred dividends (1,999,130) (7,259,959) (51,022,312) ------------ ------------ ------------ Minority interest (376,705) -- -- Net loss before preferred dividends $ (2,375,835) $ (7,259,959) $(51,022,312) Cumulative dividend on preferred stock (33,333) -- -- ------------ ------------ ------------ Net loss attributable to common stockholders $ (2,409,168) $ (7,259,959) $(51,022,312) ============ ============ ============ Basic and diluted net loss per share of common stock $ (0.44) $ (1.22) $ (8.89) ============ ============ ============ Weighted average shares outstanding: basic and diluted 5,416,124 5,933,004 5,738,987 ============ ============ ============
See accompanying notes to consolidated financial statements. F-4 GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
CLASS A CLASS B COMMON STOCK COMMON STOCK ------------------------------ --------------------------- SHARES AMOUNT SHARES AMOUNT ------------- ------------- ------------- ------------ Balance as of October 31, 1996 2,700,683 $ 27,007 1,320,000 $ 13,200 Class A common stock issued for services received (20,000 shares) 20,000 200 -- -- Class A common stock issued pursuant to Class B warrant exercise offer 3,266,587 32,666 -- -- Registration costs -- -- -- -- Redemption of Class B warrants -- -- -- -- Class A common stock issued under stock option plan pursuant to cashless exercise option 507 5 -- -- Automatic conversion of Class B shares to Class A shares upon sale to non-holder of Class B shares 75,555 755 (75,555) (755) Net loss -- -- -- -- --------- --------- ---------- --------- Balance as of October 31, 1997 6,063,332 $ 60,633 1,244,445 $ 12,445 Issuance of common stock pursuant to bonus plan 62,576 626 -- -- Treasury stock purchases (844,667 shares) -- -- -- -- Comprehensive income (loss): Unrealized gains on available for sale securities -- -- -- -- Net loss -- -- -- -- Total comprehensive loss -- -- -- -- --------- --------- ---------- --------- Balance as of October 31, 1998 6,125,908 $ 61,259 1,244,445 $ 12,445 Contribute to capital Class B shares held in escrow -- -- (1,066,667) (10,667) Voluntary conversion of Class B shares to Class A shares 177,778 1,778 (177,778) (1,778) Exercise of stock options 1,617 16 -- -- Treasury stock purchases (78,600 shares) -- -- -- -- Issuance of Series A preferred stock -- -- -- -- Issuance of Class A warrants -- -- -- -- Compensation expense -- -- -- -- Unearned compensation, net -- -- -- -- Equity attributable to minority interest -- -- -- -- Retirement of Treasury Stock (844,667) (8,447) -- -- Comprehensive income (loss): Unrealized loss on available for sale securities -- -- -- -- Net loss -- -- -- -- Total comprehensive loss -- -- -- -- --------- --------- ---------- --------- Balance as of June 30, 1999 5,460,636 $ 54,606 -- $ -- ========= ========= ========== ========= SERIES A NET UNREALIZED PREFERRED STOCK ADDITIONAL GAINS (LOSSES) ------------------------- PAID-IN ON INVESTMENT SHARES AMOUNT CAPITAL SECURITIES ----------- ----------- ------------- ------------- Balance as of October 31, 1996 -- $ -- $ 42,668,125 $ -- Class A common stock issued for services received (20,000 shares) -- -- 466,675 -- Class A common stock issued pursuant to Class B warrant exercise offer -- -- 73,557,109 -- Registration costs -- -- (4,481,164) -- Redemption of Class B warrants -- -- (40,576) -- Class A common stock issued under stock option plan pursuant to cashless exercise option -- -- 13,869 -- Automatic conversion of Class B shares to Class A shares upon sale to non-holder of Class B shares -- -- -- -- Net loss -- -- -- -- ------- -------- ------------- --------- Balance as of October 31, 1997 -- $ -- $ 112,184,038 $ -- Issuance of common stock pursuant to bonus plan -- -- 187,103 -- Treasury stock purchases (844,667 shares) -- -- -- -- Comprehensive income (loss): Unrealized gains on available for sale securities -- -- -- 6,754 Net loss -- -- -- -- Total comprehensive loss -- -- -- -- ------- -------- ------------- --------- Balance as of October 31, 1998 -- $ -- $ 112,371,141 $ 6,754 Contribute to capital Class B shares held in escrow -- -- 10,667 -- Voluntary conversion of Class B shares to Class A shares -- -- -- -- Exercise of stock options -- -- 4,228 -- Treasury stock purchases (78,600 shares) -- -- -- -- Issuance of Series A preferred stock 3,000 30 4,079,970 -- Issuance of Class A warrants -- -- 391,802 -- Compensation expense -- -- 120,320 -- Unearned compensation, net -- -- (73,449) -- Equity attributable to minority interest -- -- (1,134,749) -- Retirement of Treasury Stock -- -- (2,307,536) -- Comprehensive income (loss): Unrealized loss on available for sale securities -- -- -- (16,861) Net loss -- -- -- -- Total comprehensive loss -- -- -- -- ------- -------- ------------- --------- Balance as of June 30, 1999 3,000 $ 30 $ 113,462,394 $ (10,107) ======= ======== ============= ========= TOTAL ACCUMULATED TREASURY STOCKHOLDERS' DEFICIT STOCK EQUITY ------------- ------------- ------------- Balance as of October 31, 1996 $ (25,000,461) $ -- $ 17,707,871 Class A common stock issued for services received (20,000 shares) -- -- 466,875 Class A common stock issued pursuant to Class B warrant exercise offer -- -- 73,589,775 Registration costs -- -- (4,481,164) Redemption of Class B warrants -- -- (40,576) Class A common stock issued under stock option plan pursuant to cashless exercise option -- -- 13,874 Automatic conversion of Class B shares to Class A shares upon sale to non-holder of Class B shares -- -- -- Net loss (51,022,312) -- (51,022,312) ------------- ----------- ------------ Balance as of October 31, 1997 $ (76,022,773) $ -- $ 36,234,343 Issuance of common stock pursuant to bonus plan -- -- 187,729 Treasury stock purchases (844,667 shares) -- (2,315,983) (2,315,983) Comprehensive income (loss): Unrealized gains on available for sale securities -- -- -- Net loss (7,259,959) -- -- Total comprehensive loss -- -- (7,253,205) ------------- ----------- ------------ Balance as of October 31, 1998 $ (83,282,732) $(2,315,983) $ 26,852,884 Contribute to capital Class B shares held in escrow -- -- -- Voluntary conversion of Class B shares to Class A shares -- -- -- Exercise of stock options -- -- 4,244 Treasury stock purchases (78,600 shares) -- (193,990) (193,990) Issuance of Series A preferred stock -- -- 4,080,000 Issuance of Class A warrants -- -- 391,802 Compensation expense -- -- 120,320 Unearned compensation, net -- -- (73,449) Equity attributable to minority interest -- -- (1,134,749) Retirement of Treasury Stock -- 2,315,983 -- Comprehensive income (loss): Unrealized loss on available for sale securities -- -- -- Net loss (2,375,835) -- -- Total comprehensive loss -- -- (2,392,696) ------------- ----------- ------------ Balance as of June 30, 1999 $ (85,658,567 $ (193,990) $ 27,654,366 ============= =========== ============
See accompanying notes to consolidated financial statements. F-5 GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
TRANSITION PERIOD ENDED JUNE 30, YEAR ENDED OCTOBER 31, 1999 1998 1997 ------------ ------------ ------------ Cash flows from operating activities: Net loss $ (2,375,835) $ (7,259,959) $(51,022,312) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 394,317 1,338,017 1,815,779 Expense recognized upon issuance of stock options, warrants and shares of Class A common stock -- -- 480,749 Provision for doubtful accounts 30,092 9,869 216,820 Change in inventory valuation allowance (892,010) -- 8,297,933 Equity in loss of nonconsolidated affiliates 195,704 -- -- Loss applicable to minority interest 376,705 -- -- Special charges 2,365,340 (606,507) 19,649,765 Gain on sale of Johnny Valet, Inc. (133,396) -- -- Non cash compensation expense 139,649 -- -- Non cash expenses associated with investments 550,000 -- -- Reversal of warranty, maintenance and commission accruals (7,151,393) -- -- Loss on disposals of property and equipment -- 1,006,531 203,649 Changes in assets and liabilities, net of acquisition: Decrease (increase) in accounts receivable (560,439) 4,505,074 (3,815,139) Decrease in provision for doubtful accounts -- -- (1,949,197) Decrease (increase) in inventories 1,897,437 5,105,334 (12,563,721) Increase in note receivable -- (447,939) -- (Increase) decrease in prepaid expenses, other current assets and other assets (152,919) (532,338) 183,394 (Decrease) increase in accounts payable (1,218,791) (4,284,167) 1,673,893 (Decrease) increase in accrued liabilities 153,682 (892,345) (584,655) (Decrease) increase in deferred revenue 1,138,048 (1,930,882) 2,383,904 Increase in accrued product warranties -- 758,321 836,667 ------------ ------------ ------------ Net cash used in operating activities $ (5,243,809) $ (3,230,991) $(34,192,471) ------------ ------------ ------------ Cash flows from investing activities: Maturities of investment securities 1,049,995 2,468,880 6,810,275 Purchases of investment securities (3,891,176) (4,015,616) (2,137,084) Sales of investment securities 1,913,768 -- -- Investments in affiliates (7,572,409) -- -- Payments received on related party note receivable 509,391 -- -- Issuance of related party note receivable (75,000) Purchases of property and equipment (56,255) (77,013) (10,341,561) Proceeds from sale of equipment 7,200 3,620 -- Increase in restricted cash (373,425) (1,039,311) -- Purchase of Johnny Valet, Inc. -- (688,736) -- Proceeds from sale of Johnny Valet, Inc. 750,000 -- -- ------------ ------------ ------------ Net cash used in investing activities $ (7,737,911) $ (3,348,176) $ (5,668,370) ------------ ------------ ------------ Cash flows from financing activities: Payments on capital lease obligations -- (80,753) (53,085) Payments on notes payable (201,840) -- -- Purchase of treasury stock (193,990) (2,315,983) -- Proceeds from issuance of common stock 4,244 -- 73,589,775 Proceeds from sale of Series A 8% Convertible Preferred Stock 980,030 -- -- Registration costs -- -- (4,481,164) Redemption of Class A and Class B warrants -- -- (40,576) ------------ ------------ ------------ Net cash provided by (used in) financing activities $ 588,444 $ (2,396,736) $ 69,014,950 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents (12,393,276) (8,975,903) 29,154,109 Cash and cash equivalents at beginning of year 27,914,551 36,890,454 7,736,345 ------------ ------------ ------------ Cash and cash equivalents at end of year $ 15,521,275 $ 27,914,551 $ 36,890,454 ============ ============ ============
See accompanying notes to consolidated financial statements. F-6 GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (A) DESCRIPTION OF BUSINESS Global Technologies, Ltd. (formerly known as Interactive Flight Technologies, Inc.), and subsidiaries (the "Company" or "GTL") is a diversified technology-oriented operating company that develops and operates investments in the areas of e-commerce, interactive entertainment, networking solutions, telecommunications and gaming. The most significant of the Company's subsidiaries is The Network Connection, Inc. ("TNCi"). TNCi is engaged in the development, manufacturing and marketing of computer-based entertainment and data networks, which provides users access to information, entertainment and a wide array of service options, such as movies, shopping for goods and services, computer games, access to the World Wide Web and gambling, where permitted by applicable law. The Company's primary markets for its products are cruise ships, passenger trains, schools and corporate training. Secondary markets include business jets and hotel operators, among others. TNCi was acquired by the Company effective May 18, 1999 (May 1, 1999 for accounting purposes). Prior to the Transaction with TNCi, the consolidated financial statements for all periods presented included the results of operations of the Company's Interactive Entertainment Division ("IED") which was the primary business of the Company. (B) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Global Technologies, Ltd. and its wholly-owned subsidiaries: IFT Holdings UK, Ltd., IFT Management, Ltd., Interactive Flight Technologies Gibralter, Ltd., and MTJ Corp; and the majority-owned and controlled subsidiary TNCi. The ownership interest of minority shareholders in TNCi are recorded as "minority interest" on the accompanying consolidated financial statements. All significant intercompany accounts and transactions have been eliminated. The equity method of accounting is used for the Company's 50% or less owned affiliates over which the Company has the ability to exercise significant influence. The amount by which the Company's carrying value exceeds its share of the underlying net assets of equity affiliates ("Equity Goodwill") is amortized over five years on a straight-line basis which adjusts the Company's share of the affiliates earnings or losses. The Company has an investment that is accounted for at cost. The Company continually evaluates investments for indications of impairment based on the market value of each investment relative to cost, financial condition, near-term prospects of the investment, and other relative factors. If impairment is determined the carrying value is adjusted to fair value. (C) USE OF ESTIMATES The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Additionally, such estimates and assumptions affect the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. F-7 GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (D) CHANGE IN FISCAL YEAR END The Company has changed its fiscal year end from October 31 to June 30. Accordingly, the eight-month period resulting from this change, November 1, 1998 through June 30, 1999, is referred to as the "Transition Period". (E) REVERSE STOCK SPLIT On October 30, 1998, the stockholders of the Company approved a one-for-three reverse stock split on the Company's Class A common stock and Class B common stock. One share was issued for three shares of Common Stock held by stockholders of record as of the close of business on November 2, 1998. All references to the number of common shares, per share amounts and stock option data elsewhere in the consolidated financial statements and related footnotes have been restated as appropriate to reflect the effect of the reverse split for all periods presented prior to the reverse split. (F) CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities at the date of purchase of three months or less to be cash and cash equivalents. (G) RESTRICTED CASH At June 30, 1999 and October 31, 1998, the Company held restricted cash of $1,412,736 and $1,039,311, respectively. At June 30, 1999 and October 31, 1998, included in restricted cash was $52,612 and $601,809, respectively, held in a trust fund for payments required under consulting and severance agreements with three former executives of the Company, and $446,679 and $437,502 as of June 30, 1999 and October 31, 1998, respectively, for payments which may be required for one of the three former executives. See Note 17. At June 30, 1999, restricted cash also included $913,445 held in a certificate of deposit with a commercial bank as collateral for a letter of credit issued to secure repayment of equipment purchases for the Mexican Gaming project. (H) INVESTMENT SECURITIES Investment securities consist of debt securities with a maturity greater than three months at the time of purchase. In accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No. 115") the debt securities are classified as available-for-sale and carried at fair value, based on quoted market prices. The net unrealized gains or losses on these investments are reported in stockholders' equity. The specific identification method is used to compute the realized gains and losses on the debt securities. (I) INVENTORIES Inventories consisting principally of entertainment network components are stated at the lower of cost (first-in, first-out method) or market. (J) INTANGIBLES Intangibles consist of goodwill and trademarks. Goodwill represents the excess of the purchase price over the fair value of the net assets acquired and is amortized over ten years using the straight-line method. F-8 GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Trademarks are stated at fair market value at the date of acquisition and are amortized over ten years using the straight-line method. The Company continually evaluates whether events and circumstances have occurred that indicate the remaining estimated useful lives of intangibles may warrant revision or that the remaining balances may not be recoverable. When factors indicate that the assets should be evaluated for possible impairment, the Company uses an estimate of the undiscounted net cash flows over the remaining life of the assets in measuring whether the asset is recoverable. (K) PROPERTY AND EQUIPMENT Property and equipment are stated at the lower of cost or net realizable value. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the assets ranging from three to seven years. Leasehold improvements are depreciated using the straight-line method over the shorter of the underlying lease term or asset life. Assets acquired under capital lease arrangements have been recorded at the present value of the future minimum lease payments and are being amortized on a straight line basis over the estimated useful life of the asset or lease term, whichever is shorter. Amortization of this equipment is included in depreciation and amortization expense. (L) REVENUE RECOGNITION The Company's revenue derived from sales and installation of equipment is recognized upon installation and acceptance by the customer. Fees derived from servicing installed systems is recognized when earned, according to the terms of the service contract. Revenue pursuant to contracts that provide for revenue sharing with the customer and/or others is recognized as cash is received in the amount of the Company's retained portion of the cash pursuant to the revenue sharing agreement. Revenue earned pursuant to extended warranty agreements is recognized ratably over the warranty period. (M) DEFERRED REVENUE Deferred revenue at June 30, 1999 represents cash received on advance billings of equipment sales as allowed under installation contracts. At October 31, 1998, deferred revenue represents the gross profit on advance billings of equipment sales as allowed under installation and extended warranty contracts. (N) RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred except for development costs required by a customer contract. Development costs incurred pursuant to contractual obligations are allocated to deliverable units. These development costs are expensed as cost of equipment sales upon installation of the complete product and acceptance by the customer. (O) WARRANTY COSTS The Company provides, by a current charge to income, an amount it estimates will be needed to cover future warranty obligations for products sold with an initial warranty period. Revenue and expenses under extended warranty agreements are recognized ratably over the term of the extended warranty. F-9 GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (P) IMPAIRMENT OF LONG-LIVED ASSETS The Company records impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. If impairment is determined the carrying value is adjusted to fair value. (Q) INCOME TAXES Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (R) LOSS PER SHARE During fiscal 1998, the Company adopted Financial Accounting Standards Board (FASB) SFAS No. 128, "Earnings per Share" (SFAS No. 128). Loss per share for all prior periods have been restated to conform to the provisions of SFAS 128. Basic loss per share is computed by dividing loss attributable to common stockholders, by the weighted average number of common shares outstanding for the period. Diluted loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the loss of the Company. Weighted shares for purposes of the loss per share calculation do not include one million shares of common stock issuable upon the conversion of Series A 8% Convertible Preferred Stock at June 30, 1999, 1,066,667 shares placed in escrow at October 31, 1998 and 1997 due to the fact that they are contingently issuable and 749,146, 685,610 and 710,717 stock options outstanding at June 30, 1999, October 31, 1998 and 1997, respectively, because their inclusion would have been anti-dilutive. (S) STOCK-BASED COMPENSATION In accordance with the provisions of Accounting Principals Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), the Company measures stock-based compensation expense as the excess of the market price at the grant date over the amount the employee must pay for the stock. The Company's policy is to generally grant stock options at fair market value at the date of grant; accordingly, no compensation expense is recognized. As permitted, the Company has elected to adopt the pro forma disclosure provisions only of SFAS No. 123, "Accounting for Stock-Based Compensation". See Note 13. (T) RECLASSIFICATIONS Certain reclassifications have been made to the 1998 and 1997 consolidated financial statements to conform to the 1999 presentation. (U) RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", which establishes standards for the accounting and reporting for derivative instruments, including certain F-10 GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS derivative instruments embedded in other contracts, and hedging activities. This statement generally requires recognition of gains and losses on hedging instruments, based on changes in fair value or the earnings effect of forecasted transactions. As issued, SFAS No. 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133 -- An Amendment of FASB Statements No. 133", which deferred the effective date of SFAS No. 133 until June 15, 2000. The Company is currently evaluating the impact of SFAS No. 133. On November 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes standards for reporting and presentation of comprehensive income and its components in a full set of financial statements. Comprehensive income consists of net income and unrealized gains and losses on investment securities net of taxes and is presented in the consolidated statements of stockholders' equity and comprehensive income; it does not affect the Company's financial position or results of operations. On November 1, 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise" replacing the "industry segment" approach with the "management" approach. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. SFAS No. 131 also requires disclosure about products and services, geographical areas, and major customers. The adoption of SFAS No. 131 does not affect results of operations or financial position but does affect the disclosure of segment information. On November 1, 1998, the Company adopted Statement of Position (SOP) 98-5 "Reporting on the Costs of Start-Up Activities" issued by the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants. SOP 98-5 provides guidance on the financial reporting of start-up costs and organization costs. The SOP requires start-up activities and organization costs to be expensed as incurred. The adoption of SOP 98-5 did not have a material impact on the Company's results of operations. (2) ACQUISITION On May 11, 1999, the Company acquired from The Shaar Fund, Ltd. ("Shaar") 1,500 shares of Series B 8% Convertible Preferred Stock of TNCi, par value $.01 per share, stated value $1,000 per share (the "TNCi Series B Shares") and cash in the amount of $980,000 (net of $50,000 of legal fees) in exchange for (a) 3,000 shares of the Company's Series A 8% Convertible Preferred Stock, par value $.01 per share, stated value $1,000 per share with an estimated fair value of $4,080,000 and (b) warrants to purchase 87,500 shares of the Company's Class A Common Stock, par value $.01 per share, at an exercise price of $3.00 per share. In connection with this acquisition, the Company also received an assignment of (a) certain registration rights under a Registration Rights Agreement dated October 23, 1998 between TNCi and Shaar (the "Registration Rights Agreement") and (b) certain rights of first refusal held by Shaar with respect to future TNCi financings. Also on May 11, 1999, the Company acquired directly from TNCi 800 shares of Series C 8% Convertible Preferred Stock of TNCi, par value $.01 per share, stated value $1,000 per share (the "TNCi Series C Shares") in consideration for the Company's waiver of all prior TNCi defaults and arrearages arising out of or related to the TNCi Series B Shares. In connection with the forgoing acquisitions of the TNCi Series B Shares and TNCi Series C Shares, the Company also acquired the right to convert a Secured Promissory Note (the "Secured Promissory Note") made by TNCi in January 1999, payable to the order of the Company, into additional TNCi Series C Shares at the rate of $1,000 per TNCi Series C Share. The original principal amount of the Secured Promissory Note was $500,000. F-11 GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On May 18, 1999, the Company received from TNCi 1,055,745 shares of its common stock and 2,495,400 shares of its Series D Convertible Preferred Stock in exchange for $4,250,000 in cash and substantially all the assets and certain liabilities of the Interactive Entertainment Division, as defined in the Asset Purchase and Sale agreement dated April 30, 1999, as amended (the "Transaction"). The Company has consolidated the results of operations of TNCi from the date of acquisition. TNCi is a majority-owned subsidiary of the Company whose ownership, through a combination of the Transaction described above and the Company's purchase of TNCi's Series B Shares and 110,000 shares of TNCi's common stock from third party investors, approximates 78% of TNCi on an if-converted common stock basis. The Transaction has been accounted for by the purchase method of accounting and, accordingly, the purchase price has been allocated to the assets acquired and the liabilities assumed based upon estimated fair values at the date of acquisition as follows: Purchase Price: Cash $ 4,250,000 Net liabilities of IED contributed (4,012,430) ----------- Total 237,570 ----------- Assets acquired and liabilities assumed: Historical book value of net liabilities (2,457,723) Fair value adjustments: Inventory (1,280,847) Property (806,873) Other Assets (368,255) Liabilities (683,388) ----------- Total fair value of liabilities assumed (5,597,086) ----------- Excess of fair value of TNCi Series B 8% Preferred Stock and Series C 8% Preferred Stock over its recorded value (1,501,000) Purchase of Common Stock of TNCi (254,658) ----------- Excess of purchase price over fair value of net liabilities assumed (goodwill) $ 7,115,174 =========== The excess of fair value of TNCi Series B 8% Preferred Stock and Series C 8% Preferred Stock is the result of the Company's acquisition of such shares based on the fair value of the Company's Series A 8% Convertible Preferred Stock amounting to $4,080,000, less $980,000 (net of $50,000 of legal fees) cash received and the historical value of $1,549,000 of the Series B 8% Preferred Stock. Purchase of 110,000 shares of Common Stock of TNCi from a third party was valued based on the cash consideration paid by the Company for the shares. F-12 GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Pro Forma Pro forma unaudited operations data assuming the TNCi acquisition had taken place on November 1, 1997 is as follows: TRANSITION PERIOD ENDED YEAR ENDED JUNE 30, 1999 OCTOBER 31, 1998 ----------------- ---------------- Revenue $ 1,566,000 $24,146,000 Net loss $11,578,000 $17,590,000 Net loss per share $ 2.14 $ 2.96 (3) INVESTMENTS Investments are classified according to the applicable accounting method at June 30, 1999. Market value reflects the price of publicly traded securities at the close of business at the respective date. Unrealized gain (loss) reflects the excess (deficit) of market value over carrying value of publicly traded securities classified as available for sale. The following summarizes the Company's current portion of investments by type at:
GROSS GROSS UNREALIZED UNREALIZED AMORTIZED HOLDING HOLDING FAIR COST GAINS LOSSES VALUE ---------- ----------- ----------- ---------- JUNE 30, 1999 Available-for-sale: Corporate debt securities $4,604,858 $ -- $ (10,107) $4,594,751 ========== ========== ========== ========== OCTOBER 31, 1998 Available-for-sale: Corporate debt securities $3,683,850 $ 6,754 $ -- $3,690,604 ========== ========== ========== ==========
Corporate debt securities consist of corporate bonds with a maturity greater than three months at the time of purchase. F-13 GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following summarizes the Company's non-current investments at June 30, 1999: CARRYING VALUE --------------- Equity Affiliates (Approx. voting %) Inter Lotto (UK) Ltd. (27.5%) $ 1,050,775 Donativos S.A. de C.V. (24.5%) 1,664,555 --------------- $ 2,715,330 Cost Affiliates U.S. Wireless Corporation $ 3,037,269 -------------- Total Non-Current Investments $ 5,752,599 ============== (A) U.S. WIRELESS CORPORATION U.S. Wireless Corporation, a Delaware Corporation ("US Wireless") (NASDAQ: USWC), has developed a geographic location system designed to pinpoint the location of wireless telephone subscribers within a wireless network. The system uses proprietary technology developed by US Wireless. In March 1999, the Company invested $3 million in US Wireless in exchange for 30,000 shares of Series B Preferred Stock ("US Wireless Series B"). As of June 30, 1999, the Company accounts for this investment at cost. Each share of US Wireless Series B is convertible into approximately 67 shares of common stock of US Wireless until March 2000, after which each such share is convertible into 100 shares of common stock of US Wireless. The US Wireless Series B is subject to mandatory conversion into common stock at any time at a conversion rate of 100 shares of common stock of US Wireless in the event the closing price for US Wireless' common stock as reported on NASDAQ is at least $5.00 per share for 30 consecutive trading days. As of April 30, 1999, the Company incorrectly accounted for the US Wireless investment as available for sale. The excess of fair market value over the carrying value (unrealized gain) was incorrectly reflected as a separate component of stockholders' equity as of April 30, 1999. This investment is carried at cost as of June 30, 1999. Subsequent to June 1999, with the Company's concurrence, US Wireless has not registered the common shares underlying the US Wireless Series B shares and currently has no plans to register such shares. The US Wireless Series B entitles the holder to receive $100 per share liquidation preference before any distributions to the holders of common stock in the event of a liquidation of US Wireless. In addition, the Company and other holders of the US Wireless Series B have, as a separate class, elected one member to US Wireless' Board of Directors and one additional individual as an observer to the Board. As a condition to making the investment, the Company also obtained certain registration rights relating to the F-14 GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS registration under the Securities Act of 1933 of those shares of common stock of US Wireless into which the US Wireless Series B held by the Company is convertible. (B) INTER LOTTO (UK) LTD. In May 1999, the Company completed the acquisition of a 27.5% equity interest in Inter Lotto (UK) Ltd. ("Inter Lotto") through its wholly-owned subsidiary, IFT Holdings Limited, an United Kingdom ("UK") company ("IFT Holdings"). The Company accounts for this investment under the equity method. The balance of the shares of Inter Lotto is owned by seven shareholders. Inter Lotto has a license granted by the Gaming Board for Great Britain to operate daily lotteries on behalf of charities throughout the UK. By way of an Operating Agreement between Inter Lotto and IFT Management Limited, an UK company and wholly-owned subsidiary of IFT Holdings ("IFT Management"), IFT Management will manage the operations of the lotteries and Inter Lotto will retain responsibility for regulatory issues, charity recruiting and certain other functions as required under the gaming laws. IFT Management will be responsible for developing, installing, marketing and operating the lottery, selecting the game and managing the network. In exchange, IFT Management will retain a portion of the revenues generated. As of June 30, 1999, the Company's investment in Inter Lotto was $1,050,775 consisting of working capital advances, notes receivable and capitalized acquisition costs. During the Transition Period ended June 30, 1999, the Company recorded its proportionate share of losses of Inter Lotto and Equity Goodwill amortization of $167,493 which has been recorded as equity in loss of non-consolidated affiliates in the consolidated statement of operations. Inter Lotto has not commenced its principal operations as of June 30, 1999. (C) DONATIVOS Donativos, S.A. de C.V. ("Donativos") is a Mexican corporation formed for the purpose of operating a gaming and entertainment center in Monterrey, Nuevo Leon, Mexico. In May 1999, the Company, through its wholly-owned subsidiary, Interactive Flight Technology (Gibraltar) Ltd., a Gibraltar company ("IFT Gibraltar"), loaned $1,632,000 to Donativos in exchange for a 24.5% interest in the venture. The Company accounts for this investment under the equity method. In addition to IFT Gibraltar, other partners in the venture include Regal Gaming and Entertainment, Inc., a Minnesota corporation ("Regal Gaming"), which also has a 24.5% interest, and a Mexican national, who has a 51% interest. The IFT Gibraltar loan bears interest at an annual rate equal to the prime rate plus three percent (3%) and matures on April 30, 2001. The Company has also provided a letter of credit in the amount of $913,445 to secure repayment of the purchase price of certain gaming equipment to be acquired by IFT Gibraltar and leased to Donativos. In addition to its 24.5% equity interest in Donativos, in consideration for making the loan and providing the letter of credit, the Company will receive 25% of all of the profits generated by Donativos and, for a term of 10 years, the Company will have a 24.5% equity interest in any gaming venture in which Regal Gaming, or a subsidiary or affiliate of Regal Gaming, is an investor and which relates to gaming activities in Mexico. F-15 GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of June 30, 1999, the Company's investment in Donativos was $1,664,555 consisting of the $1,632,000 loan receivable and capitalized acquisition costs. During the Transition Period ended June 30, 1999, the Company recorded its proportionate share of losses of Donativos and Equity Goodwill amortization of $28,211 which has been recorded as equity in loss of non-consolidated affiliates in the consolidated statement of operations. (4) ACCOUNTS RECEIVABLE Accounts receivable consist of the following: JUNE 30, OCTOBER 31, 1999 1998 ----------- ----------- Trade accounts receivable $ 75,792 $ 1,130,648 Other 59,241 4,694 ----------- ----------- 135,033 1,135,342 Less allowance for doubtful accounts (6,544) -- ----------- ----------- $ 128,489 $ 1,135,342 =========== =========== (5) INVENTORIES Inventories consist of the following: JUNE 30, OCTOBER 31, 1999 1998 ----------- ------------ Raw materials $ 2,398,973 $ 2,192,442 Work in process 1,405,372 3,439,888 Finished goods 5,433,250 4,102,702 ----------- ----------- 9,237,595 9,735,032 Less inventory valuation allowance (7,837,595) (8,729,605) ----------- ----------- $ 1,400,000 $ 1,005,427 =========== =========== (6) ASSETS HELD FOR USE On July 24, 1998, the Company purchased the assets of Johnny Valet, Inc. a retail dry cleaning plant in San Diego, California. The Company paid $688,736 in cash and signed a note payable for $125,000. The non-interest-bearing note was due on January 10, 1999. The acquisition was accounted for utilizing the purchase method of accounting with the purchase price being allocated to the assets acquired and liabilities assumed based on their fair values. The excess of the purchase price over the fair value of assets acquired of $543,150 was recorded as goodwill and was being amortized over ten years. In October 1998, the Company decided to not continue to pursue its strategy of consolidating the dry cleaning industry and determined that it would sell the assets of Johnny Valet, Inc. Goodwill was written down by $106,000 to reflect a reduction in the estimated amortizable life of the goodwill. The net assets held for use total $699,196 and have been classified as current assets on the consolidated balance sheet as of October 31, 1998. F-16 GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On May 13, 1999 the Company sold the assets of Johnny Valet, Inc. for $750,000 in cash less fees and expenses of approximately $50,000. The excess of the sale price over the book value of the net assets sold was $133,396 and has been recorded as gain on sale of assets. (7) ASSETS HELD FOR SALE In connection with the Transaction, the Company relocated the corporate offices and production capabilities of TNCi to its Phoenix, Arizona offices. Accordingly, as of June 30, 1999 the decision to sell the Georgia property was made and the assets were recorded at their net realizable value and classified as assets held for sale. (8) NOTE RECEIVABLE At June 30, 1999 the Company had a receivable of $98,932 due from related parties. See Note 17. On October 21, 1998, the Company loaned Ocean Castle Investments, LLC ("Ocean Castle") $447,939 to execute a block purchase of shares of the Company's Class A common stock from an unrelated third party. The Company's Chief Executive Officer is a principal of Ocean Castle. The note bears interest at the prime rate plus 1% with all interest and principal due October 21, 2001. The note is secured by 99,542 shares of the Company's Class A Common Stock. In February 1999, the Company received payment on the $447,939 loan made to Ocean Castle. (9) PROPERTY AND EQUIPMENT Property and equipment consist of the following: JUNE 30, OCTOBER 31, 1999 1998 ------------ ----------- Leasehold improvements $ 261,668 $ 237,551 Purchased software 149,703 149,703 Furniture 173,460 138,609 Equipment 1,700,462 903,873 ------------ ----------- 2,285,293 1,429,736 Less accumulated depreciation (915,901) (649,701) ------------ ----------- $ 1,369,392 $ 780,035 ============ =========== During the year ended October 31, 1998, the Company recorded equipment write-offs of $1,006,532 which are included in special charges on the consolidated statement of operations. The write-offs are principally related to excess computers, furniture and other equipment that the Company is not utilizing. During the year ended October 31, 1997, the Company recorded equipment write-offs of $1,518,952 which are included in special charges in the consolidated statement of operations. The write-offs principally related to a system integration lab utilized in software development and testing. The lab equipment will not be utilized in the Company's future operations. F-17 GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (10) INTANGIBLES Intangibles consist of the following: JUNE 30, 1999 ------------- Goodwill $ 7,115,174 Other intangibles 79,613 ------------- 7,194,787 Less accumulated amortization (74,981) ------------- $ 7,119,806 ============= (11) ACCRUED LIABILITIES Accrued liabilities consist of the following: JUNE 30, OCTOBER 31, 1999 1998 --------- ----------- Accrued development and support costs $ -- $1,845,915 Accrued maintenance costs -- 402,418 Due to related parties (see Note 17) 1,906,607 880,000 Other accrued expenses 386,002 811,300 ---------- ---------- $2,292,609 $3,939,633 ========== ========== F-18 GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (12) NOTES PAYABLE Notes payable consists of the following:
JUNE 30, 1999 ----------- Series A, D and E Notes (see below) $ 2,386,048 Note payable due September 5, 1999, interest at 7%, convertible to TNCi preferred stock at the option of the Company 400,000 Note payable due in varying installments through 2009, interest at prime (8.25% at June 30, 1999) plus 2%, collateralized by certain commercial property and personally guaranteed by two shareholders 220,508 Note payable due in varying installments through 2000, interest at 6.9%, collateralized by a vehicle 10,308 Note payable due and payable April 19, 2001, interest at 16% payable monthly, collateralized by certain commercial property 470,000 Note payable due in varying installments through 2000, interest at 11%, collateralized by a vehicle 4,572 ----------- Total 3,491,436 Less current portion 24,391 ----------- $ 3,467,045 ===========
Aggregate maturities of notes payable as of June 30, 1999 are as follows: 2000 $ 24,391 2001 890,491 2002 2,403,402 2003 19,126 2004 21,078 Thereafter 132,948 ----------- $ 3,491,436 =========== The Series A, D and E Notes ("Series Notes") were issued by TNCi in 1998 prior to the Transaction. The Series Notes all had original maturities of approximately 135 days with interest at approximately 7% to 8% per annum. TNCi could choose to repay such Notes in cash subject to a payment charge equal to approximately 7% of the face amount of the Note or TNCi could elect to convert the Series Notes into TNCi preferred stock which is convertible into common stock at various discounts to market ranging from 15% to 25%. TNCi was in default on the Series Notes at June 30, 1999. (See Note 23.) The note payable due September 5, 1999 was in default at June 30, 1999. Subsequent to year-end, the note was converted into 200,000 shares of TNCi's Common Stock. Therefore, the note payable has been classified as long-term at June 30, 1999. Notes payable in the amount of $68,836 to related parties with interest payable at approximately 5% per annum become due and payable upon achievement of certain operational goals. F-19 GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (13) STOCK OPTION PLANS In October 1994, the Company adopted a Stock Option Plan (the 1994 Plan) which provides for the issuance of both incentive and nonqualified stock options to acquire up to 200,000 shares of the Company's Class A common stock. In November 1996, the Company amended and restated the 1994 Plan to increase the maximum shares that may be issued and sold under the plan to 800,000. The Company has granted options to purchase stock to various parties. All options were issued at a price equal to or greater than the market price of the Company's common stock at the date immediately prior to the grant and have a term of ten years. Options generally become exercisable after one to three years at the discretion of the Board of Directors. No further options will be granted under this plan. In June 1997, the Company established a 1997 Stock Option Plan (the 1997 Plan). Options exercisable for a total of 500,000 shares of the Company's Class A common stock are issuable under the 1997 Plan. The 1997 Plan is administered by the Board of Directors of the Company (or a committee of the Board) which determines the terms of options granted under the 1997 Plan, including the exercise price and the number of shares subject to the option. The 1997 Plan provides the Board of Directors with the discretion to determine when options granted thereunder shall become exercisable. During fiscal 1999, 210,698 stock options with up to a four-year vesting period were granted at exercise prices ranging from $1.688 to $2.875. As of June 30, 1999, 48,803 stock options under the 1997 Plan remained available for grant. During fiscal 1998, 240,499 stock options with up to a three-year vesting period were granted at exercise prices ranging from $1.875 to $4.50. On February 10, 1998, the Company adopted a plan to reduce the exercise price on the stock options under the Company's 1994 and 1997 Plans on specified dates to $2.625 provided the holder is a current employee on the applicable future dates. The exercise price on one-half of each outstanding option was reduced to $2.625 on October 10, 1998 pursuant to the plan. A similar reduction in the exercise price for the remaining half of the options occurred on April 10, 1999, provided the option holder was still employed by the Company at that time. During the year ended October 31, 1998, the Company granted stock options to purchase 33,333 shares of Class A common stock at an exercise price of $4.50 to each of three stockholders of the Company. The options were granted in exchange for consulting services. See Note 17. In accordance with the provisions of APB 25, the Company measures stock-based compensation expense as the excess of the market price at the grant date over the amount the employee must pay for the stock. The Company's policy is to generally grant stock options at fair market value at the date of grant, so no compensation expense is recognized. As permitted, the Company has elected to adopt the disclosure provisions only of SFAS No. 123. F-20 GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Had compensation cost for the Company's stock-based compensation plans been determined consistent with SFAS No. 123, the Company's net loss and net loss per share on a pro forma basis would be as indicated below:
TRANSITION PERIOD ENDED JUNE 30, YEARS ENDED OCTOBER 31, 1999 1998 1997 ------------- ----------- ------------- Net loss: As reported $ (2,375,835) $(7,259,959) $ (51,022,312) ============= =========== ============== Pro forma (unaudited) $ (2,847,535) $(7,666,463) $ (53,486,930) ============= =========== ============== Basic and diluted net loss per share: As reported $ (0.44) $ (1.22) $ (8.89) ============= =========== ============== Pro forma (unaudited) $ (0.53) $ (1.29) $ (9.32) ============= =========== ==============
Pro forma net losses reflect only options granted during the Transition Period, and in fiscal years ended 1998, 1997, and 1996. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net loss amounts presented above because compensation cost is reflected over the options' vesting period and compensation cost for options granted prior to November 1995 are not considered under SFAS No. 123. For purposes of the SFAS No. 123 pro forma net loss and net loss per share calculations, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in the Transition Period ended June 30, 1999 and the years ended October 31, 1998 and 1997: TRANSITION PERIOD ENDED JUNE 30, YEARS ENDED OCTOBER 31, 1999 1998 1997 ------------ ----- ----- Dividend yield 0% 0% 0% Expected volatility 100% 71.62% 71.62% Risk free interest rate 5.67% 5.65% 6.12% Expected lives (years) 5.0 5.0 5.0 F-21 GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Activity related to the stock option plans is summarized below:
TRANSITION PERIOD ENDED JUNE 30, YEARS ENDED OCTOBER 31, 1999 1998 1997 ---------------------- --------------------- --------------------- WEIGHTED WEIGHTED WEIGHTED NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE OF EXERCISE OF EXERCISE OF EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ------- --------- ------- --------- -------- --------- Balance at the beginning of year 685,610 $ 17.42 710,717 $ 24.15 534,900 $ 29.43 Granted 210,698 1.93 240,499 3.01 282,233 22.32 Exercised (1,617) 2.63 -- -- (2,983) 21.72 Forfeited (145,545) 22.18 (265,606) 21.94 (103,433) 23.82 -------- -------- -------- Balance at the end of year 749,146 12.73 685,610 17.42 710,717 24.15 ======== ======== ======== Exercisable at the end of year 358,800 23.02 426,311 24.70 428,928 24.48 ======== ======== ======== Weighted-average fair value of options granted during the year $ 1.39 $ 1.91 $ 14.04 ======== ======== ========
The following table summarizes the status of outstanding stock options as of June 30, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------- ------------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED NUMBER OF REMAINING AVERAGE NUMBER OF AVERAGE OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE ------------------------ ----------- ------------ ---------- ----------- -------- $1.688 - $4.50 446,481 9.33 $ 2.61 56,135 $ 2.49 $13.20 - $16.50 28,666 5.33 13.24 28,666 13.24 $24.00 141,667 7.00 24.00 141,667 24.00 $28.86 - $43.14 132,332 7.08 30.76 132,332 30.76 ------- ------- 749,146 358,800 ======= =======
At the discretion of the Board of Directors, the Company may allow optionees to elect to receive shares equal to the market value of the option, in lieu of delivery of the exercise price in cash. The market value of the shares issued is charged to compensation expense. As a result of optionees selecting this exercise option, 507 shares of stock were issued upon the exercise of 2,950 options during the fiscal year ended October 31, 1997. Compensation expense of $13,874 is included in the accompanying consolidated statement of operations for the year ended October 31, 1997. (14) BENEFIT PLAN The Company has adopted a defined contribution benefit plan (the "Plan") that complies with section 401(k) of the Internal Revenue Code and provides for discretionary Company contributions. Employees who complete three months of service are eligible to participate in the Plan. The Company did not make any contributions to the Plan for the Transition Period ended June 30, 1999 or the fiscal year ended October 31, 1998. F-22 GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (15) STOCKHOLDERS' EQUITY The Company's capital stock consists of Class A and Class B common stock. Holders of Class A common stock have one vote per share and holders of Class B common stock have six votes per share. Shares of Class B common stock are automatically convertible into an equivalent number of shares of Class A common stock upon the sale or transfer of such shares to a non-holder of Class B common stock. (A) STOCK REPURCHASE ACTIVITY In connection with a stock repurchase program authorized by the Board of Directors on December 17, 1997, the Company purchased a total of 844,667 shares of the Company's Class A common stock in open market activities at a total cost of $2,315,983 through October 31, 1998. On October 30, 1998, the Board of Directors authorized another repurchase program whereby the Company may repurchase up to 666,667 shares of its Class A common stock on the open market. On January 11, 1999, the Company retired all 844,667 shares of Class A common stock described above. As of June 30, 1999, the Company had repurchased an additional 78,600 shares at prices ranging from $1.49 to $2.94 per share for a total cost of $193,990. (B) PREFERRED STOCK Series A 8% Convertible Preferred Stock ("Series A Stock"); stated value $1,000 per share and liquidation value of 120% of stated value. The holder of Series A Stock is entitled to receive, when, as and if declared by the Board of Directors, an annual cumulative dividend of $80 per share payable quarterly in cash or Common stock. Cumulative undeclared and unpaid dividends at June 30, 1999 total $33,333 or $11.11 per share. At the option of the Holder, beginning 180 days after the issue date, each share of Series A Stock is convertible into Common Stock at a price equal to $3.00 per share. The Company may redeem the Series A Stock at prices ranging from 105% to 120% of stated value, plus accrued and unpaid dividends beginning from 180 days and ending 360 days from the Issue Date, May 10, 1999. If the Series A Stock is not redeemed or converted into shares of the Company's Common Stock by May 10, 2000, then the Series A Stock automatically converts into shares of the Company's Series B Preferred Stock. Series B 8% Convertible Preferred Stock ("Series B Stock"); stated value $1,000 per share is entitled to one vote for each share of common stock into which it may convert. The Series B Stock is entitled to the same dividends as the Series A Stock. Each share of Series B Stock is generally convertible into Common Stock at an amount equal to the lower of; i) 82% of the Market Price, as defined in the Certificate of Designation; ii) $3.00 per common share, or; iii) 118% of the closing bid price on NASDAQ, as defined. There are no shares of Series B Stock issued or outstanding. (C) ESCROW SHARES As a condition of the Company's initial public offering in March 1995, the underwriter required that an aggregate of 1,066,667 shares of the Company's Class B common stock be designated as escrow shares. The escrow shares are not assignable or transferable until certain earnings or market price criteria have been met. As of January 31, 1999, such criteria have not been met and the shares have been canceled and contributed to the Company's capital. F-23 GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (D) WARRANTS The following table summarizes warrant activity for the Transition Period ended June 30, 1999 and the year ended October 31, 1998:
CLASS A CLASS C CLASS D CLASS E ------------ -------- ------- ----------- Outstanding as of October 31, 1997 and October 31, 1998 -- 55,000 55,000 66,667 Issued in connection with consulting services 50,000 -- -- -- Issued in connection with the Transaction 87,500 -- -- -- ------------ -------- ------- ----------- Outstanding as of June 30, 1999 137,500 55,000 55,000 66,667 ============ ======== ======= =========== Exercise price $ 2.88-3.00 $ 33.00 $ 42.00 $4.50-24.00 ============ ======== ======= ===========
Class A, Class C, Class D and Class E warrant entitles the holder to one share of Class A common stock. With the exception of the 50,000 Class A warrants issued in connection with consulting services that vest over a 24-month period, all outstanding warrants are exercisable as of June 30, 1999. In April 1999, the Company retained the services of a financial relations firm. In connection with the consulting services to be provided, the Company issued stock purchase warrants to purchase 50,000 shares of the Company's Class A common stock at $2.90 per share. The exercise period of the warrants expires in April 2002, and the warrants vest ratably over a 24-month period from the date of issuance. On May 11, 1999, the Company issued stock purchase warrants to purchase 87,500 shares of Class A common stock at $3.00 per share to the Shaar Fund, Ltd. in connection with the issuance of its Series A Preferred Stock (see Note 15(b)). The exercise period of the warrants expire in May 2004. On November 22, 1996, the Company offered to the holders of its Class B warrants to reduce the exercise price of the Class B warrants to $22.50 per share from $29.25 per share upon the exercise of each Class B warrant exercised by December 24, 1996. As a result of this offer, 3,266,587 shares of Class A common stock were issued upon the exercise of 3,266,587 Class B warrants, yielding net proceeds of approximately $69,100,000, net of commissions and expenses approximating $4,480,000. Previously on October 23, 1996, the Company had notified the remaining Class B warrant holders of its intent to call all outstanding Class B warrants for redemption on January 17, 1997. The Company redeemed 269,895 Class B warrants at $.15 per warrant. In November 1996, the Company issued stock purchase warrants to purchase 50,000 shares of Class A common stock at $29.63 per share to Houlihan Lokey Howard & Zukin in exchange for advisory services. The exercise period of the warrants expires in November 2001. On January 6, 1997, the Company lowered the exercise price of the stock purchase warrants to $24 per share, such price being the trading price of the Class A common stock at the close of the previous business day. In November 1996, the Company issued stock purchase warrants to purchase 16,667 shares of Class A common stock at $32.25 per share in connection with the amendment and restatement of a License Agreement with FortuNet. The exercise period of the warrants expires in November 2001. On January 6, 1997, the Company lowered the exercise price of the stock purchase warrants to $24 per share, such price being the trading price of the Class A common stock at the close of the previous business day. On F-24 GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 7, 1999, the Company lowered the exercise price on the stock purchase warrants to $4.50 per share, such price representing a premium to the then trading price of the Class A common stock which was $3.69. (See Note 17.) (16) INCOME TAXES Income tax benefit differed from the amounts computed by applying the U.S. Federal corporate income tax rate of 34% to net loss as a result of the following:
1999 1998 1997 ------------ ------------ ------------ Computed expected tax benefit $ 807,784 $ 2,468,386 $ 17,347,586 Change in valuation allowance (687,890) (2,127,293) (17,328,254) Non-deductible payments (119,894) (416,498) -- Other -- 75,405 (19,332) ------------ ------------ ------------ $ -- $ -- $ -- ============ ============ ============
The tax effects of temporary differences that give rise to significant portions of the net deferred tax asset are presented below: 1999 1998 ------------ ------------ Deferred tax assets: Net operating loss carryforward $ 29,108,815 $ 18,836,132 Property and equipment 843,204 1,135,837 Deferred start-up costs 568,973 825,091 Accrued product warranty costs -- 1,825,463 Issuance of stock options and warrants 819,219 864,577 Allowance for bad debts 1,517,086 3,355 Provision for inventory valuation 3,092,828 2,968,066 Accrued liabilities 829,398 1,198,426 Deferred revenue 146,398 154,027 Other 906,293 129,850 ------------ ------------ 37,832,214 27,940,824 Less: Valuation allowance (28,628,714) (27,940,824) Valuation allowance related to the TNCi acquisition (9,203,500) -- ------------ ------------ $ -- $ -- ============ ============ In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management has provided a valuation allowance for 100% of the deferred tax assets as the likelihood of realization cannot be determined. As of June 30, 1999, the Company has a net operating loss (NOL) carryforward for federal income tax purposes of approximately $77,600,000, which begins F-25 GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS to expire in 2009, and a research and experimentation tax credit of approximately $247,000. The Company likely underwent a change in ownership in accordance with Internal Revenue Code Section 382, the effect of which has not yet been determined by the Company. This change would effect the timing of the utilization of the NOL, as well as the amount of the NOL which may ultimately be utilized, though it is not expected to materially effect the amount of the NOL carryforward. (17) RELATED PARTY TRANSACTIONS Prior to the Transaction, TNCi entered into a Secured Promissory Note with GTL in the principal amount of $750,000, bearing interest at a rate of 9.5% per annum, and a related security agreement granting GTL a security interest in its assets (the "Promissory Note"). The Promissory Note is convertible into shares of TNCi's Series C 8% Preferred Stock at the discretion of GTL. GTL has also advanced approximately $898,000 to TNCi in the form of intercompany advances. Both the Promissory Note and the advances have been eliminated in consolidation at June 30, 1999. The Company's Chief Executive Officer is a principal of Ocean Castle Investments, LLC (Ocean Castle) which maintains administrative offices for the Company's Chief Executive Officer, Corporate Secretary and certain other employees of the Company for which the Company pays rent and other administrative expenses pursuant to an agreement. During the year ended October 31, 1998, Ocean Castle executed consulting agreements with two principal stockholders of the Company. The rights and obligations of Ocean Castle under the agreements were assumed by TNCi in connection with the Transaction. The consulting agreements require payments aggregating $1,000,000 to each of the consultants through December 2003 in exchange for advisory services. Each of the consultants also received stock options to purchase 33,333 shares of Class A Common Stock of the Company at an exercise price of $4.50. As of June 30, 1999, TNCi determined that the consulting agreements had no future value due to TNCi's shift away from in-flight entertainment into alternative markets such as leisure cruise and passenger rail transport. Only limited services were provided in 1999 and no future services will by utilized. Accordingly, TNCi recorded a charge to general and administrative expenses in the Transition Period of $1.6 million representing the balance due under such contracts. In August 1999, the Company executed a separation and release agreement with a shareholder and former officer of TNCi, pursuant to which the Company paid approximately $85,000 in the form of unregistered shares of the Company's Common Stock. In June 1999, the Company loaned to a vice president of TNCi $75,000 for the purpose of assisting in a corporate relocation to the Company's headquarters in Phoenix, Arizona. Such loan is secured by assets of the employee. The note matures in August 2009 and bears an interest rate of approximately 5%. The Company has an Intellectual Property License and Support Services Agreement (the "License Agreement") for certain technology with FortuNet, Inc. ("FortuNet"). FortuNet is owned by a principal stockholder and previous director of the Company. The License Agreement provides for an annual license fee of $100,000 commencing in October 1994 and continuing through November 2002. The Company paid FortuNet $100,000 during each of the years ended October 31, 1998 and 1997. As of October 31, 1998, the remaining commitment of $400,000 was included in accrued liabilities in the consolidated balance sheet. TNCi assumed this liability in connection with the Transaction. Subsequent to June 30, 1999, TNCi agreed to a termination of this agreement and paid Fortunet $100,000 plus legal fees. GTL agreed to reprice certain warrants and options held by FortuNet and a principal shareholder of FortuNet (See Note 15(d)). The Company recorded a special charge of F-26 GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS $120,320 during the Transition Period for such repricing. The Company had revised its estimated accrual to $200,000 which is included in accrued liabilities in the consolidated balance sheet at June 30, 1999. During the year ended October 31, 1998, the Company extended by one year a consulting agreement with a former officer of the Company pursuant to which the Company will pay $55,000 for services received during the period November 1999 through October 2000. TNCi has assumed the liability for the consulting agreement in connection with the Transaction in the amount of $73,000 which is included in accrued liabilities in the consolidated balance sheet at June 30, 1999. In October 1998, the Company entered into a consulting agreement with First Lawrence Capital Corp. (First Lawrence) to perform various financial advisory services related to ongoing business development and management. The former managing director of First Lawrence is also a director of the Company. The Company retained, on a full time basis as President and Chief Operating Officer, the services of the former managing director of First Lawrence effective December 12, 1998. Accordingly, the Company entered into an employment contract with such individual. During the year ended October 31, 1998, the Company paid $11,846 under the First Lawrence consulting agreement (See Notes 18 and 23). The Company also pays for office expenses and rent of First Lawrence under the terms of the agreement. The Company paid approximately $35,803 during the Transition Period for such expenses. The Company executed a consulting agreement with the Whitestone Group, LLC, a shareholder of First Lawrence. Pursuant to the agreement, the Company paid $250,000 for consulting services received during fiscal 1998. The Company had a letter agreement dated May 28, 1996 with a specialty investment-banking firm (the Firm) to act as the Company's financial advisor. The senior managing director of this Firm is also a former director of the Company. The Company paid the Firm $811,687 during the year ended October 31, 1997. The Company had a consulting agreement with Worldwide Associates (Worldwide) to perform various consulting services. The chairman and president of Worldwide is also a former director of the Company. The Company paid Worldwide $56,063 during the year ended October 31, 1997. In November 1996, the Company executed a Strategic Alliance Agreement (Alliance Agreement) with Hyatt Ventures, Inc. (Hyatt), an affiliate of Hyatt Corporation. The president of Hyatt is also a former director of the Company. Under the terms of the Alliance Agreement, Hyatt, directly and through certain of its affiliates, agreed to use its best commercial efforts to assist the Company in advancing the Company's business with respect to the entertainment network. The Alliance Agreement was terminated in November 1997 as a result of changing market conditions. In January 1997, the Company issued 20,000 unregistered shares of Class A common stock to Hyatt in connection with Hyatt acting as a guarantor on behalf of the Company in certain contract negotiations. As a result of the stock issuance, a charge of $466,875 is included in the consolidated statement of operations for the year ended October 31, 1997. During the year ended October 31, 1998, the Company executed severance and consulting agreements with three former officers pursuant to which the Company paid the former officers and set aside restricted funds in the amounts of $3,053,642 and $735,000, respectively. The consulting agreements all expire by September 1999. Payments totaling $735,000 have been and continue to be made from restricted cash of the Company through September 1999. Expenses associated with these agreements were charged to general and administrative expenses in the Transition Period ended June 30, 1999 and the year ended October 31, 1998. Additionally, the Company's stockholders' agreement with principle stockholders covering certain corporate governance matters was cancelled. F-27 GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS During the year ended October 31, 1996, GTL executed severance agreements with three former officers pursuant to which the Company will pay severance of $752,500 over a three-year period. As of June 30, 1999 and October 31, 1998, $18,000 and $55,000 remained to be paid under these agreements. Such liabilities were assumed by TNCi in connection with the Transaction. (18) COMMITMENTS AND CONTINGENCIES (A) LAWSUIT First Lawrence Capital Corp. v. James Fox, Irwin Gross and Interactive Flight Technologies, Inc., Supreme Court of the State of New York, No. 7196/99. This is a claim made against the Company arising from the hiring by the Company of James Fox, a former First Lawrence employee. First Lawrence asserts that business opportunities of First Lawrence were diverted to the Company by James Fox and the Company. This case has been settled for 250,000 shares of the Company's common stock. Additionally, in connection with the settlement, the Company entered into a two year consulting agreement with First Lawrence beginning February 1, 2000 whereby the Company will pay $41,667 per month and in exchange, First Lawrence will be available to perform management consulting services to IFT Holdings, Ltd. (UK). The Company accrued $1.8 million as a special charge for this settlement during the Transition Period. Fidelity and Guaranty Insurance Company v. Interactive Flight Technologies, Inc., United States District Court for the District of Minnesota, CV No. 99-410. This is a declaratory judgment action where the Company and its insurers are seeking a declaration of the applicability of an excess liability policy to claims made by the estates of victims of the crash of Swissair Flight No. 111 on September 2, 1998. Barington Capital Group, L.P. et al. v. Yuri Itkis et al. (No. 98103878). On March 6, 1998, the Company was named as a nominal defendant in a derivative action filed in the Supreme Court of the State of New York, County of New York. The lawsuit named ten former officers and directors of the Company and alleged various breaches of fiduciary duty. On October 21, 1998, the Company settled the lawsuit with Barington Capital Group, L.P. ("Barington"). As part of the settlement, the Company engaged Barington to provide investment banking services for a period of twelve months and has paid Barington a retainer of $250,000 and a twelve-month consulting fee of $360,000. The Company also paid Barington $150,000 for reimbursement of litigation and proxy solicitation expenses. The agreement requires the payment of additional fees should the Company utilize the services of Barington through October of 1999. Hollingsead International, Inc. v. The Network Connection, Inc., State Court of Forsyth County, State of Georgia, Civil Action File No. 99S0053. Hollingsead International, Inc. ("Hollingsead") filed suit against the Company on January 28, 1999, alleging that the Company failed to pay invoices submitted for installation and service of audio-visual systems in its aircraft. Hollingsead sought damages in the amount of $356,850, in addition to interest at the rate of 18% per annum from March 2, 1998, attorneys' fees and punitive damages. The parties entered into a settlement agreement on or about August 5, 1999 that provided for the payment of $427,870 by the Company, to be paid in installments, including interest accruing at 8.0% per annum from July 28, 1999 until the balance is paid. The last installment is due on or before December 20, 1999. Under the settlement agreement, the Company will dismiss its counterclaims with prejudice and Hollingsead will dismiss its Complaint with prejudice upon completion of all payments by the Company. The Company recognized a liability for this settlement at June 30, 1999 in the form of purchase price consideration which is included in accounts payable. Sigma Designs, Inc. ("Sigma") v. The Network Connection, Inc., United States District Court, Northern District of California, San Jose Division, Civil Action File No. 98-21149J(EAI). Sigma filed a Complaint against the Company on December 1, 1998, alleging breach of contract and action on account. Sigma claims that the Company failed to pay for goods that it shipped to the Company. The matter was settled by written agreement dated January 22, 1999, contingent upon registration of the TNCi Common F-28 GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Stock and warrants issued to Sigma as a part of such settlement and payment by the Company of $50,000. The Company did not complete its obligations under the terms of the original settlement agreement. On or about May 1999, the shares of TNCi issued to Sigma as a part of the settlement of the above-referenced lawsuit were sold by Sigma to the Company. The lawsuit was dismissed with prejudice on July 12, 1999 as a condition of GTL's purchase. The purchase of these shares from Sigma was deemed to be part of GTL's purchase price of TNCi. (See Note 2.) Swissair/Mdl-1269, In regards to an air crash near Peggy's Cove, Nova Scotia. This multi-district litigation relates to the crash of Swissair Flight No. 111 on September 2, 1998 in waters near Peggy's Cove, Nova Scotia resulting in the death of all 229 people on board. The Swissair MD-11 aircraft involved in the crash was equipped with an Entertainment Network System that had been sold to Swissair by the Company. Following the crash, investigations were conducted and continue to be conducted by Canadian and United States agencies concerning the cause of the crash. No investigative agency has linked the Entertainment Network System to the crash. Estates of the victims of the crash have filed lawsuits throughout the United States against Swissair, Boeing, Dupont and various other parties, including the Company. TNCi was not a party to the contract for the Entertainment Network System, but has been named in some of the lawsuits filed by families of victims on a claim of successor liability. The Company and TNCi deny all liability for the crash. TNCi is being defended by the aviation insurer for the Company. Federal Express Corporation v. The Network Connection, Inc., State Court of Forsyth County, State of Georgia, Civil Action File No. 99-SC-0053. This lawsuit was served on the Company on or about July 22, 1999 by Federal Express Corporation. The suit alleges the Company owes Federal Express approximately $110,000 for past services rendered. The Company is subject to other lawsuits and claims arising in the ordinary course of its business. In the Company's opinion, as of June 30, 1999, the effect of such matters will not have a material adverse effect on the Company's results of operations and financial position. (B) LEASE OBLIGATIONS The Company leases office space and furniture under operating leases that expire at various dates through June 2003. The future minimum lease commitments under these leases are as follows: YEAR ENDING OPERATING JUNE 30, LEASES ----------- --------- 2000 $196,088 2001 199,085 2002 145,452 2003 34,551 -------- $575,176 ======== Rental expense under operating leases totaled $338,082, $960,745 and $920,412 for the Transition Period ended June 30, 1999, and the years ended October 31, 1998 and October 31, 1997, respectively. F-29 GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (C) CARNIVAL AGREEMENT In September 1998, the Company entered into a Turnkey Agreement (the "Carnival Agreement") with Carnival Corporation ("Carnival"), for the purchase, installation and maintenance of its advanced cabin entertainment and management system for the cruise industry ("CruiseView") on a minimum of one Carnival Cruise Lines ship. During the four-year period commencing on the date of the Carnival agreement, Carnival has the right to designate an unspecified number of additional ships for the installation of CruiseView by the Company. The cost per cabin for CruiseView purchase and installation on each ship is provided for in the Carnival Agreement. In December 1998, Carnival ordered the installation of CruiseView on one Fantasy Class ship of Carnival Cruise Lines, which has been in operational use, on a test basis, since August 1999. In August 1999, Carnival ordered the installation of CruiseView on one Destiny Class ship of Carnival Cruise Lines. The terms of the Carnival Agreement provide that Carnival may return the CruiseView system within the Acceptance Period, as defined in the Carnival Agreement. For the Fantasy Class ship, the acceptance period is 12 months. As of June 30, 1999, the Company recorded deferred revenue of $365,851, reflecting amounts paid by Carnival. As of June 30, 1999, the Company has not recognized any revenue in association with the Carnival Agreement. The Company is required to provide a performance bond or standby letter of credit in favor of Carnival ensuring Carnival's ability to be repaid amounts previously paid to the Company in the event Carnival determines not to accept the system as permitted under the Carnival Agreement. The Company has not provided a bond or letter of credit as of June 30, 1999. Should Carnival require the Company to obtain a bond or letter of credit the Company may be required to provide cash collateral to a financial institution securing such obligation. (D) SPECIAL CHARGES AND REVERSAL OF WARRANTY, MAINTENANCE AND COMMISSION ACCRUALS GTL has entered into sales contracts with three airlines, Swissair, Debonair Airways, Ltd. (Debonair) and Alitalia Airlines, S.p.A. (Alitalia) for the manufacture and installation of its in-flight entertainment network, and to provide hardware and software upgrades, as defined in the agreements. In connection with the Transaction, TNCi assumed all rights and obligations of the above contracts. Pursuant to the October 1997 agreement with Swissair, Swissair purchased shipsets for the first and business class sections of sixteen aircraft for an average of $1.7 million per aircraft. Included in the purchase price was material, installation, maintenance through September 1998, one-year warranty and upgrade costs for the sixteen aircraft. As of October 31, 1998, the Company had completed installations of the entertainment network on all of these aircraft. The agreement also required the Company to install the entertainment network in the first, business and economy class sections of three additional aircraft, at no charge to Swissair. The Company was responsible for all costs including entertainment network components, installation and maintenance through September 1998 for the three aircraft. As of October 31, 1998, the Company had completed installations of the entertainment network on all of these aircraft and title to each of these three shipsets had been transferred to Swissair. The estimated material, installation, maintenance and one-year warranty and upgrade costs for these three shipsets of $14,292,404 is included in the accompanying statement of operations as a special charge for the year ended October 31, 1997. During the fiscal year ended October 31, 1998, the Company recognized a recovery of special charges of $606,508. The recovery of special charges resulted from a reduction in the number of entertainment networks F-30 GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS requiring maintenance in the economy class sections of the Swissair aircraft and a reduction in development expenses. In April 1998 and October 1998, the Company entered into additional contracts with Swissair. The first letter of intent relates to a $4.7 million order for first and business class installations on four Swissair MD-11 aircraft that are being added to the Swissair fleet. Swissair had made payments of $1,450,000 on the $4.7 million order through February 1999. No payments have been received since February. The second contract was to extend the warranty on all installed systems for a second and third year at a price of $3,975,000. Through February 1999, the Company had been paid $707,500 under this contract. No subsequent payments have been received from Swissair. On October 29, 1998, GTL was notified by Swissair of its decision to deactivate the entertainment networks on all Swissair aircraft. However, by April 1999, discussions between the Company and Swissair regarding outstanding financial matters related to current accounts receivable, inventory, purchase commitments and extended warranty obligations, as well as planning discussions for an October 1999 reactivation ceased to be productive. On May 6, 1999, GTL filed a lawsuit against Swissair in the United States District Court for the District of Arizona seeking damages for Swissair's failure to honor its obligations for payment and reactivation of the Company's Entertainment Network. The Swissair agreements are not assignable to third parties under the terms of such agreements. However, in connection with the Transaction, GTL has agreed to pay to TNCi any net proceeds, if any, received from Swissair as a result of the above litigation or otherwise. Further, TNCi, as a subcontractor to GTL, will assume any operational responsibilities of the Swissair agreement in the event that such requirement arises. As a result of the above events, management concluded that its only source of future payment, if any, will be through the litigation process. In addition, with the deactivation of the entertainment system and Swissair's breach of its agreements, the Company believes it will not be called upon by Swissair to perform any ongoing warranty, maintenance or development services. Swissair's actions have rendered the Company's accounts receivable, inventory and deposits worthless as of June 30, 1999. Accordingly, the Company has recognized revenue on equipment sales to the extent of cash received of $876,000; charged off inventory to cost of equipment sales in the amount of $1,517,000; wrote off deposits of $655,000 to special charges; and reversed all warranty and maintenance accruals totaling $5,164,000. Pursuant to an agreement with Debonair, the Company was to manufacture, install, operate, and maintain the entertainment network on six Debonair aircraft for a period of eight years from installation. In February 1998, the Company and Debonair signed a Termination Agreement. Pursuant to the Termination Agreement, Debonair removed the entertainment network from its aircraft and the Company paid Debonair $134,235 as full and final settlement of all of its obligations with Debonair. Included in the accompanying statement of operations for the year ended October 31, 1997 are special charges of $956,447 for the cost of the first completed shipset and $2,881,962 to write-down all inventory related to the Debonair program. In connection with these agreements with Swissair and Debonair and the absence of any new entertainment network orders for the Company, property and equipment write-downs of $1,006,532 and $1,518,952 were recorded as special charges during fiscal 1998 and 1997, respectively. F-31 GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Pursuant to an agreement with Alitalia, the Company delivered five first generation shipsets for installation on Alitalia aircraft during fiscal 1996. Alitalia has notified the Company that it does not intend to continue operation of the shipsets, and the Company has indicated that it will not support the shipsets. For the Transition Period ended June 30, 1999, the Company recorded warranty, maintenance and commission accrual adjustments of $5,117,704, $1,730,368 and $303,321, respectively, related to the Swissair and Alitalia matters. Such adjustments to prior period estimates, which totaled $7,151,393 resulted from an evaluation of specific contractual obligations and discussions between the new management of the Company and other parties related to such contracts. Based on the results of the Company's findings during this period, such accruals were no longer considered necessary. (E) LETTER OF CREDIT In June 1999, the Company granted a letter of credit in the amount of $913,445 as security for the payment of certain equipment purchases made by an affiliate of the Company. To secure this letter of credit, the Company was required to provide cash collateral with a commercial bank. (F) PURCHASE COMMITMENT On September 9, 1999, IFT Leasing entered into an agreement with International Lottery & Totalizer Systems, Inc., a California corporation ("ILTS"), to purchase an on-line lottery system for the operation of the Inter Lotto Lotteries. The base value of the lottery system purchased from ILTS is $12.3 million. In addition, IFT Management entered into an eight-year facilities management agreement with ILTS to provide operational and technology support for the system. Under this agreement, IFT Management is required to make weekly payments of $72,000 plus additional amounts based on the number of installed terminals and sales volumes upon the commencement of ticket sales through the system. (19) FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107 "Disclosure about Fair Value of Financial Instruments" requires that the Company disclose estimated fair values for its financial instruments. The following summary presents a description of the methodologies and assumptions used to determine such amounts. Fair value estimates are made at a specific point in time and are based on relevant market information and information about the financial instrument; they are subjective in nature and involve uncertainties, matters of judgment and, therefore, cannot be determined with precision. These estimates do not reflect any premium or discount that could result from offering for sale, at one time, the Company's entire holdings of a particular instrument. Changes in assumptions could significantly affect these estimates. Since the fair value is estimated as of June 30, 1999, the amounts that will actually be realized or paid at settlement or maturity of the instruments could be significantly different. The carrying amount of cash and cash equivalents approximates fair value because their maturity is generally less than three months. The fair value of current investments are approximately $4,594,751. The fair market value of the Company's investment in US Wireless Series B, assuming conversion into 67 shares or 100 shares, of common stock for each share of US Wireless Series B and a discount of 25% for potential lack of marketability of the unregistered shares, are estimated to be $5,715,000 and $8,572,000, respectively. The carrying amount of accounts receivable, accounts payable and accrued liabilities approximate fair value as they are expected to be collected or paid within ninety days of year-end. The fair value of notes receivable and notes payable approximate the terms in the F-32 GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS marketplace at which they could be replaced. Therefore, the fair value approximates the carrying value of these financial instruments. (20) RISK RELATED TO CONCENTRATION IN THE VOLUME OF BUSINESS Sales of entertainment networks by the Company are typically made to a relatively few number of customers. This concentration of business among a few customers exposes the Company to significant risk. For the Transition Period ended June 30, 1999 and the fiscal years ended October 31, 1998 and 1997, one customer accounted for 91%, 98% and 95% of the Company's sales, respectively. Outstanding receivables from this customer were zero and $1.1 million, respectively at June 30, 1999 and October 31, 1998. (21) SUPPLEMENTAL FINANCIAL INFORMATION Supplemental disclosure of cash flow information is as follows:
TRANSITION PERIOD ENDED JUNE 30, YEARS ENDED OCTOBER 31, 1999 1998 1997 ----------- -------- -------- Cash paid for interest $ 35,624 $ 11,954 $ 13,423 =========== ======== ======== Non-cash investing and financing activities: Acquisition: Fair value of assets (liabilities) acquired $ (314,658) $813,736 $ -- Fair value of preferred stock issued 4,080,000 -- -- Note payable 3,467,045 125,000 -- =========== ======== ======== Capital lease obligations incurred $ -- $ -- $210,678 Issuance of stock under stock option plan pursuant to cashless exercise option $ -- $ -- $ 13,874 Issuance of stock for services received $ -- $187,729 $466,875 =========== ======== ========
(22) OPERATING SEGMENTS In 1998, the Company adopted SFAS 131, which requires the reporting of operating segments using the "management approach" versus the "industry approach" previously required. The Company's reportable segments consist of TNCi and general corporate operations. TNCi's operations include development, manufacturing and marketing of computer-based entertainment and data networks, which provides users access to information, entertainment and a wide array of service options such as movies, shopping for goods and services, computer games, access to the World Wide Web and gambling, where permitted by applicable law. General corporate operations consists of developing and operating affiliate companies, most of which are engaged in telecommunications, e-commerce, networking solutions and gaming. F-33 GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following summarizes information related to the Company's segments. All significant intersegment activity has been eliminated. Assets are the owned or allocated assets used by each operating segment.
TRANSITION PERIOD ENDED JUNE 30, YEARS ENDED OCTOBER 31, 1999 1998 1997 ------------ ------------ ------------ Revenue TNCi $ 958,607 $ 18,816,962 $ 11,100,709 Other 623,854 325,999 -- ------------ ------------ ------------ 1,582,461 19,142,961 11,100,709 Gross profit (loss)(a) TNCi (559,196) 3,279,891 (13,777,751) Other 178,748 100,951 -- ------------ ------------ ------------ (380,448) 3,380,842 (13,777,751) Operating income (loss) TNCi 2,338,326 (7,232,321) (52,975,915) Other (5,321,945) (2,276,918) -- ------------ ------------ ------------ (2,983,619) (9,509,239) (52,975,915) General corporate operations Gain on sale of assets 133,396 -- -- Equity in loss of non- consolidated affiliate (195,704) -- -- Net interest 985,545 2,239,101 2,157,252 General and administrative -- -- -- Other income (expenses) 61,252 10,179 (203,649) Minority interest (376,705) -- -- ------------ ------------ ------------ 607,784 2,249,280 1,953,603 Net loss $ (2,375,835) $ (7,259,959) $(51,022,312) Total assets TNCi 14,752,462 4,238,030 General corporate 24,660,159 34,026,172 ------------ ------------ Total Assets $ 39,412,621 $ 38,264,202 ============ ============
(a) Gross profit (loss) is the difference between Revenue and Cost of Revenue in the consolidated statement of operations. (23) SUBSEQUENT EVENTS In July and August 1999, the Company purchased all of the Series A and E notes and the Series D notes respectively, from the holders of such notes. Concurrent with such purchase by the Company and TNCi executed the fifth and sixth allonges to the Promissory Note which cancelled such Series Notes and rolled the principal balance, plus accrued but unpaid interest, penalties and redemption premiums on the Series Notes into the principal balance of the Promissory Note. F-34 GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On August 13, 1999, the Company and two of its officers entered into a Release and Settlement Agreement ("Agreement") with First Lawrence Capital Corp. See Note 18(a). On August 24, 1999, the Board of Directors of the Company approved the conversion of the Promissory Note and outstanding advances to TNCi into Series C Stock of TNCi and, the simultaneous conversion of the Series C Stock into TNCi's Common Stock in accordance with the designation of the Series C Stock. Such conversion, to the extent it exceeded approximately one million shares of TNCi's Common Stock on August 24, 1999, was contingent upon receiving shareholder approval to increase the authorized share capital which was subsequently approved on September 17, 1999. Accordingly, TNCi will issue to the Company approximately 4.7 million shares of its common stock. On August 24, 1999, the Board of Directors of the Company approved a $5 million secured revolving credit facility by and among the Company and TNCi ("the Facility"). The Facility provides that TNCi may borrow up to $5 million for working capital and general corporate purposes at the prime rate of interest plus 3%. The Facility matures in September 2001. TNCi paid an origination fee of $50,000 to the Company and will pay an unused line fee of 0.5% per annum. The Facility is secured by all of the assets of TNCi and is convertible, at the Company's option, into shares of the Series C Stock. The Company executed the Facility on October 12, 1999. In September 1999, the Company sold one of its two buildings in Alpharetta, Georgia. The net proceeds from the sale, plus cash of approximately $80,000 was used by the Company to repay the note payable due April 19, 2001. The sale of the second building is expected to occur in November 1999 and net proceeds are expected to be used to retire the note payable due 2009. In September 1999, the Company terminated the License Agreement with Fortunet. See Note 17. In September of 1999, IFT filed a lawsuit against Barrington Capital Group, L.P. in Maricopa County Superior Court, Arizona, seeking a declaratory judgment that no sums were owed to Barrington Capital pursuant to a Financial Advisory Service Agreement dated in October of 1998. In October of 1999, Barrington Capital Group filed a lawsuit on the same contract in the Supreme Court of the State of New York, County of New York, Index No. 99-604606, captioned Barrington Capital Group, L.P. v. Interactive Flight Technologies, Inc., alleging that Barrington is owed $1,750,471 in connection with services alleged to have been performed pursuant to the Financial Advisory Service Agreement. IFT denies all liability and denies that any sums are owed to Barrington. F-35 EX-4.8 2 WARRANT ANNEX III THIS WARRANT AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE TRANSFERRED IN VIOLATION OF SUCH ACT, THE RULES AND REGULATIONS THEREUNDER OR THE PROVISIONS OF THIS WARRANT. No. of Shares of Common Stock: 87,500 Warrant No. 1 WARRANT To Purchase Class A Common Stock of Interactive Flight Technologies, Inc. THIS IS TO CERTIFY THAT The Shaar Fund Ltd., or registered assigns, is entitled, at any time from the Closing Date (as hereinafter defined) to the Expiration Date (as hereinafter defined), to purchase from Interactive Flight Technologies, Inc., a Delaware corporation (the "Company"), 87,500 shares of Common Stock (as hereinafter defined and subject to adjustment as provided herein), in whole or in part, including fractional parts, at a purchase price equal to $3.00 per share, all on the terms and conditions and pursuant to the provisions hereinafter set forth. Article 1 DEFINITIONS As used in this Warrant, the following terms have the respective meanings set forth below: "Additional Shares of Common Stock" shall mean all shares of Common Stock issued by the Company after the Closing Date, other than Warrant Stock. "Business Day" shall mean any day that is not a Saturday or Sunday or a day on which banks are required or permitted to be closed in the State of New York. "Closing Date" shall have the meaning set forth in the Securities Purchase Agreement. "Commission" shall mean the Securities and Exchange Commission or any other federal agency then administering the Securities Act and other federal securities laws. "Common Stock" shall mean (except where the context otherwise indicates) the Class A Common Stock, $.01 par value, of the Company as constituted on the Closing Date, and any capital stock into which such Common Stock may thereafter be changed, and shall also include (i) capital stock of the Company of any other class (regardless of how denominated) issued to the holders of shares of Common Stock upon any reclassification thereof which is also not preferred as to dividends or assets over any other class of stock of the Company and which is not subject to redemption and (ii) shares of common stock of any successor or acquiring corporation received by or distributed to the holders of Common Stock of the Company in the circumstances contemplated by Section 4.4. "Convertible Securities" shall mean evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable, with or without payment of additional consideration in cash or property, for shares of Common Stock, either immediately or upon the occurrence of a specified date or a specified event. "Current Warrant Price" shall mean, in respect of a share of Common Stock at any date herein specified, the price at which a share of Common Stock may be purchased pursuant to this Warrant on such date. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, or any successor federal statute, 2 and the rules and regulations of the Commission thereunder, all as the same shall be in effect from time to time. "Exercise Period" shall mean the period during which this Warrant is exercisable pursuant to Section 2.1. "Expiration Date" shall mean a date five (5) years from the date hereof. "Holder" shall mean the Person in whose name the Warrant or Warrant Stock set forth herein is registered on the books of the Company maintained for such purpose. "Market Price" per Common Share means the average of the closing bid prices of the Common Shares as reported on the Nasdaq National Market ("Nasdaq") for the ten (10) trading days immediately before the relevant measurement date, or, if such security is not listed or admitted to trading on the Nasdaq, on the principal national security exchange or quotation system on which such security is quoted or listed or admitted to trading, or, if not quoted or listed or admitted to trading on any national securities exchange or quotation system, the average of the closing bid prices of such security on the over-the-counter market for the ten (10) trading days immediately before the day in question as reported by the National Quotation Bureau Incorporated, or a similar generally accepted reporting service, or if not so available, in such manner as furnished by any Nasdaq member firm of the National Association of Securities Dealers, Inc. selected from time to time by the Board of Directors of the Company for that purpose, or a price determined in good faith by the Board of Directors of the Company as being equal to the fair market value thereof, as the case may be, on the date in question. "Other Property" shall have the meaning set forth in Section 4.4. "Outstanding" shall mean, when used with reference to Common Stock, at any date as of which the number of 3 shares thereof is to be determined, all issued shares of Common Stock, except shares then owned or held by or for the account of the Company or any subsidiary thereof, and shall include all shares issuable in respect of outstanding scrip or any certificates representing fractional interests in shares of Common Stock. "Person" shall mean any individual, sole proprietorship, partnership, joint venture, trust, incorporated organization, association, corporation, institution, public benefit corporation, entity or government (whether federal, state, county, city, municipal or otherwise, including, without limitation, any instrumentality, division, agency, body or department thereof). "Registration Rights Agreement" shall mean the Registration Rights Agreement dated a date even herewith by and between the Company and The Shaar Fund Ltd., as it may be amended from time to time. "Restricted Common Stock" shall mean shares of Common Stock which are, or which upon their issuance on the exercise of this Warrant would be, evidenced by a certificate bearing the restrictive legend set forth in Section 9.1(a). "Securities Act" shall mean the Securities Act of 1933, as amended, or any successor federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "Securities Purchase Agreement" shall mean the Securities Purchase Agreement dated as of a date even herewith by and between the Company and The Shaar Fund, Ltd. as it may be amended from time to time. "Transfer" shall mean any disposition of any Warrant or Warrant Stock or of any interest in either thereof, which would constitute a sale thereof within the meaning of the Securities Act. 4 "Transfer Notice" shall have the meaning set forth in Section 9.2. "Warrants" shall mean this Warrant and all warrants issued upon transfer, division or combination of, or in substitution for, any thereof. All Warrants shall at all times be identical as to terms and conditions and date, except as to the number of shares of Common Stock for which they may be exercised. "Warrant Price" shall mean an amount equal to (i) the number of shares of Common Stock being purchased upon exercise of this Warrant pursuant to Section 2.1, multiplied by (ii) the Current Warrant Price as of the date of such exercise. "Warrant Stock" shall mean the shares of Common Stock purchased by the holders of the Warrants upon the exercise thereof. Article 2 EXERCISE OF WARRANT Section 2.1 Manner of Exercise. From and after the Closing Date and until 5:00 P.M., New York time, on the Expiration Date, Holder may exercise this Warrant, on any Business Day, for all or any part of the number of shares of Common Stock purchasable hereunder. In order to exercise this Warrant, in whole or in part, Holder shall deliver to the Company at its principal office at 4041 North Central Avenue, Suite B 200, Phoenix, Arizona 85012 or at the office or agency designated by the Company pursuant to Section 12, (i) a written notice of Holder's election to exercise this Warrant, which notice shall specify the number of shares of Common Stock to be purchased, (ii) payment of the Warrant Price by wire transfer or cashier's check drawn on a United States bank or by the Holder's surrender of Warrant Stock (or the right to 5 receive such number of shares) having an aggregate Market Price equal to the Warrant Price for all shares then being purchased and (iii) this Warrant. Such notice shall be substantially in the form of the subscription form appearing at the end of this Warrant as Exhibit A, duly executed by Holder or its agent or attorney. Upon receipt of the items referred to in clauses (i), (ii) and (iii) above, the Company shall, as promptly as practicable, and in any event within five (5) Business Days thereafter, execute or cause to be executed and deliver or cause to be delivered to Holder a certificate or certificates representing the aggregate number of full shares of Common Stock issuable upon such exercise, together with cash in lieu of any fraction of a share, as hereinafter provided. The stock certificate or certificates so delivered shall be, to the extent possible, in such denomination or denominations as Holder shall request in the notice and shall be registered in the name of Holder or, subject to Section 9, such other name as shall be designated in the notice. This Warrant shall be deemed to have been exercised and such certificate or certificates shall be deemed to have been issued, and Holder or any other Person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the notice, together with the cash or check or checks and this Warrant, is received by the Company as described above and all taxes required to be paid by Holder, if any, pursuant to Section 2.2 prior to the issuance of such shares have been paid. If this Warrant shall have been exercised in part, the Company shall, at the time of delivery of the certificate or certificates representing Warrant Stock, deliver to Holder a new Warrant evidencing the rights of Holder to purchase the unpurchased shares of Common Stock called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant, or, at the request of Holder, appropriate notation may be made on this Warrant and the same returned to Holder. Notwithstanding any provision herein to the contrary, the Company shall not be required to register shares in the name of any Person who acquired this Warrant (or part hereof) or any Warrant Stock otherwise than 6 in accordance with this Warrant. Section 2.2 Payment of Taxes and Charges. All shares of Common Stock issuable upon the exercise of this Warrant pursuant to the terms hereof shall be validly issued, fully paid and nonassessable, and without any preemptive rights. The Company shall pay all expenses in connection with, and all taxes and other governmental charges that may be imposed with respect to, the issue or delivery thereof, unless such tax or charge is imposed by law upon Holder, in which case such taxes or charges shall be paid by Holder. The Company shall not be required, however, to pay any tax or other charge imposed in connection with any transfer involved in the issue of any certificate for shares of Common Stock issuable upon exercise of this Warrant in any name other than that of Holder, and in such case the Company shall not be required to issue or deliver any stock certificate until such tax or other charge has been paid or it has been established to the satisfaction of the Company that no such tax or other charge is due. Section 2.3 Fractional Shares. The Company shall not be required to issue a fractional share of Common Stock upon exercise of any Warrant. As to any fraction of a share which Holder would otherwise be entitled to purchase upon such exercise, the Company shall pay a cash adjustment in respect of such final fraction in an amount equal to the same fraction of the Market Price per share of Common Stock as of the Closing Date. Section 2.4 Continued Validity. A holder of shares of Common Stock issued upon the exercise of this Warrant, in whole or in part (other than a holder who acquires such shares after the same have been publicly sold pursuant to a Registration Statement under the Securities Act or sold pursuant to Rule 144 thereunder), shall continue to be entitled with respect to such shares to all rights to which it would have been entitled as Holder under Sections 9, 10 and 14 of this Warrant. The Company will, at the time 7 of exercise of this Warrant, in whole or in part, upon the request of Holder, acknowledge in writing, in form reasonably satisfactory to Holder, its continuing obligation to afford Holder all such rights; provided, however, that if Holder shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford to Holder all such rights. Section 2.5 Redemption. Notwithstanding anything to the contrary in this Warrant, at the option of the Company, this Warrant may be redeemed to the extent not already exercised at or any time after the giving of a Notice of Corporate Action of the type referred to in Section 5.2.2, if the corporate action referred to in such Notice of Corporate Action is consummated and, upon the closing of such corporate action, the Company pays to the Holder the cash, securities and Other Property which such Holder would have otherwise received if it had exercised the Warrant immediately prior to the redemption thereof, less the Aggregate Exercise Price. The Aggregate Exercise Price shall mean the product of the Current Warrant Price multiplied by the remaining number of shares of Common Stock which the Holder was entitled to obtain upon exercise of this Warrant. In the event the amounts to be paid to the Holder do not include cash in an amount equal to or greater than the Aggregate Exercise Price, the Holder shall have the option of paying the Company the amount by which such cash is less than the Aggregate Exercise Price or of having sufficient securities or Other Property which would otherwise have been received by the Holder sold to pay such shortfall. Article 3 TRANSFER, DIVISION AND COMBINATION Section 3.1 Transfer. Subject to compliance with Article 9, transfer of this Warrant and all rights hereunder, in whole or in part, shall be registered on the books of the Company to be maintained for such purpose, upon surrender of this Warrant at the principal office of the 8 Company referred to in Section 2.1 or the office or agency designated by the Company pursuant to Section 12, together with a written assignment of this Warrant substantially in the form of Exhibit B hereto duly executed by Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall, subject to Section 9, execute and deliver a new Warrant or Warrants in the name of the assignee or assignees and in the denomination specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. A Warrant, if properly assigned in compliance with Section 9, may be exercised by a new Holder for the purchase of shares of Common Stock without having a new Warrant issued. Section 3.2 Division and Combination. Subject to Section 9, this Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office or agency of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by Holder or its agent or attorney. Subject to compliance with Section 3.1 and with Section 9, as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. Section 3.3 Expenses. The Company shall prepare, issue and deliver at its own expense (other than transfer taxes) the new Warrant or Warrants under this Section 3. Section 3.4 Maintenance of Books. The Company agrees to maintain, at its aforesaid office or agency, books for the registration and the registration of transfer of the Warrants. 9 Article 4 ADJUSTMENTS The number of shares of Common Stock for which this Warrant is exercisable, or the price at which such shares may be purchased upon exercise of this Warrant, shall be subject to adjustment from time to time as set forth in this Section 4. The Company shall give Holder notice of any event described below which requires an adjustment pursuant to this Section 4 at the time of such event. Section 4.1 Stock Dividends, Subdivisions and Combinations. If at any time the Company shall: 1. take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend payable in, or other distribution of, Additional Shares of Common Stock, 2. subdivide its outstanding shares of Common Stock into a larger number of shares of Common Stock, or 3. combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, then (i) the number of shares of Common Stock for which this Warrant is exercisable immediately after the occurrence of any such event shall be adjusted to equal the number of shares of Common Stock which a record holder of the same number of shares of Common Stock for which this Warrant is exercisable immediately prior to the occurrence of such event would own or be entitled to receive after the happening of such event, and (ii) the Current Warrant Price shall be adjusted to equal (A) the Current Warrant Price multiplied by the number of shares of Common Stock for which this Warrant is exercisable immediately prior to the adjustment divided by (B) the number of shares for which this Warrant is exercisable immediately after such adjustment. 10 Section 4.2 Certain Other Distributions. If at any time the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive any dividend or other distribution of: 1. cash, 2. any evidences of its indebtedness, any shares of its stock or any other securities or property of any nature whatsoever (other than cash, Convertible Securities or Additional Shares of Common Stock), or 3. any warrants or other rights to subscribe for or purchase any evidences of its indebtedness, any shares of its stock or any other securities or property of any nature whatsoever (other than cash, Convertible Securities or Additional Shares of Common Stock), then Holder shall be entitled to receive such dividend or distribution as if Holder had exercised the Warrant. A reclassification of the Common Stock (other than a change in par value, or from par value to no par value or from no par value to par value) into shares of Common Stock and shares of any other class of stock shall be deemed a distribution by the Company to the holders of its Common Stock of such shares of such other class of stock within the meaning of this Section 4.2 and, if the outstanding shares of Common Stock shall be changed into a larger or smaller number of shares of Common Stock as a part of such reclassification, such change shall be deemed a subdivision or combination, as the case may be, of the outstanding shares of Common Stock within the meaning of Section 4.1. Section 4.3 Other Provisions Applicable to Adjustments under this Section. The following provisions shall be applicable to the making of adjustments of the number of shares of Common Stock for which this Warrant is exercisable and the Current Warrant Price provided for in this Section 4: 11 1. When Adjustments to Be Made. The adjustments required by this Section 4 shall be made whenever and as often as any specified event requiring an adjustment shall occur. For the purpose of any adjustment, any specified event shall be deemed to have occurred at the close of business on the date of its occurrence. 2. Fractional Interests. In computing adjustments under this Section 4, fractional interests in Common Stock shall be taken into account to the nearest 1/10th of a share. 3. When Adjustment Not Required. If the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or distribution or subscription or purchase rights and shall, thereafter and before the distribution to stockholders thereof, legally abandon its plan to pay or deliver such dividend, distribution, subscription or purchase rights, then thereafter no adjustment shall be required by reason of the taking of such record and any such adjustment previously made in respect thereof shall be rescinded and annulled. 4. Challenge to Good Faith Determination. Whenever the Board of Directors of the Company shall be required to make a determination in good faith of the fair value of any item under this Section 4, such determination may be challenged in good faith by the Holder, and any dispute shall be resolved by an investment banking firm of recognized national standing selected by the Company and acceptable to the Holder. Section 4.4 Reorganization, Reclassification, Merger, Consolidation or Disposition of Assets. In case the Company shall reorganize its capital, reclassify its capital stock, consolidate or merge with or into another corporation (where the Company is not the surviving corporation or where there is a change in or distribution with respect to the 12 Common Stock of the Company), or sell, transfer or otherwise dispose of all or substantially all its property, assets or business to another corporation and, pursuant to the terms of such reorganization, reclassification, merger, consolidation or disposition of assets, shares of common stock of the successor or acquiring corporation, or any cash, shares of stock or other securities or property of any nature whatsoever (including warrants or other subscription or purchase rights) in addition to or in lieu of common stock of the successor or acquiring corporation ("Other Property"), are to be received by or distributed to the holders of Common Stock of the Company, then Holder shall have the right thereafter to receive, upon exercise of the Warrant, the number of shares of common stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and Other Property receivable upon or as a result of such reorganization, reclassification, merger, consolidation or disposition of assets by a holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such event. In case of any such reorganization, reclassification, merger, consolidation or disposition of assets, the successor or acquiring corporation (if other than the Company) shall expressly assume the due and punctual observance and performance of each and every covenant and condition of this Warrant to be performed and observed by the Company and all the obligations and liabilities hereunder, subject to such modifications as may be deemed appropriate (as determined by resolution of the Board of Directors of the Company) in order to provide for adjustments of shares of Common Stock for which this Warrant is exercisable which shall be as nearly equivalent as practicable to the adjustments provided for in this Section 4. For purposes of this Section 4.4, "common stock of the successor or acquiring corporation" shall include stock of such corporation of any class which is not preferred as to dividends or assets over any other class of stock of such corporation and which is not subject to redemption and shall also include any evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable for 13 any such stock, either immediately or upon the arrival of a specified date or the happening of a specified event and any warrants or other rights to subscribe for or purchase any such stock. The foregoing provisions of this Section 4.4 shall similarly apply to successive reorganizations, reclassification, mergers, consolidations or dispositions of assets. Section 4.5 Other Action Affecting Common Stock. In case at any time or from time to time the Company shall take any action in respect of its Common Stock, other than any action described in this Article 4, which would have a materially adverse effect upon the rights of the Holder (as compared to the rights of holders of Common Stock generally), the number of shares of Common Stock and/or the purchase price thereof shall be adjusted in such manner as may be equitable in the circumstances, as determined in good faith by the Board of Directors of the Company. Section 4.6 Certain Limitations. Notwithstanding anything herein to the contrary, the Company agrees not to enter into any transaction which, by reason of any adjustment hereunder, would cause the Current Warrant Price to be less than the par value per share of Common Stock. Article 5 NOTICES TO HOLDER Section 5.1 Notice of Adjustments. Whenever the number of shares of Common Stock for which this Warrant is exercisable, or whenever the price at which a share of such Common Stock may be purchased upon exercise of the Warrants, shall be adjusted pursuant to Section 4, the Company shall forthwith prepare a certificate to be executed by the chief financial officer of the Company setting forth, in reasonable detail, the event requiring the adjustment and 14 the method by which such adjustment was calculated (including a description of the basis on which the Board of Directors of the Company determined the fair value of any evidences of indebtedness, shares of stock, other securities or property or warrants or other subscription or purchase rights referred to in Section 4.2), specifying the number of shares of Common Stock for which this Warrant is exercisable and (if such adjustment was made pursuant to Section 4.4 or 4.5) describing the number and kind of any other shares of stock or Other Property for which this Warrant is exercisable, and any change in the purchase price or prices thereof, after giving effect to such adjustment or change. The Company shall promptly cause a signed copy of such certificate to be delivered to the Holder in accordance with Section 15.2. The Company shall keep at its office or agency designated pursuant to Section 12 copies of all such certificates and cause the same to be available for inspection at said office during normal business hours by the Holder or any prospective purchaser of a Warrant designated by the Holder. Section 5.2 Notice of Corporate Action. If at any time 1. the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or other distribution, or any right to subscribe for or purchase any evidences of its indebtedness, any shares of stock of any class or any other securities or property, or to receive any other right, or 2. there shall be any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any consolidation or merger of the Company with, or any sale, transfer or other disposition of all or substantially all the property, assets or business of the Company to, another corporation, or 15 3. there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company; then, in any one or more of such cases, the Company shall give to Holder prompt notice of the date on which a record date shall be selected for such dividend, distribution or right or for determining rights to vote in respect of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up, and (ii) in the case of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up, prompt notice of the date when the same shall take place. Such notice in accordance with the foregoing clause also shall specify (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, the date on which the holders of Common Stock shall be entitled to any such dividend, distribution or right, and the amount and character thereof, and (ii) the date on which any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up is to take place (or an estimate thereof if not precisely known) and the time, if any such time is to be fixed, as of which the holders of Common Stock shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up. Each such written notice shall be sufficiently given if addressed to Holder at the last address of Holder appearing on the books of the Company and delivered in accordance with Section 15.2. 16 Article 6 NO IMPAIRMENT The Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder against impairment. Without limiting the generality of the foregoing, the Company will (a) not increase the par value of any shares of Common Stock receivable upon the exercise of this Warrant above the amount payable therefor upon such exercise immediately prior to such increase in par value, (b) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock upon the exercise of this Warrant, and (c) use its reasonable commercial efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable the Company to perform its obligations under this Warrant. Upon the request of Holder, the Company will at any time during the period this Warrant is outstanding acknowledge in writing, in form satisfactory to Holder, the continuing validity of this Warrant and the obligations of the Company hereunder. 17 Article 7 RESERVATION AND AUTHORIZATION OF COMMON STOCK From and after the Closing Date, the Company shall at all times reserve and keep available for issue upon the exercise of Warrants such number of its authorized but unissued shares of Common Stock as will be sufficient to permit the exercise in full of all outstanding Warrants. All shares of Common Stock which shall be so issuable, when issued upon exercise of any Warrant and payment therefor in accordance with the terms of such Warrant, shall be duly and validly issued and fully paid and nonassessable, and not subject to preemptive rights. Before taking any action which would cause an adjustment reducing the Current Warrant Price below the then par value, if any, of the shares of Common Stock issuable upon exercise of the Warrants, the Company shall take any corporate action which may be necessary in order that the Company may validly and legally issue fully paid and non-assessable shares of such Common Stock at such adjusted Current Warrant Price. Before taking any action which would result in an adjustment in the number of shares of Common Stock for which this Warrant is exercisable or in the Current Warrant Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof. Article 8 TAKING OF RECORD; STOCK AND WARRANT TRANSFER BOOKS In the case of all dividends or other distributions by the Company to the holders of its Common Stock with respect to which any provision of Section 4 refers to the taking of a record of such holders, the Company will in each such case take such a record and will take such record as of 18 the close of business on a Business Day. The Company will not at any time, except upon dissolution, liquidation or winding up of the Company, close its stock transfer books or Warrant transfer books so as to result in preventing or delaying the exercise or transfer of any Warrant. Section 9 RESTRICTIONS ON TRANSFERABILITY The Warrants and the Warrant Stock shall not be transferred, hypothecated or assigned before satisfaction of the conditions specified in this Section 9, which conditions are intended to ensure compliance with the provisions of the Securities Act with respect to the Transfer of any Warrant or any Warrant Stock. Holder, by acceptance of this Warrant, agrees to be bound by the provisions of this Section 9. Section 9.1 Restrictive Legend. (a) The Holder by accepting this Warrant and any Warrant Stock agrees that this Warrant and the Warrant Stock issuable upon exercise hereof may not be assigned or otherwise transferred unless and until (i) the Company has received an opinion of counsel for the Holder that such securities may be sold pursuant to an exemption from registration under the Securities Act of 1933, as amended (the "Securities Act") or (ii) a registration statement relating to such securities has been filed by the Company and declared effective by the Commission. Each certificate for Warrant Stock issuable hereunder shall bear a legend as follows unless such securities have been sold pursuant to an effective registration statement under the Securities Act: "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended (the "Act"). The securities may not be offered for sale, sold or otherwise transferred 19 except (i) pursuant to an effective registration statement under the Act or (ii) pursuant to an exemption from registration under the Act in respect of which the Company has received an opinion of counsel satisfactory to the Company to such effect. Copies of the agreement covering both the purchase of the securities and restricting their transfer may be obtained at no cost by written request made by the holder of record of this certificate to the Secretary of the Company at the principal executive offices of the Company." (b) Except as otherwise provided in this Section 9, the Warrant shall be stamped or otherwise imprinted with a legend in substantially the following form: "This Warrant and the securities represented hereby have not been registered under the Securities Act of 1933, as amended, and may not be transferred in violation of such Act, the rules and regulations thereunder or the provisions of this Warrant." Section 9.2 Notice of Proposed Transfers. Prior to any Transfer or attempted Transfer of any Warrants or any shares of Restricted Common Stock, the Holder shall give ten (10) days' prior written notice (a "Transfer Notice") to the Company of Holder's intention to effect such Transfer, describing the manner and circumstances of the proposed Transfer, and obtain from counsel to Holder who shall be reasonably satisfactory to the Company, an opinion that the proposed Transfer of such Warrants or such Restricted Common Stock may be effected without registration under the Securities Act. After receipt of the Transfer Notice and opinion, the Company shall, within five (5) days thereof, notify the Holder as to whether such opinion is reasonably satisfactory and, if so, such Holder shall thereupon be entitled to Transfer such Warrants or such Restricted Common Stock, in accordance with the terms of the Transfer Notice. Each certificate, if any, evidencing such shares of 20 Restricted Common Stock issued upon such Transfer shall bear the restrictive legend set forth in Section 9.1(a), and the Warrant issued upon such Transfer shall bear the restrictive legend set forth in Section 9.1(b), unless in the opinion of such counsel such legend is not required in order to ensure compliance with the Securities Act. The Holder shall not be entitled to Transfer such Warrants or such Restricted Common Stock until receipt of notice from the Company under this Section 9.2(a) that such opinion is reasonably satisfactory. Section 9.3 Intentionally Omitted Section 9.4 Termination of Restrictions. Notwithstanding the foregoing provisions of Section 9, the restrictions imposed by this Section upon the transferability of the Warrants, the Warrant Stock and the Restricted Common Stock (or Common Stock issuable upon the exercise of the Warrants) and the legend requirements of Section 9.1 shall terminate as to any particular Warrant or share of Warrant Stock or Restricted Common Stock (or Common Stock issuable upon the exercise of the Warrants) (i) when and so long as such security shall have been effectively registered under the Securities Act and disposed of pursuant thereto or (ii) when the Company shall have received an opinion of counsel reasonably satisfactory to it that such shares may be transferred without registration thereof under the Securities Act. Whenever the restrictions imposed by Section 9 shall terminate as to this Warrant, as hereinabove provided, the Holder hereof shall be entitled to receive from the Company upon written request of the Holder, at the expense of the Company, a new Warrant bearing the following legend in place of the restrictive legend set forth hereon: "THE RESTRICTIONS ON TRANSFERABILITY OF THE WITHIN WARRANT CONTAINED IN SECTION 9 HEREOF TERMINATED ON ________, ____, AND ARE OF NO FURTHER FORCE AND EFFECT." 21 All Warrants issued upon registration of transfer, division or combination of, or in substitution for, any Warrant or Warrants entitled to bear such legend shall have a similar legend endorsed thereon. Whenever the restrictions imposed by this Section shall terminate as to any share of Restricted Common Stock, as hereinabove provided, the holder thereof shall be entitled to receive from the Company, at the Company's expense, a new certificate representing such Common Stock not bearing the restrictive legend set forth in Section 9.1(a). Section 9.5 Listing on Securities Exchange. If the Company shall list any shares of Common Stock on any securities exchange, it will, at its expense, list thereon, maintain and, when necessary, increase such listing of, all shares of Common Stock issued or, to the extent permissible under the applicable securities exchange rules, issuable upon the exercise of this Warrant so long as any shares of Common Stock shall be so listed during any such Exercise Period. Article 10 SUPPLYING INFORMATION The Company shall cooperate with Holder in supplying such information as may be reasonably necessary for Holder to complete and file any information reporting forms presently or hereafter required by the Commission as a condition to the availability of an exemption from the Securities Act for the sale of any Warrant or Restricted Common Stock. 22 Article 11 LOSS OR MUTILATION Upon receipt by the Company from Holder of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of this Warrant and indemnity reasonably satisfactory to it (it being understood that the written agreement of the Holder shall be sufficient indemnity), and in case of mutilation upon surrender and cancellation hereof, the Company will execute and deliver in lieu hereof a new Warrant of like tenor to Holder; provided, in the case of mutilation, no indemnity shall be required if this Warrant in identifiable form is surrendered to the Company for cancellation. Article 12 OFFICE OF THE COMPANY As long as any of the Warrants remain outstanding, the Company shall maintain an office or agency (which may be the principal executive offices of the Company) where the Warrants may be presented for exercise, registration of transfer, division or combination as provided in this Warrant. Article 13 LIMITATION OF LIABILITY No provision hereof, in the absence of affirmative action by Holder to purchase shares of Common Stock, and no enumeration herein of the rights or privileges of Holder hereof, shall give rise to any liability of Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. 23 Article 14 MISCELLANEOUS Section 14.1 Nonwaiver and Expenses. No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice Holder's rights, powers or remedies. If the Company fails to make, when due, any payments provided for hereunder, or fails to comply with any other provision of this Warrant, the Company shall pay to Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys' fees, including those of appellate proceedings, incurred by Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder. Section 14.2 Notice Generally. Except as may be otherwise provided herein, any notice or other communication or delivery required or permitted hereunder shall be in writing and shall be delivered personally or sent by certified mail, postage prepaid, or by a nationally recognized overnight courier service, and shall be deemed given when so delivered personally or by overnight courier service, or, if mailed, three (3) days after the date of deposit in the United States mails, as follows: (1) if to the Company, to: Interactive Flight Technologies, Inc. 4041 North Central Avenue Suite B 200 Phoenix, Arizona 86012 Attention: Irwin L. Gross 24 with a copy to: Mesirov Gelman Jaffe Cramer & Jamieson LLP 1735 Market Street 38th Floor Philadelphia, Pennsylvania 19103-7598 Attn: Richard P. Jaffe (2) if to the Holder, to: THE SHAAR FUND LTD., c/o SHAAR ADVISORY SERVICES LTD. 62 King George Street, Apartment 4F Jerusalem, Israel Attention: Samuel Levinson with a copy to: Weil, Gotshal & Manges LLP 767 Fifth Avenue New York, New York 10153 Attention: Gerald S. Backman, Esq. The Company or the Holder may change the foregoing address by notice given pursuant to this Section 14.2. Section 14.3 Indemnification. The Company agrees to indemnify and hold harmless Holder from and against any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, attorneys' fees, expenses and disbursements of any kind which may be imposed upon, incurred by or asserted against Holder in any manner relating to or arising out of any failure by the Company to perform or observe in any material respect any of its covenants, agreements, undertakings or obligations set forth in this Warrant; provided, however, that the Company will not be liable hereunder to the extent that any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, attorneys' fees, expenses or disbursements 25 are found in a final non-appealable judgment by a court to have resulted from Holder's gross negligence, bad faith or willful misconduct in its capacity as a stockholder or warrantholder of the Company. Section 14.4 Remedies. Holder in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under Section 9 of this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of Section 9 of this Warrant and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. Section 14.5 Successors and Assigns. Subject to the provisions of Sections 3.1 and 9, this Warrant and the rights evidenced hereby shall inure to the benefit of and be binding upon the successors of the Company and the successors and assigns of Holder. The provisions of this Warrant are intended to be for the benefit of all Holders from time to time of this Warrant and, with respect to Section 9 hereof, holders of Warrant Stock, and shall be enforceable by any such Holder or holder of Warrant Stock. Section 14.6 Amendment. This Warrant and all other Warrants may be modified or amended or the provisions hereof waived with the written consent of the Company and the Holder. Section 14.7 Severability. Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Warrant. Section 14.8 Headings. The headings used in this Warrant 26 are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant. Section 14.9 Governing Law. This Warrant shall be governed by the laws of the State of New York, without regard to the provisions thereof relating to conflict of laws. 27 IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed and its corporate seal to be impressed hereon and attested by its Secretary or an Assistant Secretary. Dated: May 10, 1999 Interactive Flight Technologies, Inc. By: --------------------------------- Name: Title: Attest: By: ------------------------- Name: Title: 28 EXHIBIT A SUBSCRIPTION FORM [To be executed only upon exercise of Warrant] The undersigned registered owner of this Warrant irrevocably exercises this Warrant for the purchase of ______ Shares of Common Stock of Interactive Flight Technologies, Inc. and herewith makes payment therefor, all at the price and on the terms and conditions specified in this Warrant and requests that certificates for the shares of Common Stock hereby purchased (and any securities or other property issuable upon such exercise) be issued in the name of and delivered to _____________ whose address is _________________ and, if such shares of Common Stock shall not include all of the shares of Common Stock issuable as provided in this Warrant, that a new Warrant of like tenor and date for the balance of the shares of Common Stock issuable hereunder be delivered to the undersigned. ----------------------------------- (Name of Registered Owner) ----------------------------------- (Signature of Registered Owner) ----------------------------------- (Street Address) ----------------------------------- (City) (State) (Zip Code) NOTICE: The signature on this subscription must correspond with the name as written upon the face of the within Warrant in every particular, without alteration or enlargement or any change whatsoever. EXHIBIT B ASSIGNMENT FORM FOR VALUE RECEIVED the undersigned registered owner of this Warrant hereby sells, assigns and transfers unto the Assignee named below all of the rights of the undersigned under this Warrant, with respect to the number of shares of Common Stock set forth below: Name and Address of Assignee No. of Shares of Common Stock and does hereby irrevocably constitute and appoint _______ ________________ attorney-in-fact to register such transfer on the books of ___________________ maintained for the purpose, with full power of substitution in the premises. Dated: Print Name: ----------------- ---------------------------- Signature: ----------------------------- Witness: ------------------------------- NOTICE: The signature on this assignment must correspond with the name as written upon the face of the within Warrant in every particular, without alteration or enlargement or any change whatsoever. EX-4.9 3 REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT dated this 6th day of May 1999 (this "Agreement"), between Interactive Flight Technologies, Inc., a Delaware Corporation, with principal offices located at 4041 North Central Avenue, Suite B 200, Phoenix, Arizona 85012 (the "Company"), and the undersigned (the "Initial Investor"). W I T N E S S E T H: WHEREAS, upon the terms and subject to the conditions of the Securities Purchase Agreement dated as of a date even herewith, between the Initial Investor and the Company (the "Securities Purchase Agreement"), the Company has agreed to issue and sell to the Initial Investor 3,000 shares of its Series A 8% Convertible Preferred Stock which, upon the terms and subject to the conditions thereof, are convertible into the Company's Class A Common Stock, $.01 par value (the "Common Stock") or the Company's Series B 8% Convertible Preferred Stock (the "Preferred Stock"), which, upon the terms and subject to the conditions thereof, are convertible into Common Stock, and Warrants (the "Warrants") to purchase 87,500 shares of Common Stock; and WHEREAS, to induce the Initial Investor to execute and deliver the Securities Purchase Agreement, the Company has agreed to provide with respect to the Common Stock issued or issuable upon conversion of the Preferred Stock and exercise of the Warrants certain registration rights under the Securities Act; NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Definitions. (a) As used in this Agreement, the following terms shall have the meanings: (i) "Affiliate" of any specified Person means any other Person who directly, or indirectly through one or more intermediaries, is in control of, is controlled by, or is under common control with, such specified Person. For purposes of this definition, control of a Person means the power, directly or indirectly, to direct or cause the direction of the management and policies of such Person whether by contract, securities, ownership or otherwise; and the terms "controlling" and "controlled" have the respective meanings correlative to the foregoing. (ii) "Closing Date" means the date of this Agreement. (iii) "Commission" means the Securities and Exchange Commission. (iv) "Current Market Price" on any date of determination means the closing bid price of a Common Share on such day as reported on the Nasdaq National Market, or, if such security is not listed or admitted to trading on the Nasdaq National Market, on the principal national security exchange or quotation system on which such security is quoted or listed or admitted to trading, or, if not quoted or listed or admitted to trading on any national securities exchange or quotation system, the closing price of such security on the over-the-counter market on the day in question as reported by the National Quotation Bureau Incorporated, or a similar generally accepted reporting service, or if not so available, in such manner as furnished by any Nasdaq member firm of the National Association of Securities Dealers, Inc. selected from time to time by the Board of Directors of the Company for that purpose, or a price determined in good faith by the Board of Directors of the Company as being equal to the fair market value thereof, as the case may be. (v) "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder, or any similar successor statute. (vi) "Investors" means the Initial Investor and any transferee or assignee of Registrable Securities who agrees to become bound by all of the terms and provisions of this Agreement in accordance with Section 8 hereof. (vii) "Person" means any individual, partnership, corporation, limited liability company, joint stock company, association, trust, unincorporated organization, or a government or agency or political subdivision thereof. (viii) "Prospectus" means the prospectus (including, without limitation, any preliminary prospectus and any final prospectus filed pursuant to Rule 424(b) under the Securities Act, including any prospectus that discloses information previously omitted from a prospectus filed as part of an effective registration statement in reliance on Rule 430A under the Securities Act) included in the Registration Statement, as amended or supplemented by any prospectus supplement with respect to the terms of the offering of any portion of the Registrable Securities covered by the Registration Statement and by all other amendments and supplements to such prospectus, including all material incorporated by reference in such prospectus and all documents filed after the date of such prospectus by the Company under the Exchange Act and incorporated by reference therein. (ix) "Registrable Securities" means the Common Stock issued or issuable upon conversion of Preferred Stock; provided, however, a share of Common Stock shall cease to be a Registrable Security for purposes of this Agreement when it no longer is a Restricted Security. (x) "Registration Statement" means a registration statement of the Company filed on an appropriate form under the Securities Act providing for the registration of, and the sale on a continuous or delayed basis by the holders of, all of the Registrable Securities pursuant to Rule 415 under the Securities Act, including the Prospectus contained therein 2 and forming a part thereof, any amendments to such registration statement and supplements to such Prospectus, and all exhibits and other material incorporated by reference in such registration statement and Prospectus. (xi) "Restricted Security" means any share of Common Stock issued or issuable upon conversion of the Preferred Stock except any such share that (i) has been registered pursuant to an effective registration statement under the Securities Act and sold in a manner contemplated by the Prospectus included in the Registration Statement, (ii) has been transferred in compliance with the resale provisions of Rule 144 under the Securities Act (or any successor provision thereto) or is transferable pursuant to paragraph (k) of Rule 144 under the Securities Act (or any successor provision thereto), or (iii) otherwise has been transferred and a new share of Common Stock not subject to transfer restrictions under the Securities Act has been delivered by or on behalf of the Company. (xii) "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder, or any similar successor statute. (b) All capitalized terms used and not defined herein have the respective meaning assigned to them in the Securities Purchase Agreement. 2. Registration. (a) Filing and Effectiveness of Registration Statement. The Company shall prepare and file with the Commission not later than forty-five (45) days after the date of issuance of the Preferred Stock, a Registration Statement relating to the offer and sale of the Registrable Securities, assuming for purposes hereof a conversion price of the Preferred Stock of $1.25 per share and shall use its best efforts to cause the Commission to declare such Registration Statement effective under the Securities Act as promptly as practicable but not later than one hundred and twenty days after the Closing Date. The Company shall not include any other securities in the Registration Statement relating to the offer and sale of the Registrable Securities. The Company shall notify the Initial Investor by written notice that such Registration Statement has been declared effective by the Commission within 24 hours of such declaration by the Commission. (b) Registration Default. If the Registration Statement covering the Registrable Securities required to be filed by the Company pursuant to Section 2(a) hereof is not (i) filed with the Commission within forty-five (45) days after the date of issuance of the Preferred Stock or (ii) declared effective by the Commission prior to one hundred and twenty days after the date of issuance of the Preferred Stock (either of which, without duplication, an "Initial Date"), then the Company shall make the payments to the Initial Investor as provided in the next sentence as liquidated damages and not as a penalty. The amount to be paid by the Company to the Initial Investor shall be determined as of each Computation Date, and such amount shall be equal to 3% (the "Liquidated Damage Rate") of the Purchase Price (as defined in the Securities Purchase Agreement) from the Initial Date to the first Computation Date and for each Computation Date thereafter, calculated on a pro rata basis to the date on which the Registration Statement is filed with (in the event of an Initial Date pursuant to (c)(i) above) or 3 declared effective by (in the event of an Initial Date pursuant to (c)(ii) above) the Commission (the "Periodic Amount"); provided, however, that in no event shall the liquidated damages be less than $30,000 and; further provided, however, that the Liquidated Damage Rate shall increase by 1% for each thirty (30) day period after the date one hundred and twenty days after the Closing Date that the Registration Statement covering the Registrable Securities required to be filed by the Company pursuant to Section 2(a) hereof is not declared effective by the Commission. The full Periodic Amount shall be paid by the Company to the Initial Investor by wire transfer of immediately available funds within three (3) days after each Computation Date. As used in this Section 2(b), "Computation Date" means the date which is thirty (30) days after the Initial Date and, if the Registration Statement required to be filed by the Company pursuant to Section 2(a) has not theretofore been declared effective by the Commission, each date which is thirty (30) days after the previous Computation Date until such Registration Statement is so declared effective. Notwithstanding the above, if the Registration Statement covering the Registrable Securities required to be filed by the Company pursuant to Section 2(a) hereof is not filed with the Commission within forty-five (45) days after the Closing Date or if the Registration Statement covering the Additional Registrable Securities (as defined in Section 2(d) hereof) required to be filed by the Company pursuant to Section 2(d) hereof is not filed with the Commission within thirty (30) days after the Current Market Price declines to $1.50 or less to the extent required by the Securities Act (because the additional shares were not covered by the Registration Statements filed pursuant to Sections 2(a)), the Company shall be in default of this Registration Rights Agreement. (c) Eligibility for Use of Form S-3. The Company agrees that at such time as it meets all the requirements for the use of Securities Act Registration Statement on Form S-3 it shall file all reports and information required to be filed by it with the Commission in a timely manner and take all such other action so as to maintain such eligibility for the use of such form. (d) Additional Registration Statement. In the event the Current Market Price declines to $1.50 or less (the "Decline Date") at any time after the Initial Date, the Company shall, to the extent required by the Securities Act (because the additional shares were not covered by the Registration Statement filed pursuant to Section 2(a)), as reasonably determined by the Initial Investor, file an additional Registration Statement with the Commission for such additional number of Registrable Securities as would be issuable upon conversion of the Preferred Stock (the "Additional Registrable Securities"), in addition to those previously registered, assuming a Conversion Price of $.75 per share. The Company shall, to the extent required by the Securities Act (because the additional shares were not covered by the Registration Statement filed pursuant to Section 2(a)), as reasonably determined by the Initial Investor, prepare and file with the Commission not later than thirty (30) days after the Decline Date, a registration statement relating to the offer and sale of such Additional Registrable Securities (the "Additional Registration Statement") and shall use its best efforts to cause the Commission to declare such Additional Registration Statement 4 effective under the Securities Act as promptly as practicable but not later than sixty (60) days thereafter. The Company shall not include any other securities in the Registration Statement relating to the offer and sale of such Additional Registrable Securities. If the Additional Registration Statement is not (i) filed with the Commission within thirty (30) days after the Decline Date or (ii) declared effective by the Commission within ninety (90) days after the Decline Date (either of which, without duplication, an "Additional Registration Date"), then the Company shall make payments to the Initial Investor at the Liquidated Damage Rate from the Additional Registration Date to the first Additional Computation Date and for each Computation Date thereafter, calculated on a pro rata basis to the date on which the Additional Registration Statement is filed with or declared effective by the Commission (the "Additional Periodic Amount"); provided, however, that in no event shall the liquidated damages be less than $30,000 and; further provided, that if the Additional Registration Statement is not declared effective by the Commission within one hundred and twenty (120) days after the Additional Registration Date set forth in clause (ii) above, then the Liquidated Damage Rate shall be increased to 4% and; further provided, however, that the Liquidated Damage Rate shall increase by 1% for each thirty (30) day period after the one hundred and fiftieth (150th) day after the Additional Registration Date set forth in clause (ii) above that the Additional Registration Statement is not declared effective by the Commission. The full Additional Periodic Amount shall be paid by the Company to the Initial Investor by wire transfer of immediately available funds within three (3) days after each Additional Computation Date. As used in this Section 2(d), "Additional Computation Date" means the date which is thirty (30) days after the Additional Registration Date and, if the Additional Registration Statement required to be filed by the Company pursuant to this Section 2(d) has not theretofore been declared effective by the Commission, each date which is thirty (30) days after the previous Additional Computation Date until such Additional Registration Statement is so declared effective. (e) Piggyback Obligations. (i) If the Company proposes to register any of its warrants, Common Stock or any other shares of common stock of the Company under the Securities Act (other than a registration (A) on Form S-8 or S-4 or any successor or similar forms, (B) relating to Common Shares or any other shares of common stock of the Company issuable upon exercise of employee share options or in connection with any employee benefit or similar plan of the Company or (C) in connection with a direct or indirect acquisition by the Company of another Person or any transaction with respect to which Rule 145 (or any successor provision) under the Securities Act applies), whether or not for sale for its own account, it will each such time, give prompt written notice at least twenty (20) days prior to the anticipated filing date of the registration statement relating to such registration to the Initial Investor, which notice shall set forth such Initial Investor' rights under this Section 2(e) and shall offer the Initial Investor the opportunity to include in such registration statement (a) such number of Registrable Securities as the Initial Investor may request and (b) any shares of Common Stock issued or issuable upon exercise of the Warrants (the "Warrant Stock"). Upon the written request of an Initial Investor made within ten (10) days after the receipt 5 of notice from the Company (which request shall specify the number of Registrable Securities intended to be disposed of by such Initial Investor), the Company will use its best efforts to effect the registration under the Securities Laws of all Registrable Securities that the Company has been so requested to register by the Initial Investor, to the extent requisite to permit the disposition of the Registrable Securities so to be registered; provided, however, that (A) if such registration involves a Public Offering, the Initial Investor must sell its Registrable Securities to the underwriters on the same terms and conditions as apply to the Company and (B) if, at any time after giving written notice of its intention to register any Registrable Securities pursuant to this Section 2 and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to register such Registrable Securities, the Company shall give written notice to the Initial Investor and, thereupon, shall be relieved of its obligation to register any Registrable Securities in connection with such registration. The Company's obligations under this Section 2(e) shall terminate on the date that the registration statement to be filed in accordance with Section 2(a) is declared effective by the Commission. (ii) If a registration pursuant to this Section 2(e) involves a Public Offering and the managing underwriter thereof advises the Company that, in its view, the number of shares of Common Stock, Warrants or other shares of Common Stock that the Company and the Initial Investor and all other prospective sellers holding registration rights intend to include in such registration exceeds the largest number of shares of Common Stock or Warrants (including any other shares of Common Stock or Warrants of the Company) that can be sold without having an adverse effect on such Public Offering (the "Maximum Offering Size"), the Company will include in such registration, only that number of shares of Common Stock or Warrants, as applicable, such that the number of securities registered does not exceed the Maximum Offering Size, with the difference between the number of shares in the Maximum Offering Size and the number of shares to be issued by the Company to be allocated (after including all shares to be issued and sold by the Company) among the Initial Investor and such other prospective holders pro rata on the basis of the relative number of securities offered for sale under such registration by each of the Initial Investor and such other prospective holders. If as a result of the proration provisions of this Section 2(e)(ii), any Initial Investor is not entitled to include all such Registrable Securities in such registration, such Initial Investor may elect to withdraw its request to include any Registrable Securities in such registration. With respect to registrations pursuant to this Section 2(e), the number of securities required to satisfy any underwriters' over-allotment option shall be allocated pro rata among the Company and the Initial Investor on the basis of the relative number of securities otherwise to be included by each of them in the registration with respect to which such over-allotment option relates. 3. Obligations of the Company. In connection with the registration of the Registrable Securities or the Warrant Stock, the Company shall: (a) Promptly (i) prepare and file with the Commission such amendments (including post-effective amendments) to the Registration Statement and 6 supplements to the Prospectus as may be necessary to keep the Registration Statement continuously effective and in compliance with the provisions of the Securities Act applicable thereto so as to permit the Prospectus forming part thereof to be current and useable by Investors for resales of the Registrable Securities for a period of two (2) years from the date on which the Registration Statement is first declared effective by the Commission (the "Effective Time") or such shorter period that will terminate when all the Registrable Securities covered by the Registration Statement have been sold pursuant thereto in accordance with the plan of distribution provided in the Prospectus, redeemed by the Company, transferred pursuant to Rule 144 under the Securities Act or otherwise transferred in a manner that results in the delivery of new securities not subject to transfer restrictions under the Securities Act (the "Registration Period") and (ii) take all lawful action such that each of (A) the Registration Statement and any amendment thereto does not, when it becomes effective, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, not misleading and (B) the Prospectus forming part of the Registration Statement, and any amendment or supplement thereto, does not at any time during the Registration Period include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Notwithstanding the foregoing provisions of this Section 3(a), the Company may, during the Registration Period, suspend the use of the Prospectus for a period not to exceed 120 days (whether or not consecutive) in any 12-month period if the Board of Directors of the Company determines in good faith that because of valid business reasons, including pending mergers or other business combination transactions, the planned acquisition or divestiture of assets, pending material corporate developments and similar events, it is in the best interests of the Company to suspend such use, and prior to or contemporaneously with suspending such use the Company provides the Investors with written notice of such suspension, which notice need not specify the nature of the event giving rise to such suspension. At the end of any such suspension period, the Company shall provide the Investors with written notice of the termination of such suspension. (b) During the Registration Period, comply with the provisions of the Securities Act with respect to Registrable Securities or Warrant Stock covered by the Registration Statement until such time as all of such Registrable Securities or Warrant Stock have been disposed of in accordance with the intended methods of disposition by the Investors as set forth in the Prospectus forming part of the Registration Statement; (c) (i) Prior to the filing with the Commission of any Registration Statement (including any amendments thereto) and the distribution or delivery of any Prospectus (including any supplements thereto), provide (A) draft copies thereof to the Investors and reflect in such documents all such comments as the Investors (and their counsel) reasonably may propose and (B) to the Investors a copy of the accountant's consent letter to be included in the filing and (ii) furnish to each Investor whose Registrable Securities are included in the Registration Statement and its legal counsel identified to the Company, (A) promptly after the same is prepared and publicly distributed, filed with the Commission, or received by the Company, one copy of the Registration Statement, each Prospectus, and each amendment or supplement thereto, and 7 (B) such number of copies of the Prospectus and all amendments and supplements thereto and such other documents, as such Investor may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such Investor; (d) (i) Register or qualify the Registrable Securities or Warrant Stock covered by the Registration Statement under such securities or "blue sky" laws of such jurisdictions as the Investors who hold a majority-in-interest of the Registrable Securities being offered reasonably request, (ii) prepare and file in such jurisdictions such amendments (including post-effective amendments) and supplements to such registrations and qualifications as may be necessary to maintain the effectiveness thereof at all times during the Registration Period, (iii) take all such other lawful actions as may be necessary to maintain such registrations and qualifications in effect at all times during the Registration Period, and (iv) take all such other lawful actions reasonably necessary or advisable to qualify the Registrable Securities for sale in such jurisdictions; provided, however, that the Company shall not be required in connection therewith or as a condition thereto to (A) qualify to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(d), (B) subject itself to general taxation in any such jurisdiction or (C) file a general consent to service of process in any such jurisdiction; (e) As promptly as practicable after becoming aware of such event, notify each Investor of the occurrence of any event, as a result of which the Prospectus included in the Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and promptly prepare an amendment to the Registration Statement and supplement to the Prospectus to correct such untrue statement or omission, and deliver a number of copies of such supplement and amendment to each Investor as such Investor may reasonably request; (f) As promptly as practicable after becoming aware of such event, notify each Investor who holds Registrable Securities or Warrant Stock being sold (or, in the event of an underwritten offering, the managing underwriters) of the issuance by the Commission of any stop order or other suspension of the effectiveness of the Registration Statement at the earliest possible time and take all lawful action to effect the withdrawal, recession or removal of such stop order or other suspension; (g) Cause all the Registrable Securities and Warrant Stock covered by the Registration Statement to be listed on the principal national securities exchange, and included in an inter-dealer quotation system of a registered national securities association, on or in which securities of the same class or series issued by the Company are then listed or included; (h) Maintain a transfer agent and registrar, which may be a single entity, for the Registrable Securities not later than the effective date of the Registration Statement; 8 (i) Cooperate with the Investors who hold Registrable Securities being offered to facilitate the timely preparation and delivery of certificates for the Registrable Securities to be offered pursuant to the Registration Statement and enable such certificates for the Registrable Securities to be in such denominations or amounts, as the case may be, as the Investors reasonably may request and registered in such names as the Investor may request; and, within three (3) business days after a Registration Statement which includes Registrable Securities is declared effective by the Commission, deliver and cause legal counsel selected by the Company to deliver to the transfer agent for the Registrable Securities (with copies to the Investors whose Registrable Securities are included in such Registration Statement) an appropriate instruction and, to the extent necessary, an opinion of such counsel; (j) Take all such other lawful actions reasonably necessary to expedite and facilitate the disposition by the Investors of their Registrable Securities in accordance with the intended methods therefor provided in the Prospectus which are customary under the circumstances; (k) Make generally available to its security holders as soon as practicable, but in any event not later than eighteen (18) months after (i) the effective date (as defined in Rule 158(c) under the Securities Act) of the Registration Statement, and (ii) the effective date of each post-effective amendment to the Registration Statement, as the case may be, an earnings statement of the Company and its subsidiaries complying with Section 11(a) of the Securities Act and the rules and regulations of the Commission thereunder (including, at the option of the Company, Rule 158); (l) In the event of an underwritten offering, promptly include or incorporate in a Prospectus supplement or post-effective amendment to the Registration Statement such information as the managers reasonably agree should be included therein and to which the Company does not reasonably object and make all required filings of such Prospectus supplement or post-effective amendment as soon as practicable after it is notified of the matters to be included or incorporated in such Prospectus supplement or post-effective amendment; (m) (i) Make reasonably available for inspection by any underwriter participating in any disposition pursuant to the Registration Statement, and any attorney, accountant or other agent retained by any such underwriter all relevant financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries, and (ii) cause the Company's officers, directors and employees to supply all information reasonably requested by such underwriter, attorney, accountant or agent in connection with the Registration Statement, in each case, as is customary for similar due diligence examinations; provided, however, that all records, information and documents that are designated in writing by the Company, in good faith, as confidential, proprietary or containing any material non-public information shall be kept confidential by such underwriter, attorney, accountant or agent (pursuant to an appropriate confidentiality agreement in the case of any such holder or agent), unless such disclosure is made pursuant to judicial process in a court proceeding (after first giving the Company an opportunity promptly to seek a protective order or otherwise limit the scope of the 9 information sought to be disclosed) or is required by law, or such records, information or documents become available to the public generally or through a third party not in violation of an accompanying obligation of confidentiality; and provided further that, if the foregoing inspection and information gathering would otherwise disrupt the Company's conduct of its business, such inspection and information gathering shall, to the maximum extent possible, be coordinated by parties entitled thereto by one firm of counsel designed by and on behalf of the majority in interest of Investors and other parties; (n) In connection with any underwritten offering, make such representations and warranties to the Investors participating in such underwritten offering and to the managers, in form, substance and scope as are customarily made by the Company to underwriters in secondary underwritten offerings; (o) In connection with any underwritten offering, obtain opinions of counsel to the Company (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the managers) addressed to the underwriters, covering such matters as are customarily covered in opinions requested in secondary underwritten offerings (it being agreed that the matters to be covered by such opinions shall include, without limitation, as of the date of the opinion and as of the Effective Time of the Registration Statement or most recent post-effective amendment thereto, as the case may be, the absence from the Registration Statement and the Prospectus, including any documents incorporated by reference therein, of an untrue statement of a material fact or the omission of a material fact required to be stated therein or necessary to make the statements therein (in the case of the Prospectus, in light of the circumstances under which they were made) not misleading, subject to customary limitations); (p) In connection with any underwritten offering, obtain "cold comfort" letters and updates thereof from the independent public accountants of the Company (and, if necessary, from the independent public accountants of any subsidiary of the Company or of any business acquired by the Company, in each case for which financial statements and financial data are, or are required to be, included in the Registration Statement), addressed to each underwriter participating in such underwritten offering (if such underwriter has provided such letter, representations or documentation, if any, required for such cold comfort letter to be so addressed), in customary form and covering matters of the type customarily covered in "cold comfort" letters in connection with secondary underwritten offerings; (q) In connection with any underwritten offering, deliver such documents and certificates as may be reasonably required by the managers, if any; and (r) In the event that any broker-dealer registered under the Exchange Act shall be an "Affiliate" (as defined in Rule 2729(b)(1) of the rules and regulations of the National Association of Securities Dealers, Inc. (the "NASD Rules") (or any successor provision thereto)) of the Company or has a "conflict of interest" (as defined in Rule 2720(b)(7) of the NASD Rules (or any successor provision thereto)) and such broker-dealer shall underwrite, participate as a member of an underwriting syndicate or 10 selling group or assist in the distribution of any Registrable Securities covered by the Registration Statement, whether as a holder of such Registrable Securities or as an underwriter, a placement or sales agent or a broker or dealer in respect thereof, or otherwise, the Company shall assist such broker-dealer in complying with the requirements of the NASD Rules, including, without limitation, by (A) engaging a "qualified independent underwriter" (as defined in Rule 2720(b)(15) of the NASD Rules (or any successor provision thereto)) to participate in the preparation of the Registration Statement relating to such Registrable Securities, to exercise usual standards of due diligence in respect thereof and to recommend the public offering price of such Registrable Securities, (B) indemnifying such qualified independent underwriter to the extent of the indemnification of underwriters provided in Section 5 hereof, and (C) providing such information to such broker-dealer as may be required in order for such broker-dealer to comply with the requirements of the NASD Rules. 4. Obligations of the Investors. In connection with the registration of the Registrable Securities or Warrant Stock, the Investors shall have the following obligations: (a) It shall be a condition precedent to the obligations of the Company to complete the registration pursuant to this Agreement with respect to the Registrable Securities or Warrant Stock of a particular Investor that such Investor shall furnish to the Company such information regarding itself, the Registrable Securities held by it and the intended method of disposition of the Registrable Securities held by it as shall be reasonably required to effect the registration of such Registrable Securities and shall execute such documents in connection with such registration as the Company may reasonably request. As least seven (7) days prior to the first anticipated filing date of the Registration Statement, the Company shall notify each Investor of the information the Company requires from each such Investor (the "Requested Information") if such Investor elects to have any of its Registrable Securities or Warrant Stock included in the Registration Statement. If at least two (2) business days prior to the anticipated filing date the Company has not received the Requested Information from an Investor (a "Non-Responsive Investor"), then the Company may file the Registration Statement without including Registrable Securities or Warrant Stock of such Non-Responsive Investor and have no further obligations to the Non-Responsive Investor; (b) Each Investor by its acceptance of the Registrable Securities agrees to cooperate with the Company in connection with the preparation and filing of the Registration Statement hereunder, unless such Investor has notified the Company in writing of its election to exclude all of its Registrable Securities from the Registration Statement; and (c) Each Investor agrees that, upon receipt of any notice from the Company of the occurrence of any event of the kind described in Section 3(e) or 3(f) or of a notice pursuant to Section 3(a), it shall immediately discontinue its disposition of Registrable Securities pursuant to the Registration Statement covering such Registrable Securities until such Investor's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 3(e) or of receipt of notice from the Company 11 pursuant to Section 3(a), as applicable, and, if so directed by the Company, such Investor shall deliver to the Company (at the expense of the Company) or destroy (and deliver to the Company a certificate of destruction) all copies in such Investor's possession, of the Prospectus covering such Registrable Securities current at the time of receipt of such notice. 5. Expenses of Registration. All expenses, other than underwriting discounts and commissions, incurred in connection with registrations, filings or qualifications pursuant to Section 3, but including, without limitation, all registration, listing, and qualifications fees, printing and engraving fees, accounting fees, and the fees and disbursements of counsel for the Company shall be borne by the Company. The Investors shall be responsible for payment of their share of any underwriting discounts or commissions. 6. Indemnification and Contribution. (a) The Company shall indemnify and hold harmless each Investor and each underwriter, if any, which facilitates the disposition of Registrable Securities or Warrant Stock, and each of their respective officers and directors and each person who controls such Investor or underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act (each such person being sometimes hereinafter referred to as an "Indemnified Person") from and against any losses, claims, damages or liabilities, joint or several, to which such Indemnified Person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in 12 any Registration Statement or an omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, not misleading, or arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Prospectus or an omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and the Company hereby agrees to reimburse such Indemnified Person for all reasonable legal and other expenses incurred by them in connection with investigating or defending any such action or claim as and when such expenses are incurred; provided, however, that the Company shall not be liable to any such Indemnified Person in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon (i) an untrue statement or alleged untrue statement made in, or an omission or alleged omission from, such Registration Statement or Prospectus in reliance upon and in conformity with written information furnished to the Company by such Indemnified Person expressly for use therein or (ii) in the case of the occurrence of an event of the type specified in Section 3(e) or of the delivery of a notice pursuant to Section 3(a) or 3(f), the use by the Indemnified Person of an outdated or defective Prospectus after the Company has provided to such Indemnified Person an updated Prospectus correcting the untrue statement or alleged untrue statement or omission or alleged omission giving rise to such loss, claim, damage or liability. (b) Indemnification by the Investors and Underwriters. Each Investor agrees, as a consequence of the inclusion of any of its Registrable Securities or Warrant Stock in a Registration Statement, and each underwriter, if any, which facilitates the disposition of Registrable Securities shall agree, as a consequence of facilitating such disposition of Registrable Securities, severally and not jointly, to (i) indemnify and hold harmless the Company, its directors (including any person who, with his or her consent, is named in the Registration Statement as a director nominee of the Company), its officers who sign any Registration Statement and each person, if any, who controls the Company within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, against any losses, claims, damages or liabilities to which the Company or such other persons may become subject, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in such Registration Statement or Prospectus or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein (in light of the circumstances under which they were made, in the case of the Prospectus), not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such holder or underwriter expressly for use therein, and (ii) reimburse the Company for any legal or other expenses incurred by the Company in connection with investigating or defending any such action or claim as such expenses are incurred. (c) Notice of Claims, etc. Promptly after receipt by a party seeking indemnification pursuant to this Section 6 (an "Indemnified Party") of written notice of 13 any investigation, claim, proceeding or other action in respect of which indemnification is being sought (each, a "Claim"), the Indemnified Party promptly shall notify the party against whom indemnification pursuant to this Section 6 is being sought (the "Indemnifying Party") of the commencement thereof; but the omission to so notify the Indemnifying Party shall not relieve it from any liability that it otherwise may have to the Indemnified Party, except to the extent that the Indemnifying Party is materially prejudiced and forfeits substantive rights and defenses by reason of such failure. In connection with any Claim the Indemnifying Party shall be entitled to assume the defense thereof. Notwithstanding the assumption of the defense of any Claim by the Indemnifying Party, the Indemnified Party shall have the right to employ separate legal counsel and to participate in the defense of such Claim at the reasonable cost and expense of the Indemnifying Party unless the Indemnified Party and the Indemnifying Party shall reasonably have concluded that representation of the Indemnified Party by the Indemnifying Party by the same legal counsel would not be appropriate due to actual or, as reasonably determined by legal counsel to the Indemnified Party, potentially differing interests between such parties in the conduct of the defense of such Claim, or if there may be legal defenses available to the Indemnified Party that are in addition to or disparate from those available to the Indemnifying Party, or the Indemnifying Party shall have failed to employ legal counsel reasonably satisfactory to the Indemnified Party within a reasonable period of time after notice of the commencement of such Claim. Except as provided above, the Indemnifying Party shall not, in connection with any Claim in the same jurisdiction, be liable for the fees and expenses of more than one firm of counsel for the Indemnified Party (together with appropriate local counsel). The Indemnifying Party shall not, without the prior written consent of the Indemnifying Party (which consent shall not unreasonably be withheld), settle or compromise any Claim or consent to the entry of any judgment that does not include an unconditional release of the Indemnifying Party from all liabilities with respect to such Claim or judgment. (d) Contribution. If the indemnification provided for in this Section 6 is unavailable to or insufficient to hold harmless an Indemnified Person under subsection (a) or (b) above in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each Indemnifying Party shall contribute to the amount paid or payable by such Indemnified Party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and the Indemnified Party in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative fault of such Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by such Indemnified Party or by such Indemnified Party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 6(d) were determined by pro rata allocation (even if the Investors or any underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in this Section 6(d). The amount paid 14 or payable by an Indemnified Party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above shall be deemed to include any legal or other fees or expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The obligations of the Investors and any underwriters in this Section 6(d) to contribute shall be several in proportion to the percentage of Registrable Securities registered or underwritten, as the case may be, by them and not joint. (e) Notwithstanding any other provision of this Section 6, in no event shall any (i) Investor be required to undertake liability to any person under this Section 6 for any amounts in excess of the dollar amount of the proceeds to be received by such Investor from the sale of such Investor's Registrable Securities (after deducting any fees, discounts and commissions applicable thereto) pursuant to any Registration Statement under which such Registrable Securities are to be registered under the Securities Act and (ii) underwriter be required to undertake liability to any Person hereunder for any amounts in excess of the aggregate discount, commission or other compensation payable to such underwriter with respect to the Registrable Securities underwritten by it and distributed pursuant to the Registration Statement. (f) The obligations of the Company under this Section 6 shall be in addition to any liability which the Company may otherwise have to any Indemnified Person and the obligations of any Indemnified Person under this Section 6 shall be in addition to any liability which such Indemnified Person may otherwise have to the Company. The remedies provided in this Section 6 are not exclusive and shall not limit any rights or remedies which may otherwise be available to an indemnified party at law or in equity. 7. Rule 144. With a view to making available to the Investors the benefits of Rule 144 under the Securities Act or any other similar rule or regulation of the Commission that may at any time permit the Investors to sell securities of the Company to the public without registration ("Rule 144"), the Company agrees to use its best efforts to: (a) comply with the provisions of paragraph (c)(1) of Rule 144; and (b) file with the Commission in a timely manner all reports and other documents required to be filed by the Company pursuant to Section 13 or 15(d) under the Exchange Act; and, if at any time it is not required to file such reports but in the past had been required to or did file such reports, it will, upon the request of any Holder, make available other information as required by, and so long as necessary to permit sales of, its Registrable Securities pursuant to Rule 144. 8. Assignment. The rights to have the Company register Registrable Securities or Warrant Stock pursuant to this Agreement shall be automatically assigned by the Investors to any permitted transferee of all or any portion of such securities (or all 15 or any portion of any Preferred Stock or Warrant of the Company which is convertible into such securities) of Registrable Securities or Warrant Stock only if: (a) the Investor agrees in writing with the transferee or assignee to assign such rights, and a copy of such agreement is furnished to the Company within a reasonable time after such assignment, (b) the Company is, within a reasonable time after such transfer or assignment, furnished with written notice of (i) the name and address of such transferee or assignee and (ii) the securities with respect to which such registration rights are being transferred or assigned, (c) immediately following such transfer or assignment, the securities so transferred or assigned to the transferee or assignee constitute Restricted Securities, and (d) at or before the time the Company received the written notice contemplated by clause (b) of this sentence the transferee or assignee agrees in writing with the Company to be bound by all of the provisions contained herein. 9. Amendment and Waiver. Any provision of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and Investors who hold a majority-in-interest of the Registrable Securities. Any amendment or waiver effected in accordance with this Section 9 shall be binding upon each Investor and the Company. 10. Miscellaneous. (a) A person or entity shall be deemed to be a holder of Registrable Securities whenever such person or entity owns of record such Registrable Securities. If the Company receives conflicting instructions, notices or elections from two or more persons or entities with respect to the same Registrable Securities, the Company shall act upon the basis of instructions, notice or election received from the registered owner of such Registrable Securities. (b) If, after the date hereof and prior to the Commission declaring the Registration Statement to be filed pursuant to Section 2(a) effective under the Securities Act, the Company grants to any Person any registration rights with respect to any Company securities which are more favorable to such other Person than those provided in this Agreement, then the Company forthwith shall grant (by means of an amendment to this Agreement or otherwise) identical registration rights to all Investors hereunder. (c) Except as may be otherwise provided herein, any notice or other communication or delivery required or permitted hereunder shall be in writing and shall be delivered personally or sent by certified mail, postage prepaid, or by a nationally recognized overnight courier service, and shall be deemed given when so delivered personally or by overnight courier service, or, if mailed, three (3) days after the date of deposit in the United States mails, as follows: (1) if to the Company, to: Interactive Flight Technologies, Inc. 4041 North Central Avenue 16 Suite B 200 Phoenix, Arizona 86012 Attention: Irwin L. Gross with a copy to: Mesirov Gelman Jaffe Cramer & Jamieson, LLP 1735 Market Street 38th Floor Philadelphia, Pennsylvania 19103-7598 Attn: Richard P. Jaffe (2) if to the Initial Investor, to: THE SHAAR FUND LTD., c/o SHAAR ADVISORY SERVICES LTD. 62 King George Street, Apartment 4F Jerusalem, Israel Attention: Samuel Levinson With a copy to: Weil Gotshal & Manges LLP 767 Fifth Avenue New York, NY 10153 Attention: Gerald S. Backman, P.C. (3) if to any other Investor, at such address as such Investor shall have provided in writing to the Company. The Company, the Initial Investor or any Investor may change the foregoing address by notice given pursuant to this Section 10(c). (d) Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof. (e) This Agreement shall be governed by and interpreted in accordance with the laws of the State of New York. Each of the parties consents to the jurisdiction of the federal courts whose districts encompass any part of the City of New York or the state courts of the State of New York sitting in the City of New York in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. (f) The remedies provided in this Agreement are cumulative and not exclusive of any remedies provided by law. If any term, provision, covenant or 17 restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provision, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their best efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable. (g) The Company shall not enter into any agreement with respect to its securities that is inconsistent with the rights granted to the holders of Registrable Securities or Warrant Stock in this Agreement or otherwise conflicts with the provisions hereof. Without limiting the generality of the foregoing, without the written consent of the Holders of a majority in interest of the Registrable Securities, the Company shall not grant to any person the right to request it to register any of its securities under the Securities Act unless the rights so granted are subject in all respect to the prior rights of the holders of Registrable Securities set forth herein, and are not otherwise in conflict or inconsistent with the provisions of this Agreement. The restrictions on the Company's rights to grant registration rights under this paragraph shall terminate on the date the Registration Statement to be filed pursuant to Section 2(a) is declared effective by the Commission. (h) This Agreement, the Securities Purchase Agreement, the Warrant, and the Certificate of Designations, Preferences and Rights of Series B Preferred Stock, dated as of the date hereof (the "Certificate of Designations"), between the Company and the Initial Holder constitute the entire agreement among the parties hereto with respect to the subject matter hereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein. This Agreement, the Securities Purchase Agreement, the Warrant and the Certificate of Designations supersede all prior agreements and undertakings among the parties hereto with respect to the subject matter hereof. (i) Subject to the requirements of Section 8 hereof, this Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties hereto. (j) All pronouns and any variations thereof refer to the masculine, feminine or neuter, singular or plural, as the context may require. (k) The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning thereof. (l) The Company acknowledges that any failure by the Company to perform its obligations under Section 3, or any delay in such performance could result in direct damages to the Investors and the Company agrees that, in addition to any other 18 liability the Company may have by reason of any such failure or delay, the Company shall be liable for all direct damages caused by such failure or delay. (m) This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement. A facsimile transmission of this signed Agreement shall be legal and binding on all parties hereto. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first above written. INTERACTIVE FLIGHT TECHNOLOGIES, INC. By: --------------------------------- Name: Title: THE SHAAR FUND LTD. By: --------------------------------- Name: Title: 19 EX-10.21 4 LEASE ----------------------------- 135 EAST 57th STREET LLC, Landlord, INTERACTIVE FLIGHT TECHNOLOGIES, INC. Tenant. ----- LEASE ----- Premises: 135 East 57th Street Part of the 26th Floor New York, New York 10022 -----------------------------
TABLE OF CONTENTS ARTICLE PAGE - ------- ---- 1. Premises; Term...........................................................................1 2. Commencement of Term.....................................................................1 3. Rent.....................................................................................2 4. Use......................................................................................4 5. Alterations, Fixtures....................................................................5 6. Repairs..................................................................................8 7. Floor Load; Noise........................................................................9 8. Laws, Ordinances, Requirements of Public Authorities............................................................................9 9. Insurance...............................................................................11 10. Damage by Fire or Other Cause...........................................................13 11. Assignment, Subletting, Mortgaging......................................................14 12. Liability of Landlord and Indemnity by Tenant...................................................................22 13. Moving of Heavy Equipment...............................................................23 14. Condemnation............................................................................24 15. Entry, Right to Change Public Portions of the Building.......................................................................25 16. Conditional Limitations, Etc............................................................26 17. Mechanic's Liens........................................................................31 18. Landlord's Right to Perform Tenant's Obligations..................................................................32 19. Covenant of Quiet Enjoyment.............................................................32 20. Excavation..............................................................................32 21. Services and Equipment..................................................................33 22. Escalation..............................................................................36 23. Electric Inclusion......................................................................42 24. Broker..................................................................................45 25. Subordination and Ground Lease..........................................................45 26. Estoppel Certificate....................................................................48 27. Waiver of Jury Trial....................................................................48 28. Surrender of Premises...................................................................49 29. Rules and Regulations...................................................................49 30. Successors and Assigns and Definitions..................................................50 31. Notices.................................................................................51 32. No Waiver; Entire Agreement.............................................................51 33. Captions................................................................................53 34. Inability to Perform....................................................................53 35. No Representations by Landlord..........................................................53 36. Security Deposit........................................................................54
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TABLE OF CONTENTS (continued) ARTICLE PAGE - ------- ---- 37. Rent Control............................................................................56 38. Landlord's Contribution ................................................................57 39. Supplemental Air Conditioning ..........................................................58 Testimonium and Signatures..............................................................59 Acknowledgments.........................................................................60 Schedule A Floor Plan....................................................61 Schedule B Description of Land...........................................62 Schedule C Rules and Regulations.........................................63 Schedule D Cleaning Specifications.......................................67 Schedule E Definitions...................................................69
ii INDENTURE OF LEASE made this 10th day of September, 1999, between 135 EAST 57th STREET LLC, a New York limited liability company, having an office at 750 Lexington Avenue, New York, New York 10022 ("Landlord") and INTERACTIVE FLIGHT TECHNOLOGIES, INC., a Delaware corporation having an office at 1811 Chestnut Street, Philadelphia, Pennsylvania 19103 ("Tenant"). W I T N E S S E T H : ARTICLE 1 Premises; Term Landlord hereby leases to Tenant and Tenant hereby hires from Landlord the following space ("Demised Premises"): part of the 26th floor as shown crosshatched on the floor plan (Schedule A) attached hereto, in the office building known as and by the street number 135 East 57th Street, in the Borough of Manhattan, City and State of New York ("Building"), upon and subject to the terms, covenants and conditions hereafter set forth. TO HAVE AND TO HOLD the Demised Premises unto Tenant for a term commencing on the "Commencement Date", as defined in Article 2 hereof, and ending on a date (the "Expiration Date") which shall be ten (10) years after the Commencement Date, plus the number of days required, if any, to have such term expire on the last day of a calendar month, or on such earlier date upon which said term may expire or terminate pursuant to the conditions of this Lease or pursuant to law. IT IS MUTUALLY COVENANTED AND AGREED between Landlord and Tenant as follows: ARTICLE 2 Commencement of Term Section 2.01. The Demised Premises are presently occupied by a tenant under a lease expiring on October 31, 1999. The term of this Lease and the payment of minimum rent hereunder shall commence on the date (the "Commencement Date") that possession of the Demised Premises has been delivered to Tenant vacant, free of all occupants, whether such date is prior to, on or after November 1, 1999. Landlord shall give Tenant at least ten (10) days prior written notice of the anticipated date it will deliver possession of the Demised Premises to Tenant, provided Landlord shall have no liability or responsibility to Tenant if Landlord is unable to deliver possession of the Demised Premises to Tenant on the date set forth in such notice. Section 2.02. Tenant has fully inspected the Demised Premises, is familiar with the condition thereof and agrees to accept possession of the same on the Commencement Date in broom clean condition. Landlord shall not be required to do any work therein to make the same suitable for the conduct of Tenant's business, except that Landlord shall deliver the same to Tenant in broom clean condition. Section 2.03. If, prior to the Commencement Date, Tenant shall enter the Demised Premises or any part thereof to make any installations, Landlord shall have no liability or obligation for the care or preservation of Tenant's property. However, Tenant shall, commencing as of the date of such entry, pay Landlord's charges for (i) electricity, at the rate of $3.00 per rentable square foot per annum (with respect to the portion of the Demised Premises so entered), and (ii) such items for which Tenant is separately billed hereunder, including without limitation, overtime use of freight elevator and HVAC service and extraordinary services. Section 2.04. Promptly after the Commencement Date, Landlord and Tenant shall execute a statement in recordable form confirming the agreed upon Commencement and Expiration Dates of this Lease, in accordance with the foregoing provisions. ARTICLE 3 Rent Section 3.01. Tenant shall pay as rent for the Demised Premises, the following: (a) a fixed minimum rent (the "minimum rent") at the following annual rates: (i) $282,150.00 per annum (or $23,512.50 per month) for the first five (5) years of the 2 term following the Commencement Date, including a partial month if the Commencement Date is not the first day of a month, and in such event the minimum rent for such month shall be prorated; and (ii) $292,050.00 per annum (or $24,337.50 per month) for the last five (5) years of the term; and (b) all other sums and charges required to be paid by Tenant under the terms of this Lease (including without limitation, the payments required to be made under Article 22), which shall be deemed to be and are sometimes referred to hereafter as additional rent. Section 3.02. Notwithstanding the provisions of Section 3.01 hereof and provided Tenant is not then in default under any of the provisions of this Lease on its part to be performed, Tenant shall be entitled to an abatement of part of the minimum rent only as follows: the amount of $22,275.00 for each of the 1st, 2nd, 3rd, 4th, 17th and 18th months of the term succeeding the Commencement Date and the balance of minimum rent for each such month of $1,237.50 shall be payable by Tenant. Tenant acknowledges that the consideration for the aforesaid abatement of minimum rent is Tenant's agreement to perform all of the terms, covenants and conditions of this Lease on its part to be performed. Therefore, if this Lease shall terminate by reason of Tenant's default under any of such terms, covenants and conditions of this Lease, the aggregate amount of all minimum rent that was abated shall immediately thereafter become due and payable by Tenant to Landlord. In the event of Tenant's failure to pay such aggregate amount to Landlord, Landlord shall be entitled to the same rights and remedies as in the event of Tenant's default in the payment of minimum rent. Tenant shall be required to pay additional rent and all other sums from and after the Commencement Date. Section 3.03. The minimum rent shall be payable in equal monthly installments in advance on the first day of each and every month during the term of this Lease, except that the amount of $23,512.50 shall be paid upon the execution of this Lease and shall be applied to payment of the minimum rent for the fifth (5th) month of the term succeeding the Commencement Date. Section 3.04. Tenant shall pay the minimum rent and additional rent in lawful money of the United States which shall be legal tender for the payment of all debts, public and private, at the time of payment. Landlord and Tenant agree that Tenant shall pay all minimum rent, additional rent and other amounts now due or hereafter to become due to the 3 Landlord or its agents as provided for in this Lease, (collectively, the "Rents") (as and when due) directly to the following lock-box account: 135 East 57th Street LLC P.O. Box 41004 Newark, New Jersey 07101-8007 All rent checks shall be made payable to 135 East 57th Street LLC. Section 3.05. The minimum rent and additional rent shall be payable by Tenant without any set-off, abatement or deduction whatsoever and without notice or demand, except as otherwise expressly provided herein. ARTICLE 4 Use Section 4.01. Tenant shall use and occupy the Demised Premises for administrative, executive and general office purposes only. Section 4.02. Notwithstanding the provisions of Section 4.01, Tenant shall not use or allow the use of the Demised Premises or any part thereof (1) for the cooking and/or sale of food, except that Tenant may warm foods; (2) for storage for sale of any alcoholic beverage in the Demised Premises; (3) for storage for and/or sale of any product or material from the Demised Premises; (4) for manufacturing or printing purposes; (5) for the conduct of a school or training facility or conduct of any business which results in the presence of the general public in the Demised Premises; (6) for the conduct of the business of an employment agency or personnel agency; (7) for the conduct of any public auction, gathering, meeting or exhibition; (8) for occupancy by a foreign, United States, state, municipal or other governmental or quasi-governmental body, agency or department or any authority or other entity which is affiliated therewith or controlled thereby and which has diplomatic or sovereign immunity or the like with respect to a commercial lease; (9) for messenger or delivery service (excluding Tenant's or any subtenant's own employees); (10) as a public stenographer or typist; (11) as a telephone or telegraph agency; (12) as medical offices; (13) as a travel agency; (14) as a dating service; (15) as a restaurant; (16) as studios for radio, television or other media;(17) as a night club, discotheque, arcade or like kind establishments; (18) as a public or quasi-public health facility, radiation treatment facility, methadone clinic or other drug related clinic, abortion clinic, or for any practice conducted in or through the format of a clinic; (19) as a pawn shop; (20) as an off-track betting parlor; (21) as a homeless shelter, soup 4 kitchen or similar use; (22) for the sale or display of pornographic products or services; (23) for the use or storage of flammable liquids or chemicals; (24) as a funeral parlor; (25) for the sale or grooming of pets; or (26) for any form of spiritualist services, such a fortune telling or reading. Furthermore, the Demised Premises shall not be used for any purpose that would, in Landlord's reasonable judgment, tend to lower the first-class character of the Building, create unreasonable or excessive elevator or floor loads, impair or interfere with any of the Building operations or the proper and economic heating, air-conditioning, cleaning or any other services of the Building, interfere with the use of the other areas of the Building by any other tenants, or impair the appearance of the Building. Neither Tenant nor any person within Tenant's control shall use, generate, store, treat and/or dispose of any Hazardous Materials (as hereinafter defined) in, on, under or about the Demised Premises. Section 4.03. If any governmental license or permit, other than a Certificate of Occupancy or any license or permit required for the proper and lawful conduct of Tenant's business in the Demised Premises, or any part thereof, and if failure to secure such license or permit would in any way affect Landlord, Tenant, at its expense, shall duly procure and thereafter maintain such license or permit and submit the same for inspection by Landlord. Tenant shall at all times comply with the terms and conditions of each such license or permit. Section 4.04. Tenant shall not at any time use or occupy, or permit anyone to use or occupy, the Demised Premises, or do or permit anything to be done in the Demised Premises, in violation of the Certificate of Occupancy, for the Demised Premises or for the Building, and will not permit or cause any act to be done or any condition to exist on the Demised Premises which may be dangerous unless safeguarded as required by law, or which in law constitutes a nuisance, public or private, or which may make void or voidable any insurance then in force covering the Building and building equipment. ARTICLE 5 Alterations, Fixtures Section 5.01. Tenant, without Landlord's prior consent, shall make no alterations, installations, additions, or improvements in or to the Demised Premises ("work") including, but not limited to, an air-conditioning or cooling system, or any unit or part thereof or other apparatus of like or other nature, railings, mezzanine floors, galleries and the like. If any contractor, other than Landlord, shall perform work, such contractor shall first be approved by Landlord, and as a condition of such approval, Tenant shall pay to Landlord ten (10%) percent of the cost of such 5 work for supervision, coordination and other expenses incurred by Landlord in connection therewith. However, such ten (10%) percent charge shall not apply to Tenant's initial work in the Demised Premises nor to painting, wall covering, carpeting and furnishings. Workers' compensation and public liability insurance and property damage insurance, all in amounts and with companies and/or forms reasonably satisfactory to Landlord, shall be provided and at all times maintained by Tenant's contractors engaged in the performance of the work, and before proceeding with the work, certificates of such insurance shall be furnished to Landlord. If consented to by Landlord, all such work shall be done at Tenant's sole expense and in full compliance with all governmental authorities having jurisdiction thereover. Upon completion of such work, Tenant shall deliver to Landlord full scale "as built" plans for the same. All work affixed to the realty or if not so affixed but for which Tenant shall have received a credit, shall become the property of Landlord, subject to Tenant's right to replace same during the term hereof with items of equal quality class and value, and shall remain upon, and be surrendered with, the Demised Premises as a part thereof at the end of the term or any renewal or extension term, as the case may be, without allowance to Tenant or charge to Landlord, unless Landlord elects otherwise on notice to Tenant given at the time Landlord has consented to the work. However, if Landlord shall elect, otherwise, Tenant at Tenant's expense, at or prior to any termination of this Lease, shall remove all such work or such portion thereof as Landlord shall elect and Tenant shall restore the Demised Premises to its original condition, reasonable wear and tear excepted, at Tenant's expense. Notwithstanding the foregoing, Tenant shall not be obligated to remove any of its initial work in the Demised Premises. If any Building facilities or services, including but not limited to air-conditioning and ventilating equipment installed by Landlord, are adversely affected or damaged by reason of the work by Tenant, Tenant, at its expense, shall repair such damage to the extent such damage has been caused by Tenant's work and shall correct the work so as to prevent any further damage or adverse effect on such facilities or services. Section 5.02. Prior to commencing any work pursuant to the provisions of Section 5.01, Tenant shall furnish to Landlord: (a) Plans and specifications for the work to be done. (b) Copies of all governmental permits and authorizations which may be required in connection with such work. (c) A certificate evidencing that Tenant (or Tenant's contractor) has procured workers' compensation insurance covering all persons employed in connection with the work who might assert claims for death or bodily injury against Overlandlord, as defined in Article 25, Landlord, Tenant, any mortgagee or the Building. 6 (d) Such additional personal injury and property damage insurance (over and above the insurance required to be carried by Tenant pursuant to the provisions of Section 9.03) as Landlord may reasonably require because of the nature of the work to be done by Tenant. (e) Except with respect to Tenant's initial work in the Demised Premises, if the cost of any subsequent work exceeds $25,000, a bond or other security satisfactory to Landlord, in the amount of one hundred ten (110%) percent of the aggregate cost of the work, to insure completion of such work. Section 5.03. Where furnished by or at the expense of Tenant (except the replacement of an item theretofore furnished and paid for by Landlord or for which Tenant has received a credit), all movable property, furniture, furnishings, roller files, equipment and trade fixtures ("personalty") other than those affixed to the realty shall remain the property of and shall be removed by Tenant on or prior to any termination or expiration of this Lease, and, in the case of damage by reason of such removal, Tenant, at Tenant's expense, promptly shall repair the damage. If Tenant does not remove any such personalty, Landlord, at its election, (a) may cause the personalty to be removed and placed in storage at Tenant's expense or (b) may treat the personalty as abandoned and may dispose of the personalty as it sees fit without accounting to Tenant for any proceeds realized upon such disposal. Section 5.04. Tenant agrees that the exercise of its rights pursuant to the provisions of this Article 5 shall not be done in a manner which would create any work stoppage, picketing, labor disruption or dispute or violate Landlord's union contracts affecting the Building or interfere with the business of Landlord or any Tenant or occupant of the Building. In the event of the occurrence of any condition described above arising from the exercise by Tenant of its right pursuant to the provisions of this Article 5, Tenant shall, immediately upon notice from Landlord, cease the manner of exercise of such right giving rise to such condition. In the event Tenant fails to cease such manner of exercise of its rights as aforesaid, Landlord, in addition to any rights available to it under this Lease and pursuant to law, shall have the right to injunction without notice. With respect to Tenant's work, Tenant shall make all arrangements for, and pay all expenses incurred in connection with, use of the freight elevators servicing the Demised Premises during those hours other than as provided in Section 21.01(a) in accordance with Landlord's customary charges therefor. 7 ARTICLE 6 Repairs Section 6.01. Tenant shall take good care of the Demised Premises and the fixtures therein and at its sole cost and expense make all repairs thereto as and when needed to preserve them in good working order and condition. Tenant, at its expense, shall make all repairs to the HVAC, mechanical, plumbing and electrical systems within the Demised Premises resulting from the negligence or willful misconduct of Tenant, its agents, contractors and employees. All damage or injury to the Demised Premises or the Building or to any building equipment or systems caused by Tenant moving property in or out of the Building or by installation or removal of personalty or resulting from negligence or conduct of Tenant, its employees, agents, contractors, customers, invitees and visitors, shall be repaired, promptly by Tenant at Tenant's expense, and whether or not involving structural changes or alterations, to the satisfaction of Landlord. All repairs shall include replacements or substitutions where necessary and shall be at least equal to the quality, class and value of the property repaired, replaced or substituted and shall be done in a good and workmanlike manner. Section 6.02. Landlord, at its expense, shall maintain and make all repairs and replacements, structural and otherwise, to the exterior and public portions of the Building and to the Demised Premises, unless Tenant is required to make them under the provisions of Section 6.01 or unless required as a result of the performance or existence of alterations performed by Tenant or on Tenant's behalf, in which event Tenant, at its expense, shall perform such maintenance, repairs or replacements. Tenant shall notify Landlord of the necessity for any repairs for which Landlord may be responsible in the Demised Premises under the provisions of this Section. Landlord shall have no liability to Tenant by reason of any inconvenience, annoyance, interruption or injury to business arising from Landlord's making any repairs or changes which Landlord is required or permitted by this Lease, or required by law, to make in or to any portion of the Building or the Demised Premises, or in or to the fixtures, equipment or appurtenances of the Building or the Demised Premises. Section 6.03. Tenant shall not store or place any materials or other obstructions in the lobby or other public portions of the Building, or on the sidewalk abutting the Building. 8 ARTICLE 7 Floor Load; Noise Section 7.01. Tenant shall not place a load upon any floor of the Demised Premises which exceeds the load per square foot which such floor was designed to carry (50 lbs. live per square foot) and which is allowed by law. Section 7.02. Business machines and mechanical equipment belonging to Tenant which cause noise, vibration or any other nuisance that may be transmitted to the structure or other portions of the Building or to the Demised Premises, to such a degree as to be reasonably objectionable to Landlord or which interfere with the use or enjoyment by other tenants of their premises or the public portions of the Building, shall be placed and maintained by Tenant, at Tenant's expense, in settings of cork, rubber or spring type vibration eliminators sufficient to eliminate such objectionable or interfering noise or vibration. ARTICLE 8 Laws, Ordinances, Requirements of Public Authorities Section 8.01. (a) Tenant, at its expense, shall comply with all laws, orders, ordinances, rules and regulations and directions of Federal, State, County and Municipal authorities and departments thereof having jurisdiction over the Demised Premises and the Building, including but not limited to the Americans With Disabilities Act ("Governmental Requirements"), referable to Tenant or the Demised Premises, unless arising by reason of Tenant's occupancy, use or manner of use of the Demised Premises or any installations made therein by or at Tenant's request, or any default by Tenant under this Lease. (b) Tenant covenants and agrees that Tenant shall, at Tenant's sole cost and expense, comply at all times with all Governmental Requirements governing the use, generation, storage, treatment and/or disposal of any "Hazardous Materials" (which term shall mean any biologically or chemically active or other toxic or hazardous wastes, pollutants or substances, including, without limitation, asbestos, PCBs, petroleum products and by-products, substances defined or listed as "hazardous substances" or "toxic 9 substances" or similarly identified in or pursuant to the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. ss.9601 et seq., and as hazardous wastes under the Resource Conservation and Recovery Act, 42 U.S.C. ss.6010 et seq., any chemical substance or mixture regulated under the Toxic Substance Control Act of 1976, as amended, 15 U.S.C. ss.2601 et seq., any "toxic pollutant" under the Clean Water Act, 33 U.S.C. ss.466 et seq., as amended, any hazardous air pollutant under the Clean Air Act, 42 U.S.C. ss.7401 et seq., hazardous materials identified in or pursuant to the Hazardous Materials Transportation Act, 49 U.S.C. ss.1802 et seq., and any hazardous or toxic substances or pollutant regulated under any other Governmental Requirements). Tenant shall agree to execute, from time to time, at Landlord's request, affidavits, representations and the like concerning Tenant's best knowledge and belief regarding the presence of Hazardous Materials in, on, under or about the Demised Premises, the Building or the Land. Tenant shall indemnify and hold harmless Landlord, its partners, officers, shareholders, members, directors and employees, Overlandlord and any mortgagee (collectively, the "Indemnitees"), from and against any loss, cost, damage, liability or expense (including attorneys' fees and disbursements) arising by reason of any cleanup, removal, remediation, detoxification action or any other activity required or recommended of any Indemnitees by any government authority by reason of the presence in or about the Land, the Building or the Demised Premises of any Hazardous Materials, as a result of or in connection with the act or omission of Tenant or any person or entity within Tenant's control or the breach of this Lease by Tenant or any person or entity within Tenant's control. The foregoing covenants and indemnity shall survive the expiration of any termination of this Lease. (c) Landlord, at its expense, shall comply with and cure Governmental Requirements relating to the public portions of the Building and to the Demised Premises, provided non-compliance will materially curtail Tenant's use or access to the Demised Premises and provided that Tenant is not obligated to comply with them under the provisions of subdivision (a) of this Section. Landlord, at its expense, may contest the validity of any Governmental Requirements and postpone compliance therewith pending such contest. Section 8.02. If Tenant receives written notice of any violation of any Governmental Requirements applicable to the Demised Premises, it shall give prompt notice thereof to Landlord. Section 8.03. Tenant will not clean, nor allow any window in the Demised Premises to be cleaned, from the outside in violation of Section 202 of the 10 Labor Law or the rules of the Board of Standards and Appeals or of any other board or body having or asserting jurisdiction. ARTICLE 9 Insurance Section 9.01. Tenant shall not do or permit to be done any act or thing in or upon the Demised Premises which will invalidate or be in conflict with the Certificate of Occupancy for the Building or the terms of the insurance policies covering the Building and the property and equipment therein; and Tenant, at its expense, shall comply with all rules, orders, regulations and requirements of the New York Board of Fire Underwriters or any other similar body having jurisdiction, and of the insurance carriers, and shall not knowingly do or permit anything to be done in or upon the Demised Premises in a manner which increases the rate of insurance for the Building or any property or equipment therein over the rate in effect on the Commencement Date. Section 9.02. If, by reason of Tenant's failure to comply with the provisions of Section 9.01 or any of the other provisions of this Lease, the rate of insurance for the Building or the property and equipment of Landlord shall be higher than on the Commencement Date, Tenant shall pay to Landlord any additional or increased insurance premiums to the extent resulting therefrom thereafter paid by Landlord, and Tenant shall make such payment forthwith on demand of Landlord. In any action or proceeding wherein Landlord and Tenant are parties, a schedule or "make up" of any insurance rate for the Building or Demised Premises issued by the New York Fire Insurance Exchange, or other body establishing fire insurance rates for the Building, shall be conclusive evidence of the facts therein stated and of the several items and charges in the insurance rates then applicable to the Building or Demised Premises. Section 9.03. (a) Tenant covenants to provide on or before the Commencement Date and to keep in force during the term hereof, the following insurance coverage: (i) For the benefit of Landlord, Tenant, any mortgagee and Overlandlord (as defined in Article 25), a commercial policy of liability insurance protecting and indemnifying Landlord, Tenant, any mortgagee and the Overlandlord against any and all claims for personal injury, death or property damage occurring upon, in or 11 about the Demised Premises, and the public portions of the Building in connection with any act of Tenant, its employees, agents, contractors, customers, invitees and visitors including, without limitation, personal injury, death or property damage resulting from any work performed by or on behalf of Tenant, with coverage of not less than $3,000,000.00 combined single limit for personal injury, death and property damage arising out of one occurrence or accident. (ii) Fire and extended coverage in an amount adequate to cover the cost of replacement of all personal property, fixtures, furnishings and equipment, including Tenant's work (as referred to in Section 5.01), located in the Demised Premises. (b) All such insurance shall (i) be effected under valid and enforceable policies, (ii) be issued by insurers of recognized responsibility authorized to do business in the State of New York, (iii) contain a provision whereby the insurer agrees not to cancel the insurance without ten (10) days' prior written notice to Landlord, and (iv) contain a provision that no act or omission of Tenant shall result in forfeiture of the insurance as against Landlord. On or before the Commencement Date, Tenant shall deliver to Landlord duplicate originals of the aforesaid policies or certificates evidencing the aforesaid insurance coverage, and renewal policies or certificates shall be delivered to Landlord at least thirty (30) days prior to the expiration date of each policy with proof of payment of the premiums thereof. Section 9.04. Landlord and Tenant shall each secure an appropriate clause in, or an endorsement upon, each fire or extended coverage policy obtained by it and covering the Building, the Demised Premises or the personal property, fixtures and equipment located therein or thereon, pursuant to which the respective insurance companies waive subrogation or permit the insured, prior to any loss, to agree with a third party to waive any claim it might have against said third party. The waiver of subrogation or permission for waiver of any claim herein before referred to shall extend to the agents of each party and its employees and, in the case of Tenant, shall also extend to all other persons and entities occupying or using the Demised Premises in accordance with the terms of this lease. If and to the extent that such waiver or permission can be obtained only upon payment of an additional charge, then, the party benefitting from the waiver or permission shall pay such charge upon demand, or shall be deemed to have agreed that the party obtaining the insurance coverage in question shall be free of any further obligations under the provisions hereof relating to such waiver or permission. 12 Subject to the foregoing provisions of this Section 9.05, and insofar as may be permitted by the terms of the insurance policies carried by it, (i) each party hereby releases the other with respect to any claim (including a claim for negligence) which it might otherwise have against the other party for loss, damages or destruction with respect to its property by fire or other casualty (including rental value or business interruption, as the case may be) occurring during the term of this Lease covered by insurance and (ii) Tenant releases other tenants but only to the extent that the policies of such other tenants permit a similar waiver for the benefit of Tenant and such other tenant gives such a waiver. ARTICLE 10 Damage by Fire or Other Cause Section 10.01. If the Demised Premises shall be damaged by fire or other casualty, the damage shall be repaired by and at the expense of Landlord and the minimum rent and additional rent provided in Article 22 until such repairs shall be made, shall be apportioned according to the part of the Demised Premises which is usable by Tenant. Landlord shall have no responsibility to repair any damage to Tenant's work (as referred to in Section 5.01), the same being the responsibility of Tenant. No penalty shall accrue for delays which may arise by reason of adjustment of insurance by Landlord, unavoidable delays (as hereinafter defined), or any other cause beyond Landlord's reasonable control. Tenant shall give notice to Landlord promptly upon learning thereof in case of fire or other damage to the Demised Premises. If the Demised Premises are totally or substantially damaged or are rendered wholly or substantially unusable by fire or any such other casualty, or if the Building shall be so damaged that Landlord shall decide to demolish it or to rebuild it (whether or not the Demised Premises shall have been damaged), Landlord at its election may terminate this Lease by written notice to Tenant, within ninety (90) days after such fire or other casualty, and thereupon the term of this Lease shall expire by lapse of time upon the third (3rd) day after such notice is given, and Tenant shall vacate and surrender the Demised Premises to Landlord. Tenant shall not be liable under this Lease for anything accruing after the date of such expiration. Tenant hereby waives the provisions of Section 227 of the Real Property Law, and the provisions of this Article shall govern and control in lieu thereof. Section 10.02. No damages of compensation shall be payable by Landlord nor shall Tenant make any claim for inconvenience, loss of business or annoyance arising from any repair or restoration of any portion of the Demised Premises or of the Building. Landlord shall use its best efforts to commence and 13 effect such repairs promptly and in such manner as not to unreasonably interfere with Tenant's occupancy. ARTICLE 11 Assignment, Subletting, Mortgaging Section 11.01. Tenant will not, by operation of law or otherwise, assign, mortgage or encumber this Lease, or sublet or permit the Demised Premises or any part thereof to be occupied or used by others for desk space, mailing privileges or otherwise, without Landlord's prior written consent in each instance. If this Lease be assigned, or if the Demised Premises or any part thereof be underlet or occupied by anybody other than Tenant, Landlord, may, after default by Tenant, collect rent from the assignee, undertenant or occupant, and apply the net amount collected to the rent herein reserved, but no assignment, underletting, occupancy or collection shall be deemed a waiver of the provisions hereof, the acceptance of the assignee, undertenant or occupant as tenant, or a release of Tenant from the further performance by Tenant of covenants on the part of Tenant herein contained. The consent by Landlord to any assignment, subletting, mortgage or encumbrance shall not in any manner be construed to relieve Tenant from obtaining Landlord's express consent to any other or further assignment, subletting, mortgage or encumbrance. In no event shall any permitted sublessee assign or encumber its sublease or further sublet all or any portion of its sublet space, or otherwise suffer or permit the sublet space or any part thereof to be used or occupied by others, without Landlord's prior written consent in each instance. Section 11.02. If Tenant shall at any time or times during the term of this Lease desire to assign this Lease or sublet all or part of the Demised Premises, Tenant shall give notice thereof to Landlord, which notice shall be accompanied by (a) a conformed or photostatic copy of the proposed assignment or sublease, the effective or commencement date of which shall be not less than thirty (30) nor more than 180 days after the giving of such notice, (b) a statement setting forth in reasonable detail the identity of the proposed assignee or subtenant, the nature of its business and its proposed use of the Demised Premises, and (c) current financial information with respect to the proposed assignee or subtenant, including, without limitation, its most recent financial report. Such notice shall be deemed an offer from Tenant to Landlord whereby Landlord (or Landlord's designee) may, at its option, (i) sublease such space (hereinafter called the "Leaseback Space") from Tenant upon the terms and conditions hereinafter set forth (if the proposed transaction is a sublease of all or part of the Demised Premises), (ii) terminate this Lease if the proposed transaction is an assignment or a sublease (whether by one 14 sublease or a series of related or unrelated sublease) of all of substantially all of the Demised Premises, or (iii) terminate this Lease with respect to the Leaseback Space (if the proposed transaction is a sublease of part of the Demised Premises). Said options may be exercised by Landlord by notice to Tenant at any time within thirty (30) days after such notice has been given by Tenant to Landlord; and during such thirty (30) day period Tenant shall not assign this Lease nor sublet such space to any person. Section 11.03. If Landlord exercises its option to terminate this Lease in the case where Tenant desires either to assign this Lease or sublet (whether by one sublease or a series of related or unrelated subleases) all or substantially all of the Demised Premises, then, this Lease shall end and expire on the date that such assignment or sublet was to be effective or commence, as the case may be, and the minimum rent and additional rent shall be paid and apportioned to such date. Section 11.04. If Landlord exercises its option to terminate this Lease in part in any case where Tenant desires to sublet part of the Demised Premises, then, (a) this Lease shall end and expire with respect to such part of the Demised Premises on the date that the proposed sublease was to commence; and (b) from and after such date the minimum rent and additional rent shall be adjusted, based upon the proportion that the rentable area of the Demised Premises remaining bears to the total rentable area of the Demised Premises; and (c) Tenant shall pay to Landlord, upon demand, the costs incurred by Landlord in physically separating such part of the Demised Premises from the balance of the Demised Premises and in complying with any laws and requirements of any public authorities relating to such separation. Section 11.05. If Landlord exercises its option to sublet the Leaseback Space, such sublease to Landlord or its designee (as subtenant) shall be at the lower of (i) the rental rate per rentable square foot of minimum rent and additional rent then payable pursuant to this Lease or (ii) the rentals set forth in the proposed sublease, and shall be for the same term as that of the proposed subletting, and such sublease: (a) shall be expressly subject to all of the covenants, agreements, terms, provisions and conditions of this Lease except such as are irrelevant or inapplicable, and except as otherwise expressly set forth to the contrary in this Section; (b) Such sublease shall be upon the same terms and conditions as those contained in the proposed sublease, except such as are irrelevant or inapplicable and except as otherwise expressly set forth to the contrary in this Section; 15 (c) Such sublease shall give the sublessee the unqualified and unrestricted right, without Tenant's permission, to assign such sublease or any interest therein and/or to sublet the Leaseback Space or any part or parts of the Leaseback Space and to make any and all changes, alterations, and improvements in the space covered by such sublease at no cost or liability to Tenant and if the proposed sublease will result in all or substantially all of the Demised Premises being sublet, grant Landlord or its designee the option to extend the term of such sublease for the balance of the term of this Lease less one (1) day; (d) Such sublease shall provide that any assignee or further subtenant, of Landlord or its designee, may, at the election of Landlord, be permitted to make alterations, decorations and installations in the Leaseback Space or any part thereof and shall also provide in substance that any such alterations, decorations and installations in the Leaseback Space therein made by any assignee or subtenant of Landlord or its designee may be removed, in whole or in part, by such assignee or subtenant, at its option, prior to or upon the expiration or other termination of such sublease provided that such assignee or subtenant, at its expense, shall repair any damage and injury to that portion of the Leaseback Space so sublet caused by such removal; and (e) Such sublease shall also provide that (i) the parties to such sublease expressly negate any intention that any estate created under such sublease be merged with any other estate held by either of said parties, (ii) any assignment or subletting by Landlord or its designee (as the subtenant) may be for any purpose or purposes that Landlord, in Landlord's uncontrolled discretion, shall deem suitable or appropriate, (iii) Tenant, at Tenant's expense, shall and will at all times provide and permit reasonably appropriate means of ingress to and egress from the Leaseback Space so sublet by Tenant to Landlord or its designee, (iv) Landlord, at Tenant's expense, may make such alterations as may be required or deemed necessary by Landlord to physically separate the Leaseback Space from the balance of the Demised Premises and to comply with any laws and requirements of public authorities relating to such separation, and (v) that at the expiration of the term of such sublease, Tenant will accept the space covered by such sublease in its then existing condition, subject to the obligations of the sublessee to make such repairs thereto as may be necessary to preserve the premises demised by such sublease in good order and condition. 16 Section 11.06. (a) If Landlord exercises its option to sublet the Leaseback Space, Landlord shall indemnify and save Tenant harmless from all obligations under this Lease as to the Leaseback Space during the period of time it is so sublet to Landlord. (b) Performance by Landlord, or its designee, under a sublease of the Leaseback Space shall be deemed performance by Tenant of any similar obligation under this Lease and any default under any such sublease shall not give rise to a default under a similar obligation contained in this Lease, nor shall Tenant be liable for any default under this Lease or deemed to be in default hereunder if such default is occasioned by or arises from any act or omission of the tenant under such sublease or is occasioned by or arises from any act or omission of any occupant holding under or pursuant to any such sublease. (c) Tenant shall have no obligation, at the expiration or earlier termination of the term of this Lease, to remove any alteration, installation or improvement made in the Leaseback Space by Landlord. Section 11.07. In the event Landlord does not exercise an option provided to it pursuant to Section 11.02 and provided that Tenant is not in default in any of Tenant's obligations under this Lease, Landlord's consent (which must be in writing and in form reasonably satisfactory to Landlord) to the proposed assignment or sublease shall not be unreasonably withheld or delayed, provided and upon condition that: (a) Tenant shall have complied with the provisions of Section 11.02 and Landlord shall not have exercised its option under said Section 11.02 within the time permitted therefor; (b) In Landlord's judgment, the proposed assignee or subtenant is engaged in a business and the Demised Premises, or the relevant part thereof, will be used in a manner which (i) is limited to the use expressly permitted under Sections 4.01 and 4.02 of this Lease, and (ii) is in keeping with the then standards of the Building; (c) The proposed assignee or subtenant is a reputable person of good character and with sufficient financial worth considering the responsibility involved, and Landlord has been furnished with reasonable proof thereof; (d) Neither (i) the proposed assignee or sublessee nor (ii) any person which, directly or indirectly, controls, is controlled by or 17 is under common control with, the proposed assignee or sublessee, is then an occupant of any part of the Building, provided there is other comparable space in the Building available for leasing by Landlord; (e) The proposed assignee or sublessee is not a person with whom Landlord is currently negotiating to lease space in the Building; (f) The proposed sublease shall be in form reasonably satisfactory to Landlord and shall comply with the provisions of this Article; (g) Subject to the provisions of Section 11.02, at any one time there shall not be more than two (2) subtenants (including Landlord or its designee) in the Demised Premises; (h) Tenant shall reimburse Landlord on demand for any reasonable costs that may be incurred by Landlord in connection with said assignment or sublease, including, without limitation, the reasonable costs incurred in making investigations as to the acceptability of the proposed assignee or subtenant, and reasonable legal costs incurred in connection with the granting of any requested consent; (i) Tenant shall not have (i) advertised in any way the availability of the Demised Premises without prior notice to Landlord, (ii) listed the Demised Premises for subletting or assignment with a broker, agent or representative other than the then managing agent of the Building or other agent designed by Landlord, or (iii) listed the Demised Premises in any public media at a rental rate less than the minimum rent or additional rent at which Landlord is then offering to lease other space in the Building; and (j) The proposed subtenant or assignee shall not be entitled, directly or indirectly, to diplomatic or sovereign immunity and shall be subject to the service of process in and the jurisdiction of the courts of New York State. Except for any subletting by Tenant to Landlord or its designee pursuant to the provisions of this Article, each subletting pursuant to this Article shall be subject to all of the covenants, agreements, terms, provisions and conditions contained in this Lease. Notwithstanding any such subletting other than to Landlord or other than any such subletting to any other subtenant and/or acceptance of rent or additional rent by Landlord from any subtenant, Tenant shall and will remain fully liable for the payment for the minimum rent and additional rent due and to become due hereunder 18 and for the performance of all the covenants, agreements, terms, provisions and conditions contained in this Lease on the part of Tenant to be performed and all acts and omissions of any licensee or subtenant or anyone claiming under or through any subtenant which shall be in violation of any of the obligations of this Lease, and any such violation shall be deemed to be a violation by Tenant. Tenant further agrees that notwithstanding any such subletting, no other person claiming through or under Tenant (except as provided in Section 11.05) shall or will be made except upon compliance with and subject to the provisions of this Article. If Landlord shall decline to give its consent to any proposed assignment or sublease, or if Landlord shall exercise its option under Section 11.02, Tenant shall indemnify, defend and hold harmless Landlord against and from any and all loss, liability, damages, costs and expenses (including reasonable counsel fees) resulting from any claims that may be made against Landlord by the proposed assignee or sublessee or by any brokers or other persons claiming a commission or similar compensation in connection with the proposed assignment or sublease. Section 11.08. In the event that (a) Landlord fails to exercise its options under Section 11.02 and consents to a proposed assignment or sublease, and (b) Tenant fails to execute and deliver the assignment or sublease to which Landlord consented within ninety (90) days after the giving of such consent, then, Tenant shall again comply with all of the provisions and conditions of Section 11.02 before assigning this Lease or subletting all or part of the Demised Premises. Section 11.09. With respect to each and every sublease or subletting authorized by Landlord under the provisions of this Lease, it is further agreed: (a) No subletting shall be for a term ending later than one day prior to the expiration date of this Lease; (b) No sublease shall be valid, and no subtenant shall take possession of the Premises or any part thereof, until an executed counterpart of such sublease has been delivered to Landlord; (c) Each sublease shall provide that it is subject and subordinate to this Lease and to the matters to which this Lease is or shall be subordinate, and that in the event of termination, re-entry or dispossess by Landlord under this Lease Landlord may, at its option, take over all of the right, title and interest of Tenant, as sublessor, under such sublease, and such subtenant shall, at Landlord's option, attorn to Landlord pursuant to the then executory provisions of such sublease, except that Landlord shall not (i) be liable for any previous act or omission of Tenant under such sublease, (ii) be subject to any offset, not expressly provided in such sublease, which thereto accrued to such subtenant against Tenant, or (iii) be bound by any previous 19 modification of such sublease or by any previous prepayment of more than one month's rent. Section 11.10. If Landlord gives its consent to any assignment of this Lease or to any sublease, Tenant shall, in consideration therefor, pay to Landlord, as additional rent: (a) in the case of an assignment of this Lease or an assignment by any sublease, an amount equal to one-half of all sums and other considerations paid to Tenant from the assignee for such assignment or paid to Tenant by any sublessee or other person claiming through or under Tenant for such assignment (including, but not limited to sums paid for the sale of Tenant's or sublessee's fixtures, leasehold improvements, less, in case of a sale thereof, the then net unamortized or undepreciated cost thereof determined on the basis of Tenant's or sublessee's federal income tax returns). The sums payable to Landlord under this Section 11.10(a) shall be paid to Landlord as and when paid by such assignee to Tenant; and (b) in the case of a sublease, an amount equal to one-half of the rents and charges and other consideration payable under the sublease to Tenant by the subtenant or paid to Tenant by any such sublessee or other person claiming through or under Tenant in connection with such subletting which is in excess of the minimum rent accruing during the term of the sublease in respect of the subleased space (at the rate per square foot payable by Tenant hereunder or such sublessee) pursuant to the terms of this Lease (including, but not limited to, sums paid for the sale or rental of Tenant's fixtures, leasehold improvements, less, in the case of the sale thereof, the then net unamortized or undepreciated cost thereof determined on the basis of Tenant's or sublessee's federal income tax returns). The sums payable to Landlord under this Section 11.10(b) shall be paid to Landlord as and when paid by such subtenant to Tenant. (c) For the purposes of computing the sums payable by Tenant to Landlord under subparagraphs (a) and (b) hereof, there shall be excluded from the consideration payable to Tenant by any assignee or sublessee any transfer taxes, rent concession, reasonable attorney's fees, reasonable brokerage commissions, advertising costs and fix-up costs paid by Tenant with respect to such assignment or subletting, but only to the extent any such sums are allocable to the period of this Lease (in the case of any assignment), or the term of any sublease. Section 11.11. If Tenant is a corporation, partnership, limited liability company or other entity, the provisions of Section 11.01 shall apply to a 20 transfer (by one or more transfers) of a majority of the stock, partnership, membership or other ownership interests of Tenant as if such transfer of a majority of the stock, partnership, membership or other ownership interests of Tenant were an assignment of this Lease; but said provisions and the provisions of this Article 11 other than Sections 11.11 and 11.14, shall not apply to transactions with a corporation, partnership, limited liability company or other entity into or with which Tenant is merged or consolidated or to which substantially all of Tenant's assets are transferred (provided such merger, consolidation or transfer of assets is for a good business purpose and not principally for the purpose of transferring the leasehold estate created by this Lease) or to any corporation, partnership, limited liability company or other entity which controls or is controlled by Tenant or is under common control with Tenant, provided that in any of such events (i) the successor to Tenant has a net worth computed in accordance with generally accepted accounting principles at least equal to the net worth of Tenant immediately prior to such merger, consolidation or transfer, and (ii) proof satisfactory to Landlord of such net worth shall have been delivered to Landlord at least ten (10) days prior to the effective date of any such transaction. Section 11.12. Any assignment or transfer of this Lease, whether made with Landlord's consent pursuant to Section 11.07 or without Landlord's consent pursuant to Section 11.11, shall be made only if, and shall not be effective until, the assignee shall execute, acknowledge and deliver to Landlord an agreement in form and substance reasonably satisfactory to Landlord whereby the assignee shall assume the obligations of this Lease on the part of Tenant to be performed or observed and whereby the assignee shall agree that the provisions in this Article 11 shall, notwithstanding such assignment or transfer, continue to be binding upon it in respect of all future assignments and transfers. The original named Tenant covenants that, notwithstanding any assignment or transfer, whether or not in violation of the provisions of this Lease, and notwithstanding the acceptance of minimum rent and/or additional rent by Landlord from an assignee, transferee, or any other party, the original named Tenant shall remain fully liable for the payment of the minimum rent and additional rent and for the other obligations of this Lease on the part of Tenant to be performed or observed. Section 11.13. The joint and several liability of Tenant and any immediate or remote successor in interest of Tenant and the due performance of the obligations of this Lease on Tenant's part to be performed or observed shall not be discharged, released or impaired in any respect by any agreement or stipulation made by Landlord extending the time of, or modifying any of the obligations of, this Lease, or by any waiver or failure of Landlord to enforce any of the obligations of this Lease. Section 11.14. The listing of any name other than that of Tenant, whether on the doors of the Demised Premises, or the Building directory, if any, or otherwise, shall not operate to vest any right or interest in this Lease or in the 21 Demised Premises, nor shall it be deemed to be the consent of Landlord to any assignment or transfer of this Lease, to any sublease of the Demised Premises, or to the use or occupancy thereof by others. ARTICLE 12 Liability of Landlord and Indemnity by Tenant Section 12.01. Tenant shall indemnify Landlord, its members, stockholders, directors, officers, agents, contractors and employees against and save Landlord, its members, stockholders, directors, officers, agents, contractors and employees harmless from any liability to and claim by or on behalf of any person, firm, governmental authority, corporation or entity for personal injury, death or property damage, arising: (a) from the use by Tenant of the Demised Premises, or from any work whatsoever done or omitted to be done by Tenant, its employees, agents, contractors, customers, invitees; and (b) from any breach or default by Tenant of and under any of the terms, covenants and conditions of this Lease on Tenant's part to be performed. Tenant also shall indemnify Landlord, its members, stockholders, directors, officers, agents, contractors and employees against and save Landlord, its members, stockholders, directors, officers, agents, contractors and employees harmless from all costs, reasonable counsel fees, expenses and penalties incurred by Landlord in connection with any such liability or claim other than such liability or claim incurred as a result of Landlord's negligence or willful misconduct. If any action or proceeding shall be brought against Landlord, its members, stockholders, directors, officers, agents, contractors and employees in connection with any such liability or claim, Tenant, on notice from Landlord, shall defend such action or proceeding, at Tenant's expense, by counsel reasonably satisfactory to Landlord, or by the attorney for Tenant's insurance carrier whose insurance policy covers the liability or claim. Section 12.02. Landlord shall not be liable for any damage to property of Tenant or of others entrusted to employees of the Building, nor for the loss of or damage to any property of Tenant by theft or otherwise. Landlord and its agents shall not be liable for any injury or damage to persons or property resulting from fire, explosion, falling plaster, steam, gas, electricity, water, rain or snow or leaks 22 from any part of the Building or from the pipes, appliances or plumbing works or from the roof, street or sub-surface or from any other place or by dampness; nor shall Landlord be liable for any such damage caused by other tenants or persons in the Building or caused by operations in construction of any public or quasi-public work; nor shall Landlord be liable for any latent defect in the Demised Premises or in the Building. If, at any time any windows of the Demised Premises are permanently closed, darkened or bricked up by reason of the requirements of law or temporarily closed or darkened by reason of repairs, alterations or maintenance by Landlord, Landlord shall not be liable for any damage Tenant may sustain thereby and Tenant shall not be entitled to any compensation therefor nor abatement of rent nor shall the same release Tenant from its obligations hereunder nor constitute an eviction. (Reference hereinabove to Landlord shall for all purposes be deemed to include the Overlandlord as defined in Article 25.) Tenant shall reimburse and compensate Landlord, as additional rent, within ten (10) days after rendition of a statement for all expenditures made and for all losses, liabilities, claims, damages, fines, penalties and expenses incurred by Landlord arising from any default by Tenant under this Lease. Tenant shall give immediate notice to Landlord upon its discovery of accidents in the Demised Premises. Section 12.03. If in this Lease it is provided that Landlord's consent or approval as to any matter will not be unreasonably withheld, and it is established by a court or body having final jurisdiction thereover that Landlord has been unreasonable, the only effect of such finding shall be that Landlord shall be deemed to have given its consent or approval; but Landlord shall not be liable to Tenant in any respect for money damages by reason of withholding its consent. ARTICLE 13 Moving of Heavy Equipment Tenant shall not move any safe, heavy equipment or bulky matter in or out of the Building without Landlord's written consent, which shall not be unreasonably withheld. If the movement of such items requires special handling, Tenant agrees to employ only persons holding a Master Rigger's License to do said work and all such work shall be done in full compliance with the Administrative Code of the City of New York and other municipal requirements. All such movements shall be made during hours which will least interfere with the normal operations of the 23 Building, and all damage caused by such movement shall be promptly repaired by Tenant at Tenant's expense. ARTICLE 14 Condemnation Section 14.01. In the event that the whole of the Demised Premises shall be condemned or taken in any manner for any public or quasi-public use, this Lease and the term and estate hereby granted shall forthwith cease and terminate as of the date of vesting of title. In the event that only a part of the Demised Premises shall be so condemned or taken, then, effective as of the date of vesting of title, the minimum rent and additional rent hereunder for such part shall be equitably abated and this Lease shall continue as to such part not so taken. In the event that only a part of the Building shall be so condemned or taken, then (a) if substantial structural alteration or reconstruction of the Building shall, in the reasonable opinion of Landlord, be necessary or appropriate as a result of such condemnation or taking (whether or not the Demised Premises be affected), Landlord may, at its option, terminate this Lease and the term and estate hereby granted as of the date of such vesting of title by notifying Tenant in writing of such termination within sixty (60) days following the date on which Landlord shall have received notice of the vesting of title, or (b) if Landlord does not elect to terminate this Lease, as aforesaid, this Lease shall be and remain unaffected by such condemnation or taking, except that the minimum rent and additional rent shall be abated to the extent, if any, hereinbefore provided. In the event that only a part of the Demised Premises shall be so condemned or taken and this Lease and the term and estate hereby granted are not terminated as hereinbefore provided, Landlord, out of the portion of the award allocated for such purpose and to the extent such award is sufficient, will restore with reasonable diligence the remaining structural portions of the Demised Premises as nearly as practicable to the same condition as it was in prior to such condemnation or taking. Section 14.02. In the event of termination in any of the cases hereinabove provided, this Lease and the term and estate hereby granted shall expire as of the date of such termination with the same effect as if that were the Expiration Date and the rent hereunder shall be apportioned as of such date. Section 14.03. In the event of any condemnation or taking hereinabove mentioned of all or a part of the Building, Landlord shall be entitled to receive the entire award in the condemnation proceeding, including any award made for the value of the estate vested by this Lease in Tenant, and Tenant hereby 24 expressly assigns to Landlord any and all right, title and interest of Tenant now or hereafter arising in or to any such award or any part thereof, and Tenant shall be entitled to receive no part of such award. Notwithstanding the foregoing, Tenant may make a separate claim for Tenant's moveable trade fixtures and moving expenses, provided the same shall not affect or reduce Landlord's award. ARTICLE 15 Entry, Right to Change Public Portions of the Building Section 15.01. Tenant shall permit Landlord to erect, use and maintain pipes and conduits in and through the walls, within the ceiling or below the floors of the Demised Premises. Landlord, or its agents or designee shall have the right, on prior written notice (except no notice in an emergency), to enter the Demised Premises for the purpose of making such repairs or alterations as Landlord shall desire, shall be required or shall have the right to make under the provisions of this Lease, provided such work is made in a manner not to unreasonably interfere with Tenant's regular business operations in the Demised Premises; and shall also have the right to enter the Demised Premises for the purpose of inspecting them or exhibiting them to prospective purchasers or lessees of the Building or to prospective mortgagees or to prospective assignees of any such mortgagees. Landlord shall, during the progress of any work in the Demised Premises, be allowed to take all material into and upon the Demised Premises that may be required for the repairs or alterations above mentioned without the same constituting an eviction of Tenant in whole or in part and the rent reserved shall in no wise abate, except as otherwise provided in this Lease, while said repairs or alterations are being made. Section 15.02. During the nine (9) months prior to the expiration of the term of this Lease, Landlord may exhibit the Demised Premises to prospective tenants. Section 15.03. Landlord shall have the right at any time without thereby creating an actual or constructive eviction or incurring any liability to Tenant therefor, to change the arrangement or location of such of the following as are not contained within the Demised Premises: entrances, passageways, doors and doorways, corridors, elevators, stairs, toilets, and other like public service portions of the Building, provided such changes do not interfere with Tenant's access to the Demised Premises; and to put so-called "solar film" or other energy-saving installations on the inside and outside of the windows. All parts (except surfaces facing the interior of the Demised Premises) of all walls, windows and doors bounding the Demised Premises (including exterior Building walls, exterior core corridor walls, 25 exterior doors and entrances), all space in or adjacent to the Demised Premises used for shafts, stacks, stairways, chutes, pipes, conduits, ducts, fan rooms, heating, air cooling, plumbing and other mechanical facilities, service closets and other Building facilities are not part of the Demised Premises and Landlord shall have the use thereof, as well as access thereto through the Demised Premises for the purposes of operation, maintenance, alteration and repair. Section 15.04. Landlord shall have the right at any time to name the Building as it desires and to change any and all such names at any time thereafter. ARTICLE 16 Conditional Limitations, Etc. Section 16.01. If at any time during the term of this Lease: (a) Tenant or any guarantor of this Lease shall file a petition in bankruptcy or insolvency or for reorganization or arrangement or for the appointment of a receiver of all or a portion of Tenant's or such guarantor's property, or (b) Any petition of the kind referred to in subdivision (a) of this Section shall be filed against Tenant or such guarantor and such petition shall not be vacated, discharged or withdrawn within ninety (90) days, or (c) Tenant or such guarantor shall be adjudicated a bankrupt by any court, or (d) Tenant or such guarantor shall make an assignment for the benefit of creditors, or (e) a permanent receiver shall be appointed for the property of Tenant or such guarantor by order of a court of competent jurisdiction by reason of the insolvency of Tenant or such guarantor (except where such receiver shall be appointed in an involuntary proceeding, if he shall not be withdrawn within ninety (90) days after the date of his appointment), 26 then Landlord, at Landlord's option, may terminate this Lease on five (5) days' notice to Tenant, and upon such termination, Tenant shall quit and surrender the Demised Premises to Landlord. Section 16.02 (a) If Tenant assumes this Lease and proposes to assign the same pursuant to the provisions of the Bankruptcy Code, 11 U.S.C. ss. 101 et seq. (the "Bankruptcy Code") to any person or entity who shall have made a bona fide offer to accept an assignment of this Lease on terms acceptable to Tenant, then notice of such proposed assignment, setting forth (i) the name and address of such person, (ii) all of the terms and conditions of such offer, and (iii) the adequate assurance to be provided Landlord to assure such person's future performance under the Lease, including, without limitation, the assurance referred to in section 365(b)(1) of the Bankruptcy Code, shall be given to Landlord by Tenant not later than twenty (20) days after receipt by Tenant but in no event later than ten (10) days prior to the date that Tenant shall make application to a court of competent jurisdiction for authority and approval to enter into such assignment and assumption, and Landlord shall thereupon have the prior right and option, to be exercised by notice to Tenant given at any time prior to the effective date of such proposed assignment, to accept an assignment of this Lease upon the same terms and conditions and for the same consideration, if any, as the bona fide offer made by such person, less any brokerage commissions which may be payable out of the consideration to be paid by such person for the assignment of this Lease. (b) If this Lease is assigned to any person or entity pursuant to the provisions of the Bankruptcy Code, any and all monies or other considerations payable or otherwise delivered in connection with such assignment shall be paid or delivered to Landlord, shall be and remain the exclusive property of Landlord and shall not constitute property of Tenant or of the estate of Tenant within the meaning of the Bankruptcy Code. Any and all monies or other considerations constituting Landlord's Property under the preceding sentence not paid or delivered to Landlord shall be held in trust for the benefit of Landlord and shall be promptly paid to Landlord. (c) Any person or entity to which this Lease is assigned pursuant to the provisions of the Bankruptcy Code, shall be deemed without further act or deed to have assumed all of the obligations arising under this Lease on and after the date of such assignment. Any such assignee shall upon demand execute and deliver to Landlord an instrument confirming such assumption. 27 (d) Nothing contained in this Section shall, in any way, constitute a waiver of the provisions of this Lease relating to assignment. Tenant shall not, by virtue of this Section, have any further rights relating to assignment other than those granted in the Bankruptcy Code. (e) Notwithstanding anything in this Lease to the contrary, all amounts payable by Tenant to or on behalf of Landlord under this Lease, whether or not expressly denominated as rent, shall constitute rent for the purposes of Section 502(b)(6) of the Bankruptcy Code. (f) The term "Tenant" as used in this Section includes any trustee, debtor in possession, receiver, custodian or other similar officer. Section 16.03. If this Lease shall terminate pursuant to the provisions of Section 16.01: (a) Landlord shall be entitled to recover from Tenant arrears in minimum rent and additional rent and, in addition thereto as liquidated damages, an amount equal to the difference between the minimum rent and additional rent for the unexpired portion of the term of this Lease which had been in force immediately prior to the termination effected under Section 16.01 of this Article and the fair and the reasonable rental value of the Demised Premises, on the date of termination, for the same period, both discounted at the rate of eight (8%) percent per annum to the date of termination; or (b) Landlord shall be entitled to recover from Tenant arrears in minimum rent and additional rent and, in addition thereto as liquidated damages, an amount equal to the maximum allowed by statute or rule of law in effect at the time when and governing the proceedings in which such damages are to be proved, whether or not such amount be greater or less than the amount referred to in subdivision (a) of this Section. Section 16.04. (a) If Tenant shall fail to make any payment of any minimum rent or additional rent when the same becomes due and payable, or if Tenant shall fail to cancel or discharge any lien referred to in Section 17.02, or if the Demised Premises become deserted, and if any such default shall continue for a period of five (5) days after notice thereof by Landlord, or 28 (b) If Tenant shall be in default in the performance of any of the other terms, covenants and conditions of this Lease and such default shall not have been remedied within thirty (30) days after notice by Landlord to Tenant specifying such default and requiring it to be remedied; or where such default reasonably cannot be remedied within such period of thirty (30) days, if Tenant shall not have commenced the remedying thereof within such period of time and shall not be proceeding with due diligence to remedy it, then Landlord, at Landlord's election, may terminate this Lease on five (5) days' notice to Tenant, and upon such termination Tenant shall quit and surrender the Demised Premises to Landlord. Section 16.05. If this Lease shall terminate as provided in this Article or if Tenant shall be in default in the payment of minimum rent or additional rent when the same become due and payable, and such default shall continue for a period of five (5) days after notice by Landlord to Tenant, (a) Landlord may re-enter and resume possession of the Demised Premises and remove all persons and property therefrom either by summary dispossess proceedings or by a suitable action or proceeding, at law or in equity, without being liable for any damages therefor, and (b) Landlord may re-let the whole or any part of the Demised Premises for a period equal to, greater or less than the remainder of the then term of this Lease, at such rental and upon such terms and conditions as Landlord shall deem reasonable to any tenant it may deem suitable and for any use and purpose it may deem appropriate. Landlord shall not be liable in any respect for failure to re-let the Demised Premises or, in the event of such re-letting, for failure to collect the rent thereunder and any sums received by Landlord on a re-letting in excess of the rent reserved in this Lease shall belong to Landlord. Section 16.06. If this Lease shall terminate as provided in this Article or by summary proceedings (except as to any termination under Section 16.01), Landlord shall be entitled to recover from Tenant as damages, in addition to arrears in minimum rent and additional rent, (a) an amount equal to (i) all expenses incurred by Landlord in recovering possession of the Demised Premises and in connection with the re-letting of the Demised Premises, including, without limitation, the cost of repairing, renovating or remodeling the Demised Premises, (ii) the cost of performing any work required to be 29 done by Tenant under this Lease, (iii) the cost of placing the Demised Premises in the same condition as that in which Tenant is required to surrender them to Landlord under this Lease, and (iv) all brokers' commissions and legal fees incurred by Landlord in re-letting the Demised Premises, which amounts set forth in this subdivision (a) shall be due and payable by Tenant to Landlord at such time or times as they shall have been incurred; and (b) an amount equal to the deficiency between the minimum rent and additional rent which would have become due and payable had this Lease not terminated and the net amount, if any, of rent collected by Landlord on re-letting the Demised Premises. The amounts specified in this subdivision shall be due and payable by Tenant on the several days on which such minimum rent and additional rent would have become due and payable had this Lease not terminated. Tenant consents that Landlord shall be entitled to institute separate suits or actions or proceedings for the recovery of such amount or amounts, and Tenant hereby waives the right to enforce or assert the rule against splitting a cause of action as a defense thereto. Landlord, at its election, which shall be exercised by the service of a notice on Tenant, at any time after such termination of this Lease, may collect from Tenant and Tenant shall pay, in lieu of the sums becoming due, under the provisions of subdivision (b) of this Section, an amount equal to the difference between the minimum rent and additional rent which would have become due and payable had this Lease not terminated (from the date of the service of such notice to the end of the term of this Lease which had been in force immediately prior to any termination effected under this Article) and the then fair and reasonable rental value of the Demised Premises for the same period, both discounted to the date of the service of such notice at the rate of eight (8%) percent per annum. Section 16.07. Tenant, for itself and for all persons claiming through or under it, hereby waives any and all rights which are or may be conferred upon Tenant by any present or future law to redeem the Demised Premises after a warrant to dispossess shall have been issued or after judgment in an action of ejectment shall have been made and entered. Section 16.08. The words "re-enter" and "re-entry", as used in this Article, are not restricted to their technical legal meanings. Section 16.09. Landlord shall not be required to give any notice of its intention to re-enter, except as otherwise provided in this Lease. 30 Section 16.10. In any action or proceeding brought by Landlord against Tenant, predicated on a default in the payment of minimum rent or additional rent, Tenant shall not have the right to and shall not interpose any set-off or counterclaim of any kind whatsoever, other than a claim which would be legally barred for failure to raise as a counterclaim in such action or proceeding. If Tenant has any claim, Tenant shall be entitled only to bring an independent action therefor; and if such independent action is brought by Tenant, Tenant shall not be entitled to and shall not consolidate it with any pending action or proceeding brought by Landlord against Tenant for a default in the payment of minimum rent or additional rent. ARTICLE 17 Mechanic's Liens Section 17.01. If, subject to and notwithstanding Landlord's consent as required under this Lease, Tenant shall cause any changes, alterations, additions, improvements, installations or repairs to be made to or at the Demised Premises or shall cause any labor to be performed or material to be furnished in connection therewith, neither Landlord nor the Demised Premises, under any circumstances, shall be liable for the payment of any expense incurred or for the value of any work done or material furnished, and all such changes, alterations, additions, improvements, installations and repairs and labor and material shall be made, furnished and performed upon Tenant's credit alone and at Tenant's expense, and Tenant shall be solely and wholly responsible to contractors, laborers, and materialmen furnishing and performing such labor and material. Nothing contained in this Lease shall be deemed or construed in any way as constituting the consent or request of Landlord, express or implied, to any contractor, laborer or materialman to furnish to perform any such labor or material. Section 17.02. If, because of any act or omission (or alleged act or omission) of Tenant any mechanic's or other lien, charge or order for the payment of money shall be filed against the Demised Premises or the Building or Landlord's estate as tenant under any ground or underlying lease (whether or not such lien, charge or order is valid or enforceable as such), for work claimed to have been for, or materials furnished to, Tenant, Tenant, at Tenant's expense, shall cause it to be cancelled or discharged of record by bonding or otherwise within twenty (20) days after such filing, and Tenant shall indemnify Landlord against and save Landlord harmless from and shall pay all reasonable costs, expenses, losses, fines and penalties, including, without limitation, reasonable attorneys' fees resulting therefrom. 31 ARTICLE 18 Landlord's Right to Perform Tenant's Obligations If Tenant shall default in the performance of any of the terms or covenants and conditions of this Lease, Landlord, without being under any obligation to do so and without hereby waiving such default, may remedy such default for the account and at the expense of Tenant. Any payment made or expense incurred by Landlord for such purpose (including, but not limited to, reasonable attorneys' fees) with interest at the maximum legal rate, shall be deemed to be additional rent hereunder and shall be paid by Tenant to Landlord on demand, or at Landlord's election, added to any subsequent installment or installments of minimum rent. ARTICLE 19 Covenant of Quiet Enjoyment Landlord covenants that upon Tenant paying the minimum rent and additional rent and observing and performing all the terms, covenants and conditions of this Lease on Tenant's part to be observed and performed, Tenant may peaceably and quietly enjoy the Demised Premises, subject nevertheless to the terms and conditions of this Lease, and provided, however, that no eviction of Tenant by reason of the foreclosure of any mortgage nor or hereafter affecting the Demised Premises or by reason of any termination of any ground or underlying lease to which this Lease is subject and subordinate, whether such determination is by operation of law, by agreement or otherwise, shall be construed as a breach of this covenant nor shall any action be brought against Landlord by reason thereof. ARTICLE 20 Excavation In the event that construction is to be commenced or an excavation is made or authorized for building or other purposes upon land adjacent to the Building, Tenant shall, if necessary, afford to the person or persons causing or authorized to commence construction or cause such excavation or to engage in such other 32 purpose, license to enter upon the Demised Premises for the purpose of doing such work as shall reasonably be necessary to protect or preserve the Building, from injury or damage and to support the Building and any new structure to be built by proper foundations, pinning and/or underpinning, or otherwise. ARTICLE 21 Services and Equipment Section 21.01. Landlord shall, at its cost and expense: (a) Provide operatorless passenger elevator service Mondays through Fridays from 8:00 A.M. to 6:00 P.M., holidays excepted. A passenger elevator will be available at all other times. A freight elevator shall be available Mondays through Fridays, holidays excepted, only from 8:00 to 6:00 P.M. The freight elevator shall be available on a "first come, first served" basis during the said days and hours and on a reservation "first come, first served" basis other than on said days and hours at Landlord's customary charges therefor. (b) Maintain and repair the Building standard heating, ventilating and air conditioning system servicing the Demised Premises (the "HVAC System") installed by Landlord, except for those repairs which are the obligation of Tenant pursuant to Article 6 of this Lease. The HVAC System will be operated by Landlord as and when required by law, or for the comfortable occupancy of the Demised Premises (as determined by Landlord) during the applicable seasons on Mondays through Fridays, holidays excepted, from 8:00 A.M. to 6:00 P.M.; provided that Tenant shall draw and close the draperies or blinds for the windows of the Demised Premises whenever the HVAC system is in operation and the position of the sun so requires and shall, at all times, cooperate fully with Landlord and abide by all of the Rules and Regulations which Landlord may prescribe for the proper functioning of the HVAC System. The on-floor portion of the HVAC System will be controlled by Landlord, except for the thermostatic controls within the Demised Premises. Landlord agrees to operate the HVAC System servicing the Demised Premises in accordance with their design criteria unless energy and/or water conservation programs, guidelines or laws and/or requirements of public authorities, shall provide for any reduction in operations below said design criteria in which case such equipment shall be operated so as to provide reduced service in accordance 33 therewith. Tenant shall not be permitted to make any adjustments to the HVAC System except by use of thermostatic controls within the Demised Premises. Tenant agrees to maintain the thermostatic controls within the Demised Premises set within the range of settings mandated by any laws and/or requirements of public authorities or governmental standards for temperature or energy related matters. Tenant expressly acknowledges that some or all windows are or may be hermetically sealed and will not open and Landlord makes no representation as to the habitability of the Demised Premises at any time the HVAC System is not in operation. Tenant hereby expressly waives any claims against Landlord arising out of the cessation of operation of the HVAC System, or the suitability of the Demised Premises when the same is not in operation, whether due to normal scheduling or the reasons set forth in Section 21.03. Landlord will not be responsible for the failure of the HVAC System if such failure results from the occupancy of the Demised Premises by more than an average of one (1) person for each one hundred (100) square feet in any separate room or area or if Tenant shall install and operate machines, incandescent lighting and appliances the total connected electrical load in excess of the Building's electrical specifications, as determined by Landlord's consulting engineers. If Tenant shall occupy the Demised Premises at an occupancy rate of greater than that for which the HVAC System was designed, or if the total connected electrical load is in excess of the Building's electrical specifications, as determined by Landlord's consulting engineers, or if Tenant's partitions shall be arranged in such a way as to interfere with the normal operation of the HVAC System, Landlord may elect to make changes to the HVAC System or the ducts through which it operates required by reason thereof, and the cost thereof shall be reimbursed by Tenant to Landlord, as additional rent, within twenty (20) days after presentation of a bill therefor. Landlord, throughout the term, shall have free access to all mechanical installations of Landlord, including but not limited to air-cooling, fan, ventilating and machine rooms and electrical closets, and Tenant shall not construct partitions or other obstructions that may interfere with Landlord's free access thereto, or interfere with the moving of Landlord's equipment to and from the enclosures containing said installations. Neither Tenant nor any person or entity within Tenant's control shall at any time enter the said enclosures or tamper with, adjust, touch or otherwise in any manner affect said mechanical installations, except as set forth herein with respect to the thermostatic controls within the Demised Premises. (c) Provide Building standard cleaning services in Tenant's office space and public portions of the Building, except no services shall be performed Saturdays, Sundays and holidays, in 34 accordance with Schedule "D" annexed hereto and made part hereof. If, however, any additional cleaning of the Demised Premises is to be done by Tenant, it shall be done at Tenant's sole expense, in a manner reasonably satisfactory to Landlord and no one other than persons approved by Landlord shall be permitted to enter the Demised Premises or the Building for such purpose. Tenant shall pay to Landlord the cost of removal of any of Tenant's refuse and rubbish from the Demised Premises and the Building (i) to the extent that the same, in any one day, exceeds the average daily amount of refuse and rubbish usually attendant upon the use of such Demised Premises as offices, as described and included in Landlord's cleaning contract for the Building or recommended by Landlord's cleaning contractor, and (ii) related to or deriving from the preparation of consumption of food or drink. Bills for the same shall be rendered by Landlord to Tenant at such time as Landlord may elect and shall be due and payable as additional rent within ten (10) days after the time rendered. Tenant, at Tenant's expense, shall cause the Demised Premises to be treated against infestation by vermin, rodents or roaches, whenever there is evidence of any infestation caused by Tenant. Tenant shall not permit any person or enter the Demised Premises or the Building for the purpose of providing such extermination services, unless such persons have been approved by Landlord. (d) Furnish hot and cold water for lavatory and drinking purposes. If Tenant requires, uses or consumes water for any other purposes, Landlord may install a meter or meters or other means to measure Tenant's water consumption, and Tenant shall reimburse Landlord for the cost of the meter or meters and the installation thereof, and shall pay for the maintenance of said meter equipment and/or pay Landlord's cost of other means of measuring such water consumption by Tenant. Tenant shall pay to Landlord on demand the cost of all water consumed as measured by said meter or meters or as otherwise measured, including sewer rents. (e) If Tenant shall require and request any of the foregoing services at times other than above provided, and if such request is made at least twenty-four (24) hours prior to the time when such additional services are required, Landlord will provide them and Tenant shall pay to Landlord promptly thereafter the charges therefor at the then Building standard rate charged to other tenants in the Building. Section 21.02. Holidays shall be deemed to mean all federal holidays, state holidays and Building Service Employees Union Contract holidays. 35 Section 21.03. Landlord reserves the right to interrupt, curtail or suspend the services required to be furnished by Landlord under this Lease when necessary by reason of accident, emergency, mechanical breakdown or when required by any law, order or regulation of any Federal, State, County or Municipal authority, or for any other cause beyond the control of Landlord. Landlord shall use due diligence to complete all required repairs or other necessary work as quickly as possible so that Tenant's inconvenience resulting therefrom may be for as short a period of time as circumstances will reasonably permit. Tenant shall not be entitled to nor shall Tenant make claim for any diminution or abatement of minimum rent or additional rent or other compensation, nor shall this Lease or any of the obligations of Tenant be affected or reduced by reason of such interruption, curtailment, suspension, work or inconvenience. Section 21.04. Tenant shall reimburse Landlord promptly for the actual out-of-pocket cost to Landlord of removal from the Demised Premises and the Building of any refuse and rubbish of Tenant not covered by the Cleaning Specifications (Schedule D) and Tenant shall pay all bills therefor when rendered. Section 21.05. If Tenant shall request Landlord to furnish any services in addition to those hereinabove provided or perform any work not required under this Lease, and Landlord agrees to furnish and/or perform the same, Tenant shall pay to Landlord promptly thereafter the charges therefor, which charges are deemed to be additional rent and payable as such. ARTICLE 22 Escalation Section 22.01. Taxes. Tenant shall pay to Landlord, as additional rent, tax escalation in accordance with this Section: (a) Definitions: For the purpose of this Section, the following definitions shall apply: (i) The term "Tax Base Factor" shall mean the real estate taxes for the Building Project for the period from July 1, 1999 to June 30, 2000, as finally determined. (ii) The term "The Building Project" shall mean the parcel of land described in Schedule B of this 36 Lease with all the present improvements existing and erected thereon. (iii) The term "comparative tax year" shall mean the New York City real estate tax year commencing on July 1, 2000 and each subsequent New York City real estate tax year. If the present use of July 1-June 30 New York City real estate tax year shall hereafter be changed, then such changed tax year shall be used with appropriate adjustment for the transition. (iv) The term "Real Estate Taxes" shall mean the total of all taxes, special or other assessments and charges of any Special Business Improvement District levied, assessed or imposed at any time by any governmental authority: (a) upon or against the Building Project, and (b) in connection with the receipt of income or rents from the Building Project to the extent that same shall be in lieu of all or a portion of any of the aforesaid taxes or assessments, or additions or increases thereof. Income, franchise, transfer, inheritance, corporate, mortgage recording or capital stock taxes of Landlord, or penalties or interest thereon, shall be excluded from "Real Estate Taxes" for the purposes hereof. If, due to a future change in the method of taxation or in the taxing authority, or for any other reason, a franchise, income, transit, profit or other tax or governmental imposition, however designated, shall be levied against Landlord in substitution in whole or in part for the Real Estate Taxes, or in lieu of or addition to or increase of Real Estate Taxes, then such franchise, income, transit, profit or other tax or governmental imposition shall be included within "Real Estate Taxes." Tenant acknowledges that the Tax Escalation Payment (as hereinafter defined) constitutes a method by which Landlord is seeking to compensate for increases in expenses and that the Tax Escalation Payment shall be calculated and paid by Tenant to Landlord whether or not Real Estate Taxes have then been paid by Landlord. (v) The term "the Percentage" for purposes of computing tax escalation, shall mean 1.237%. 37 (b) (i) In the event that the Real Estate Taxes payable for any comparative tax year shall exceed the Tax Base Factor, Tenant shall pay to Landlord, as additional rent for such comparative tax year, an amount for tax escalation ("Tax Escalation Payment")equal to the Percentage of the excess. Before or after the start of each Comparative Tax Year, Landlord shall furnish to Tenant a statement of the Tax Escalation Payment payable for such Comparative Tax Year. Tenant shall make its aforesaid Tax Escalation Payment to Landlord, in installments in the same manner and not later than thirty (30) days prior to the last date that Real Estate Taxes are payable by Landlord to the governmental authority. If a statement is furnished to Tenant after the commencement of the Comparative Tax Year in respect of which such statement is rendered, Tenant shall, within ten (10) days thereafter, pay to Landlord an amount equal to those installments of the total Tax Escalation Payment then due. If, during the term of this Lease, Real Estate Taxes are required to be paid, in full or in monthly or other installments, on any other date or dates than as presently required, or if Landlord shall be required to make monthly deposits of Real Estate Taxes to the holder of any mortgage, then Tenant's Tax Escalation Payment(s) shall be correspondingly adjusted so that the same are due to Landlord in corresponding installments not later than thirty (30) days prior to the last date on which the applicable installment of such Real Estate Taxes shall be due and payable to the governmental authority or such mortgagee. (ii) If in any tax certiorari proceeding regarding Real Estate Taxes payable for any Comparative Tax Year or in otherwise establishing such taxes, Landlord has incurred expenses for legal and/or consulting services rendered in applying for, negotiating or obtaining a reduction of the assessment upon which the Real Estate Taxes are predicated, Tenant shall pay an amount equal to the Percentage of such expenses. (iii) The statements of the Tax Escalation Payment to be furnished by Landlord as provided above shall constitute a final determination as between Landlord and Tenant of the Tax Escalation Payment for the 38 periods represented thereby, except for mathematical error in computation. (iv) In no event shall the fixed minimum rent under this Lease be reduced by virtue of this Section 22.01. (v) Upon the date of any expiration or termination of this Lease, whether the same be the date hereinabove set forth for the expiration of the term or any prior or subsequent date, a proportionate share of the Tax Escalation Payment for the Comparative Tax Year during which such expiration or termination occurs shall immediately become due and payable by Tenant to Landlord, if it was not theretofore already billed and paid, or due and payable by Landlord to Tenant if the amount paid by Tenant exceeded such proportionate share. The said proportionate share shall be based upon the length of time that this Lease shall have been in existence during such Comparative Tax Year. Prior to or promptly after said expiration or termination, Landlord shall compute the Tax Escalation Payment due from or owed to Tenant, as aforesaid and Tenant shall promptly pay Landlord any amount unpaid. If Landlord shall receive a refund or a tax credit of any amount of Real Estate Taxes for any Comparative Tax Year for which Tenant has made a payment, Landlord shall pay to Tenant within fifteen (15) days of its receipt of such refund the Percentage of any such refund, less the Percentage of any legal fees and other expenses provided for in Section 22.01(b)(ii) to the extent the same have not theretofore been paid by Tenant. (vi) Landlord's and Tenant's obligations to make the adjustments referred to in subdivision (v) above shall survive any expiration or termination of this Lease. (vii) Any delay or failure of Landlord in billing any Tax Escalation Payment hereinabove provided shall not constitute a waiver of or in any way impair the continuing obligation of Tenant to pay such Tax Escalation Payment hereunder. 39 Section 22.02. Porter's Wage Rate. Tenant shall pay to the Landlord, as additional rent, a porter's wage rate escalation in accordance with this Section: (a) For the purpose of this Section, the following definitions shall apply: (i) "Wage Rate" shall mean the minimum regular hourly rate of wages in effect as of January 1st of each year (whether paid by Landlord or any contractor employed by Landlord) computed as paid over a forty hour week to Porters in Class A office buildings pursuant to an Agreement between Realty Advisory Board on Labor Relations, Incorporated, or any successor thereto, and Local 32B-32J of the Building Service Employees International Union, AFL-CIO, or any successor thereto; and provided, however, that if there is no such agreement in effect prescribing a wage rate for Porters, computations and payments shall thereupon be made upon the basis of the regular hourly wage rate actually payable in effect as of January 1st of each year, and provided, however, that if in any year during the term, the regular employment of Porters shall occur on days or during the hours when overtime or other premium pay rates are in effect pursuant to such Agreement, then the term "hourly rate of wages" as used herein shall be deemed to mean the average hourly rate for the hours in a calendar week during which Porters are regularly employed (e.g., if pursuant to an agreement between Realty Advisory Board and the Local the regular employment of Porters for forty hours during a calendar week is at a regular hourly wage rate of $3.00 for the first thirty hours, and premium or overtime hourly wage rate of $4.50 for the remaining ten hours, then the hourly rate of wages under this Article during such period shall be the total weekly rate of $135.00 divided by the total number of regular hours of employment, forty or $3.375). Notwithstanding the foregoing, if at any time such hourly wage rate is different for new hire and old hire Porters, then thereafter such hourly wage rate shall be based on the weighted average of the wage rates for the different classifications of Porters. (ii) "Base Wage Rate" shall mean the Wage Rate in effect on January 1, 2000. 40 (iii) The term "Porters" shall mean that classification of non-supervisory employees employed in and about the Building who devote a major portion of their time to general cleaning, maintenance and miscellaneous services essentially of a non-technical and non-mechanical nature and are the type of employees who are presently included in the classification of "Class A-Others" in the Commercial Building Agreement between the Realty Advisory Board and the aforesaid Union. (iv) The term "minimum regular hourly rate of wages" shall not include any payments for fringe benefits or adjustments of any kind. (v) The term "Multiplication Factor" shall mean 4,950. (b) If the Wage Rate for any calendar year during the term shall be increased above the Base Wage Rate, then Tenant shall pay, as additional rent, an amount equal to the product obtained by multiplying the Multiplication Factor by 100% of the number of cents (including any fraction of a cent) by which the Wage Rate is greater than the Base Wage Rate, such payment to be made in equal one-twelfth (1/12th) monthly installments commencing with the first monthly installment of minimum rent falling due on or after the effective date of such increase in Wage Rate (payable retroactive from said effective date) and continuing thereafter until a new adjustment shall have become effective in accordance with the provisions of this Article. Landlord shall give Tenant notice of each change in Wage Rate which will be effective to create or change Tenant's obligation to pay additional rent pursuant to the provisions of this Section 22.02 and such notice shall contain Landlord's calculation in reasonable detail and certified as true by an authorized partner of Landlord or of its managing agent, of the annual rate of additional rent payable resulting from such increase in Wage Rate. Such amounts shall be prorated for any partial calendar years during the term. (c) Every notice given by Landlord pursuant to Section 22(b) hereof shall be conclusive and binding upon Tenant, except for manifest error. (d) The "Wage Rate" is intended to be a substitute comparative index of economic costs and does not necessarily reflect the actual costs of wages or other expenses of operating the Building. 41 The Wage Rate shall be used whether or not the Building is a Class A office building and whether or not Porters are employed in the Building and without regard to whether such employees are members of the Union referred to in subsection (a) hereof. ARTICLE 23 Electric Inclusion Section 23.01. (a) Landlord shall furnish electric energy on a rent inclusion basis to the Demised Premises, the charges therefor being included in the minimum rent. The amount included in the minimum rent is based upon the normal use of such electric energy between the hours of 9:00 A.M. to 6:00 P.M. on Mondays through Fridays, holidays excepted, for lighting and for the normal use of lamps, typewriters, personal computers and similar customary office machines. Landlord shall not be liable in any way for any loss, damage or expense that Tenant may sustain or incur by reason of for any failure, change, interruption or defect in the supply or character of electric energy furnished to the Demised Premises by reason of any requirement, act or omission of the Electric Service Provider or Alternate Service Provider (as said terms are hereinafter defined) serving the Building with electricity and no such failure, change, interruption or defect shall constitute an actual of constructive eviction, in whole or in part, or entitle Tenant to any abatement of minimum rent or additional rent or relieve Tenant of its obligations under this Lease. Tenant shall furnish and install, at its sole cost and expense, all lighting fixtures, tubes, lamps, bulbs, ballasts and outlets relating to Tenant's electrical equipment. (b) Landlord has advised Tenant that presently Con Edison ("Electric Service Provider") is the utility company selected by Landlord to provide electricity service for the Building. Notwithstanding the foregoing, if permitted by law, Landlord shall have the right at any time and from time to time during the term of this Lease to either contract for service from a different company or companies providing electricity service (each such company shall hereinafter be referred to as an "Alternate Service Provider") or continue to contract for service from the Electric Service Provider. 42 (c) Tenant shall cooperate with Landlord, the Electric Service Provider, and any Alternate Service Provider at all times and, as reasonably necessary, shall allow Landlord, Electric Service Provider, and any Alternate Service Provider reasonable access to the Building's electric lines, feeders, risers, wiring, and any other machinery within the Demised Premises. Section 23.02. Tenant's connected electrical load in the Demised Premises, including lighting, shall not at any time exceed the capacity of any of the electrical conductors and equipment in or serving the Demised Premises. In order to insure that such capacity is not exceeded and to avert possible adverse effect upon the Building electric service, Tenant shall not, without Landlord's prior consent in each instance, connect any additional fixtures, appliances or equipment (other than as set forth in Section 23.01) or make any alteration or addition to the electric system of the Demised Premises existing on the Commencement Date. Should Landlord grant such consent, all additional risers or other equipment required therefor shall be provided by Landlord and the cost thereof shall be paid by Tenant upon Landlord's demand. As a condition to granting such consent, Landlord may require Tenant to agree to an increase in the annual minimum rent by an amount which will reflect the value to Tenant of the additional service to be furnished by Landlord, that is the potential additional electrical energy to be made available to Tenant based upon the estimated additional capacity of such additional risers or other equipment. If Landlord and Tenant cannot agree thereon, the amount of such increase shall be determined by a reputable, independent electrical engineer or consultant, to be selected by Landlord whose fees or charges shall be paid by Tenant. When the amount of such increase is so determined, Tenant shall pay to Landlord within twenty (20) days following notification to Tenant of such determination the amount thereof retroactive to the date of such increased usage, unless within such twenty (20) day period Tenant disputes such determination. If Tenant disputes such determination, it shall, at its own expense, obtain from a reputable, independent electrical engineer or consultant, its own survey of the additional electrical energy consumed by Tenant. Tenant's consultant and Landlord's consultant shall then seek to agree on a finding of such determination of such change in the consumption of electrical energy. If they cannot agree, they shall choose a third reputable, independent electrical engineer or consultant, whose cost shall be shared equally by Landlord and Tenant, to make a similar survey, and the determination of such third consultant shall be controlling. If they cannot agree on such third consultant, within ten (10) days, then either party may apply to the Supreme Court in the County of New York, for the appointment of such third consultant. However, pending such determination, Tenant shall pay to Landlord the amount as determined by Landlord's engineer or consultant. If the amount determined as aforesaid is different from that determined by Landlord's engineer or consultant, then Landlord and Tenant shall make adjustment for any deficiency owed by Tenant or overage paid by Tenant. Following the final determination, the parties shall execute an agreement supplementary hereto to reflect such increase in the annual minimum rent and in the amount set forth in Section 43 23.03; but such increase shall be effective even if such supplementary agreement is not executed. Section 23.03. If, during the term of this Lease, the public utility rate paid by Landlord for the supply of electric current to the Building shall be increased or if there shall be an increase in taxes or if additional taxes shall be imposed upon the sale or furnishing of such electric energy (hereafter collectively as the "cost") the annual minimum rent shall be increased by an amount arrived at by multiplying $14,850 (or the sum to which said sum may have been increased pursuant to the provisions of Section 23.02 or this Section 23.03 prior to the effective date of the cost increases; such sum being referred to herein as the "Rent Inclusion Factor") by the percentage of the increase of such cost. When the amount of such increase is so determined, Landlord and Tenant shall execute an agreement supplementary hereto to reflect such increase in the amount of the minimum rent payable and effective from the effective date of such increase, but such increase shall be effective from such date whether or not such a supplementary agreement is executed. Section 23.04. Landlord reserves the right to discontinue furnishing electric energy at any time, whether or not Tenant is in default under this Lease, upon not less than thirty (30) days' notice to Tenant. If Landlord exercises such right of discontinuance, this Lease shall continue in full force and effect and shall be unaffected thereby, except only that, from and after the effective date of such discontinuance, Landlord shall not be obligated to furnish electric energy to Tenant, and the minimum rent payable under this Lease shall be reduced by an amount per annum equal to the then prevailing Rent Inclusion Factor. If Landlord so elects to discontinue furnishing electric energy to Tenant, Tenant shall arrange to obtain electric energy directly from the public utility company furnishing electric service to the Building or the Alternate Service Provider. Notwithstanding the foregoing, Landlord shall not discontinue furnishing electric energy until Tenant is able to obtain such electric energy directly from said public utility or the Alternate Service Provider. Such electric energy may be furnished to Tenant by means of the then existing Building system feeders, risers and wiring. All meters and additional panel boards, feeders, risers, wiring and other conductors and equipment which may be required to obtain electric energy directly from such public utility company, and which are to be located within the Demised Premises, shall be installed by Landlord at its expense if such discontinuance was voluntary, or installed by Landlord at Tenant's expense if such discontinuance was required by law or the public utility company. Therefore, all of such equipment shall be maintained by Tenant at its expense. Section 23.05. At no time shall Tenant's connected electrical load excluding the Building HVAC, in the Demised Premises, including lighting, exceed five (5) watts per usable square foot. 44 Section 23.06. If any additional charge or tax is imposed upon Landlord with respect to electric energy furnished to Tenant by any federal, state or municipal authority, Tenant, unless prohibited by law or by any governmental authority having jurisdiction thereover, shall pay to Landlord, within ten (10) days following Landlord's demand, accompanied by copies of all relevant bills or back-up documentation, Tenant's pro rata share of such additional charge or tax. ARTICLE 24 Broker Landlord and Tenant covenant and represent that the sole brokers who negotiated and brought about this transaction were GVA Williams and Cohen Brothers Realty Corporation and Landlord agrees to pay a commission therefor as per separate agreements. Landlord and Tenant agree to hold the other harmless against any claims for a brokerage commission arising out of a breach by the other of the representations contained in this Article. ARTICLE 25 Subordination and Ground Lease Section 25.01. This Lease is subject and subordinate to (a) the ground and underlying lease, dated as of December 19, 1972 between William F. Wallace and Stratford C. Wallace, as trustees u/t/a made by Dorita Fitzgerald Wallace, landlord, and Madison Realty Associates, tenant, and to the rights of the landlord thereunder (the landlord under said ground and underlying lease being sometimes referred to in this Lease as the "Overlandlord"), (b) any other ground and underlying lease, and (c) to all mortgages which may now or hereafter affect any such ground and underlying lease or the Building, and to all renewals, modifications, amendments, consolidations, replacements or extensions of any of the foregoing. This clause shall be self-operative and no further instrument of subordination shall be required. However, in confirmation of such subordination, Tenant, at any time and from time to time, shall execute promptly, and within fifteen (15) days of such request, any certificate and document that Landlord may reasonably request which reasonably evidences such subordination, and Tenant hereby irrevocably constitutes and appoints Landlord attorney-in-fact for Tenant to execute any such instrument for and on behalf of Tenant if not so executed and delivered by Tenant within said fifteen (15) day period. 45 Section 25.02. (a) The Tenant covenants and agrees that if by reason of a default under any underlying lease (including an underlying lease through which the Landlord derives its leasehold estate in the Demised Premises), or under any mortgage such underlying lease and the leasehold estate of the Landlord in the Premises demised hereby is terminated, the Tenant will attorn to the then holder of the reversionary interest in the premises demised by this Lease and will recognize such holder as the Tenant's Landlord under this Lease, unless the lessor under such underlying lease or the holder of any such mortgage shall, in any proceeding to terminate such underlying lease or foreclose such mortgage, elects to terminate this Lease and the rights of Tenant hereunder provided, however, the holder of the reversionary interest shall not be (i) liable for any act or omission or negligence of Landlord under this Lease; (ii) subject to any counterclaim, defense or offset, not expressly provided for in this Lease and asserted with reasonable promptness which theretofore shall have accrued to Tenant against Landlord; (iii) obligated to perform any work; (iv) bound by any previous modification or amendment of this Lease or by any previous prepayment of more than one (1) month's rent, unless such modification or prepayment shall have been approved in writing by the holder of such Mortgage; (v) obligated to repair the Demised Premises, or the Building, or any part thereof, in the event of any damage beyond such repair as can reasonably be accomplished from the net proceeds of insurance actually made available to the then holder of the reversionary interest; or (iv) obligated to repair the Demised Premises or the Building, or any part thereof, in the event of partial condemnation of the Demised Premises or the Building. Nothing contained in this subparagraph shall be construed to impair any right otherwise exercisable by any such holder. Tenant agrees to execute and deliver, at any time and from time to time, upon the request of the Landlord of or the lessor under any such underlying lease or the holder of any such mortgage any instrument which may be necessary or appropriate to evidence such attornment, and Tenant hereby irrevocably constitutes and appoints Landlord attorney-in-fact for Tenant to execute any such instrument for and on behalf of Tenant if not so executed and delivered by Tenant within said fifteen (15) day period. The Tenant further waives the provisions of any statute or rule or law now or hereafter in effect which may give or purport to give Tenant any right of election to terminate this Lease or to surrender possession of the premises demised hereby in the event any proceeding is brought by the lessor under any underlying lease or the holder of any such mortgage to terminate the same, and agrees that unless and until any such lessor, in connection with any such proceeding, shall elect to terminate this Lease and the rights of Tenant 46 hereunder, this Lease shall not be affected in any way whatsoever by any such proceeding. (b) Upon Tenant's receipt of a written notice from the lessor under any underlying lease or the holder of any such mortgage to the effect that (i) the lessor of said underlying lease or the holder of any such mortgage is entitled to send a notice to the Landlord, as tenant under said underlying lease, terminating said lease, and (ii) the Tenant should pay the minimum rent and additional rent thereafter due and payable under this Lease to said lessor or the holder of any such mortgage at a place designated in such notice, Tenant shall pay such minimum rent and additional rent to said lessor under said underlying lease or the holder of any such mortgage at such designated place until such time as said lessor or holder shall notify Tenant that Landlord is no longer in default under said underlying lease or such mortgage and that Tenant may resume paying all minimum rent and additional rent thereafter due and payable under this Lease to Landlord. Tenant shall have no liability to the Landlord for paying any minimum rent or additional rent to said lessor under the underlying lease or holder of any such mortgage or otherwise acting in accordance with the provisions of any notice sent to it under this paragraph and shall be relieved of its obligations to pay Landlord any minimum rent or additional rent under this Lease to the extent such payments are made to said lessor under the underlying lease. Section 25.03. In the event of any act or omission by Landlord which would give Tenant the right to terminate this Lease or to claim a partial or total eviction, pursuant to the terms of this Lease, if any, Tenant will not exercise any such right until: (a) it has given written notice to cure (whether concurrently with or subsequent to any notice given to Landlord), regarding such act or omission to the holder of any leasehold mortgage and to the landlord of any ground or underlying lease, whose names and addresses shall previously have been furnished to Tenant, addressed to such holder and landlord at the last addresses so furnished, and (b) a reasonable period of time (not to exceed the period in this Lease or the ground lease or the mortgage, as the case may be) for remedying such act or omission shall have elapsed following such giving of notice during which such parties, or any of them, with reasonable diligence, following the giving of such notice, shall not have commenced and is or are not continuing to remedy such act or omission or to cause the same to be remedied. 47 Section 25.04. If, in connection with obtaining financing for the Building, or of Landlord's interest in any ground or underlying lease, a banking, insurance or other recognized institutional lender shall request modifications in this Lease as a condition to such financing, Tenant will not withhold, delay or defer its consent thereto and its execution and delivery of such modification agreement, provided that such modifications do not increase the obligations of Tenant hereunder or adversely affect the leasehold interest hereby created or Tenant's use and enjoyment of the Demised Premises. ARTICLE 26 Estoppel Certificate Each party shall at any time, and from time to time, within ten (10) business days after so requested by the other party execute, acknowledge and deliver to the other party , a statement addressed to the other party or its designee (a) certifying that this Lease is unmodified and in full force and effect (or, if there have been modifications, that the same is in full force and effect as modified and stating the modifications), (b) stating the dates to which the minimum rent and additional rent have been paid, (c) stating whether or not there exists any default by the other under this Lease, and, if so, specifying each such default, and (d) such other information as may be required by Landlord, Tenant or any mortgagee, it being intended that any such statement may be relied upon by Landlord, by any mortgagee or prospective mortgagee of any mortgage affecting the Building or the leasehold estate under any ground or underlying lease affecting the land described in Schedule C and/or Building and improvements thereon, or may be relied upon by the landlord under any such ground or underlying lease or a purchaser of Lessee's estate under any such ground or underlying lease or any interest therein, or by Tenant and any permitted assignee. ARTICLE 27 Waiver of Jury Trial Tenant hereby waives the right to trial by jury in any summary proceeding that may hereafter be instituted against it or in any action or proceeding that may be brought by Landlord on matters which are connected with this Lease, or any of its provisions or Tenant's use or occupancy of the Demised Premises, 48 including any claims for injury or damage, or any emergency or other statutory remedy with respect thereto. ARTICLE 28 Surrender of Premises Section 28.01. Upon the expiration or other termination of the term of this Lease, Tenant shall quit and surrender the Demised Premises, vacant, broom clean, in good order and condition, ordinary wear and tear and damage by fire or other casualty excepted, and shall remove all its property therefrom, except as otherwise provided in this Lease. Tenant's obligation to observe or perform this covenant shall survive the expiration or other termination of the term of this Lease. Section 28.02. In the event Tenant shall remain in possession of the Demised Premises after the expiration or other termination of the term of this Lease, such holding over shall not constitute a renewal or extension of this Lease. Landlord, may, at its option, elect to treat Tenant as one who is not removed at the end of the term, and thereupon be entitled to all of the remedies against Tenant provided by law in that situation or Landlord may elect to construe such holding over as a tenancy from month-to-month, subject to all of the terms and conditions of this Lease, except as to the duration thereof, and the minimum rent shall be due, in either of such events, at a monthly rental rate equal to two (2) times the monthly installment of minimum rent which would otherwise be payable for such month, together with any and all additional rent. Tenant shall also be responsible for and hereby indemnifies Landlord against any claims made by any succeeding tenant or prospective tenant founded upon Tenant's delay in surrendering the Demised Premises to Landlord. ARTICLE 29 Rules and Regulations Section 29.01. Tenant, its servants, employees, agents, visitors and licensees shall observe faithfully and comply with the rules and regulations set forth in Schedule "C" attached hereto and made a part hereof. Landlord shall have the right from time to time during the term of this Lease to make reasonable changes in and additions to the rules thus set forth provided such changes and additions are 49 applicable to all other office tenants in the Building. All rules and regulations shall be enforced in a non-discriminatory manner. Section 29.02. Any failure by Landlord to enforce any rules and regulations now or hereafter in effect, either against Tenant or any other tenant in the Building, shall not constitute a breach hereunder or waiver of any such rules and regulations. ARTICLE 30 Successors and Assigns and Definitions Section 30.01. The covenants, conditions and agreements contained in this Lease shall bind and enure to the benefit of Landlord and Tenant and their respective distributees, legal representatives, successors and, except as otherwise provided herein, their assigns. Section 30.02. The term "Landlord" as used in this Lease, so far as the covenants and agreements on the part of Landlord are concerned shall be limited to mean and include only the owner or owners at the time in question of the tenant's estate under any ground or underlying lease covering the land described in Schedule "B" hereto annexed and/or the Building and improvements thereon. In the event of any assignment or assignments of such tenant's estate, Landlord herein named (and in case of any subsequent assignment, the then assignor) shall be automatically freed and relieved from and after the date of such assignment of all personal liability as respects to performance of any of Landlord's covenants and agreements thereafter to be performed, and such assignee shall be bound by all of such covenants and agreements; it being intended that Landlord's covenants and agreements shall be binding on Landlord, its successors and assigns only during and in respect of their successive periods of such ownership. However, in any event, the members in Landlord shall not have any personal liability or obligation by reason of any default by Landlord under any of Landlord's covenants and agreements in this Lease. In case of such default, Tenant will look only to Landlord's estate, as tenant, under such ground or underlying lease and its interest in the Building, to recover any loss or damage resulting therefrom; and Tenant shall have no right to nor shall Tenant assert any claim against nor have recourse to Landlord's other property or assets to recover such loss or damage. Section 30.03. All pronouns or any variation thereof shall be deemed to refer to masculine, feminine or neuter, singular or plural as the identity of 50 the person or persons may require; and if Tenant shall consist of more than one (1) person, the obligations of such persons, as Tenant, under this Lease, shall be joint and several. Section 30.04. The definitions contained in Schedule E annexed hereto are hereby made a part of this Lease. ARTICLE 31 Notices Any notice, statement, certificate, request, approval, consent or demand required or permitted to be given under this Lease shall be in writing sent by registered or certified mail (or reputable, commercial overnight courier service) return receipt requested, addressed, as the case may be, to Landlord, at 750 Lexington Avenue, New York, New York 10022, and to Tenant prior to the Commencement Date at 1811 Chestnut Street, Philadelphia, Pennsylvania 19103, and after the Commencement Date at the Demised Premises, or to such other addresses as Landlord or Tenant respectively shall designate in the manner herein provided. Such notice, statement, certificate, request, approval, consent or demand shall be deemed to have been given on the date when mailed, as aforesaid, or on the date of delivery by overnight courier. ARTICLE 32 No Waiver; Entire Agreement Section 32.01. The specific remedies to which Landlord may resort under the provisions of this Lease are cumulative and are not intended to be exclusive of any other remedies or means of redress to which Landlord may be lawfully entitled in case of any breach or threatened breach by Landlord of any of the terms, covenants and conditions of this Lease. The failure of Landlord to insist upon the strict performance of any of the terms, covenants and conditions of this Lease, or to exercise any right or remedy herein contained, shall not be construed as a waiver or relinquishment for the future of such term, covenant, condition, right or remedy. A receipt by Landlord of minimum rent or additional rent with knowledge of the breach of any term, covenant or condition of this Lease shall not be deemed a waiver of such breach. This Lease may not be changed or terminated orally. In 51 addition to the other remedies in this Lease provided, Landlord shall be entitled to seek to restrain by injunction, the violation or attempted or threatened violation of any of the terms, covenants and conditions of this Lease or to a decree, any court having jurisdiction in the matter, compelling performance of any such terms, covenants and conditions. Section 32.02. No receipt of monies by Landlord from Tenant, after any re-entry or after the cancellation or termination of this Lease in any lawful manner, shall reinstate the Lease; and after the service of notice to terminate this Lease, or after commencement of any action, proceeding or other remedy, Landlord may demand, receive and collect any monies due, and apply them of account of Tenant's obligations under this Lease but without in any respect affecting such notice, action, proceeding or remedy, except that if a money judgment is being sought in any such action or proceeding, the amount of such judgment shall be reduced by such payment. Section 32.03. If Tenant is in arrears in the payment of minimum rent or additional rent, Tenant waives its right, if any, to designate the items in arrears against which any payments made by Tenant are to be credited and Landlord may apply any of such payments to any such items in arrears as Landlord, in its sole discretion, shall determine, irrespective of any designation or request by Tenant as to the items against which any such payments shall be credited. Section 32.04. No payment by Tenant nor receipt by Landlord of a lesser amount than may be required to be paid hereunder shall be deemed to be other than on account of any such payment, nor shall any endorsement or statement on any check or any letter accompanying any check tendered as payment be deemed an accord and satisfaction and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such payment due or pursue any other remedy in this Lease provided. Section 32.05. This Lease and the Schedules annexed hereto constitute the entire agreement between Landlord and Tenant referable to the Demised Premises, and all prior negotiations and agreements are merged herein. Section 32.06. If any term or provision of this Lease or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Lease shall be valid and be enforced to the fullest extent permitted by law. 52 ARTICLE 33 Captions The captions of Articles in this Lease are inserted only as a matter of convenience and for reference and they in no way define, limit or describe the scope of this Lease or the intent of any provision thereof. ARTICLE 34 Inability to Perform Tenant's obligation to pay minimum rent and additional rent and to perform all of the other terms, covenants and conditions of this Lease shall not be affected, diminished, or excused if by reason of unavoidable delays (as hereinafter defined) Landlord fails or is unable to supply any services or make any repairs or perform any work which under this Lease Landlord has expressly agreed to supply, make or perform, and the time for the performance or observance thereof shall be extended for the period of time as Landlord shall have been so delayed. The words "unavoidable delays", as used in this Lease shall mean (a) the enactment of any law or issuance of any governmental order, rule or regulation (i) prohibiting or restricting performance of work of the character required to be performed by Landlord under this Lease, or (ii) establishing rationing or priorities in the use of materials, or (iii) restricting the use of labor, and (b) strikes, lockouts, acts of God, inability to obtain labor or materials, enemy action, civil commotion, fire, unavoidable casualty or other similar types of causes beyond the reasonable control of Landlord, other than financial inability. ARTICLE 35 No Representations by Landlord Neither Landlord nor any agent or employee of Landlord has made any representation whatsoever with respect to the Demised Premises except as expressly set forth in this Lease. 53 ARTICLE 36 Security Deposit Section 36.01. Concurrently with the execution of this Lease, Tenant shall deposit with Landlord the sum of $282,150.00, by Letter of Credit as provided in Section 36.02, as security for the faithful performance and observance by Tenant of the terms, provisions and conditions of this Lease. Tenant agrees that, in the event that Tenant defaults in respect of any of the terms, provisions and conditions of this Lease (including the payment of minimum rent and additional rent), after any applicable notice and expiration of any applicable cure period, Landlord may notify the "Issuing Bank" (as such term is defined in Section 36.02) and thereupon receive all of the monies represented by the said Letter of Credit and use, apply, or retain the whole or any part of such proceeds, as the case may be, to the extent required for the payment of any minimum rent, additional rent, or any other sum as to which Tenant is in default, or for any sum that Landlord may expend or may be required to expend by reason of Tenant's default, in respect of any of the terms, covenants and conditions of this Lease (including any damages or deficiency accrued before or after summary proceedings or other re-entry by Landlord). In the event that Landlord applies or retains any portion or all of the proceeds of such Letter of Credit Tenant shall, within five (5) days after demand by Landlord, restore the amount so applied or retained so that, at all times, the amount deposited shall be $282,150.00. Upon Tenant's making such additional deposit, Landlord is hereby authorized to act as Tenant's agent to use the proceeds of the Letter of Credit to obtain a new Letter of Credit and Tenant hereby irrevocable appoints Landlord as Tenant's agent and attorney-in-fact to obtain a replacement Letter of Credit from the Issuing Bank or any other qualifying bank (such qualifying bank shall then be the Issuing Bank). If Tenant shall fail or refuse to make such additional deposit, Landlord shall have the same rights in law and in equity and under this Lease as it has with respect to a default by Tenant in the payment of minimum rent. In the event that Tenant shall fully and faithfully comply with all of the terms, provisions, covenants and conditions of this Lease, the cash security or Letter of Credit, as the case may be, shall be returned to Tenant within twenty (20) days after the expiration date and after delivery of possession of the entire Demised Premises to Landlord in the condition provided in this Lease for such delivery of possession. Section 36.02. Such letter of credit (the "Letter of Credit") shall be a clean, irrevocable and unconditional Letter of Credit issued by and drawn upon any commercial bank (the "Issuing Bank") with offices for banking purposes in the City of New York and having a net worth of not less than $500,000,000.00, which Letter of Credit shall have an initial term of not less than one year or thereafter having a term expiring not less than ninety (90) days following the expiration of the term of this 54 Lease, shall permit multiple drawings, shall be transferable by the beneficiary at one or more occasions at no charge to the beneficiary and otherwise be in form and content satisfactory to Landlord, be for the account of Landlord and be in the amount of $282,150.00. Notwithstanding the foregoing, if at any time the net worth of the Issuing Bank is less than $500,000,000.00 or its rating is downgraded from its current rating, and provided Tenant does not replace the existing Letter of Credit with a Letter of Credit meeting the criteria of Section 36.02 within the sooner of thirty (30) days following Tenant's receipt of Landlord's notice to Tenant of either of the foregoing events or the number of days remaining until the expiration date of the existing Letter of Credit, Landlord shall have the right, at any time thereafter, to draw down the entire proceeds pursuant to the terms of Section 36.01 as cash security pending the replacement of such Letter of Credit. The Letter of Credit shall provide that: (a) the Issuing Bank shall pay to Landlord or its duly authorized representative an amount up to the face amount of the Letter of Credit upon presentation of the Letter of Credit and a sight draft, in the amount to be drawn, together with a statement by landlord that Tenant is in default under this Lease after notice and expiration of any applicable cure period; (b) it shall be deemed automatically renewed, without amendment, for consecutive periods of one (1) year each thereafter during the term of this Lease, unless Issuing Bank sends written notice (hereinafter referred to as the Non-Renewal Notice) to Landlord by certified or registered mail, return receipt requested, not less than sixty (60) days next preceding the expiration date of the Letter of Credit that it elects not to have the Letter of Credit renewed, and it being agreed that the giving of such Non-Renewal Notice shall for the purpose of this Article 37 be deemed a default under this Lease, unless Tenant replaces the Letter of Credit with a substitute Letter of Credit meeting the criteria of this Section 36.02 or with a cash deposit at least thirty (30) days prior to the expiration date of the Letter of Credit. (c) Landlord, subsequent to its receipt of a Non-Renewal Notice, and prior to the expiration date of the Letter of Credit, shall have the right, exercisable by means of sight draft, to receive the monies represented by the Letter of Credit and hold such proceeds pursuant to the terms of Section 36.01 as cash security pending the replacement of such Letter of Credit; and (d) upon Landlord's sale or assignment of its estate as Tenant under any ground or underlying lease, the Letter of Credit shall be transferable by Landlord, as provided in Section 36.03. 55 Section 36.03. In the event Landlord's estate as tenant under any ground or underlying Lease is sold or assigned, Landlord shall have the right to transfer the Letter of Credit then held by Landlord to the vendee or assignee, and Landlord shall thereupon be released by Tenant from all liability for the return of such Letter of Credit. In such event, Tenant agrees to look solely to the new Landlord for the return of said Letter of Credit. It is agreed that the provisions hereof shall apply to every transfer or assignment made of the Letter of Credit to a new Landlord. Section 36.04. Tenant covenants that it will not assign or encumber, or attempt to assign or encumber, the Letter of Credit deposited hereunder as security, and that neither Landlord nor its successors or assigns shall be bound by any such assignment, encumbrance, attempted assignment, or attempted encumbrance. Section 36.05. The use of the security, as provided in this Article, shall not be deemed or construed as a waiver of Tenant's default or as a waiver of any other rights and remedies to which Landlord may be entitled under the provisions of this Lease by reason of such default, it being intended that Landlord's rights to use the whole or any part of the security shall be in addition to but not in limitation of any such other rights and remedies; and Landlord may exercise any of such other rights and remedies independent of or in conjunction with its rights under this Article. Section 36.06. Provided Tenant is not then in default under any of the terms, covenants and conditions of this Lease on its part to be performed, after the actual payment by Tenant of thirty-six (36) monthly installments of minimum rent under this Lease, the amount of the security deposit hereunder shall be reduced to $211,612.50. In such event, Tenant shall either deliver to Landlord a replacement Letter of Credit in the reduced amount and Landlord will then return to Tenant the existing Letter of Credit, or Tenant will deliver to Landlord an amendment to the existing Letter of Credit reducing the amount thereof to $211,612.50. ARTICLE 37 Rent Control In the event the minimum rent and/or additional rent or any part thereof provided to be paid by Tenant under the provisions of this Lease during the demised term shall become uncollectible or shall be reduced or required to be reduced or refunded by virtue of any federal, state, county or city law, order or regulation, or by any direction of a public officer or body pursuant to law, or the orders, rules, code or regulations of any organization or entity formed pursuant to law, Tenant shall enter 56 into such agreement(s) and take such other steps (without additional expense or liability to Tenant) as Landlord may reasonably request and as may be legally permissible to permit Landlord to collect the maximum rents which from time to time during the continuance of such legal rent restriction may be legally permissible (and not in excess of the amounts reserved therefor under this Lease). Upon the termination of such legal rent restriction, (a) the minimum rent and/or additional rent shall become and thereafter be payable in accordance with the amounts reserved herein for the periods following such termination, and (b) Tenant shall pay to Landlord promptly upon being billed, to the maximum extent legally permissible, an amount equal to (i) minimum rent and/or additional rent which would have been paid pursuant to this Lease but for such legal rent restriction less (ii) the rents paid by Tenant during the period such legal rent restriction was in effect. ARTICLE 38 Landlord's Contribution Subject to the provisions of Article 5 of this Lease, Tenant agrees to perform the initial work and installations required to make the Demised Premises suitable for the conduct of Tenant's business. Tenant agrees to deliver to landlord, for Landlord's approval the plans and specifications for Tenant's initial work within thirty (30) days from the date hereof. Landlord agrees to contribute up to the sum of $148,500.00 (Landlord's Contribution") toward the cost of such work, which shall be only for hard costs, design and engineering costs, furniture (including built-in furniture and fixtures, equipment, and moving expenses and excluding all other soft costs which shall be paid for by Tenant. Landlord shall pay to Tenant, from time to time, but not more often that once a month, ninety (90%) percent of the cost of the work requested by Tenant theretofore performed by the contractor, provided Tenant delivers to Landlord concurrently with its request, receipted bills of the contractor involved approved by Tenant, a certificate by Tenant's architect that such bills have been approved and the work or materials evidenced by such bills have been satisfactorily performed or delivered and a waiver of mechanic's lien signed by the contractor with respect to the amount paid as evidenced by the receipted bill, such payment to be made to Tenant within ten (10) days after receipt of Tenant's request together with the aforesaid documentation. Within ten (10) days after Landlord receives a certificate from Tenant's architect stating that Tenant's work has been substantially completed, that the same has been performed in compliance with all applicable Governmental Requirements and the approved plans and specifications and delivery to Landlord of the final "sign-off" letters and equipment use permits (as necessary) for all work performed from the applicable municipal authorities, Landlord shall pay to Tenant the aggregate of the ten (10%) percent sums retained by Landlord. Landlord shall have no obligation or responsibility to pay any cost 57 exceeding the amount of Landlord's Contribution. If the amount Tenant expends for the cost exceeds the amount of Landlord's Contribution, Tenant shall be responsible for the payment to the contractors of the excess. If said amount is less than the amount of Landlord's Contribution, Landlord shall not be obligated to pay such difference to Tenant. Tenant shall indemnify and hold Landlord harmless from and against any and all claims, costs and expenses in connection with such work exceeding the amount of Landlord's Contribution. ARTICLE 39 Supplemental Air Conditioning Tenant may use the existing three (3) ton supplemental air conditioning system (the "System) in the Demised Premises. Tenant shall pay Landlord's charges, as the same exist from time to time, for all hours of operation of the System. Landlord's charges are currently $1,250.00 per ton per year. Tenant, at its own cost, shall maintain such System in good condition and repair and shall make any replacements thereof as may be required. However, Landlord represents that the said System will be in good working order on the Commencement Date. Tenant, at its own expense, shall obtain in its own name the use permits for such System and provide Landlord with copies of same. Tenant shall also obtain and pay for all annual renewal fees in connection therewith, and provide Landlord with a copy of such annual renewals. Tenant shall indemnify and hold Landlord harmless from and against any loss, claims, costs and expenses (including reasonable attorneys' fees) in connection with the repair and maintenance of said System. Landlord shall install a device to measure the hours of operation of the System, which device is capable of providing a print-out verifying the date and time of usage. Tenant, as additional rent, agrees to pay for the cost of electricity consumed in connection with the operation of the System, as set forth in said device, at the rate from time to time payable by Landlord for the purchase of electric current from the public utility furnishing electric current to the Building, together with any taxes or other charges of any kind imposed by the utility. Such payment shall be made within ten (10) days after submission to Tenant of bills therefor. 58 IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Lease as of the day and year first above written. 135 EAST 57TH STREET LLC By: 135 East 57th Street Managing Co., Inc., its managing member By: ----------------------------------- Charles Steven Cohen, President Landlord INTERACTIVE FLIGHT TECHNOLOGIES, INC. By: ----------------------------------- Title: Tenant 59 STATE OF NEW YORK ) ) ss: COUNTY OF NEW YORK ) On the __________ day of _______________ in the year 1999 before me, the undersigned, a Notary Public in and said State, personally appeared Charles Steven Cohen, personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his capacity, and that by his signature on the instrument, the individual, or the person upon behalf of which the individual acted, executed the instrument. ------------------------------------ Notary Public STATE OF NEW YORK ) ) ss: COUNTY OF NEW YORK ) On the __________ day of _______________ in the year 1999 before me, the undersigned, a Notary Public in and said State, personally appeared _________________, personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his capacity, and that by his signature on the instrument, the individual, or the person upon behalf of which the individual acted, executed the instrument. ------------------------------------ Notary Public 60 SCHEDULE A Floor Plan 61 SCHEDULE B Description of Land All that certain lot, piece and parcel of land situate, lying and being in the Borough of Manhattan, City, County and State of New York, bounded and described as follows: BEGINNING at the corner formed by the intersection of the northerly side of 57th Street with the westerly side of Lexington Avenue; RUNNING THENCE westerly along the northerly side of 57th Street, 215 feet; THENCE northerly and parallel with Park Avenue and part of the distance through a party wall, 100 feet 5 inches to the center line of the block; THENCE easterly along the center line of the block, 108 feet 9 inches to a point, 106 feet 3 inches west of the westerly side of Lexington Avenue; THENCE northerly parallel with Lexington Avenue and part of the distance through a party wall, 100 feet 5 inches to the southerly side of 58th Street; THENCE easterly along the southerly side of 58th Street; 37 feet 6 inches; THENCE southerly parallel with Lexington Avenue, 80 feet 5 inches; THENCE easterly parallel with 58th Street and part of the distance through a party wall, 68 feet 9 inches to the westerly side of Lexington Avenue; THENCE southerly along the westerly side of Lexington Avenue, 120 feet 5 inches to the corner aforesaid, the point or place of BEGINNING. 62 SCHEDULE C Rules and Regulations 1. The rights of tenants in the entrances, corridors, elevators and escalators of the Building are limited to ingress to and egress from the tenants' premises for the tenants and their employees, licensees, guests, customers and invitees, and no tenant shall use, or permit the use of, the entrances, corridors, escalators or elevators for any other purpose. No tenant shall invite to the tenant's premises, or permit the visit of, persons in such numbers or under such conditions as to interfere with the use and enjoyment of any of the plazas, entrances, corridors, escalators, elevators and other facilities of the Building by other tenants. Fire exits and stairways are for emergency use only, and they shall not be used for any other purposes by the tenants, their employees, licensees or invitees. No tenant shall encumber or obstruct, or permit the encumbrance or obstruction of any of the sidewalks, plazas, entrances, corridors, escalators, elevators, fire exits or stairways of the Building. The Landlord reserves the right to control and operate the public portions of the Building and the public facilities, as well as facilities, furnished for the common use of the tenants, in such manner as it deems best for the benefit of the tenants generally. 2. The reasonable cost of repairing any damage to the public portions of the Building or the public facilities or to any facilities used in common with other tenants, caused by a tenant or the employees, licensees or invitees of the tenant, shall be paid by such tenant. 3. The Landlord may refuse admission to the Building outside of ordinary business hours to any person not known to the watchman in charge or not having a pass issued by the Landlord or not properly identified, and may require all persons admitted to or leaving the Building outside of ordinary business hours to register. Tenant's employees, agents and visitors shall be permitted to enter and leave the building after ordinary business hours whenever appropriate arrangements have been previously made between the Landlord and the Tenant with respect thereto. Each tenant shall be responsible for all persons for whom he requests such permission and shall be liable to the Landlord for all acts of such persons. Any person whose presence in the Building at any time shall, in the judgment of the Landlord, be prejudicial to the safety, character, reputation and interests of the Building or its tenants may be denied access to the Building or may be rejected therefrom. In case of invasion, riot, public excitement or other commotion the Landlord may prevent all access to the Building during the continuance of the same, by closing the doors or otherwise, for the safety of the tenants and protection of property in the Building. The Landlord may require any person leaving the Building with any package or other object to exhibit a pass from the tenant from whose 63 premises the package or object is being removed, but the establishment and enforcement of such requirement shall not impose any responsibility on the Landlord for the protection of any tenant against the removal of property from the premises of the tenant. The Landlord shall, in no way, be liable to any tenant for damages or loss arising from the admission, exclusion or ejection of any person to or from the tenant's premises or the Building under the provisions of this rule. 4. No tenant shall obtain or accept for use in its premises towel, barbering, boot blacking, floor polishing, lighting maintenance, cleaning or other similar services from any persons not authorized by the Landlord in writing to furnish such services, provided always that the charges for such services by persons authorized by the Landlord are comparable to the industry charge. Such services shall be furnished only at such hours, in such places within the tenant's premises and under such reasonable regulations as may be fixed by the Landlord. 5. No awnings or other projections over or around the windows shall be installed by any tenant, and only such window blinds as are supplied or permitted by the Landlord shall be used in a tenant's premises. 6. There shall not be used in any space, or in the public halls of the Building, either by the Tenant or by jobbers or others, in the delivery or receipt of merchandise, any hand trucks, except those equipped with rubber tires and side guards. 7. All entrance doors in each tenant's premises shall be left locked when the tenant's premises are not in use. Entrance doors shall not be left open at any time. All windows in each tenant's premises shall be kept closed at all times and all blinds therein above the ground floor shall be lowered when and as reasonably required because of the position of the sun, during the operation of the Building air conditioning system to cool or ventilate the tenant's premises. 8. No noise, including the playing of any musical instruments, radio or television, which, in the judgment of the Landlord, might disturb other tenants in the Building shall be made or permitted by any tenant. Nothing shall be done or permitted in any tenant's premises, and nothing shall be brought into or kept in any tenant's premises, which would impair or interfere with any of the Building services or the proper and economic heating, cleaning or other servicing of the Building or the premises, or the use or enjoyment by any other tenant of any other premises, nor shall there be installed by any tenant any ventilating, air conditioning, electrical or other equipment of any kind which, in the judgment of the Landlord, might cause any such impairment or interference. No dangerous, flammable, combustible or explosive object or material shall be brought into the Building by any tenant or with the permission of any tenant. 64 9. Tenant shall not permit any cooking or food odors emanating within the Demised Premises to seep into other portions of the Building. 10. No acids, vapor or other materials shall be discharged or permitted to be discharged into the waste lines, vents or flues of the Building which may damage them. the water and wash closets and other plumbing fixtures in or serving any tenant's premises shall not be used for any purpose other than the purpose for which they were designed or constructed, and no sweepings, rubbish, rags, acids or other foreign substances shall be deposited therein. All damages resulting from any misuse of the fixtures shall be borne by the tenant who, or whose servants, employees, agents, visitors or licensees, shall have caused the same. 11. No signs, advertisement, notice or other lettering shall be exhibited, inscribed, painted or affixed by any tenant on any part of the outside or inside the premises or the Building without the prior written consent of the Landlord. In the event of the violation of the foregoing by any tenant, Landlord may remove the same without any liability, and may charge the expense incurred by such removal to the tenant or tenants violating this rule. Interior signs and lettering on doors and elevators shall be inscribed, painted, or affixed for each tenant by Landlord at the expense of such tenant, (the charge not to exceed that which a reputable outside contractor would charge), and shall be of a size, color and style reasonably acceptable to Landlord. Landlord shall have the right to prohibit any advertising by any tenant which impairs the reputation of the building or its desirability as a building for offices, and upon written notice from Landlord, Tenant shall refrain from or discontinue such advertising. 12. No additional locks or belts of any kind shall be placed upon any of the doors or windows in any tenant's premises and no lock on any door therein shall be changed or altered in any respect. Upon the termination of a tenant's lease, all keys of the tenant's premises and toilet rooms shall be delivered to the Landlord. 13. No tenant shall mark, paint, drill into or in any way deface any part of the Building or the premises demised to such tenant. No boring, cutting or stringing of wires shall be permitted, except with the prior written consent of Landlord, which will not be unreasonably withheld or delayed, and as Landlord may reasonably direct. No tenant shall install any resilient tile or similar floor covering in the premises demised to such tenant except in a manner approved by Landlord. 14. No tenant shall use or occupy, or permit any portion of the premises demised to such tenant to be used or occupied, as an office for a public stenographer or typist, or as a barber or manicure shop, or as an employment bureau. No tenant or occupant shall engage or pay any employees in the Building, except those actually working for such tenant or occupant in the Building, nor advertise for laborers giving an address at the Building. 65 15. No premises shall be used, or permitted to be used, at any time, as a store for the sale or display of goods, wares or merchandise of any kind, or as a restaurant, shop, booth, bootblack or other stand, or for the conduct of any business or occupation which predominantly involves direct patronage of the general public in the premises demised to such tenant, or for manufacturing or for other similar purposes. 16. The requirements of tenants will be attended only upon application at the office of the Building. Employees of Landlord shall not perform any work or do anything outside of the regular duties, unless under special instructions from the office of the Landlord. 17. Each tenant shall, at its expense, provide artificial light in the premises demised to such tenant for Landlord's agents, contractors and employees while performing janitorial or other cleaning services and making repairs or alterations in said premises. 18. The tenant's employees shall not loiter around the hallways, stairways, elevators, front, roof or any other part of the Building used in common by the occupants thereof. 19. If the premises demised to any tenant become infested with vermin, such tenant, at its sole cost and expense, shall cause its premises to be exterminated, from time to time, to the satisfaction of Landlord and shall employ such exterminators therefor as shall be approved by Landlord. 20. No bicycle or other vehicle and no animals shall be allowed in the showrooms, offices, halls, corridors or any other parts of the Building. 66 SCHEDULE D Cleaning Specifications for 135 East 57th Street Landlord will perform cleaning services in the Demised Premises and related areas as follows: NIGHTLY Empty and wipe clean all ash trays. Empty and wipe clean all waste receptacles. Wipe clean all areas within hand high reach; including but not limited to window sills, wall ledgers, chairs, desks, tables, baseboards, file cabinets, convector enclosures, pictures and all manner of office furniture. Wipe clean all glass top desks and tables. Sweep with treated cloths all composition tile flooring. Carpet sweep all carpeted areas, and vacuum clean weekly. PUBLIC LAVATORIES (Nightly or as otherwise designated) Wash and dry all bowls, seats urinals, washbasins and mirrors. Wash and wipe dry all metal work. Supply and insert toilet tissue, toweling and soap in dispensers. Empty paper towel and sanitary napkin disposal receptacles and remove to designated area. Sweep and wash floors. 67 Wipe clean all sills, partitions and ledges. Wipe clean exterior of waste cans and dispensing units. Wash both partitions monthly. Wash tile walls monthly. Wash and dry interior of waste cans and sanitary disposal containers weekly. Machine scrub flooring monthly. Dust exterior of light fixtures monthly. FLOOR MAINTENANCE A. Public Corridors in Multi-Tenanted Floors only. Damp mop and buff all composition flooring monthly. B. High Dusting Public Areas. High dust all walls, ledges, pictures, anemostats, registers, grilles, etc., not reached in normal nightly cleaning quarterly. WINDOW CLEANING SERVICES Clean all exterior windows, inside and out periodically during the year, as Landlord deems necessary. RUBBISH REMOVAL SERVICES Remove all ordinary dry rubbish and paper only from the office premises of the Demised Premises daily, Monday through Friday, holidays excepted. 68 SCHEDULE E Definitions (a) The term mortgage shall include an indenture of mortgage and deed of trust to a trustee to secure an issue of bonds, and the term mortgagee shall include such a trustee. (b) The terms include, including and such as shall each be construed as if followed by phrase "without being limited to". (c) The term obligations of this lease, and words of like import, shall mean the covenants to pay rent and additional rent under this lease and all of the other covenants and conditions contained in this lease. Any provision in this lease that one party or the other or both shall do or not do or shall cause or permit or not cause or permit a particular act, condition, or circumstance shall be deemed to mean that such party so covenants or both parties so covenant, as the case may be. (d) The term Tenant's obligations hereunder, and words of like import, and the term Landlord's obligations hereunder, and words of like import, shall mean the obligations of this lease which are to be performed or observed by Tenant, or by Landlord, as the case may be. Reference to performance of either party's obligations under this lease shall be construed as "performance and observance". (e) Reference to Tenant being or not being in default hereunder, or words of like import, shall mean that Tenant is in default, after any applicable notice and cure period, in the performance of one or more of Tenant's obligations hereunder, or that Tenant is not in default, after any applicable notice and cure period, in the performance of any of Tenant's obligations hereunder, or that a condition of the character described in Section 25.01 has occurred and continues or has not occurred or does not continue, as the case may be. (f) References to Landlord as having no liability to Tenant or being without liability to Tenant, shall mean that Tenant is not entitled to terminate this lease, or to claim actual or constructive eviction, partial or total, or to receive any abatement or diminution of rent, or to be relieved in any manner of any of its other obligations hereunder, or to be compensated for loss or injury suffered or to enforce any other kind of liability whatsoever against Landlord under or with respect to this lease or with respect to Tenant's use or occupancy of the Demised Premises. (g) The term laws and/or requirements of public authorities and words of like import shall mean laws and ordinances of any or all of the Federal, state, city, county and borough governments and rules, regulations, orders and/or directives of any or all departments, subdivisions, bureaus, agencies or offices thereof, or of any other governmental, public or quasi-public authorities, having jurisdiction in the premises, and/or the direction of any public officer pursuant to law. 69 (h) The term requirements of insurance bodies and words of like import shall mean rules, regulations, orders and other requirements of the New York Board of Fire Underwriters and/or the New York Fire Insurance Rating Organization and/or any other similar body performing the same or similar functions and having jurisdiction or cognizance of the Building and/or the Demised Premises. (i) The term repair shall be deemed to include restoration and replacement as may be necessary to achieve and/or maintain good working order and condition. (j) Reference to termination of this lease includes expiration or earlier termination of the term of this lease or cancellation of this lease pursuant to any of provisions of this lease or to law. Upon a termination of this lease, the term and estate granted by this lease shall end at noon of the date of termination as if such date were the date of expiration of the term of this lease and neither party shall have any further obligation or liability to the other after such termination (i) except as shall be expressly provided for in this lease, or (ii) except for such obligation as by its nature or under the circumstances can only be, or by the provisions of this lease, may be, performed after such termination, and, in any event, unless expressly otherwise provided in this lease, any liability for a payment which shall have accrued to or with respect to any period ending at the time of termination shall survive the termination of this lease. (k) The term Tenant shall mean Tenant herein named or any assignee or other successor in interest (immediate or remote) of Tenant herein named, while such Tenant or such assignee or other successor in interest, as the case may be, is in possession of the Demised Premises as owner of the Tenant's estate and interest granted by this lease and also, if Tenant is not an individual or a corporation, all of the persons, firms and corporations then comprising Tenant. (l) Words and phrases used in the singular shall be deemed to include the plural and vice versa, and nouns and pronouns used in any particular gender shall be deemed to include any other gender. (m) The rule of ejusdem generis shall not be applicable to limit a general statement following or referable to an enumeration of specific matters to matters similar to the matters specifically mentioned. 70 EX-10.23 5 ASSIGNMENT ASSIGNMENT THIS ASSIGNMENT is dated as of May 10, 1999 by and between The Shaar Fund Ltd. ("Assignor") and Interactive Flight Technologies, Inc. ("Assignee"). WHEREAS, Assignor and Assignee are parties to that certain Securities Purchase Agreement dated May 6, 1999 (the "Securities Purchase Agreement"); WHEREAS, pursuant to the terms of the Securities Purchase Agreement and this Assignment, Assignor is assigning to Assignee all of its rights under and with respect to 1,500 shares (the "Shares") of the Series B Convertible Preferred Stock of The Network Connection, Inc. ("TNC"). NOW, THEREFORE, for the purchase price set forth in the Securities Purchase Agrement and for other good and valuable consideration, the receipt and sufficiency of which are hereby mutually acknowledged, the parties hereto agree as follows: 1. Assignor hereby sells, assigns, transfers, conveys and delivers to Assignee all of Assignor's right, title and interest in and to the Shares, including without limitation (a) all of Assignor's rights of first refusal set forth in Paragraph IV.G. of that certain Securities Purchase Agreement between TNC and Assignor dated October 23, 1998 (the "Securities Purchase Agreement") and (b) the stock registration rights with respect to the Shares set forth in that certain Registration Rights Agreement between TNC and Assignor dated October 23, 1998 (the "Registration Rights Agreement"). 2. Assignee hereby agrees, from and after the date hereof, to be bound by all of the provisions of the Registration Rights Agreement and to observe and comply with all obligations and restrictions imposed on Assignor thereunder with respect to the Shares which obligations or restrictions first arise after the date hereof. Assignee acknowledges and agrees that the restrictive legend endorsement set forth in Paragraph IV.A. of the Securities Purchase Agreement will apply to the Shares and any shares of Common Stock issued in conversion thereof. 3. This Assignment may be signed in any number of counterparts, each of which shall be an original, but all of which when taken together shall constitute one and the same instrument. 4. This Assignment shall be construed in accordance with and governed by the laws of the State of New York applicable to agreements made and to be performed entirely within such State, without regard to the choice of law principles thereof. 5. Each of Assignor and Assignee agrees, at any time and from time to time hereafter, to execute, acknowledge, where appropriate, and deliver such further instruments and documents, and to take such other action, as may reasonably be requested by the other, in order to carry out the intents and purposes, or effectuate the provisions of this Assignment. IN WITNESS WHEREOF, the parties hereto have executed this Assignment this day of May, 1999. ASSIGNOR THE SHAAR FUND LTD. By: --------------------------------- Name: Title: ASSIGNEE INTERACTIVE FLIGHT TECHNOLOGIES, LTD. By: -------------------------------- Name: Irwin L. Gross Title: President The undersigned understands and consents to the foregoing Assignment and acknowledges and agrees that from and after the date hereof, Assignee shall have and enjoy all of the rights assigned to it pursuant to the terms hereof. THE NETWORK CONNECTION, INC. By: ------------------------ Name: Wilbur Riner Title: Chief Executive Officer 2 EX-10.24 6 AMENDMENT NO. 1 TO REGISTRATION RIGHTS AGREEMENT AMENDMENT NO. 1 TO REGISTRATION RIGHTS AGREEMENT THIS AMENDMENT NO. 1 TO REGISTRATION RIGHTS AGREEMENT is made this 10th day of May, 1999 by and between THE NETWORK CONNECTION, INC., a Georgia corporation (the "Company"), and Interactive Flight Technologies, Inc., a Delaware corporation ("IFT"). WHEREAS, the Company and The Shaar Fund Ltd. ("Shaar") entered into a Registration Rights Agreement dated October 23, 1998 (the "Registration Rights Agreement"); WHEREAS, the Company issued to Shaar 1,500 shares of Series B 8% Convertible Preferred Stock (the "Series B Stock") pursuant to that certain Securities Purchase Agreement between the Company and Shaar dated October 23, 1998; WHEREAS, on the date hereof Shaar sold the Series B Stock to IFT, and in connection with such sale, assigned its rights under the Registration Rights Agreement to IFT; WHEREAS, the Company issued to IFT 800 shares of Series C 8% Convertible Preferred Stock (the "Series C Stock") on the date hereof, pursuant to that certain Securities Purchase Agreement dated on the date hereof; WHEREAS, the Company, as Maker, and IFT, as Payee, are parties to that certain Secured Promissory Note, dated January 26, 1999, as amended by the Allonge to Secured Promissory Note dated January 29, 1999, the Second Allonge to Secured Promissory Note dated March 19, 1999, the Third Allonge to Secured Promissory Note dated March 24, 1999, and the Fourth Allonge to Secured Promissory Note dated the date hereof (collectively, the "Note"), which is convertible into shares of Series C Stock; WHEREAS, the parties desire that any shares of Common Stock issuable upon conversion of the Series C Stock be registrable pursuant to the terms of the Registration Rights Agreement; WHEREAS, the parties desire to have IFT waive certain defaults of the Company which have occurred under the Registration Rights Agreement; and WHEREAS, the Company and IFT wish to confirm and modify IFT's registration rights under the Registration Rights Agreement and to amend the Registration Rights Agreement, as described below, by entering into this Amendment No. 1. NOW, THEREFORE, for and in consideration of the premises contained herein, and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, and intending to be legally bound hereby, the parties agree and amend the Registration Rights Agreement as follows: 1. The definition of the term "Registrable Securities" contained in subparagraph 1(a) of the Registration Rights Agreement be and it hereby is amended to include in addition to the securities originally within such definition, from and after the date hereof, (i) any and all shares of Common Stock issued pursuant to the conversion of the Series C Stock, or issued in lieu of cash dividend payments thereon, and (ii) any and all shares of Common Stock issued pursuant to the exercise of any of the Additional Warrants (as such term is defined in the Note) that were issued by the Company to IFT on March 24, 1999 in accordance with the Note. The Company's obligations under the Registration Rights Agreement shall henceforth apply to any and all such shares described in the foregoing sentence. 2. Subparagraph 2(a) of the Registration Rights Agreement be and it hereby is amended to read as follows: (a) Filing and Effectiveness of Registration Statement. The Company shall prepare and file with the Commission by not later than fifteen (15) business days after the date hereof, a Registration Statement relating to the offer and sale of the Registrable Securities and shall use its best efforts to cause the Commission to declare such Registration Statement effective under the Securities Act as promptly as practicable but not later than 120 calendar days after such date. Such registration statement shall assume a conversion price of One Dollar Fifty Cents ($1.50) per share. The Company shall not include any other securities in the Registration Statement relating to the offer and sale of the Registrable Securities. The Company shall notify IFT by written notice that such Registration Statement has been declared effective by the Commission within 48 hours of such declaration by the Commission. 3. Subparagraph 2(b) of the Registration Rights Agreement be and it hereby is amended to read as follows: (b) Registration Default. If the Registration Statement covering the Registrable Securities or the Additional Registrable Securities (as defined in Section 2(d) hereof) required to be filed by the Company pursuant to Section 2(a) or 2(d) hereof, as the case may be, is not (i) filed with the Commission within the time required by the terms of this Agreement or (ii) declared effective by the Commission within the time required by the terms of this Agreement (either of which, without duplication, an "Initial Date"), then the Company shall make the payments to IFT as provided in the next sentence as liquidated damages and not as a penalty. The amount to be paid by the Company to IFT shall be determined as of each Computation Date (as defined below), and such amount shall be equal to 2% (the "Liquidated Damage Rate") of the Stated Value per share of all shares of Series B 2 Preferred Stock and all shares of Series C Preferred Stock outstanding from the Initial Date to the first Computation Date and for each Computation Date thereafter, calculated on a pro rata basis to the date on which the Registration Statement is filed with (in the event of an Initial Date pursuant to (b) (i) above) or declared effective by (in the event of an Initial Date pursuant to (b) (ii) above) the Commission (the "Periodic Amount"); provided, however, that if any Liquidated Damages are payable, then the Liquidated Damages shall not be less than Forty Thousand Dollars ($40,000). The full Periodic Amount shall be paid by the Company to IFT by wire transfer of immediately available funds within three days after each Computation Date. As used in this Section 2(b), "Computation Date" means the date which is 30 days after the Initial Date and, if the Registration Statement required to be filed by the Company pursuant to Section 2(a) has not theretofore been declared effective by the Commission, each date which is 30 days after the previous Computation Date until such Registration Statement is so declared effective. Notwithstanding the above, if the Registration Statement covering the Registrable Securities or the Additional Registrable Securities (as defined in Section 2(d) hereof) required to be filed by the Company pursuant to Section 2(a) or (2d) hereof, as the case may be, is not filed with the Commission within the time required by the terms of this Agreement, the Company shall be in default of this Registration Rights Agreement, as amended. 4. IFT hereby waives, to the fullest extent permitted by law, all breaches, failures, defaults, and events of defaults of the Company on and as of the date of this Amendment No. 1 under the Registration Rights Agreement. This waiver is limited strictly as written and shall not require or imply any other or further waivers of any future such breaches, failures, defaults, or events of default of the Company, and therefore, IFT reserves all of its rights to insist on strict compliance by the Company with the terms of the Registration Rights Agreement as hereby amended from and after the date hereof. 5. The Company hereby acknowledges IFT as the holder of all rights under the Registration Rights Agreement, as hereby amended. 6. This Amendment No. 1 is executed, and shall be considered, as an amendment to the Registration Rights Agreement, and shall form a part thereof, and the provisions of the Registration Rights Agreement as amended by this Amendment No. 1, are hereby ratified and confirmed in all respects. 3 7. This Amendment No. 1 may be executed in any number of counterparts, each of which shall be deemed an original, and all of which taken together shall constitute but one and the same instrument. This Amendment No. 1 shall become binding only when each party hereto has executed and delivered to the other party one or more counterparts. IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment No. 1 to Registration Rights Agreement as of the date first above written. THE NETWORK CONNECTION, INC. By: --------------------------------- INTERACTIVE FLIGHT TECHNOLOGIES, INC. By: --------------------------------- 4 EX-10.25 7 SECURITIES PURCHASE AGREEMENT SECURITIES PURCHASE AGREEMENT THIS SECURITIES PURCHASE AGREEMENT is made as of May 10, 1999, between THE NETWORK CONNECTION, INC., a Georgia corporation with principal executive offices located at 1324 Union Hill Road, Alpharetta, Georgia 30004, (the "Company"), and INTERACTIVE FLIGHT TECHNOLOGIES, INC., a Delaware corporation ("Buyer"). W I T N E S S E T H: WHEREAS, the Company and the Shaar Fund, Ltd. ("Shaar') are parties to that certain Securities Purchase Agreement (the "Shaar Purchase Agreement") dated October 23, 1998 pursuant to which Shaar purchased from the Company 1,500 shares of the Company's Series B 8% Convertible Preferred Stock, $1,000 Stated Value per share (the "Series B Shares"); WHEREAS, in connection with Shaar's purchase of the Series B Shares, the Company and Shaar also entered into a Registration Rights Agreement dated October 23, 1998 (the "Registration Rights Agreement") pursuant to which the Company agreed to register certain shares of its capital stock for the benefit of Shaar; WHEREAS, the Company has failed to pay any dividends on the Series B Shares since the date of issuance and is therefore in arrears with respect to its dividend obligations; WHEREAS, the Company has defaulted with respect to its obligations under the Registration Rights Agreement and pursuant to the terms thereof is liable for certain damages stated therein on account of such default; WHEREAS, the Company purported to redeem the Series B Shares from Shaar by notice dated December 14, 1998, but such notice was defective and in any event, the Company failed to tender the redemption price of such Series B Shares to Shaar thereafter; WHEREAS, Shaar and Buyer have entered into a Securities Purchase Agreement (the "Series B Securities Purchase Agreement") pursuant to which Buyer will acquire the Series B Shares; WHEREAS, Shaar will transfer to Buyer Shaar's rights under the Registration Rights Agreement, Shaar's rights under the Shaar Purchase Agreement, and certain other rights Shaar obtained in connection with the purchase by Shaar of the Series B Shares; WHEREAS, it is a condition to the closing of the transactions between Buyer and Shaar that the Company execute this Agreement; WHEREAS, Buyer has agreed to waive all prior dividend arrearages on the Series B Shares to and including the date hereof, and to waive any and all prior defaults arising in connection with the Series B Shares, whether arising under the Registration Rights Agreement, the Shaar Purchase Agreement, any ancillary agreements with respect thereto (whether oral or written), or otherwise; WHEREAS, the Company has agreed to issue to Buyer 800 shares of the Company's Series C 8% Convertible Preferred Stock, $1,000 Stated Value per share (the "Series C Shares") having the designations rights, preferences, limitations, and privileges set forth in the Articles of Amendment to the Articles of Incorporation of the Company dated the date hereof (the "Amendment"), in consideration for such waivers; WHEREAS, Buyer is the holder of that certain Secured Promissory Note dated January 26, 1999, as amended by the Allonge to Secured Promissory Note dated January 29, 1999, the Second Allonge to Secured Promissory Note dated March 19, 1999, and the Third Allonge to Secured Promissory Note dated March 24, 1999 (collectively, the "Note"), made by the Company and payable to the order of Buyer in the current principal amount of $750,000; WHEREAS, Buyer and the Company have agreed to amend the Note by the issuance on the date hereof of that certain Fourth Allonge to Secured Promissory Note and Buyer has agreed to waive any alleged defaults through the date hereof under the Note; and WHEREAS, the parties wish to confirm that the Series B Shares issued and outstanding after the transfer thereof from Shaar to Buyer will be in full force and effect in accordance with their terms as they existed on the original date of issuance of such shares. NOW THEREFORE, for and in consideration of the premises and the mutual covenants contained herein, the parties hereto, intending to be legally bound, hereby agree as follows: I. PURCHASE AND SALE OF SERIES C SHARES A. Transaction. Buyer hereby agrees to purchase from the Company, and the Company hereby agrees to issue and sell to the Buyer in a transaction exempt from the registration and prospectus delivery requirements of the Securities Act of 1933, as amended (the "Securities Act"), 800 Series C Shares. B. Purchase Price; Form of Payment. In exchange for receipt of the Series C Shares, and the additional consents and assurances given by the Company pursuant to Article III herein, Buyer hereby agrees to waive, to the fullest extent permitted by law, all prior Company defaults and arrearages arising out of or related to the Series B Shares, including but not limited to, the Company's failure to file a registration statement with respect to the Common Stock as provided in the Registration Rights Agreement, the failure to have such registration statement declared effective by the Commission (as hereafter defined) the failure to pay Liquidated Damages as provided in the Registration Rights Agreement, the failure to declare or pay dividends on or with respect to the Series B Shares to and including the date hereof, and any and all defaults, events of default, and asserted failures and breaches by the Company under the Shaar Purchase Agreement and ancillary agreements related thereto (whether oral or written) with respect to redemption of Series B Shares or otherwise. 2 II. BUYER'S REPRESENTATIONS AND WARRANTIES Buyer represents and warrants to and covenants and agrees with the Company as follows: A. Buyer is purchasing the Series C Shares and the shares of Common Stock issuable upon conversion of the Series C Shares (the "Conversion Shares" and, collectively with the Series C Shares, the "Securities") for its own account, for investment purposes only and not with a view towards or in connection with the public sale or distribution thereof in violation of the Securities Act. B. Buyer is (i) experienced in making investments of the kind contemplated by this Agreement, (ii) capable, by reason of its business and financial experience, of evaluating the relative merits and risks of an investment in the Securities, and (iii) able to afford the loss of its investment in the Securities. C. Buyer understands that the Securities are being offered and sold by the Company in reliance on an exemption from the registration requirements of the Securities Act and equivalent state securities and "blue sky" laws, and that the Company is relying upon the accuracy of, and Buyer's compliance with, Buyer's representations, warranties and covenants set forth in this Agreement to determine the availability of such exemption and the eligibility of Buyer to purchase the Securities; D. Buyer has been furnished with or provided access to all materials relating to the business, financial position and results of operations of the Company, and all other materials requested by Buyer to enable it to make an informed investment decision with respect to the Securities. E. Buyer acknowledges that it has been furnished with copies of the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1998 and all other reports and documents heretofore filed by the Company with the Securities and Exchange Commission (the "Commission") pursuant to the Securities Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), since December 31, 1998 (collectively the "Commission Filings"). F. Buyer acknowledges that in making its decision to purchase the Securities it has been given an opportunity to ask questions of and to receive answers from the Company's executive officers, directors and management personnel concerning the terms and conditions of the private placement of the Securities by the Company. G. Buyer understands that the Securities have not been approved or disapproved by the Commission or any state securities commission and that the foregoing authorities have not reviewed any documents or instruments in connection with the offer and sale to it of the Securities and have not confirmed or determined the adequacy or accuracy of any such documents or instruments. 3 H. This Agreement has been duly and validly authorized, executed and delivered by Buyer and is a valid and binding agreement of Buyer enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally. I. Neither Buyer nor its affiliates nor any person acting on its or their behalf has the intention of entering, or will enter into, prior to the closing, any put option, short position or other similar instrument or position with respect to the Common Stock and neither Buyer nor any of its affiliates nor any person acting on its or their behalf will use at any time shares of Common Stock acquired pursuant to this Agreement to settle any put option, short position or other similar instrument or position that may have been entered into prior to the execution of this Agreement. III. COMPANY'S REPRESENTATIONS AND WARRANTIES The Company represents and warrants to and covenants and agrees with the Buyer as follows: A. Capitalization. 1. The authorized capital stock of the Company consists of 10,000,000 shares of Common Stock, of which 5,278,737 shares are outstanding on the date hereof and 2,500,000 shares of Preferred Stock, of which only 1,500 shares of Series B 8% Convertible Preferred Stock are outstanding on the date hereof. All of the issued and outstanding shares of Common Stock and Preferred Stock have been duly authorized and validly issued and are fully paid and non-assessable. As of the date hereof, the Company has outstanding stock options and warrants to purchase 1,863,096 shares of Common Stock. The Conversion Shares have been duly and validly authorized and reserved for issuance by the Company, and when issued by the Company upon conversion of, or in lieu of accrued dividends on, the Series C Shares, will be duly and validly issued, fully paid and non-assessable and will not subject the holder thereof to personal liability by reason of being such holder. There are no preemptive, subscription, "call" or other similar rights to acquire the Common Stock (including the Conversion Shares) that have been issued or granted to any person. 2. The Company does not own or control, directly or indirectly, any interest in any other corporation, partnership, limited liability company, unincorporated business organization, association, trust or other business entity. B. Organization; Reporting Company Status. 1. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Georgia and is duly qualified as a foreign corporation in all jurisdictions in which the failure to so qualify would have a material adverse effect on the business, properties, prospects, condition (financial or otherwise) or results of operations of the Company or on the consummation of any of the transactions contemplated by this Agreement (a "Material Adverse Effect"). 2. The Company has registered its Common Stock pursuant to Section 12 of the Exchange Act and has timely filed with the Commission all reports and information required to be filed by it pursuant to all reporting obligations under Section 13(a) or 15(d), as applicable, of the Exchange Act for the 12-month period immediately preceding the date hereof. The Common 4 Stock is listed and traded on the NASDAQ Stock Market ("NASDAQ") and the Company has not received any notice regarding, and to its knowledge there is no threat, of the termination or discontinuance of the eligibility of the Common Stock for such listing. C. Authorized Shares. The Company has duly and validly authorized and reserved for issuance shares of Common Stock sufficient in number for the conversion, of the Series C Shares (assuming for purposes of this Section III.C. a Conversion Price (as defined in the Amendment) of $1.50 per share. The Company understands and acknowledges the potentially dilutive effect to the Common Stock of the issuance of the Series C Shares and the potential conversion of the Series C Shares the Common Stock. The Company further acknowledges that its obligation to issue Conversion Shares upon conversion of the Series C Shares in accordance with this Agreement and the Series C Shares is absolute and unconditional regardless of the dilutive effect that such issuance may have on the ownership interests of other stockholders of the Company. D. Authority; Validity and Enforceability. The Company has the requisite corporate power and authority to enter into this Agreement, the Amendment, the Fourth Allonge to Secured Promissory Note, and Amendment No. 1 to Registration Rights Agreement dated the date hereof (collectively, the "Transaction Documents"), and to perform all of its obligations hereunder and thereunder (including the issuance, sale and delivery to Buyer of the Securities). The execution, delivery and performance by the Company of this Agreement, the Transaction Documents, and the consummation by the Company of the transactions contemplated hereby and thereby, has been duly authorized by all necessary corporate action on the part of the Company. Each Transaction Document constitutes a valid and binding obligation of the Company enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally. The Securities have been duly and validly authorized for issuance by the Company and, when executed and delivered by the Company, will be valid and binding obligations of the Company enforceable against it in accordance with their terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally. E. Non-contravention. The execution and delivery by the Company of the Transaction Documents, the issuance of the Securities, and the consummation by the Company of the other transactions contemplated hereby and thereby, do not and will not conflict with or result in a breach by the Company of any of the terms or provisions of, or constitute a default (or an event which, with notice, passage of time or both, would constitute a default) under (i) the Articles of Incorporation or By-laws of the Company or (ii) except for such conflict, breach or default which would not have a Material Adverse Effect, any indenture, mortgage, deed of trust or other material agreement or instrument to which the Company is a party or by which its properties or assets are bound, or any law, rule, regulation, decree, judgment or order of any court or public or governmental authority having jurisdiction over the Company or any of the Company's properties or assets. F. Approvals. No authorization, approval or consent of any court or public or governmental authority is required to be obtained by the Company for the issuance and sale of 5 the Series C Shares (or the Conversion Shares) to Buyer as contemplated by this Agreement, except such authorizations, approvals and consents that have been obtained by the Company prior to the date hereof. G. Commission Filings. None of the Commission Filings contained at the time they were filed any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they were made, not misleading. H. Absence of Certain Changes. Except as disclosed in the Commission Filings, since the Balance Sheet Date (as defined in Section III.L.), there has not occurred any change, event or development in the business, financial condition, or results of operations of the Company, and there has not existed any condition having or reasonably likely to have, a Material Adverse Effect. I. Full Disclosure. There is no fact known to the Company (other than general economic or industry conditions known to the public generally) that has not been fully disclosed in writing to the Buyer that (i) reasonably would be expected to have a Material Adverse Effect or (ii) reasonably would be expected to materially and adversely affect the ability of the Company to perform its obligations pursuant to this Agreement, the Amendment or the Registration Rights Agreement. J. Absence of Litigation. There is no action, suit, claim, proceeding, inquiry or investigation pending or, to the Company's knowledge, threatened, by or before any court or public or governmental authority which, if determined adversely to the Company, would have a Material Adverse Effect. K. Absence of Events of Default. No "Event of Default" (as defined in any agreement or instrument to which the Company is a party) and no event which, with notice, lapse of time or both, would constitute an Event of Default (as so defined), has occurred and is continuing, which could have a Material Adverse Effect. L. Financial Statements; No Undisclosed Liabilities. The Company has delivered to Buyer true and complete copies of its audited balance sheet as at December 31, 1998 and the related audited statements of operations and cash flows for the fiscal year ended December 31, 1998 including the related notes and schedules thereto (the "Financial Statements"). The Financial Statements are complete and correct in all material respects, has been prepared in accordance with United States General Accepted Accounting Principles ("GAAP") and in conformity with the practices consistently applied by the Company without modification of the accounting principles used in the preparation thereof, and fairly presents the financial position, results of operations and cash flows of the Company as at the dates and for the periods indicated. For purposes hereof, the audited balance sheet of the Company as at December 31, 1998 is hereinafter referred to as the "Balance Sheet" and December 31, 1998 is hereinafter referred to as the "Balance Sheet Date." The Company has no indebtedness, obligations or liabilities of any kind (whether accrued, absolute, contingent or otherwise, and whether due or to become due) that would have been required to be reflected in, reserved against or otherwise described in the Balance Sheet or in the notes thereto in accordance with GAAP, which was not fully reflected in, reserved against 6 or otherwise described in the Balance Sheet or the notes thereto or was not incurred in the ordinary course of business consistent with the Company's past practices since the Balance Sheet Date. M. Compliance with Laws; Permits. The Company is in compliance with all laws, rules, regulations, codes, ordinances and statutes (collectively "Laws") applicable to it or to the conduct of its business, except for such non-compliance which would not have a Material Adverse Effect. The Company possesses all permits, approvals, authorizations, licenses, certificates and consents from all public and governmental authorities which are necessary to conduct its business, except for those the absence of which would not have a Material Adverse Effect. N. Securities Law Matters. Based, in part on the representations and warranties of Buyer set forth in Article II hereof, the offer and sale by the Company of the Securities is exempt from (i) the registration and prospectus delivery requirements of the Securities Act and the rules and regulations of the Commission thereunder and (ii) the registration and/or qualification provisions of all applicable United States state securities and "blue sky" laws. The Company shall not directly or indirectly take, and shall not permit any of its directors, officers or Affiliates directly or indirectly to take, any action (including, without limitation, any offering or sale to any person or entity of Series C Shares or shares of Common Stock), so as to make unavailable the exemption from Securities Act registration being relied upon by the Company for the offer and sale to Buyer of the Series C Shares (and the Conversion Shares) as contemplated by this Agreement. No form of general solicitation or advertising has been used or authorized by the Company or any of its officers, directors or Affiliates in connection with the offer or sale of the Series C Shares (and the Conversion Shares) as contemplated by this Agreement or any other agreement to which the Company is a party. O. Internal Controls and Procedures. The Company maintains accurate books and records and internal accounting controls which provide reasonable assurance that (i) all transactions to which the Company is a party or by which its properties are bound are executed with management's authorization; (ii) the reported accountability of the Company's assets is compared with existing assets at regular intervals; (iii) access to the Company's assets is permitted only in accordance with management's authorization; and (iv) all transactions to which the Company is a party or by which its properties are bound are recorded as necessary to permit preparation of the financial statements of the Company in accordance with U.S. generally accepted accounting principles. P. Right of First Refusal. Other than a right of first refusal which expires on July 23, 1999, granted to Shaar under the terms of the Shaar Purchase Agreement (which right has been duly and properly assigned to Buyer and is in full force and effect), the Company does not have in effect any right of first refusal with any person with respect to the issuance or sale of Common Stock, securities convertible into Common Stock, or debt of the Company. Q. Environmental Matters. The operations of the Company are in material compliance with all applicable environmental laws and all permits issued pursuant to 7 environmental laws or otherwise. The Company has not received since the Balance Sheet Date, any written communications alleging that it may be in violation of any environmental law or any permit issued pursuant to any environmental law, or may have any liability under any environmental law. R. Labor Matters. The Company is not a party to any labor or collective bargaining agreement and there are no labor or collective bargaining agreements which pertain to employees of the Company. S. Tax Matters. The Company has filed all tax returns which it is required to file under applicable laws except for such tax returns in respect of which the failure to so file does not and could not have a Material Adverse Effect. All such tax returns as filed are true and correct in all material respects and have been prepared in accordance with all applicable laws. The Company is in compliance in all material respects with all provisions of the Employee Retirement Income Security Act of 1974 and the regulations promulgated thereunder which are applicable to it. T. Property. The Company has good and marketable title to all real and personal property (tangible and intangible, and including all technology rights and assets) owned by it, free and clear of all liens, encumbrances and defects except such as do not materially affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by the Company, and except for the lien securing the obligation represented by the Note. The Company owns or possesses adequate and enforceable rights to all patents, patent applications, trademarks, trademark applications, trade names, service marks, copyrights, copyright applications, licenses, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures) and other similar rights and proprietary knowledge necessary for the conduct of its business as now being conducted. To the best of the Company's knowledge, the Company is not infringing upon or in conflict with any right of any other person with respect to any of the foregoing intellectual property. No claims have been asserted by any person to the ownership or use of such intellectual property and has no knowledge of any basis for such a claim. U. No Misrepresentation. To the Company's knowledge, no representation or warranty of the Company contained in this Agreement, any schedule, annex or exhibit hereto or any agreement, instrument or certificate furnished by the Company to Buyer pursuant to this Agreement, contains any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, not misleading. V. Adequacy of Consideration. The Board of Directors of the Company has determined that the consideration to be received for the Series C Shares to be issued pursuant to the terms of this Agreement is adequate in accordance with Section 14-2-621 of the Georgia Business Corporation Code. 8 IV. COVENANTS AND ACKNOWLEDGMENTS. A. Restrictive Legend. Buyer acknowledges and agrees that, upon issuance pursuant to this Agreement, the Securities shall have endorsed thereon a legend in substantially the following form (and a stop-transfer order may be placed against transfer of Securities): "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE, AND ARE BEING OFFERED AND SOLD PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH LAWS. THESE SECURITIES MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR SUCH OTHER LAWS." B. Filings. The Company shall make all necessary SEC and "blue sky" filings required to be made by the Company in connection with the sale of the Securities to the Buyer as required by all applicable Laws, and shall provide a copy thereof to the Buyer promptly after such filing. C. Reporting Status. So long as the Buyer beneficially owns any of the Securities, the Company shall use its best efforts to file all reports required to be filed by it with the Commission pursuant to Section 13 or 15(d) of the Exchange Act. D. Listing. Except to the extent the Company lists its Common Stock on The New York Stock Exchange or the Nasdaq National Market System, the Company shall use its best efforts to maintain its listing of the Common Stock on the NASDAQ. E. Reserved Conversion Shares. Subject to Article 6 of the Amendment, the Company at all times from and after the date hereof shall have a sufficient number of shares of Common Stock duly and validly authorized and reserved for issuance to satisfy the conversion, in full, of the Series C Shares (assuming for purposes of this Section IV.E., a Conversion Price of $1.50 per share. In the event the Current Market Price (as defined in the Amendment) declines to $1.25, the Company shall, within 10 days of the occurrence of such event, authorize and reserve for issuance such additional shares of Common Stock sufficient in number for the conversion, in full, of the Series C Shares, assuming for purposes of this Section IV.E. a Conversion Price of not greater than $ 1.00 per share, subject to Article 6 of the Amendment. F. The Series B Shares. 1. Consent to Transfer and Assignment. The Company hereby consents to the transfer of the Series B Shares from Shaar to Buyer, and further consents to the assignment referred to in Paragraph B of Article VIII of the Series B Securities Purchase Agreement, providing for the assignment by Shaar to Buyer of all of its rights under the Series B Stock. 9 2. Series B Dividends. The Company confirms, represents and warrants that no dividends have been paid on or with respect to the Series B Shares since the date of issuance nor have funds been set aside for such purpose. After giving effect to the waiver referred to in Section I.B, dividends on the Series B Stock shall begin to accrue as of the date hereof. 3. Redemption. The Company hereby withdraws the December 14, 1998 notice of redemption of the Series B Shares, and the Company and the Buyer hereby confirm, represent, warrant and acknowledge to one another that such notice of redemption, and any other agreement with respect to a redemption of Series B Shares (whether oral or written), is withdrawn or rescinded, and in either event is of no force or effect, and is void ab initio. The Company hereby acknowledges that the Series B Shares are issued and outstanding and have the designations, rights, preferences, limitations, and privileges set forth in the Company's Articles of Incorporation as in effect on the date such shares were originally issued. Neither the sending of the redemption notice referred to above nor the putative redemption resulting therefrom, nor any other act or failure to act has had the effect of terminating or limiting any dividend, conversion, registration, transfer, or other right of any such Series B Share, except and only to the extent specifically set forth in this Agreement V. TRANSFER AGENT INSTRUCTIONS. A. The Company undertakes and agrees that no instruction other than the instructions referred to in this Article V and customary stop transfer instructions prior to the registration and sale of the Common Stock pursuant to an effective Securities Act registration statement will be given to its transfer agent for the Common Stock and that the Common Stock issuable upon conversion of the Series C Shares otherwise shall be freely transferable on the books and records of the Company as and to the extent provided in this Agreement, the Registration Rights Agreement and applicable law. Nothing contained in this Section V.A. shall affect in any way Buyer's obligations and agreement to comply with all applicable securities laws upon resale of such Common Stock. If, at any time, Buyer provides the Company with an opinion of counsel reasonably satisfactory to the Company that registration of the resale by Buyer of such Common Stock is not required under the Securities Act and that the removal of restrictive legends is permitted under applicable law, the Company shall permit the transfer of such Common Stock and, promptly instruct the Company's transfer agent to issue one or more certificates for Common Stock without any restrictive legends endorsed thereon. B. The Company shall permit Buyer to exercise its right to convert the Series C Shares by telecopying an executed and completed Notice of Conversion to the Company. Each date on which a Notice of Conversion is telecopied to and received by the Company in accordance with the provisions hereof shall be deemed a Conversion Date. Promptly after Buyer delivers the Notice of Conversion to the Company, Buyer shall deliver to the Company the Series C Shares being converted. The Company shall transmit the certificates evidencing the shares of Common Stock issuable upon conversion of any Series C Shares (together with certificates evidencing any Series C Shares not being so converted) to Buyer via express courier, by electronic transfer or otherwise, within ten business days after receipt by the Company of the Notice of Conversion (the "Delivery Date"). 10 C. The Company understands that a delay in the issuance of the shares of Common Stock issuable in lieu of cash dividends on the Series C Shares or upon the conversion of the Series C Shares beyond the applicable Delivery Date could result in economic loss to Buyer. As compensation to Buyer for such loss (and not as a penalty), the Company agrees to pay to Buyer for late issuance of Common Stock issuable in lieu of cash dividends on the Series C Shares or upon conversion of the Series C Shares in accordance with the following schedule (where "No. Business Days" is defined as the number of business days beyond ten (10) business days from the Delivery Date referred to in Section V.B.): Compensation For Each 500 Shares of Series C Shares Not Converted Timely or 500 Shares of Common Stock Issuable In Lieu of Cash Dividends or Compensation For Each 500 Shares of Series C Shares Not Converted Timely or 500 Shares of Common Stock Issuable In Lieu of Cash No. Business Days Dividends - ----------------- ----------------------- 1 $25 2 $50 3 $75 4 $100 5 $125 6 $150 7 $175 8 $200 9 $225 10 $250 more than 10 $250 + 100 for each Business Day Late beyond 10 days The Company shall pay to Buyer the compensation described above by the transfer of immediately available funds upon Buyer's demand. Nothing herein shall limit Buyer's right to pursue actual damages for the Company's failure to issue and deliver Common Stock to Buyer (which actual damages shall be reduced by the amount of any compensation paid by the Company as described above in this Section V.D.), and in addition to any other remedies which 11 may be available to Buyer, in the event the Company fails for any reason to effect delivery of such shares of Common Stock within five business days after the relevant Interest Payment Due Date, or the Delivery Date, as applicable, Buyer shall be entitled to rescind the relevant Notice of Conversion by delivering a notice to such effect to the Company whereupon the Company and Buyer shall each be restored to their respective original positions immediately prior to delivery of such Notice of Conversion on delivery. VI. CLOSING. The date and time of the issuance and sale of the Series C Shares (the "Closing Date") shall be the date hereof at 10:00 a.m. local time or such other as shall be mutually agreed upon in writing. The issuance and sale of the Securities shall occur on the Closing Date at the offices of Weil, Gotshal & Manages LLP, 767 Fifth Avenue, New York, New York. VII. CONDITIONS TO THE COMPANY'S OBLIGATIONS. The Buyer understands that the Company's obligation to sell the Securities on the Closing Date to Buyer pursuant to this Agreement is conditioned upon: A. The accuracy in all material respects on the Closing Date of the representations and warranties of Buyer contained in this Agreement as if made on the Closing Date (except for representations and warranties which, by their express terms, speak as of and relate to a specified date, in which case such accuracy shall be measured as of such specified date) and the performance by Buyer in all material respects on or before the Closing Date of all covenants and agreements of Buyer required to be performed by it pursuant to this Agreement on or before the Closing Date; B. There shall not be in effect any Law or order, ruling, judgment or writ of any court or public or governmental authority restraining, enjoining or otherwise prohibiting any of the transactions contemplated by this Agreement. VIII. CONDITIONS TO BUYER'S OBLIGATIONS. The Company understands that Buyer's obligation to purchase the Securities on the Closing Date pursuant to this Agreement is conditioned upon: A. Delivery by the Company of one or more certificates (I/N/O Buyer) evidencing the Securities to be purchased by Buyer pursuant to this Agreement; B. The accuracy in all material respects on the Closing Date of the representations and warranties made by the Company in this Agreement as if made on the Closing Date (except for representations and warranties which, by their express terms, speak as of and relate to a specified date, in which case such accuracy shall be measured as of such specified date) and the performance by the Company in all material respects on or before the Closing Date of all covenants and agreements of the Company required to be performed by it pursuant to this Agreement on or before the Closing Date; 12 C. Buyer's having received an opinion of counsel for the Company, dated the Closing Date, substantially in the form of Annex I attached hereto. D. There not having occurred (i) any general suspension of trading in, or limitation on prices listed for, the Common Stock on NASDAQ, (ii) the declaration of a banking moratorium or any suspension of payments in respect of banks in the United States, or (iii) in the case of the foregoing existing at the date of this Agreement, a material acceleration or worsening thereof. E. There not having occurred any event or development, and there being in existence no condition, having or which reasonably and forseeably would have a Material Adverse Effect. F. The Company shall have delivered to Buyer reimbursement of Buyer's out-of-pocket costs and expenses incurred in connection with the transactions contemplated by the Note and this Agreement (including the fees and disbursements of Buyer's legal counsel in an amount not to exceed $50,000). G. There shall not be in effect any Law or order, ruling, judgment or writ of any court or public or governmental authority restraining, enjoining or otherwise prohibiting any of the transactions contemplated by this Agreement. H. Buyer's receipt of a duly executed Amendment No. 1 to Registration Rights Agreement in form and substance satisfactory to Buyer. IX. SURVIVAL; INDEMNIFICATION. A. The representations, warranties and covenants made by each of the Company and Buyer in this Agreement, the annexes, schedules and exhibits hereto and in each instrument, agreement and certificate entered into and delivered by them pursuant to this Agreement, shall survive the Closing and the consummation of the transactions contemplated hereby for a period of one year. In the event of a breach or violation of any of such representations, warranties or covenants, the party to whom such representations, warranties or covenants have been made shall have all rights and remedies for such breach or violation available to it under the provisions of this Agreement or otherwise, whether at law or in equity, irrespective of any investigation made by or on behalf of such party on or prior to the Closing Date. B. The Company hereby agrees to indemnify and hold harmless the Buyer, its Affiliates and their respective officers, directors, partners and members (collectively, the "Buyer Indemnitees"), from and against any and all losses, claims, damages, judgments, penalties, liabilities and deficiencies (collectively, "Losses"), and agrees to reimburse the Buyer Indemnitees for all out-of-pocket expenses (including the reasonable fees and expenses of legal counsel), in each case promptly as incurred by the Buyer Indemnitees and to the extent arising out of or in connection with: 1. any misrepresentation, omission of fact or breach of any of the Company's representations or warranties contained in this Agreement, the annexes, schedules or exhibits 13 hereto or any instrument, agreement or certificate entered into or delivered by the Company pursuant to this Agreement; or 2. any failure by the Company to perform in any material respect any of its covenants, agreements, undertakings or obligations set forth in this Agreement, the annexes, schedules or exhibits hereto or any instrument, agreement or certificate entered into or delivered by the Company pursuant to this Agreement. C. Buyer hereby agrees to indemnify and hold harmless the Company, its Affiliates and their respective officers, directors, partners and members (collectively, the "Company Indemnitees"), from and against any and all Losses, and agrees to reimburse the Company Indemnitees for all out-of-pocket expenses (including the reasonable fees and expenses of legal counsel), in each case promptly as incurred by the Company Indemnitees and to the extent arising out of or in connection with: 1. any misrepresentation, omission of fact, or breach of any of Buyer's representations or warranties contained in this Agreement, the annexes, schedules or exhibits hereto or any instrument, agreement or certificate entered into or delivered by Buyer pursuant to this Agreement; or 2. any failure by Buyer to perform in any material respect any of its covenants, agreements, undertakings or obligations set forth in this Agreement or any instrument, certificate or agreement entered into or delivered by Buyer pursuant to this Agreement. D. Promptly after receipt by either party hereto seeking indemnification pursuant to this Section IX (an "Indemnified Party") of written notice of any investigation, claim, proceeding or other action in respect of which indemnification is being sought (each, a "Claim"), the Indemnified Party promptly shall notify the party against whom indemnification pursuant to this Section IX is being sought (the "Indemnifying Party") of the commencement thereof; but the omission to so notify the Indemnifying Party shall not relieve it from any liability that it otherwise may have to the Indemnified Party, except to the extent that the Indemnifying Party is materially prejudiced and forfeits substantive rights and defenses by reason of such failure. In connection with any Claim, the Indemnifying Party shall be entitled to assume the defense thereof. Notwithstanding the assumption of the defense of any Claim by the Indemnifying Party, the Indemnified Party shall have the right to employ separate legal counsel (together with appropriate local counsel) and to participate in the defense of such Claim, and the Indemnifying Party shall bear the reasonable fees, out-of-pocket costs and expenses of such separate legal counsel to the Indemnified Party if (and only if): (x) the Indemnifying Party shall have agreed to pay such fees, out-of-pocket costs and expenses, (y) the Indemnified Party and the Indemnifying Party reasonably shall have concluded that representation of the Indemnified Party and the Indemnifying Party by the same legal counsel would not be appropriate due to actual or, as reasonably determined by legal counsel to the Indemnified Party, (i) potentially differing interests between such parties in the conduct of the defense of such Claim, or (ii) if there may be legal defenses available to the Indemnified Party that are in addition to or disparate from those available to the Indemnifying Party and which can not be presented by counsel to the Indemnifying Party, or (z) the Indemnifying Party shall have failed to employ legal counsel 14 reasonably satisfactory to the Indemnified Party within a reasonable period of time after notice of the commencement of such Claim. If the Indemnified Party employs separate legal counsel in circumstances other than as described in clauses (x), (y) or (z) above, the fees, costs and expenses of such legal counsel shall be borne exclusively by the Indemnified Party. Except as provided above, the Indemnifying Party shall not, in connection with any Claim in the same jurisdiction, be liable for the fees and expenses of more than one firm of legal counsel for the Indemnified Party (together with appropriate local counsel). The Indemnifying Party shall not, without the prior written consent of the Indemnified Party (which consent shall not unreasonably be withheld), settle or compromise any Claim or consent to the entry of any judgment that does not include an unconditional release of the Indemnified Party from all liabilities with respect to such Claim or judgment. E. In the event one party hereunder should have a claim for indemnification that does not involve a claim or demand being asserted by a third party, the Indemnified Party promptly shall deliver notice of such claim to the Indemnifying Party. If the Indemnified Party disputes the claim, such dispute shall be resolved by mutual agreement of the Indemnified Party and the Indemnifying Party or by binding arbitration conducted in accordance with the procedures and rules of the American Arbitration Association. Judgment upon any award rendered by any arbitrators may be entered in any court having competent jurisdiction thereof. X. GOVERNING LAW: MISCELLANEOUS. This Agreement shall be governed by and interpreted in accordance with the laws of the State of New York, without regard to the conflicts of law principles of such state. Each of the parties consents to the jurisdiction of the federal courts whose districts encompass any part of the City of New York or the state courts of the State of New York sitting in the City of New York in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. A facsimile transmission of this signed Agreement shall be legal and binding on all parties hereto. This Agreement may be signed in one or more counterparts, each of which shall be deemed an original. The headings of this Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement. 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. This Agreement may be amended only by an instrument in writing signed by the party to be charged with enforcement. This Agreement supersedes all prior agreements and understandings among the parties hereto with respect to the subject matter hereof. XI. NOTICES. Except as may be otherwise provided herein, any notice or other communication or delivery required or permitted hereunder shall be in writing and shall be delivered personally or sent by certified mail, postage prepaid, or by a nationally recognized overnight courier service, by facsimile with confirmation back if followed promptly by first class mail, and shall be deemed given when so delivered personally or by overnight courier service, or, if mailed, three (3) days after the date of deposit in the United States mails, as follows: 15 (1) if to the Company, to: The Network Connection, Inc. 1324 Union Hill Road Alpharetta, Georgia 30004 Attention: Wilbur Riner With a copy to: Nixon, Hargrave, Devans & Doyle LLP 437 Madison Avenue New York, New York 10022-7001 Attention: Peter W. Rothberg, Esquire (2) if to Buyer, to Interactive Flight Technologies, Inc. 4041 North Central Avenue Suite B 200 Phoenix, AZ 86012 Attention: Irvin R. Gross with a copy to: Mesirov Gelman Jaffe Cramer Jamieson, LLP 1735 Market Street Suite 3800 Philadelphia, PA 19103-7598 Attn: Richard P. Jaffe, Esquire The Company or Buyer may change the foregoing address by notice given pursuant to this Section XI. XII. CONFIDENTIALITY. Each of the Company and Buyer agrees to keep confidential and not to disclose to or use for the benefit of any third party the terms of this Agreement or any other information which at any time is communicated by the other party as being confidential without the prior written approval of the other party; provided, however, that this provision shall not apply to information which, at the time of disclosure, is already part of the public domain (except by breach of this Agreement) and information which is required to be disclosed by law (including, without limitation, pursuant to Item 10 of Rule 601 of Regulation S-K under the Securities Act and the Exchange Act). XIII. ASSIGNMENT. This Agreement shall not be assignable by either of the parties hereto prior to the Closing without the prior written consent of the other party, and any attempted assignment contrary to the provisions hereby shall be null and void; provided, 16 however, that Buyer may assign its rights and obligations hereunder, in whole or in part, to any affiliate of Buyer who furnishes to the Company the representations and warranties set forth in Section II hereof and otherwise agrees to be bound by the terms of this Agreement. IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Agreement on the date first above written. THE NETWORK CONNECTION, INC. By: --------------------------------- Name: Title: INTERACTIVE FLIGHT TECHNOLOGIES, INC. By: --------------------------------- Name: Title: 17 EX-10.26 8 SECURITIES PURCHASE AGREEMENT SECURITIES PURCHASE AGREEMENT THIS SECURITIES PURCHASE AGREEMENT is made as of the 25th day of June, 1999, between GALAPACO HOLDINGS, LTD., a corporation organized under the laws of the Bahamas, and MATTERHORN, LTD., a corporation organized under the laws of Switzerland (collectively, the "Holders") and INTERACTIVE FLIGHT TECHNOLOGIES, INC., a Delaware corporation ("IFT"). W I T N E S S E T H: WHEREAS, the Holders are the holders of notes identified on Schedule B attached hereto (the "Notes") issued by The Network Connection, Inc., a Georgia corporation with principal executive offices at 1324 Union Hill Road, Alpharetta, Georgia 30201 ("TNC"), having an aggregate principal amount of $470,750 and aggregate accrued interest, redemption premiums, and other amounts due thereon totaling $239,781 (collectively, the "Redemption Premium"); and WHEREAS, IFT has agreed to purchase the Notes in exchange for a total of 177,633 shares of the Class A Common Stock of IFT, par value $.01 per share (the "Common Stock"). NOW THEREFORE, for and in consideration of the premises and the mutual covenants contained herein, the parties hereto, intending to be legally bound, hereby agree as follows: I. PURCHASE AND SALE OF NOTES A. Transaction. The Holders hereby severally agree to sell to IFT, and IFT agrees to purchase from the Holders, the respective Notes (including all principal and the Redemption Premium having an aggregate balance due of $710,531) owned by each such Holder, in a transaction exempt from the registration and prospectus delivery requirements of the Securities Act of 1933, as amended (the "Securities Act"), in accordance with the information set forth on Schedule A attached hereto. B. Purchase Price; Form of Payment. The consideration for the Notes to be purchased by IFT shall be 177,633 shares of Common Stock payable to the Holders as set forth on Schedule A attached hereto. II. HOLDERS' REPRESENTATIONS AND WARRANTIES The Holders severally represent and warrant to IFT as follows: A. Each of the Holders is acquiring the Common Stock for their own account, for investment purposes only and not with a view towards or in connection with the public sale or distribution thereof in violation of the Securities Act. B. Each of the Holders is (i) experienced in making investments of the kind contemplated by this Agreement, (ii) capable, by reason of his, her or its respective business and financial experience, of evaluating the relative merits and risks of an investment in the Common Stock, and (iii) able to afford the loss of the entire investment in the Common Stock. C. Each Holder understands that the Common Stock is being offered and sold by IFT in reliance on an exemption from the registration requirements of the Securities Act and equivalent state securities and "blue sky" laws, and that IFT is relying upon the accuracy of, and the Holders' compliance with, the Holders' respective representations, warranties and covenants set forth in this Agreement to determine the availability of such exemption and the eligibility of the Holders to purchase the Common Stock. D. The Holders have each been furnished with or provided access to all materials relating to the business, financial position and results of operations of IFT and TNC, and all other materials requested by the Holders to enable them to each make an informed investment decision with respect to the Common Stock and the Notes. E. The Holders acknowledge that they have each been furnished with copies of IFT's Annual Report on Form 10-KSB for the fiscal year ended October 31, 1998, IFT's Quarterly Report on Form 10-QSB for the fiscal quarter ended April 30, 1999, IFT's Schedule 13D dated May 11, 1999 filed with respect to IFT's beneficial ownership of TNC Common Stock; IFT's Current Report on Form 8-K dated May 17, 1999; IFT's Proxy Statement with respect to its annual meeting of Stockholders held on February 4, 1999, and all other reports and documents heretofore filed by IFT with the Securities and Exchange Commission (the "Commission") pursuant to the Securities Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), since January 31, 1999 (collectively the "Commission Filings"). The Holders also acknowledge that they have each been furnished with copies of TNC's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1998; TNC's Quarterly Report on Form 10-QSB for the fiscal quarter ended March 31, 1999; and all other reports and documents heretofore filed by TNC with the Commission pursuant to the Securities Act and the Exchange Act, since December 31, 1998. F. The Holders each acknowledge that in making their decision to acquire the Common Stock they have each been given an opportunity to ask questions of and to receive answers from IFT's and TNC's respective executive officers, directors and management personnel concerning the business and officers of IFT and TNC, respectively. G. The Holders each understand that the Common Stock has not been approved or disapproved by the Commission or any state securities commission and that the foregoing authorities have not reviewed any documents or instruments in connection with the offer and sale to it of the Common Stock and have not confirmed or determined the adequacy or accuracy of any such documents or instruments. H. This Agreement has been duly and validly authorized, executed and delivered by the Holders and is a valid and binding agreement of each of the Holders enforceable against each of them in accordance with its terms, subject to applicable bankruptcy, insolvency, 2 fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally. I. None of the Holders nor their affiliates nor any person acting on behalf of any of the Holders have the intention of entering into, and each such holder covenants severally that it will not enter into prior to the closing, any put option, short position or other similar instrument or position with respect to the Common Stock and none of the Holders nor any of their affiliates nor any person acting on the behalf of any of the Holders will use at any time shares of Common Stock acquired pursuant to this Agreement to settle any put option, short position or other similar instrument or position that may have been entered into prior to the execution of this Agreement. J. Each of the Holders has good, marketable, and unencumbered title to their respective Notes, free and clear of all liens, security interests, pledges, claims, options, and rights of others. There are no restriction on any of the Holders' right to transfer the Notes to IFT pursuant to the terms of this Agreement. None of the Notes have been modified or amended except as set forth on Schedule B attached hereto. The amounts set forth on Schedule A are a true, complete, and accurate statement of the amounts due under the Notes as of the date hereof. K. Galapaco Holdings, Ltd. and Matterhorn, Ltd., are corporations duly organized, validly existing and in good standing under the laws of the Bahamas and Switzerland, respectively, with their principal places of business at Charlotte House, Charlotte St., P.O. Box N-8318, Nassau, Bahamas, and P.O. Box 735, CH-6045, Meggen, Switzerland, respectively, and were not organized for the purpose of acquiring the Common Stock. Each Holder has the power to acquire the Common Stock pursuant to the terms hereof. III. IFT'S REPRESENTATIONS AND WARRANTIES IFT represents and warrants to and covenants and agrees with the Holders as follows: A. Capitalization. The authorized capital stock of IFT consists of 40,000,000 shares of Common Stock, of which 5,460,636 shares are outstanding on the date hereof and 5,000,000 shares of Preferred Stock, of which 3,000 Series A Preferred Shares are outstanding on the date hereof. All of the issued and outstanding shares of Common Stock and Preferred Stock have been duly authorized and validly issued and are fully paid and non-assessable. The Common Stock has been duly and validly authorized, and when issued by IFT, will be duly and validly issued, fully paid and non-assessable and will not subject the holder thereof to personal liability by reason of being such holder. B. Organization; Reporting IFT Status. IFT is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and is duly qualified as a foreign corporation in all jurisdictions in which the failure to so qualify would have a material adverse effect on the business, properties, prospects, condition (financial or otherwise) or results of operations of IFT or on the consummation of any of the transactions contemplated by this Agreement (a "Material Adverse Effect"). 3 C. Authority; Validity and Enforceability. IFT has the requisite corporate power and authority to enter into this Agreement and the Registration Rights Agreement to be dated and delivered at Closing as referred to in Section VIII.F (collectively, the "Transaction Documents"), and to perform all of its obligations hereunder and thereunder (including the issuance, sale and delivery to the Holders of the Common Stock). The execution, delivery and performance by IFT of this Agreement, the Transaction Documents, and the consummation by IFT of the transactions contemplated hereby and thereby, has been duly authorized by all necessary corporate action on the part of IFT. Each Transaction Document constitutes a valid and binding obligation of IFT enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally. The Common Stock has been duly and validly authorized for issuance by IFT and, when executed and delivered by IFT, will be valid and binding obligations of IFT enforceable against it in accordance with their terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally. D. Non-contravention. The execution and delivery by IFT of the Transaction Documents, the issuance of the Common Stock, and the consummation by IFT of the other transactions contemplated hereby and thereby, do not and will not conflict with or result in a breach by IFT of any of the terms or provisions of, or constitute a default (or an event which, with notice, passage of time or both, would constitute a default) under (i) the Certificate of Incorporation or By-laws of IFT or (ii) except for such conflict, breach or default which would not have a Material Adverse Effect, any indenture, mortgage, deed of trust or other material agreement or instrument to which IFT is a party or by which its properties or assets are bound, or any law, rule, regulation, decree, judgment or order of any court or public or governmental authority having jurisdiction over IFT or any of IFT's properties or assets. E. Approvals. No authorization, approval or consent of any court or public or governmental authority is required to be obtained by IFT for the issuance of the Common Stock to the Holders as contemplated by this Agreement, except such authorizations, approvals and consents that have been obtained by IFT prior to the date hereof. F. Commission Filings. None of the Commission Filings contained at the time they were filed any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they were made, not misleading. G. Absence of Certain Changes. Except as disclosed in the Commission Filings, since January 31, 1999, there has not occurred any change, event or development in the business, financial condition, or results of operations of IFT, and there has not existed any condition having or reasonably likely to have, a Material Adverse Effect. H. Securities Law Matters. Based in part on the representations and warranties of the Holders set forth in Article II hereof, the offer and issuance by IFT of the Common Stock pursuant to the terms of this Agreement is exempt from (i) the registration and prospectus delivery requirements of the Securities Act and the rules and regulations of the Commission 4 thereunder and (ii) the registration and/or qualification provisions of all applicable United States state securities and "blue sky" laws. IFT shall not directly or indirectly take, and shall not permit any of its directors, officers or Affiliates directly or indirectly to take, any action, so as to make unavailable the exemption from the Securities Act registration being relied upon by IFT for the issuance to the Holders of the Common Stock as contemplated by this Agreement. No form of general solicitation or advertising has been used or authorized by IFT or any of its officers, directors or Affiliates in connection with the offer or sale of the Common Stock as contemplated by this Agreement or any other agreement to which IFT is a party. I. Adequacy of Consideration. The Board of Directors of IFT has determined that the consideration to be received for the Common Stock to be issued pursuant to the terms of this Agreement is adequate in accordance with Section 153 of the Delaware General Corporation Law. IV. COVENANTS AND ACKNOWLEDGMENTS. A. Restrictive Legend. The Holders acknowledge and agree that, upon issuance pursuant to this Agreement, the Common Stock shall have endorsed thereon legends in substantially the following forms: THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE, AND ARE BEING OFFERED AND SOLD PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH LAWS. THESE SECURITIES MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR SUCH OTHER LAWS. THESE SECURITIES HAVE BEEN ISSUED OR SOLD IN RELIANCE ON PARAGRAPH (13) OF CODE SECTION 10-5-9 OF THE "GEORGIA SECURITIES ACT OF 1973," AND MAY NOT BE SOLD OR TRANSFERRED EXCEPT IN A TRANSACTION WHICH IS EXEMPT UNDER SUCH ACT OR PURSUANT TO AN EFFECTIVE REGISTRATION UNDER SUCH ACT. B. Filings. IFT shall make all necessary SEC and state "blue sky" filings required to be made by IFT in connection with the issuance of the Common Stock to the Holders (based on the representations and warranties of the Holders) as required by all applicable laws, and shall provide a copy thereof to the Holders promptly after such filing. VI. CLOSING. The date and time of the closing pursuant to this Agreement (the "Closing Date") shall be July 9, 1999 at 9:00 a.m. local time or such other as shall be mutually agreed upon in 5 writing at the offices of Balboni Law Group, LLC, 3475 Lenox Rd. N.E., Suite 990, Atlanta, GA 30326. VII. CONDITIONS TO IFT'S OBLIGATIONS. IFT's obligation to close hereunder is conditioned upon the following, any of which may be waived by IFT: A. The accuracy in all material respects on the Closing Date of the representations and warranties of each of the Holders contained in this Agreement as if made on the Closing Date (except for representations and warranties which, by their express terms, speak as of and relate to a specified date, in which case such accuracy shall be measured as of such specified date) and the performance by the each of the Holders in all material respects on or before the Closing Date of their respective covenants and agreements required to be performed by each of them pursuant to this Agreement on or before the Closing Date; B. The absence of any law or order, ruling, judgment or writ of any court or public or governmental authority restraining, enjoining or otherwise prohibiting any of the transactions contemplated by this Agreement; C. IFT's receipt of (1) a duly executed Irrevocable Proxy in the form attached hereto as Exhibit A from each Holder; (2) a duly executed Allonge to Secured Promissory Note from TNC in form and substance satisfactory to IFT; (3) a duly executed Registration Rights Agreement in the form attached hereto as Exhibit C; (4) all of the original Notes and Addenda thereto duly endorsed to the order of IFT; (5) a General Release in the form attached hereto as Exhibit D from each Holder; and (6) a duly executed Put/Call Agreement in the form attached hereto as Exhibit E from each Holder; and D. The Closing of the transactions between IFT and five third parties (who are also holders of notes signed by TNC) pursuant to those certain Securities Purchase Agreements dated as of the date hereof. VIII. CONDITIONS TO THE HOLDERS' OBLIGATIONS. The Holders' obligation to close hereunder is conditioned upon the following, any of which may be waived by the Holders severally: A. The receipt by each Holder of one or more certificates registered in the name of each Holder, respectively) evidencing the Common Stock to be acquired by such Holder pursuant to this Agreement, as set forth on Schedule A attached hereto; B. The accuracy in all material respects on the Closing Date of the representations and warranties made by IFT in this Agreement as if made on the Closing Date (except for representations and warranties which, by their express terms, speak as of and relate to a specified date, in which case such accuracy shall be measured as of such specified date) and the performance by IFT in all material respects on or before the Closing Date of all covenants and 6 agreements of IFT required to be performed by it pursuant to this Agreement on or before the Closing Date; C. There not having occurred (i) any general suspension of trading in, or limitation on prices listed for, the Common Stock of IFT on NASDAQ, (ii) the declaration of a banking moratorium or any suspension of payments in respect of banks in the United States, or (iii) in the case of the foregoing existing at the date of this Agreement, a material acceleration or worsening thereof; D. There not having occurred any event or development, and there being in existence no condition, having or which reasonably and foreseeably would have a Material Adverse Effect; E. The absence of any law or order, ruling, judgment or writ of any court or public or governmental authority restraining, enjoining or otherwise prohibiting any of the transactions contemplated by this Agreement; and F. Each Holder's receipt of (1) a duly executed Registration Rights Agreement in the form of Exhibit C attached hereto; and (2) a duly executed Put/Call Agreement in the form of Exhibit E attached hereto. IX. SURVIVAL; INDEMNIFICATION. A. The representations, warranties and covenants made by each of IFT and each of the Holders in this Agreement, the annexes, schedules and exhibits hereto and in each instrument, agreement and certificate entered into and delivered by either of them pursuant to this Agreement, shall survive the Closing and the consummation of the transactions contemplated hereby for a period of one year. In the event of a breach or violation of any of such representations, warranties or covenants, the party to whom such representations, warranties or covenants have been made shall have all rights and remedies for such breach or violation available to it under the provisions of this Agreement or otherwise, whether at law or in equity, irrespective of any investigation made by or on behalf of such party on or prior to the Closing Date. B. IFT hereby agrees to indemnify and hold harmless each Holder, their respective affiliates and their respective officers, directors, partners and members (collectively, the "Holder Indemnitees"), from and against any and all losses, claims, damages, judgments, penalties, liabilities and deficiencies (collectively, "Losses"), and agrees to reimburse Holder Indemnitees for all out-of-pocket expenses (including the reasonable fees and expenses of legal counsel), in each case promptly as incurred by Holder Indemnitees and to the extent arising out of or in connection with: 1. any misrepresentation, omission of fact or breach of any of IFT's representations or warranties contained in this Agreement, the exhibits hereto or any instrument, agreement or certificate entered into or delivered by IFT pursuant to this Agreement; or 7 2. any failure by IFT to perform in any material respect any of its covenants, agreements, undertakings or obligations set forth in this Agreement, the exhibits hereto or any instrument, agreement or certificate entered into or delivered by IFT pursuant to this Agreement. C. The Holders hereby agree to indemnify and hold harmless IFT, its Affiliates and their respective officers, directors, partners and members (collectively, the "IFT Indemnitees"), from and against any and all Losses, and agrees to reimburse IFT Indemnitees for all out-of-pocket expenses (including the reasonable fees and expenses of legal counsel), in each case promptly as incurred by IFT Indemnitees and to the extent arising out of or in connection with: 1. any misrepresentation, omission of fact, or breach of any of the Holders' representations or warranties contained in this Agreement, the exhibits hereto or any instrument, agreement or certificate entered into or delivered by the Holders pursuant to this Agreement; or 2. any failure by any of the Holders to perform in any material respect any of its covenants, agreements, undertakings or obligations set forth in this Agreement or any instrument, certificate or agreement entered into or delivered by any of the Holders pursuant to this Agreement. D. Promptly after receipt by either party hereto seeking indemnification pursuant to this Section IX (an "Indemnified Party") of written notice of any investigation, claim, proceeding or other action in respect of which indemnification is being sought (each, a "Claim"), the Indemnified Party promptly shall notify the party against whom indemnification pursuant to this Section IX is being sought (the "Indemnifying Party") of the commencement thereof; but the omission to so notify the Indemnifying Party shall not relieve it from any liability that it otherwise may have to the Indemnified Party, except to the extent that the Indemnifying Party is materially prejudiced and forfeits substantive rights and defenses by reason of such failure. In connection with any Claim, the Indemnifying Party shall be entitled to assume the defense thereof. Notwithstanding the assumption of the defense of any Claim by the Indemnifying Party, the Indemnified Party shall have the right to employ separate legal counsel (together with appropriate local counsel) and to participate in the defense of such Claim, and the Indemnifying Party shall bear the reasonable fees, out-of-pocket costs and expenses of such separate legal counsel to the Indemnified Party if (and only if): (x) the Indemnifying Party shall have agreed to pay such fees, out-of-pocket costs and expenses, (y) the Indemnified Party and the Indemnifying Party reasonably shall have concluded that representation of the Indemnified Party and the Indemnifying Party by the same legal counsel would not be appropriate (i) due to actual or, as reasonably determined by legal counsel to the Indemnified Party, potentially differing interests between such parties in the conduct of the defense of such Claim, or (ii) if there may be legal defenses available to the Indemnified Party that are in addition to or disparate from those available to the Indemnifying Party and which can not be presented by counsel to the Indemnifying Party, or (z) the Indemnifying Party shall have failed to employ legal counsel reasonably satisfactory to the Indemnified Party within a reasonable period of time after notice of the commencement of such Claim. If the Indemnified Party employs separate legal counsel in circumstances other than as described in clauses (x), (y) or (z) above, the fees, costs and expenses of such legal counsel shall be borne exclusively by the Indemnified Party. Except as provided 8 above, the Indemnifying Party shall not, in connection with any Claim in the same jurisdiction, be liable for the fees and expenses of more than one firm of legal counsel for the Indemnified Party (together with appropriate local counsel). The Indemnifying Party shall not, without the prior written consent of the Indemnified Party (which consent shall not unreasonably be withheld), settle or compromise any Claim or consent to the entry of any judgment that does not include an unconditional release of the Indemnified Party from all liabilities with respect to such Claim or judgment. E. In the event one party hereunder should have a claim for indemnification that does not involve a claim or demand being asserted by a third party, the Indemnified Party promptly shall deliver notice of such claim to the Indemnifying Party. If the Indemnified Party disputes the claim, such dispute shall be resolved by mutual agreement of the Indemnified Party and the Indemnifying Party or by binding arbitration conducted in accordance with the procedures and rules of the American Arbitration Association. Judgment upon any award rendered by any arbitrators may be entered in any court having competent jurisdiction thereof. X. GOVERNING LAW: MISCELLANEOUS. This Agreement shall be governed by and interpreted in accordance with the laws of the Commonwealth of Pennsylvania, without regard to the conflicts of law principles of such state. Each of the parties consents to the jurisdiction of the Federal courts whose districts encompass any part of the City of Philadelphia or the state courts of Commonwealth of Pennsylvania sitting in the City of Philadelphia in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. A facsimile transmission of this signed Agreement shall be legal and binding on all parties hereto. This Agreement may be signed in one or more counterparts, each of which shall be deemed an original. The headings of this Agreement have been inserted for convenience of reference only and shall not form part of, or affect the interpretation of, this Agreement. 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. This Agreement may be amended only by an instrument in writing signed by the party to be charged with enforcement. This Agreement supersedes all prior agreements and understandings among the parties hereto with respect to the subject matter hereof. XI. NOTICES. Except as may be otherwise provided herein, any notice or other communication or delivery required or permitted hereunder shall be in writing and shall be delivered personally or sent by certified mail, postage prepaid, or by a nationally recognized overnight courier service, by facsimile with confirmation back if followed promptly by first class mail, and shall be deemed given when so delivered personally or by overnight courier service, or, if mailed, three (3) days after the date of deposit in the United States mails, as follows: (1) if to a Holder at the respective address set forth in Section II.K. (2) if to IFT, to 9 Interactive Flight Technologies, Inc. 4041 North Central Avenue Suite B 200 Phoenix, AZ 86012 Attention: Irwin L. Gross with a copy to: Mesirov Gelman Jaffe Cramer Jamieson, LLP 1735 Market Street - Suite 3800 Philadelphia, PA 19103-7598 Attn: Steven B. King, Esquire IFT or any of the Holders may change his, her, or its respective address for notices by notice given pursuant to this Article XI. XII. CONFIDENTIALITY. IFT and each of the Holders agree to keep confidential and not to disclose to or use for the benefit of any third party the terms of this Agreement or any other information which at any time is communicated by the other party as being confidential without the prior written approval of the other party; provided, however, that this provision shall not apply to information which, at the time of disclosure, is already part of the public domain (except by breach of this Agreement) and information which is required to be disclosed by law (including, without limitation, pursuant to Item 10 of Rule 601 of Regulation S-K under the Securities Act and the Exchange Act). IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Agreement on the date first above written. INTERACTIVE FLIGHT TECHNOLOGIES, INC. By: ------------------------------------ Name: Title: (Signatures continued on next page) 10 GALAPACO HOLDINGS, LTD. By: ------------------------------------ Name: Title: MATTERHORN, LTD. By: ------------------------------------ Name: Title: 11 SCHEDULE A
Shares of Class A Principal Common Stock of Amount of Redemption IFT to be Received Notes Premium to Holder by Holder Held June 3, 1999 Total Due ------ ------------------ --------- ------------ --------- Galapaco Holdings 107,181 $270,750 $157,975 $428,725 Matterhorn, Ltd. 70,452 200,000 81,806 281,806 ------- -------- -------- -------- TOTALS 177,633 $470,750 $239,781 $710,531 - ------ ======= ======== ======== ========
SCHEDULE B AMENDMENTS TO NOTES
Key Addendum Holder Date of Note Addendum Date Provisions ------ ------------ ------------- ------------ Galapaco Holdings, Inc. October 12, 1998 January 13, 1999 full redemption of Note by 2/1/99 or additional redemption bonus due to Holder Galapaco Holdings, Inc. October 12, 1998 ?? (illegible) full redemption of Note by 2/25/99 or additional redemption bonus due to Holder; warrants reissued at $2.50 exercise price Matterhorn, Ltd. December 11, 1998 February 12, 1999 full redemption of Note by 3/15/99 or additional redemption bonus due to Holder; warrants reissued at $2.50 exercise price
EXHIBIT A IRREVOCABLE PROXY EXHIBIT B [Intentionally Omitted) EXHIBIT C REGISTRATION RIGHTS AGREEMENT EXHIBIT D GENERAL RELEASE EXHIBIT E PUT/CALL AGREEMENT EX-10.27 9 REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT is dated this _____ day of July, 1999 (this "Agreement") between Interactive Flight Technologies, Inc., a Delaware corporation, with principal offices located at 4041 North Central Avenue, Suite B 200, Phoenix, Arizona 85012 (the "Company"), and each of the undersigned Initial Investors (the "Initial Investors"). W I T N E S S E T H: WHEREAS, upon the terms and subject to the conditions of those certain Securities Purchase Agreements dated June 25, 1999, between the Initial Investors and the Company (individually, a "Securities Purchase Agreement," and collectively, the "Securities Purchase Agreements"), the Company has agreed to issue to the Initial Investors the number of shares of the Company's Class A Common Stock (the "Common Stock") set forth in the Securities Purchase Agreements; and WHEREAS, to induce each Initial Investor to execute and deliver his, her, or its respective Securities Purchase Agreement, the Company has agreed to provide with respect to the Common Stock issued certain registration rights under the Securities Act (as hereinafter defined). NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Definitions. (a) As used in this Agreement, the following terms shall have the following respective meanings: (i) "Commission" means the Securities and Exchange Commission. (ii) "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder, or any similar successor statute. (iii) "Investors" means the Initial Investors and any transferee or assignee of Registrable Securities who agrees to become bound by all of the terms and provisions of this Agreement in accordance with Section 8 hereof. (iv) "Person" means any individual, partnership, corporation, limited liability company, joint stock company, association, trust, unincorporated organization, or a government or agency or political subdivision thereof. (v) "Prospectus" means the prospectus (including, without limitation, any preliminary prospectus and any final prospectus filed pursuant to Rule 424(b) under the Securities Act, including any prospectus that discloses information previously omitted from a prospectus filed as part of an effective registration statement in reliance on Rule 430A under the Securities Act) included in the Registration Statement, as amended or supplemented by any prospectus supplement with respect to the terms of the offering of any portion of the Registrable Securities covered by the Registration Statement and by all other amendments and supplements to such prospectus, including all material incorporated by reference in such prospectus and all documents filed after the date of such prospectus by the Company under the Exchange Act and incorporated by reference therein. (vi) "Registrable Securities" means the Common Stock issued or issuable pursuant to a Securities Purchase Agreement; provided, however, a share of Common Stock shall cease to be a Registrable Security for purposes of this Agreement when it no longer is a Restricted Security. (vii) "Registration Statement" means a registration statement of the Company filed on an appropriate form under the Securities Act providing for the registration of, and the sale on a continuous or delayed basis by the holders of, all of the Registrable Securities pursuant to Rule 415 under the Securities Act, including the Prospectus contained therein and forming a part thereof, any amendments to such registration statement and supplements to such Prospectus, and all exhibits and other material incorporated by reference in such registration statement and Prospectus. (viii) "Restricted Security" means any share of Common Stock issued or issuable pursuant to a Securities Purchase Agreement except any such share that (i) has been registered pursuant to an effective registration statement under the Securities Act and sold in a manner contemplated by the Prospectus included in the Registration Statement, (ii) has been transferred in compliance with the resale provisions of Rule 144 under the Securities Act (or any successor provision thereto) or is transferable pursuant to paragraph (k) of Rule 144 under the Securities Act (or any successor provision thereto), or (iii) otherwise has been transferred and a new share of Common Stock not subject to transfer restrictions under the Securities Act has been delivered by or on behalf of the Company. 2 (ix) "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder, or any similar successor statute. (b) All capitalized terms used and not defined herein have the respective meaning assigned to them in the Securities Purchase Agreements. 2. Registration. (a) Filing and Effectiveness of Registration Statement. The Company shall use reasonable commercial efforts to prepare and file with the Commission not later than December 31, 1999, a Registration Statement relating to the offer and sale of the Registrable Securities, and shall use reasonable commercial efforts to cause the Commission to declare such Registration Statement effective under the Securities Act as promptly as practicable after filing. The Company shall notify the Initial Investors by written notice that such Registration Statement has been declared effective by the Commission promptly after such declaration by the Commission. Notwithstanding the foregoing provisions of this Section 2(a), the Company may defer such filing one time for a period not to exceed fifteen (15) days if the Board of Directors of the Company determines in good faith that because of a material, pending corporate transaction such as a pending merger or other business combination or the planned material acquisition or divestiture of assets, it is in the best interests of the Company to defer such filing, and prior to or contemporaneously with such deferral the Company provides the Investors with written notice of such deferral, which notice need not specify the nature of the event giving rise to such deferral. (b) Eligibility for Use of Form S-3. The Company agrees that at such time after December 31, 1999 as it meets all the requirements for the use of Securities Act Registration Statement on Form S-3 it shall file all reports and information required to be filed by it with the Commission in a timely manner and take all such other action so as to maintain such eligibility for the use of such form. (c) Piggyback Obligation. (i) If the Company, after September 30, 1999, proposes to register any of its warrants or any other shares of common stock of the Company under the Securities Act (other than a registration (A) on Form S-8 or S-4 or any successor or similar forms, (B) relating to Common Shares or any other shares of common stock of the Company issuable upon exercise of employee share options or in connection with any employee benefit or similar plan of the Company, (C) in connection with a direct or indirect acquisition by the Company of another Person or any transaction with respect to which Rule 145 (or any successor provision) under the Securities Act applies, or (D) on behalf of the Shaar Fund, Ltd., and its permitted successors and assigns), whether or not for sale for its own account, it will each such time, give prompt written notice at least twenty (20) days prior to the anticipated filing date of the registration statement 3 relating to such registration to the Investors, which notice shall set forth such Investors' rights under this Section 2(c) and shall offer the Investors the opportunity to include in such registration statement such number of Registrable Securities owned by such Investors as the Investors may request. Upon the written request of an Investor made within ten (10) days after the receipt of notice from the Company (which request shall specify the number of Registrable Securities intended to be disposed of by such Investor), the Company will use its best efforts to effect the registration under the Securities Act of all Registrable Securities that the Company has been so requested to register by the Investors, to the extent requisite to permit the disposition of the Registrable Securities so to be registered; provided, however, that (A) if such registration involves an underwritten offering, the Investors who elect to participate in such offering must sell their Registrable Securities to the underwriters selected as provided in Section 2(c)(ii) hereof on the same terms and conditions as apply to the Company and the other prospective sellers and (B) if, at any time after giving written notice of its intention to register any Registrable Securities pursuant to this Section 2 and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to register such Registrable Securities, the Company shall give written notice to the Investors and, thereupon, shall be relieved of its obligation to register any Registrable Securities in connection with such registration. The Company's obligations under this Section 2(c) shall terminate on the date that the registration statement to be filed in accordance with Section 2(a) is declared effective by the Commission. (ii) If a registration pursuant to this Section 2(c) involves an underwritten offering and the managing underwriter thereof advises the Company that, in its view, the number of warrants or other shares of Common Stock that the Company and the Investors and all other prospective sellers holding registration rights intend to include in such registration exceeds the largest number of shares of Common Stock or warrants that can be sold without having an adverse effect on such offering (the "Maximum Offering Size"), the Company will include in such registration, only that number of shares of common stock or warrants, as applicable, such that the number of Registrable Securities registered does not exceed the Maximum Offering Size, with the difference between the number of shares in the Maximum Offering Size and the number of shares to be issued by the Company and by the Shaar Fund, Ltd. (if any) in the aggregate to be allocated among the Investors and such other prospective sellers (other than the Company and the Shaar Fund, Ltd.) pro rata on the basis of the relative number of Registrable Securities to be offered for sale under such registration by each of the Investors and such other prospective sellers (other than the Company and the Shaar Fund, Ltd.). If as a result of the proration provisions of this Section 2(c)(ii), any Investor is not entitled to include all such Registrable Securities in such 4 registration, any such Investor may elect to withdraw its request to include any Registrable Securities in such registration. With respect to registrations pursuant to this Section 2(c), the number of securities required to satisfy any underwriters' over-allotment option shall be allocated pro rata among the Company, the Investors, the Shaar Fund, Ltd., and the other prospective sellers on the basis of the relative number of securities otherwise to be included by each of them in the registration with respect to which such over-allotment option relates. 3. Obligations of the Company. In connection with any required registration of the Registrable Securities under this Agreement, the Company shall: (a) Promptly (i) prepare and file with the Commission such amendments (including post-effective amendments) to the Registration Statement and supplements to the Prospectus as may be necessary to keep the Registration Statement continuously effective and in compliance with the provisions of the Securities Act applicable thereto so as to permit the Prospectus forming part thereof to be current and useable by Investors for resales of the Registrable Securities for a period of two (2) years from the date on which the Registration Statement is first declared effective by the Commission (the "Effective Time") or such shorter period that will terminate when all the Registrable Securities covered by the Registration Statement have been sold pursuant thereto in accordance with the plan of distribution provided in the Prospectus, redeemed by the Company, transferred pursuant to Rule 144 under the Securities Act or otherwise transferred in a manner that results in the delivery of new securities not subject to transfer restrictions under the Securities Act (the "Registration Period") and (ii) take all lawful action such that each of (A) the Registration Statement and any amendment thereto does not, when it becomes effective, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, not misleading and (B) the Prospectus forming part of the Registration Statement, and any amendment or supplement thereto, does not at any time during the Registration Period include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Notwithstanding the foregoing provisions of this Section 3(a), the Company may, during the Registration Period, suspend the use of the Prospectus for a period not to exceed 120 days (whether or not consecutive) in any 12-month period if the Board of Directors of the Company determines in good faith that because of valid business reasons, including pending mergers or other business combination transactions, the planned acquisition or divestiture of assets, pending material corporate developments and similar events, it is in the best interests of the Company to suspend such use, and prior to or contemporaneously with suspending such use the Company provides the Investors with written notice of such suspension, which notice need not specify the nature of the event giving rise to such 5 suspension. At the end of any such suspension period, the Company shall provide the Investors with written notice of the termination of such suspension. (b) During the Registration Period, comply with the provisions of the Securities Act with respect to Registrable Securities covered by the Registration Statement until such time as all of such Registrable Securities have been disposed of in accordance with the intended methods of disposition by the Investors as set forth in the Prospectus forming part of the Registration Statement; (c) (i) Prior to the filing with the Commission of any Registration Statement (including any amendments thereto) and the distribution or delivery of any Prospectus (including any supplements thereto), provide (A) draft copies thereof to the Investors and reflect in such documents all such comments as the Investors (and their counsel) reasonably may propose and (B) to the Investors a copy of the accountant's consent letter to be included in the filing and (ii) furnish to each Investor whose Registrable Securities are included in the Registration Statement and its legal counsel identified to the Company, (A) promptly after the same is prepared and publicly distributed, filed with the Commission, or received by the Company, one copy of the Registration Statement, each Prospectus, and each amendment or supplement thereto, and (B) such number of copies of the Prospectus and all amendments and supplements thereto and such other documents, as such Investor may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such Investor; (d) (i) Register or qualify the Registrable Securities covered by the Registration Statement under such securities or "blue sky" laws of such jurisdictions as the Investors who hold a majority-in-interest of the Registrable Securities being offered reasonably request, (ii) prepare and file in such jurisdictions such amendments (including post-effective amendments) and supplements to such registrations and qualifications as may be necessary to maintain the effectiveness thereof at all times during the Registration Period, (iii) take all such other lawful actions as may be necessary to maintain such registrations and qualifications in effect at all times during the Registration Period, and (iv) take all such other lawful actions reasonably necessary or advisable to qualify the Registrable Securities for sale in such jurisdictions; provided, however, that the Company shall not be required in connection therewith or as a condition thereto to (A) qualify to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(d), (B) subject itself to general taxation in any such jurisdiction or (C) file a general consent to service of process in any such jurisdiction; (e) As promptly as practicable after becoming aware of such event, notify each Investor of the occurrence of any event, as a result of which the Prospectus included in the Registration Statement, as then in effect, includes an 6 untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and promptly prepare an amendment to the Registration Statement and supplement to the Prospectus to correct such untrue statement or omission, and deliver a number of copies of such supplement and amendment to each Investor as such Investor may reasonably request; (f) As promptly as practicable after becoming aware of such event, notify each Investor who holds Registrable Securities being sold (or, in the event of an underwritten offering, the managing underwriters) of the issuance by the Commission of any stop order or other suspension of the effectiveness of the Registration Statement at the earliest possible time and take all lawful action to effect the withdrawal, recession or removal of such stop order or other suspension; (g) Cause all the Registrable Securities covered by the Registration Statement to be listed on the principal national securities exchange, and included in an inter-dealer quotation system of a registered national securities association, on or in which securities of the same class or series issued by the Company are then listed or included; (h) Maintain a transfer agent and registrar, which may be a single entity, for the Registrable Securities not later than the effective date of the Registration Statement; (i) Cooperate with the Investors who hold Registrable Securities being offered to facilitate the timely preparation and delivery of certificates for the Registrable Securities to be offered pursuant to the Registration Statement and enable such certificates for the Registrable Securities to be in such denominations or amounts, as the case may be, as the Investors reasonably may request and registered in such names as the Investor may request; and, within three (3) business days after a Registration Statement which includes Registrable Securities is declared effective by the Commission, deliver and cause legal counsel selected by the Company to deliver to the transfer agent for the Registrable Securities (with copies to the Investors whose Registrable Securities are included in such Registration Statement) an appropriate instruction and, to the extent necessary, an opinion of such counsel; (j) Take all such other lawful actions reasonably necessary to expedite and facilitate the disposition by the Investors of their Registrable Securities in accordance with the intended methods therefor provided in the Prospectus which are customary under the circumstances; (k) Make generally available to its security holders as soon as practicable, but in any event not later than eighteen (18) months after (i) the 7 effective date (as defined in Rule 158(c) under the Securities Act) of the Registration Statement, and (ii) the effective date of each post-effective amendment to the Registration Statement, as the case may be, an earnings statement of the Company and its subsidiaries complying with Section 11(a) of the Securities Act and the rules and regulations of the Commission thereunder (including, at the option of the Company, Rule 158); (l) In the event of an underwritten offering, promptly include or incorporate in a Prospectus supplement or post-effective amendment to the Registration Statement such information as the managers reasonably agree should be included therein and to which the Company does not reasonably object and make all required filings of such Prospectus supplement or post-effective amendment as soon as practicable after it is notified of the matters to be included or incorporated in such Prospectus supplement or post-effective amendment; (m) (i) Make reasonably available for inspection by any underwriter participating in any disposition pursuant to the Registration Statement, and any attorney, accountant or other agent retained by any such underwriter all relevant financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries, and (ii) cause the Company's officers, directors and employees to supply all information reasonably requested by such underwriter, attorney, accountant or agent in connection with the Registration Statement, in each case, as is customary for similar due diligence examinations; provided, however, that all records, information and documents that are designated in writing by the Company, in good faith, as confidential, proprietary or containing any material non-public information shall be kept confidential by such underwriter, attorney, accountant or agent (pursuant to an appropriate confidentiality agreement in the case of any such holder or agent), unless such disclosure is made pursuant to judicial process in a court proceeding (after first giving the Company an opportunity promptly to seek a protective order or otherwise limit the scope of the information sought to be disclosed) or is required by law, or such records, information or documents become available to the public generally or through a third party not in violation of an accompanying obligation of confidentiality; and provided further that, if the foregoing inspection and information gathering would otherwise disrupt the Company's conduct of its business, such inspection and information gathering shall, to the maximum extent possible, be coordinated by parties entitled thereto by one firm of counsel designed by and on behalf of the majority in interest of Investors and other parties; (n) In connection with any underwritten offering, make such representations and warranties to the Investors participating in such underwritten offering and to the managers, in form, substance and scope as are customarily made by the Company to underwriters in secondary underwritten offerings; 8 (o) In connection with any underwritten offering, obtain opinions of counsel to the Company (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the managers) addressed to the underwriters, covering such matters as are customarily covered in opinions requested in secondary underwritten offerings (it being agreed that the matters to be covered by such opinions shall include, without limitation, as of the date of the opinion and as of the Effective Time of the Registration Statement or most recent post-effective amendment thereto, as the case may be, the absence from the Registration Statement and the Prospectus, including any documents incorporated by reference therein, of an untrue statement of a material fact or the omission of a material fact required to be stated therein or necessary to make the statements therein (in the case of the Prospectus, in light of the circumstances under which they were made) not misleading, subject to customary limitations); (p) In connection with any underwritten offering, obtain "cold comfort" letters and updates thereof from the independent public accountants of the Company (and, if necessary, from the independent public accountants of any subsidiary of the Company or of any business acquired by the Company, in each case for which financial statements and financial data are, or are required to be, included in the Registration Statement), addressed to each underwriter participating in such underwritten offering (if such underwriter has provided such letter, representations or documentation, if any, required for such cold comfort letter to be so addressed), in customary form and covering matters of the type customarily covered in "cold comfort" letters in connection with secondary underwritten offerings; (q) In connection with any underwritten offering, deliver such documents and certificates as may be reasonably required by the managers, if any; and (r) In the event that any broker-dealer registered under the Exchange Act shall be an "Affiliate" (as defined in Rule 2729(b)(1) of the rules and regulations of the National Association of Securities Dealers, Inc. (the "NASD Rules") (or any successor provision thereto)) of the Company or has a "conflict of interest" (as defined in Rule 2720(b)(7) of the NASD Rules (or any successor provision thereto)) and such broker-dealer shall underwrite, participate as a member of an underwriting syndicate or selling group or assist in the distribution of any Registrable Securities covered by the Registration Statement, whether as a holder of such Registrable Securities or as an underwriter, a placement or sales agent or a broker or dealer in respect thereof, or otherwise, the Company shall assist such broker-dealer in complying with the requirements of the NASD Rules, including, without limitation, by (A) engaging a "qualified independent underwriter" (as defined in Rule 2720(b)(15) of the NASD Rules (or any successor provision thereto)) to participate in the preparation of the Registration Statement 9 relating to such Registrable Securities, to exercise usual standards of due diligence in respect thereof and to recommend the public offering price of such Registrable Securities, (B) indemnifying such qualified independent underwriter to the extent of the indemnification of underwriters provided in Section 5 hereof, and (C) providing such information to such broker-dealer as may be required in order for such broker-dealer to comply with the requirements of the NASD Rules. 4. Obligations of the Investors. In connection with the registration of the Registrable Securities, the Investors shall have the following obligations: (a) It shall be a condition precedent to the obligations of the Company to complete the registration pursuant to this Agreement with respect to the Registrable Securities of a particular Investor that such Investor shall furnish to the Company such information regarding itself, the Registrable Securities held by it and the intended method of disposition of the Registrable Securities held by it as shall be reasonably required to effect the registration of such Registrable Securities and shall execute such documents in connection with such registration as the Company may reasonably request. As least seven (7) days prior to the first anticipated filing date of the Registration Statement, the Company shall notify each Investor of the information the Company requires from each such Investor (the "Requested Information") if such Investor elects to have any of its Registrable Securities included in the Registration Statement. If at least two (2) business days prior to the anticipated filing date the Company has not received the Requested Information from an Investor (a "Non-Responsive Investor"), then the Company may file the Registration Statement without including Registrable Securities of such Non-Responsive Investor. Thereafter, at the request of such Non-Responsive Investor the Company shall, if legally permitted to do so, amend such Registration Statement to include any of the Registrable Securities of such Non-Responsive Investor but such Non-Responsive Investor shall bear the reasonable costs and expenses of the Company incurred in connection with such filing. (b) Each Investor by its acceptance of the Registrable Securities agrees to cooperate with the Company in connection with the preparation and filing of the Registration Statement hereunder, unless such Investor has notified the Company in writing of its election to exclude all of its Registrable Securities from the Registration Statement; and (c) Each Investor agrees that, upon receipt of any notice from the Company of the occurrence of any event of the kind described in Section 3(e) or 3(f) or of a notice pursuant to Section 3(a), it shall immediately discontinue its disposition of Registrable Securities pursuant to the Registration Statement covering such Registrable Securities until such Investor's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 3(e) or of receipt of 10 notice from the Company pursuant to Section 3(a), as applicable, and, if so directed by the Company, such Investor shall deliver to the Company (at the expense of the Company) or destroy (and deliver to the Company a certificate of destruction) all copies in such Investor's possession, of the Prospectus covering such Registrable Securities current at the time of receipt of such notice. 5. Expenses of Registration. All expenses, other than underwriting discounts and commissions, incurred in connection with registrations, filings or qualifications pursuant to Section 2, but including, without limitation, all registration, listing, and qualifications fees, printing and engraving fees, accounting fees, and the fees and disbursements of counsel for the Company shall be borne by the Company. The Investors shall be responsible for payment of their share of any underwriting discounts or commissions and for expenses of their counsel. 6. Indemnification and Contribution. (a) Indemnification by Company. The Company shall indemnify and hold harmless each Investor and each underwriter, if any, which facilitates the disposition of Registrable Securities and each of their respective officers and directors and each person who controls such Investor or underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act (each such person being sometimes hereinafter referred to as an "Indemnified Person") from and against any losses, claims, damages or liabilities, joint or several, to which such Indemnified Person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Registration Statement or an omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, not misleading, or arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Prospectus or an omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and the Company hereby agrees to reimburse such Indemnified Person for all reasonable legal and other expenses incurred by them in connection with investigating or defending any such action or claim as and when such expenses are incurred; provided, however, that the Company shall not be liable to any such Indemnified Person in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon (i) an untrue statement or alleged untrue statement made in, or an omission or alleged omission from, such Registration Statement or Prospectus in reliance upon and in conformity with written information furnished to the Company by such Indemnified Person expressly for use therein or (ii) in the case of the occurrence of an event of the type specified in Section 3(e) or of the delivery of a notice pursuant to Section 3(a) or 3(f), the use by 11 the Indemnified Person of an outdated or defective Prospectus after the Company has provided to such Indemnified Person an updated Prospectus correcting the untrue statement or alleged untrue statement or omission or alleged omission giving rise to such loss, claim, damage or liability. (b) Indemnification by the Investors and Underwriters. Each Investor agrees, as a consequence of the inclusion of any of its Registrable Securities in a Registration Statement, and each underwriter, if any, which facilitates the disposition of Registrable Securities shall agree, as a consequence of facilitating such disposition of Registrable Securities, severally and not jointly, to (i) indemnify and hold harmless the Company, its directors (including any person who, with his or her consent, is named in the Registration Statement as a director nominee of the Company), its officers who sign any Registration Statement and each person, if any, who controls the Company within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, against any losses, claims, damages or liabilities to which the Company or such other persons may become subject, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in such Registration Statement or Prospectus or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein (in light of the circumstances under which they were made, in the case of the Prospectus), not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such holder or underwriter expressly for use therein, and (ii) reimburse the Company for any legal or other expenses incurred by the Company in connection with investigating or defending any such action or claim as such expenses are incurred. (c) Notice of Claims, etc. Promptly after receipt by a party seeking indemnification pursuant to this Section 6 (an "Indemnified Party") of written notice of any investigation, claim, proceeding or other action in respect of which indemnification is being sought (each, a "Claim"), the Indemnified Party promptly shall notify the party against whom indemnification pursuant to this Section 6 is being sought (the "Indemnifying Party") of the commencement thereof; but the omission to so notify the Indemnifying Party shall not relieve it from any liability that it otherwise may have to the Indemnified Party, except to the extent that the Indemnifying Party is materially prejudiced and forfeits substantive rights and defenses by reason of such failure. In connection with any Claim the Indemnifying Party shall be entitled to assume the defense thereof. Notwithstanding the assumption of the defense of any Claim by the Indemnifying Party, the Indemnified Party shall have the right to employ separate legal counsel 12 and to participate in the defense of such Claim at the reasonable cost and expense of the Indemnifying Party unless the Indemnified Party and the Indemnifying Party shall reasonably have concluded that representation of the Indemnified Party by the Indemnifying Party by the same legal counsel would not be appropriate due to actual or, as reasonably determined by legal counsel to the Indemnified Party, potentially differing interests between such parties in the conduct of the defense of such Claim, or if there may be legal defenses available to the Indemnified Party that are in addition to or disparate from those available to the Indemnifying Party, or the Indemnifying Party shall have failed to employ legal counsel reasonably satisfactory to the Indemnified Party within a reasonable period of time after notice of the commencement of such Claim. Except as provided above, the Indemnifying Party shall not, in connection with any Claim in the same jurisdiction, be liable for the fees and expenses of more than one firm of counsel for the Indemnified Party (together with appropriate local counsel). The Indemnifying Party shall not, without the prior written consent of the Indemnifying Party (which consent shall not unreasonably be withheld), settle or compromise any Claim or consent to the entry of any judgment that does not include an unconditional release of the Indemnifying Party from all liabilities with respect to such Claim or judgment. (d) Contribution. If the indemnification provided for in this Section 6 is unavailable to or insufficient to hold harmless an Indemnified Person under subsection (a) or (b) above in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each Indemnifying Party shall contribute to the amount paid or payable by such Indemnified Party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and the Indemnified Party in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative fault of such Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by such Indemnified Party or by such Indemnified Party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 6(d) were determined by pro rata allocation (even if the Investors or any underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in this Section 6(d). The amount paid or payable by an Indemnified Party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above shall be deemed to include any legal or other fees or expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. No person guilty of fraudulent misrepresentation (within the 13 meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The obligations of the Investors and any underwriters in this Section 6(d) to contribute shall be several in proportion to the percentage of Registrable Securities registered or underwritten, as the case may be, by them and not joint. (e) Limitations on Indemnification. Notwithstanding any other provision of this Section 6, in no event shall any (i) Investor be required to undertake liability to any person under this Section 6 for any amounts in excess of the dollar amount of the proceeds to be received by such Investor from the sale of such Investor's Registrable Securities (after deducting any fees, discounts and commissions applicable thereto) pursuant to any Registration Statement under which such Registrable Securities are to be registered under the Securities Act and (ii) underwriter be required to undertake liability to any Person hereunder for any amounts in excess of the aggregate discount, commission or other compensation payable to such underwriter with respect to the Registrable Securities underwritten by it and distributed pursuant to the Registration Statement. (f) Non-Exclusive Obligations. The obligations of the Company under this Section 6 shall be in addition to any liability which the Company may otherwise have to any Indemnified Person and the obligations of any Indemnified Person under this Section 6 shall be in addition to any liability which such Indemnified Person may otherwise have to the Company. The remedies provided in this Section 6 are not exclusive and shall not limit any rights or remedies which may otherwise be available to an indemnified party at law or in equity. 7. Rule 144. With a view to making available to the Investors the benefits of Rule 144 under the Securities Act or any other similar rule or regulation of the Commission that may at any time permit the Investors to sell securities of the Company to the public without registration ("Rule 144"), the Company agrees to use reasonable commercial efforts to: (a) comply with the provisions of paragraph (c)(1) of Rule 144; and (b) file with the Commission in a timely manner all reports and other documents required to be filed by the Company pursuant to Section 13 or 15(d) under the Exchange Act; and, if at any time it is not required to file such reports but in the past had been required to or did file such reports, it will, upon the request of any Holder, make available other information as required by, and so long as necessary to permit sales of, its Registrable Securities pursuant to Rule 144. 8. Assignment. The rights to have the Company register Registrable Securities pursuant to this Agreement shall be automatically assigned 14 by the Investors to any permitted transferee of all or any portion of such Registrable Securities only if: (a) the Investor agrees in writing with the transferee or assignee to assign such rights, and a copy of such agreement is furnished to the Company within a reasonable time after such assignment, (b) the Company is, within a reasonable time after such transfer or assignment, furnished with written notice of (i) the name and address of such transferee or assignee and (ii) the securities with respect to which such registration rights are being transferred or assigned, (c) immediately following such transfer or assignment, the securities so transferred or assigned to the transferee or assignee constitute Restricted Securities, and (d) at or before the time the Company received the written notice contemplated by clause (b) of this sentence the transferee or assignee agrees in writing with the Company to be bound by all of the provisions contained herein. 9. Amendment and Waiver. Any provision of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and Investors who hold a majority-in-interest of the Registrable Securities. Any amendment or waiver effected in accordance with this Section 9 shall be binding upon each Investor and the Company. 10. Miscellaneous. (a) A person or entity shall be deemed to be a holder of Registrable Securities whenever such person or entity owns of record such Registrable Securities. If the Company receives conflicting instructions, notices or elections from two or more persons or entities with respect to the same Registrable Securities, the Company shall act upon the basis of instructions, notice or election received from the registered owner of such Registrable Securities. (b) If, after the date hereof and prior to the Commission declaring the Registration Statement to be filed pursuant to Section 2(a) effective under the Securities Act, the Company grants to any Person any registration rights with respect to any Company securities which are more favorable to such other Person than those provided in this Agreement, then the Company forthwith shall grant (by means of an amendment to this Agreement or otherwise) identical registration rights to all Investors hereunder. (c) Except as may be otherwise provided herein, any notice or other communication or delivery required or permitted hereunder shall be in writing and shall be delivered personally or sent by certified mail, postage prepaid, or by a nationally recognized overnight courier service, and shall be deemed given when so delivered personally or by overnight courier service, or, if mailed, three (3) days after the date of deposit in the United States mails, as follows: 15 (1) if to the Company, to: Interactive Flight Technologies, Inc. 4041 North Central Avenue Suite B 200 Phoenix, Arizona 86012 Attention: Irwin L. Gross with a copy to: 16 Mesirov Gelman Jaffe Cramer & Jamieson, LLP 1735 Market Street 38th Floor Philadelphia, Pennsylvania 19103-7598 Attn: Steven B. King, Esquire (2) if to an Initial Investor, c/o Sovereign Capital Advisors, LLC Tower Place - Suite 1965 3340 Peachtree Road, NE Atlanta, GA 30328 (3) if to any other Investor, at such address as such Investor shall have provided in writing to the Company. The Company, the Initial Investors or any Investor may change the foregoing address by notice given pursuant to this Section 10(c). (d) Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof. (e) This Agreement shall be governed by and interpreted in accordance with the laws of the Commonwealth of Pennsylvania. Each of the parties consents to the jurisdiction of the Federal courts whose districts encompass any part of the City of Philadelphia, Pennsylvania or the state courts of the Commonwealth of Pennsylvania sitting in the City of Philadelphia in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. (f) The remedies provided in this Agreement are cumulative and not exclusive of any remedies provided by law. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provision, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their best efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions 17 covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable. (g) The Company shall not enter into any agreement with respect to its securities that is inconsistent with the rights granted to the holders of Registrable Securities in this Agreement or otherwise conflicts with the provisions hereof. Without limiting the generality of the foregoing, without the written consent of the Holders of a majority in interest of the Registrable Securities, the Company shall not grant to any person the right to request it to register any of its securities under the Securities Act unless the rights so granted are not otherwise in conflict or inconsistent with the provisions of this Agreement. The restrictions on the Company's rights to grant registration rights under this paragraph shall terminate on the date the Registration Statement to be filed pursuant to Section 2(a) is declared effective by the Commission. (h) This Agreement and the Securities Purchase Agreements between the Company and the Initial Investors constitute the entire agreement among the parties hereto with respect to the subject matter hereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein. This Agreement and the Securities Purchase Agreements, supersede all prior agreements and undertakings among the parties hereto with respect to the subject matter hereof. (i) Subject to the requirements of Section 8 hereof, this Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties hereto. (j) All pronouns and any variations thereof refer to the masculine, feminine or neuter, singular or plural, as the context may require. (k) The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning thereof. (l) The Company acknowledges that any failure by the Company to perform its obligations under Section 2, or any delay in such performance could result in direct damages to the Investors and the Company agrees that, in addition to any other liability the Company may have by reason of any such failure or delay, the Company shall be liable for all direct damages caused by such failure or delay. (m) This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement. A facsimile transmission of this signed Agreement shall be legal and binding on all parties hereto. 18 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first above written. INTERACTIVE FLIGHT TECHNOLOGIES, INC. By: --------------------------------- Name: Title: INITIAL INVESTORS: (SEAL) ------------------------------- Peter Che Nan Chen (SEAL) ------------------------------- Sui Wa Chau LUFENG INVESTMENTS, LTD. By: --------------------------------- Name: Title: CORRELLUS INTERNATIONAL, LTD. GALAPACO HOLDINGS, LTD. By: By: ------------------------------ --------------------------------- Name: Name: Title: Title: MATTERHORN, LTD. KEYWAY HOLDINGS CO. By: By: ------------------------------ --------------------------------- Name: Name: Title: Title: 19 EX-10.28 10 PUT/CALL AGREEMENT PUT/CALL AGREEMENT THIS PUT/CALL AGREEMENT is made this _____ day of July, 1999 by and between Interactive Flight Technologies, Inc., a Delaware corporation (the "Company") and Galapaco Holdings, Ltd. ("Holder"). W I T N E S S E T H: WHEREAS, Holder is the owner of the number of shares of the Class A Common Stock of the Company (the "Shares") set forth on the signature page of this Agreement; WHEREAS, Company desires to grant to Holder the option to put the Shares to the Company at a price of $3.50 per Share at any time in the ten day period ending January 10, 2000; and WHEREAS, Holder desires to grant to Company the option to call the Shares at a price of $4.50 per Share at any time in the ten day period ending January 10, 2000. NOW, THEREFORE, in consideration of the foregoing, the mutual covenants herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, each intending to be legally bound hereby, agree as follows: 1. Put/Call Options. (a) The Company hereby grants to Holder the right and option to require Company to purchase any or all of the Shares on the terms and subject to the conditions hereinafter set forth in this Agreement (the "Put Option"). (b) Holder hereby grants to Company the right and option to purchase all or any of the Shares held by Holder, on the terms and subject to the conditions hereinafter set forth in this Agreement (the "Call Option"). 2. Price. (a) The purchase price to be paid, if the Put Option is exercised, shall be Three Dollars and Fifty Cents ($3.50) per Share (the "Put Option Price"), which shall be paid at the Closing (as hereinafter defined) in the manner provided in this Agreement. (b) The purchase price to be paid, if the Call Option is exercised, shall be Four Dollars and Fifty Cents ($4.50) per Share (the "Call Option Price"), which shall be paid at the Closing in the manner provided in this Agreement. 3. Exercise of Put Option. The following provisions shall apply to exercise of the Put Option: (a) Holder shall exercise the Put Option by sending a notice of election (the "Put Notice of Election") to the Company in the form attached hereto and incorporated herein by reference. The Put Notice of Election shall be in writing, shall be sent to the Company at the address and in the manner set forth in subparagraph 10(c) hereof (or to such other address as shall then be applicable if such address has been changed in the manner set forth in such subparagraph), and shall contain the information about the Closing set forth in subparagraph 9(a) hereof. (b) If exercised, the Put Option may be exercised as to some or all of the Shares. (c) The Put Option may be exercised only during the period between 12:01 a.m. E.S.T. January 1, 2000 and 5:00 p.m. E.S.T. January 10, 2000 (the "Effective Period"). The date and time of the exercise of the Put Option shall be that date and time when the Put Notice of Election is actually received by the Company. (d) Payment for Shares shall be made by certified check payable to the order of Holder, or at the option of Holder, by wire transfer of immediately available funds to the bank account set forth on the Put Notice of Election. 4. Exercise of Call Option. The following provisions shall apply to exercise of the Call Option: (a) The Company shall exercise the Call Option by sending a notice of election (the "Call Notice of Election") to the Holder in the form attached hereto and incorporated herein by reference. The Call Notice of Election shall be in writing, shall be sent to the Holder at the address and in the manner set forth in subparagraph 10(c) hereof (or to such other address as shall then be applicable if such address has been changed in the manner set forth in such subparagraph), and shall contain the information about the Closing set forth in subparagraph 9(a) hereof. (b) If exercised, the Call Option may be exercised as to some or all of the Shares. (c) The Call Option may be exercised only during the Effective Period. The date and time of the exercise of the Call Option shall be that date and time when the Call Notice of Election is actually received by the Holder. (d) Payment for Shares shall be made by certified or bank cashier's check payable to the order of Holder. 2 (e) In the event that Holder exercises the Put Option and the Company exercises the Call Option, then the Call Option exercise shall be void ab initio and Closing shall be held pursuant to the Put Option. 5. Term. Except for any obligations arising under this Agreement as a result of the proper exercise of the Call Option or the Put Option (which obligations shall survive termination of this Agreement), this Agreement shall terminate at the end of the Effective Period or, if earlier, the date on which any Shares are sold by the Holder pursuant to a registration statement declared effective by the Securities and Exchange Commission. 6. Change or Exchange of Capital Stock. (a) In the event that the outstanding shares of Class A Common Stock of the Company shall be changed into or exchanged for a different number or kind of shares of capital stock of the Company or shall be changed into or exchanged for a different number or kind of shares of capital stock or other securities of the Company or of another company (whether by reason of merger, consolidation, recapitalization, reclassification, split-up, or otherwise), then there shall be substituted for each remaining Share not acquired by exercise of either the Put Option or the Call Option prior to the record date for such merger, consolidation, recapitalization, reclassification, split-up, or otherwise, the number and kind of shares of capital stock or other securities into which each outstanding share of Class A Common Stock of the Company shall be so changed or for which each such share of capital stock shall be so exchanged. In the event that there shall be any such change or exchange, then (i) Holder shall be entitled to sell to the Company pursuant to the Put Option all of such capital stock and other securities into which each Share shall have been changed or for which it shall have been exchanged for the Put Option Price which would have been required to be paid for such Share assuming there had been no such change or exchange, and otherwise in accordance with the terms of this Agreement; and (ii) the Company shall be entitled to purchase from the Holder pursuant to the Call Option all of such capital stock and other securities into which each Share shall have been changed or for which it shall have been exchanged for the Call Option Price which would have been required to be paid for such Share assuming there had been no such change or exchange, and otherwise in accordance with the terms of this Agreement. (b) In the event that the outstanding Shares shall be subdivided into a greater or combined into a lesser number of such shares, whether by stock dividend, stock split or combination of shares, the Put Option Price and the Call Option Price shall be proportionately decreased or increased, as the case may be, and the number of remaining Shares (those not acquired by exercise of either the Put or Call Option prior to the record date of such stock dividend, stock split, or combination of shares) subject to the Put or Call Option shall be proportionately increased or decreased as the case may be, so as appropriately to reflect such subdivision or combination, effective immediately upon the effectiveness of such subdivision or combination. 3 (c) No such adjustment shall be made, however, by reason of the issuance of shares of common stock of the Company for cash, property, or services; by way of stock options, stock warrants, subscription rights; or otherwise. 7. Representations and Warranties of Company. The Company hereby represents and warrants that this Agreement constitutes the valid and binding obligation of the Company, and is enforceable against it in accordance with its terms, except to the extent that the enforcement thereof is limited by bankruptcy, reorganization, insolvency, moratorium, or other similar laws or orders affecting the enforcement of creditors' rights generally, or by equitable principles. 8. Transfers. The Put Option is not transferable by Holder (otherwise than (if Holder is an individual) by will or pursuant to the laws of descent and distribution in the event of Holder`s death, in which event the Put Option may be exercised by the heirs or legal representatives of Holder). Any attempt at assignment, transfer, pledge or disposition of the Put Option contrary to the provisions hereof or the levy of any execution, attachment or similar process upon the Put Option shall be null and void and without force or effect. Any exercise of the Put Option by a person other than Holder shall be accompanied by appropriate proofs, satisfactory in form and substance to the Company, of the right of each person to exercise the Put Option. 9. Closing. (a) The Closing shall be held at a date and time to be selected by Holder or by the Company in the Put Notice of Election or Call Notice of Election, respectively; provided, however, that the date specified in the Put Notice of Election or Call Notice of Election shall not be less than fourteen (14) nor more than sixty (60) days after the date of such Put Notice of Election or Call Notice of Election, as the case may be. (b) Closing shall be held at the chief executive offices of the Company, or such other place as shall be agreed upon by the parties. (c) At Closing, the Company shall deliver or cause to be delivered to Holder the Put Option Price per Share or Call Option Price per Share, as applicable, for all of the Shares to be purchased by Company pursuant to the Put Notice of Election or Call Notice of Election and Holder shall deliver to the Company all of the Shares (or other securities) being purchased duly endorsed for transfer or with an executed stock power attached, in either such case with signature guaranteed by a member of the Stock Transfer Agents' Medallion Program. 10. Miscellaneous. (a) Indulgences, Etc. Neither the failure nor any delay on the part of either party to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or of any other right, remedy, power or privilege, nor shall any waiver of any right, remedy, power or privilege with respect to any occurrence be construed as a 4 waiver of such right, remedy, power or privilege with respect to any other occurrence. No waiver shall be effective unless it is in writing and is signed by the party asserted to have granted such waiver. (b) Controlling Law. This Agreement and all questions relating to its validity, interpretation, performance and enforcement (including, without limitation, provisions concerning limitations of actions), shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania, notwithstanding any conflict-of-laws doctrines of such jurisdiction to the contrary, and without the aid of any canon, custom or rule of law requiring construction against the draftsman. (c) Notices. All notices, requests, demands and other communications required or permitted under this Agreement shall be in writing and shall be deemed to have been duly given, made and received when personally delivered or when deposited in the United States mails, registered or certified mail, postage prepaid, return receipt requested, addressed as set forth below: (i) If to Holder: c/o Sovereign Capital Advisors, LLC Tower Place - Suite 1965 3340 Peachtree Road, NE Atlanta, GA 30328 (ii) If to Company: Interactive Flight Technologies, Inc. 4041 North Central Avenue B-200 Phoenix, AZ 85014 Attn: Mr. Morris C. Aaron with a copy, given in the manner prescribed above, to: Mesirov Gelman Jaffe Cramer & Jamieson, LLP 1735 Market Street, 38th Floor Philadelphia, PA 19103 Attn: Steven B. King, Esquire In addition, notice by mail shall be by air mail if posted outside of the continental United States. Either party may alter the address to which communications or copies are to be sent by giving notice of such change of address in conformity with the provisions of this subparagraph (c) for the giving of notice. 5 (d) Binding Nature of Agreement; No Assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns, except that neither party may assign or transfer its rights nor delegate its obligations under this Agreement without the prior written consent of the other party hereto. (e) Provisions Separable. The provisions of this Agreement are independent of and separable from each other, and no provision shall be affected or rendered invalid or unenforceable by virtue of the fact that for any reason any other or others of them may be invalid or unenforceable in whole or in part. (f) Entire Agreement. This Agreement contains the entire understanding between the parties hereto with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements and understandings, inducements or conditions, express or implied, oral or written, except as herein contained. The express terms hereof control and supersede any course of performance and/or usage of the trade inconsistent with any of the terms hereof. This Agreement may not be modified or amended other than by an agreement in writing. (g) Paragraph Headings. The Paragraph and subparagraph headings in this Agreement have been inserted for convenience of reference only; they form no part of this Agreement and shall not affect its interpretation. (h) Gender, Etc. Words used herein, regardless of the number and gender specifically used, shall be deemed and construed to include any other number, singular or plural, and any other gender, masculine, feminine or neuter, as the context indicates is appropriate. (i) Number of Days. In computing the number of days for purposes of this Agreement, all days shall be counted, including Saturdays, Sundays and Holidays; provided, however, that if the final day of any time period falls on a Saturday, Sunday or Holiday, then the final day shall be deemed to be the next day which is not a Saturday, Sunday or Holiday. For purposes of this subparagraph (i), the term "Holiday" shall mean a day, other than a Saturday or Sunday, on which national banks with branches in the Commonwealth of Pennsylvania are or may elect to be closed. 6 (j) Currency. All monetary amounts referred to in this Agreement shall be and be deemed to be references to lawful currency of the United States of America. IN WITNESS WHEREOF, the parties have executed this Agreement the date first above written. ATTEST: INTERACTIVE FLIGHT TECHNOLOGIES, INC. - ------------------------------- ----------------------------- Secretary Name: [Corporate Seal] Title: GALAPACO HOLDINGS, LTD. - ------------------------------- ----------------------------- [Corporate Seal] (if applicable) Name: Title: Shares of Class A Common Stock of the Company 107,181 7 PUT NOTICE OF ELECTION The undersigned and Interactive Flight Technologies, Inc. (the "Company") are parties to that certain Put/Call Agreement dated __________ __, 1999. Pursuant to the terms thereof, the undersigned hereby exercises his, her or its option to require the Company to purchase the number of shares of the Class A common stock of the Company, (the "Shares") set forth below. Closing hereunder shall be held at the chief executive offices of the Company at _____ _.m. local time, on __________ ___, 2000. The undersigned elects to have the purchase price paid by wire transfer of immediately available funds to the following bank account: Bank Name: ___________________________ Branch (if applicable): ___________________ Bank Location: _________________________ Bank Routing Number: __________________ For Credit to Account No. ________________ Name of Account: _______________________ (If the foregoing bank information is not included in this Notice of Election, the undersigned agrees to accept payment by delivery of a certified or bank cashier's check payable to the order of the undersigned.) The undersigned represents and acknowledges that (i) the undersigned knows, or has had the opportunity to acquire, all information concerning the business, affairs, financial condition and prospects of the Company which the undersigned deems relevant to making a fully informed decision regarding the consummation of the transactions contemplated hereby and (ii) he, she, or it has been supplied with copies of the Company's latest Annual Report on Form 10-K (or 10-KSB, as the case may be), the Company's latest quarterly report on Form 10-Q (or 10-QSB, as the case may be), Company's latest proxy statement, and Company's latest Annual Report to Stockholders. Date: --------------------------- ---------------------------------- Name: Address: Number of Shares: ----------------------------- CALL NOTICE OF ELECTION Interactive Flight Technologies, Inc. (the "Company") and _________________ ("Holder") are parties to that certain Put/Call Agreement dated ___________ __, 1999. Pursuant to the terms thereof, the Company hereby exercises its option to purchase ____________ shares of the Class A common stock of the Company (the "Shares") owned by Holder. Closing hereunder shall be held at the chief executive offices of the Company at _____ _.m. local time, on __________ ___, 2000. INTERACTIVE FLIGHT TECHNOLOGIES, INC. Date: BY: --------------------------- ----------------------------------- Name: Title: PUT/CALL AGREEMENT THIS PUT/CALL AGREEMENT is made this _____ day of July, 1999 by and between Interactive Flight Technologies, Inc., a Delaware corporation (the "Company") and Matterhorn, Ltd. ("Holder"). W I T N E S S E T H: WHEREAS, Holder is the owner of the number of shares of the Class A Common Stock of the Company (the "Shares") set forth on the signature page of this Agreement; WHEREAS, Company desires to grant to Holder the option to put the Shares to the Company at a price of $3.50 per Share at any time in the ten day period ending January 10, 2000; and WHEREAS, Holder desires to grant to Company the option to call the Shares at a price of $4.50 per Share at any time in the ten day period ending January 10, 2000. NOW, THEREFORE, in consideration of the foregoing, the mutual covenants herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, each intending to be legally bound hereby, agree as follows: 1. Put/Call Options. (a) The Company hereby grants to Holder the right and option to require Company to purchase any or all of the Shares on the terms and subject to the conditions hereinafter set forth in this Agreement (the "Put Option"). (b) Holder hereby grants to Company the right and option to purchase all or any of the Shares held by Holder, on the terms and subject to the conditions hereinafter set forth in this Agreement (the "Call Option"). 2. Price. (a) The purchase price to be paid, if the Put Option is exercised, shall be Three Dollars and Fifty Cents ($3.50) per Share (the "Put Option Price"), which shall be paid at the Closing (as hereinafter defined) in the manner provided in this Agreement. (b) The purchase price to be paid, if the Call Option is exercised, shall be Four Dollars and Fifty Cents ($4.50) per Share (the "Call Option Price"), which shall be paid at the Closing in the manner provided in this Agreement. 3. Exercise of Put Option. The following provisions shall apply to exercise of the Put Option: (a) Holder shall exercise the Put Option by sending a notice of election (the "Put Notice of Election") to the Company in the form attached hereto and incorporated herein by reference. The Put Notice of Election shall be in writing, shall be sent to the Company at the address and in the manner set forth in subparagraph 10(c) hereof (or to such other address as shall then be applicable if such address has been changed in the manner set forth in such subparagraph), and shall contain the information about the Closing set forth in subparagraph 9(a) hereof. (b) If exercised, the Put Option may be exercised as to some or all of the Shares. (c) The Put Option may be exercised only during the period between 12:01 a.m. E.S.T. January 1, 2000 and 5:00 p.m. E.S.T. January 10, 2000 (the "Effective Period"). The date and time of the exercise of the Put Option shall be that date and time when the Put Notice of Election is actually received by the Company. (d) Payment for Shares shall be made by certified check payable to the order of Holder, or at the option of Holder, by wire transfer of immediately available funds to the bank account set forth on the Put Notice of Election. 4. Exercise of Call Option. The following provisions shall apply to exercise of the Call Option: (a) The Company shall exercise the Call Option by sending a notice of election (the "Call Notice of Election") to the Holder in the form attached hereto and incorporated herein by reference. The Call Notice of Election shall be in writing, shall be sent to the Holder at the address and in the manner set forth in subparagraph 10(c) hereof (or to such other address as shall then be applicable if such address has been changed in the manner set forth in such subparagraph), and shall contain the information about the Closing set forth in subparagraph 9(a) hereof. (b) If exercised, the Call Option may be exercised as to some or all of the Shares. (c) The Call Option may be exercised only during the Effective Period. The date and time of the exercise of the Call Option shall be that date and time when the Call Notice of Election is actually received by the Holder. (d) Payment for Shares shall be made by certified or bank cashier's check payable to the order of Holder. 2 (e) In the event that Holder exercises the Put Option and the Company exercises the Call Option, then the Call Option exercise shall be void ab initio and Closing shall be held pursuant to the Put Option. 5. Term. Except for any obligations arising under this Agreement as a result of the proper exercise of the Call Option or the Put Option (which obligations shall survive termination of this Agreement), this Agreement shall terminate at the end of the Effective Period. 6. Change or Exchange of Capital Stock. (a) In the event that the outstanding shares of Class A Common Stock of the Company shall be changed into or exchanged for a different number or kind of shares of capital stock of the Company or shall be changed into or exchanged for a different number or kind of shares of capital stock or other securities of the Company or of another company (whether by reason of merger, consolidation, recapitalization, reclassification, split-up, or otherwise), then there shall be substituted for each remaining Share not acquired by exercise of either the Put Option or the Call Option prior to the record date for such merger, consolidation, recapitalization, reclassification, split-up, or otherwise, the number and kind of shares of capital stock or other securities into which each outstanding share of Class A Common Stock of the Company shall be so changed or for which each such share of capital stock shall be so exchanged. In the event that there shall be any such change or exchange, then (i) Holder shall be entitled to sell to the Company pursuant to the Put Option all of such capital stock and other securities into which each Share shall have been changed or for which it shall have been exchanged for the Put Option Price which would have been required to be paid for such Share assuming there had been no such change or exchange, and otherwise in accordance with the terms of this Agreement; and (ii) the Company shall be entitled to purchase from the Holder pursuant to the Call Option all of such capital stock and other securities into which each Share shall have been changed or for which it shall have been exchanged for the Call Option Price which would have been required to be paid for such Share assuming there had been no such change or exchange, and otherwise in accordance with the terms of this Agreement. (b) In the event that the outstanding Shares shall be subdivided into a greater or combined into a lesser number of such shares, whether by stock dividend, stock split or combination of shares, the Put Option Price and the Call Option Price shall be proportionately decreased or increased, as the case may be, and the number of remaining Shares (those not acquired by exercise of either the Put or Call Option prior to the record date of such stock dividend, stock split, or combination of shares) subject to the Put or Call Option shall be proportionately increased or decreased as the case may be, so as appropriately to reflect such subdivision or combination, effective immediately upon the effectiveness of such subdivision or combination. (c) No such adjustment shall be made, however, by reason of the issuance of shares of common stock of the Company for cash, property, or services; by way of stock options, stock warrants, subscription rights; or otherwise. 3 7. Representations and Warranties of Company. The Company hereby represents and warrants that this Agreement constitutes the valid and binding obligation of the Company, and is enforceable against it in accordance with its terms, except to the extent that the enforcement thereof is limited by bankruptcy, reorganization, insolvency, moratorium, or other similar laws or orders affecting the enforcement of creditors' rights generally, or by equitable principles. 8. Transfers. The Put Option is not transferable by Holder (otherwise than (if Holder is an individual) by will or pursuant to the laws of descent and distribution in the event of Holder`s death, in which event the Put Option may be exercised by the heirs or legal representatives of Holder). Any attempt at assignment, transfer, pledge or disposition of the Put Option contrary to the provisions hereof or the levy of any execution, attachment or similar process upon the Put Option shall be null and void and without force or effect. Any exercise of the Put Option by a person other than Holder shall be accompanied by appropriate proofs, satisfactory in form and substance to the Company, of the right of each person to exercise the Put Option. 9. Closing. (a) The Closing shall be held at a date and time to be selected by Holder or by the Company in the Put Notice of Election or Call Notice of Election, respectively; provided, however, that the date specified in the Put Notice of Election or Call Notice of Election shall not be less than fourteen (14) nor more than sixty (60) days after the date of such Put Notice of Election or Call Notice of Election, as the case may be. (b) Closing shall be held at the chief executive offices of the Company, or such other place as shall be agreed upon by the parties. (c) At Closing, the Company shall deliver or cause to be delivered to Holder the Put Option Price per Share or Call Option Price per Share, as applicable, for all of the Shares to be purchased by Company pursuant to the Put Notice of Election or Call Notice of Election and Holder shall deliver to the Company all of the Shares (or other securities) being purchased duly endorsed for transfer or with an executed stock power attached, in either such case with signature guaranteed by a member of the Stock Transfer Agents' Medallion Program. 10. Miscellaneous. (a) Indulgences, Etc. Neither the failure nor any delay on the part of either party to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or of any other right, remedy, power or privilege, nor shall any waiver of any right, remedy, power or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power or privilege with respect to any other occurrence. No waiver shall be effective unless it is in writing and is signed by the party asserted to have granted such waiver. 4 (b) Controlling Law. This Agreement and all questions relating to its validity, interpretation, performance and enforcement (including, without limitation, provisions concerning limitations of actions), shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania, notwithstanding any conflict-of-laws doctrines of such jurisdiction to the contrary, and without the aid of any canon, custom or rule of law requiring construction against the draftsman. (c) Notices. All notices, requests, demands and other communications required or permitted under this Agreement shall be in writing and shall be deemed to have been duly given, made and received when personally delivered or when deposited in the United States mails, registered or certified mail, postage prepaid, return receipt requested, addressed as set forth below: (i) If to Holder: c/o Sovereign Capital Advisors, LLC Tower Place - Suite 1965 3340 Peachtree Road, NE Atlanta, GA 30328 (ii) If to Company: Interactive Flight Technologies, Inc. 4041 North Central Avenue B-200 Phoenix, AZ 85014 Attn: Mr. Morris C. Aaron with a copy, given in the manner prescribed above, to: Mesirov Gelman Jaffe Cramer & Jamieson, LLP 1735 Market Street, 38th Floor Philadelphia, PA 19103 Attn: Steven B. King, Esquire In addition, notice by mail shall be by air mail if posted outside of the continental United States. Either party may alter the address to which communications or copies are to be sent by giving notice of such change of address in conformity with the provisions of this subparagraph (c) for the giving of notice. (d) Binding Nature of Agreement; No Assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns, except that neither party may assign or transfer its rights nor delegate its obligations under this Agreement without the prior written consent of the other party hereto. 5 (e) Provisions Separable. The provisions of this Agreement are independent of and separable from each other, and no provision shall be affected or rendered invalid or unenforceable by virtue of the fact that for any reason any other or others of them may be invalid or unenforceable in whole or in part. (f) Entire Agreement. This Agreement contains the entire understanding between the parties hereto with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements and understandings, inducements or conditions, express or implied, oral or written, except as herein contained. The express terms hereof control and supersede any course of performance and/or usage of the trade inconsistent with any of the terms hereof. This Agreement may not be modified or amended other than by an agreement in writing. (g) Paragraph Headings. The Paragraph and subparagraph headings in this Agreement have been inserted for convenience of reference only; they form no part of this Agreement and shall not affect its interpretation. (h) Gender, Etc. Words used herein, regardless of the number and gender specifically used, shall be deemed and construed to include any other number, singular or plural, and any other gender, masculine, feminine or neuter, as the context indicates is appropriate. (i) Number of Days. In computing the number of days for purposes of this Agreement, all days shall be counted, including Saturdays, Sundays and Holidays; provided, however, that if the final day of any time period falls on a Saturday, Sunday or Holiday, then the final day shall be deemed to be the next day which is not a Saturday, Sunday or Holiday. For purposes of this subparagraph (i), the term "Holiday" shall mean a day, other than a Saturday or Sunday, on which national banks with branches in the Commonwealth of Pennsylvania are or may elect to be closed. 6 (j) Currency. All monetary amounts referred to in this Agreement shall be and be deemed to be references to lawful currency of the United States of America. IN WITNESS WHEREOF, the parties have executed this Agreement the date first above written. ATTEST: INTERACTIVE FLIGHT TECHNOLOGIES, INC. - ------------------------------- ----------------------------- Secretary Name: [Corporate Seal] Title: MATTERHORN, LTD - ------------------------------- ----------------------------- [Corporate Seal] (if applicable) Name: Title: Shares of Class A Common Stock of the Company 70,452 7 PUT NOTICE OF ELECTION The undersigned and Interactive Flight Technologies, Inc. (the "Company") are parties to that certain Put/Call Agreement dated __________ __, 1999. Pursuant to the terms thereof, the undersigned hereby exercises his, her or its option to require the Company to purchase the number of shares of the Class A common stock of the Company, (the "Shares") set forth below. Closing hereunder shall be held at the chief executive offices of the Company at _____ _.m. local time, on __________ ___, 2000. The undersigned elects to have the purchase price paid by wire transfer of immediately available funds to the following bank account: Bank Name: ___________________________ Branch (if applicable): ___________________ Bank Location: _________________________ Bank Routing Number: __________________ For Credit to Account No. ________________ Name of Account: _______________________ (If the foregoing bank information is not included in this Notice of Election, the undersigned agrees to accept payment by delivery of a certified or bank cashier's check payable to the order of the undersigned.) The undersigned represents and acknowledges that (i) the undersigned knows, or has had the opportunity to acquire, all information concerning the business, affairs, financial condition and prospects of the Company which the undersigned deems relevant to making a fully informed decision regarding the consummation of the transactions contemplated hereby and (ii) he, she, or it has been supplied with copies of the Company's latest Annual Report on Form 10-K (or 10-KSB, as the case may be), the Company's latest quarterly report on Form 10-Q (or 10-QSB, as the case may be), Company's latest proxy statement, and Company's latest Annual Report to Stockholders. Date: --------------------------- ---------------------------------- Name: Address: Number of Shares: ----------------------------- CALL NOTICE OF ELECTION Interactive Flight Technologies, Inc. (the "Company") and _________________ ("Holder") are parties to that certain Put/Call Agreement dated ___________ __, 1999. Pursuant to the terms thereof, the Company hereby exercises its option to purchase ____________ shares of the Class A common stock of the Company (the "Shares") owned by Holder. Closing hereunder shall be held at the chief executive offices of the Company at _____ _.m. local time, on __________ ___, 2000. INTERACTIVE FLIGHT TECHNOLOGIES, INC. Date: BY: --------------------------- ----------------------------------- Name: Title: PUT/CALL AGREEMENT THIS PUT/CALL AGREEMENT is made this _____ day of July, 1999 by and between Interactive Flight Technologies, Inc., a Delaware corporation (the "Company") and Correllus International, Ltd. ("Holder"). W I T N E S S E T H: WHEREAS, Holder is the owner of the number of shares of the Class A Common Stock of the Company (the "Shares") set forth on the signature page of this Agreement; WHEREAS, Company desires to grant to Holder the option to put the Shares to the Company at a price of $3.50 per Share at any time in the ten day period ending January 10, 2000; and WHEREAS, Holder desires to grant to Company the option to call the Shares at a price of $4.50 per Share at any time in the ten day period ending January 10, 2000. NOW, THEREFORE, in consideration of the foregoing, the mutual covenants herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, each intending to be legally bound hereby, agree as follows: 1. Put/Call Options. (a) The Company hereby grants to Holder the right and option to require Company to purchase any or all of the Shares on the terms and subject to the conditions hereinafter set forth in this Agreement (the "Put Option"). (b) Holder hereby grants to Company the right and option to purchase all or any of the Shares held by Holder, on the terms and subject to the conditions hereinafter set forth in this Agreement (the "Call Option"). 2. Price. (a) The purchase price to be paid, if the Put Option is exercised, shall be Three Dollars and Fifty Cents ($3.50) per Share (the "Put Option Price"), which shall be paid at the Closing (as hereinafter defined) in the manner provided in this Agreement. (b) The purchase price to be paid, if the Call Option is exercised, shall be Four Dollars and Fifty Cents ($4.50) per Share (the "Call Option Price"), which shall be paid at the Closing in the manner provided in this Agreement. 3. Exercise of Put Option. The following provisions shall apply to exercise of the Put Option: (a) Holder shall exercise the Put Option by sending a notice of election (the "Put Notice of Election") to the Company in the form attached hereto and incorporated herein by reference. The Put Notice of Election shall be in writing, shall be sent to the Company at the address and in the manner set forth in subparagraph 10(c) hereof (or to such other address as shall then be applicable if such address has been changed in the manner set forth in such subparagraph), and shall contain the information about the Closing set forth in subparagraph 9(a) hereof. (b) If exercised, the Put Option may be exercised as to some or all of the Shares. (c) The Put Option may be exercised only during the period between 12:01 a.m. E.S.T. January 1, 2000 and 5:00 p.m. E.S.T. January 10, 2000 (the "Effective Period"). The date and time of the exercise of the Put Option shall be that date and time when the Put Notice of Election is actually received by the Company. (d) Payment for Shares shall be made by certified check payable to the order of Holder, or at the option of Holder, by wire transfer of immediately available funds to the bank account set forth on the Put Notice of Election. 4. Exercise of Call Option. The following provisions shall apply to exercise of the Call Option: (a) The Company shall exercise the Call Option by sending a notice of election (the "Call Notice of Election") to the Holder in the form attached hereto and incorporated herein by reference. The Call Notice of Election shall be in writing, shall be sent to the Holder at the address and in the manner set forth in subparagraph 10(c) hereof (or to such other address as shall then be applicable if such address has been changed in the manner set forth in such subparagraph), and shall contain the information about the Closing set forth in subparagraph 9(a) hereof. (b) If exercised, the Call Option may be exercised as to some or all of the Shares. (c) The Call Option may be exercised only during the Effective Period. The date and time of the exercise of the Call Option shall be that date and time when the Call Notice of Election is actually received by the Holder. (d) Payment for Shares shall be made by certified or bank cashier's check payable to the order of Holder. 2 (e) In the event that Holder exercises the Put Option and the Company exercises the Call Option, then the Call Option exercise shall be void ab initio and Closing shall be held pursuant to the Put Option. 5. Term. Except for any obligations arising under this Agreement as a result of the proper exercise of the Call Option or the Put Option (which obligations shall survive termination of this Agreement), this Agreement shall terminate at the end of the Effective Period. 6. Change or Exchange of Capital Stock. (a) In the event that the outstanding shares of Class A Common Stock of the Company shall be changed into or exchanged for a different number or kind of shares of capital stock of the Company or shall be changed into or exchanged for a different number or kind of shares of capital stock or other securities of the Company or of another company (whether by reason of merger, consolidation, recapitalization, reclassification, split-up, or otherwise), then there shall be substituted for each remaining Share not acquired by exercise of either the Put Option or the Call Option prior to the record date for such merger, consolidation, recapitalization, reclassification, split-up, or otherwise, the number and kind of shares of capital stock or other securities into which each outstanding share of Class A Common Stock of the Company shall be so changed or for which each such share of capital stock shall be so exchanged. In the event that there shall be any such change or exchange, then (i) Holder shall be entitled to sell to the Company pursuant to the Put Option all of such capital stock and other securities into which each Share shall have been changed or for which it shall have been exchanged for the Put Option Price which would have been required to be paid for such Share assuming there had been no such change or exchange, and otherwise in accordance with the terms of this Agreement; and (ii) the Company shall be entitled to purchase from the Holder pursuant to the Call Option all of such capital stock and other securities into which each Share shall have been changed or for which it shall have been exchanged for the Call Option Price which would have been required to be paid for such Share assuming there had been no such change or exchange, and otherwise in accordance with the terms of this Agreement. (b) In the event that the outstanding Shares shall be subdivided into a greater or combined into a lesser number of such shares, whether by stock dividend, stock split or combination of shares, the Put Option Price and the Call Option Price shall be proportionately decreased or increased, as the case may be, and the number of remaining Shares (those not acquired by exercise of either the Put or Call Option prior to the record date of such stock dividend, stock split, or combination of shares) subject to the Put or Call Option shall be proportionately increased or decreased as the case may be, so as appropriately to reflect such subdivision or combination, effective immediately upon the effectiveness of such subdivision or combination. (c) No such adjustment shall be made, however, by reason of the issuance of shares of common stock of the Company for cash, property, or services; by way of stock options, stock warrants, subscription rights; or otherwise. 3 7. Representations and Warranties of Company. The Company hereby represents and warrants that this Agreement constitutes the valid and binding obligation of the Company, and is enforceable against it in accordance with its terms, except to the extent that the enforcement thereof is limited by bankruptcy, reorganization, insolvency, moratorium, or other similar laws or orders affecting the enforcement of creditors' rights generally, or by equitable principles. 8. Transfers. The Put Option is not transferable by Holder (otherwise than (if Holder is an individual) by will or pursuant to the laws of descent and distribution in the event of Holder`s death, in which event the Put Option may be exercised by the heirs or legal representatives of Holder). Any attempt at assignment, transfer, pledge or disposition of the Put Option contrary to the provisions hereof or the levy of any execution, attachment or similar process upon the Put Option shall be null and void and without force or effect. Any exercise of the Put Option by a person other than Holder shall be accompanied by appropriate proofs, satisfactory in form and substance to the Company, of the right of each person to exercise the Put Option. 9. Closing. (a) The Closing shall be held at a date and time to be selected by Holder or by the Company in the Put Notice of Election or Call Notice of Election, respectively; provided, however, that the date specified in the Put Notice of Election or Call Notice of Election shall not be less than fourteen (14) nor more than sixty (60) days after the date of such Put Notice of Election or Call Notice of Election, as the case may be. (b) Closing shall be held at the chief executive offices of the Company, or such other place as shall be agreed upon by the parties. (c) At Closing, the Company shall deliver or cause to be delivered to Holder the Put Option Price per Share or Call Option Price per Share, as applicable, for all of the Shares to be purchased by Company pursuant to the Put Notice of Election or Call Notice of Election and Holder shall deliver to the Company all of the Shares (or other securities) being purchased duly endorsed for transfer or with an executed stock power attached, in either such case with signature guaranteed by a member of the Stock Transfer Agents' Medallion Program. 10. Miscellaneous. (a) Indulgences, Etc. Neither the failure nor any delay on the part of either party to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or of any other right, remedy, power or privilege, nor shall any waiver of any right, remedy, power or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power or privilege with respect to any other occurrence. No waiver shall be effective unless it is in writing and is signed by the party asserted to have granted such waiver. 4 (b) Controlling Law. This Agreement and all questions relating to its validity, interpretation, performance and enforcement (including, without limitation, provisions concerning limitations of actions), shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania, notwithstanding any conflict-of-laws doctrines of such jurisdiction to the contrary, and without the aid of any canon, custom or rule of law requiring construction against the draftsman. (c) Notices. All notices, requests, demands and other communications required or permitted under this Agreement shall be in writing and shall be deemed to have been duly given, made and received when personally delivered or when deposited in the United States mails, registered or certified mail, postage prepaid, return receipt requested, addressed as set forth below: (i) If to Holder: c/o Sovereign Capital Advisors, LLC Tower Place - Suite 1965 3340 Peachtree Road, NE Atlanta, GA 30328 (ii) If to Company: Interactive Flight Technologies, Inc. 4041 North Central Avenue B-200 Phoenix, AZ 85014 Attn: Mr. Morris C. Aaron with a copy, given in the manner prescribed above, to: Mesirov Gelman Jaffe Cramer & Jamieson, LLP 1735 Market Street, 38th Floor Philadelphia, PA 19103 Attn: Steven B. King, Esquire In addition, notice by mail shall be by air mail if posted outside of the continental United States. Either party may alter the address to which communications or copies are to be sent by giving notice of such change of address in conformity with the provisions of this subparagraph (c) for the giving of notice. (d) Binding Nature of Agreement; No Assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns, except that neither party may assign or transfer its rights nor delegate its obligations under this Agreement without the prior written consent of the other party hereto. 5 (e) Provisions Separable. The provisions of this Agreement are independent of and separable from each other, and no provision shall be affected or rendered invalid or unenforceable by virtue of the fact that for any reason any other or others of them may be invalid or unenforceable in whole or in part. (f) Entire Agreement. This Agreement contains the entire understanding between the parties hereto with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements and understandings, inducements or conditions, express or implied, oral or written, except as herein contained. The express terms hereof control and supersede any course of performance and/or usage of the trade inconsistent with any of the terms hereof. This Agreement may not be modified or amended other than by an agreement in writing. (g) Paragraph Headings. The Paragraph and subparagraph headings in this Agreement have been inserted for convenience of reference only; they form no part of this Agreement and shall not affect its interpretation. (h) Gender, Etc. Words used herein, regardless of the number and gender specifically used, shall be deemed and construed to include any other number, singular or plural, and any other gender, masculine, feminine or neuter, as the context indicates is appropriate. (i) Number of Days. In computing the number of days for purposes of this Agreement, all days shall be counted, including Saturdays, Sundays and Holidays; provided, however, that if the final day of any time period falls on a Saturday, Sunday or Holiday, then the final day shall be deemed to be the next day which is not a Saturday, Sunday or Holiday. For purposes of this subparagraph (i), the term "Holiday" shall mean a day, other than a Saturday or Sunday, on which national banks with branches in the Commonwealth of Pennsylvania are or may elect to be closed. 6 (j) Currency. All monetary amounts referred to in this Agreement shall be and be deemed to be references to lawful currency of the United States of America. IN WITNESS WHEREOF, the parties have executed this Agreement the date first above written. ATTEST: INTERACTIVE FLIGHT TECHNOLOGIES, INC. - ------------------------------- ----------------------------- Secretary Name: [Corporate Seal] Title: CORRELLUS INTERNATIONAL, LTD. - ------------------------------- ----------------------------- [Corporate Seal] (if applicable) Name: Title: Shares of Class A Common Stock of the Company 50,940 7 PUT NOTICE OF ELECTION The undersigned and Interactive Flight Technologies, Inc. (the "Company") are parties to that certain Put/Call Agreement dated __________ __, 1999. Pursuant to the terms thereof, the undersigned hereby exercises his, her or its option to require the Company to purchase the number of shares of the Class A common stock of the Company, (the "Shares") set forth below. Closing hereunder shall be held at the chief executive offices of the Company at _____ _.m. local time, on __________ ___, 2000. The undersigned elects to have the purchase price paid by wire transfer of immediately available funds to the following bank account: Bank Name: ___________________________ Branch (if applicable): ___________________ Bank Location: _________________________ Bank Routing Number: __________________ For Credit to Account No. ________________ Name of Account: _______________________ (If the foregoing bank information is not included in this Notice of Election, the undersigned agrees to accept payment by delivery of a certified or bank cashier's check payable to the order of the undersigned.) The undersigned represents and acknowledges that (i) the undersigned knows, or has had the opportunity to acquire, all information concerning the business, affairs, financial condition and prospects of the Company which the undersigned deems relevant to making a fully informed decision regarding the consummation of the transactions contemplated hereby and (ii) he, she, or it has been supplied with copies of the Company's latest Annual Report on Form 10-K (or 10-KSB, as the case may be), the Company's latest quarterly report on Form 10-Q (or 10-QSB, as the case may be), Company's latest proxy statement, and Company's latest Annual Report to Stockholders. Date: --------------------------- ---------------------------------- Name: Address: Number of Shares: ----------------------------- CALL NOTICE OF ELECTION Interactive Flight Technologies, Inc. (the "Company") and _________________ ("Holder") are parties to that certain Put/Call Agreement dated ___________ __, 1999. Pursuant to the terms thereof, the Company hereby exercises its option to purchase ____________ shares of the Class A common stock of the Company (the "Shares") owned by Holder. Closing hereunder shall be held at the chief executive offices of the Company at _____ _.m. local time, on __________ ___, 2000. INTERACTIVE FLIGHT TECHNOLOGIES, INC. Date: BY: --------------------------- ----------------------------------- Name: Title: PUT/CALL AGREEMENT THIS PUT/CALL AGREEMENT is made this _____ day of July, 1999 by and between Interactive Flight Technologies, Inc., a Delaware corporation (the "Company") and Sui Wa Chau ("Holder"). W I T N E S S E T H: WHEREAS, Holder is the owner of the number of shares of the Class A Common Stock of the Company (the "Shares") set forth on the signature page of this Agreement; WHEREAS, Company desires to grant to Holder the option to put the Shares to the Company at a price of $3.50 per Share at any time in the ten day period ending January 10, 2000; and WHEREAS, Holder desires to grant to Company the option to call the Shares at a price of $4.50 per Share at any time in the ten day period ending January 10, 2000. NOW, THEREFORE, in consideration of the foregoing, the mutual covenants herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, each intending to be legally bound hereby, agree as follows: 1. Put/Call Options. (a) The Company hereby grants to Holder the right and option to require Company to purchase any or all of the Shares on the terms and subject to the conditions hereinafter set forth in this Agreement (the "Put Option"). (b) Holder hereby grants to Company the right and option to purchase all or any of the Shares held by Holder, on the terms and subject to the conditions hereinafter set forth in this Agreement (the "Call Option"). 2. Price. (a) The purchase price to be paid, if the Put Option is exercised, shall be Three Dollars and Fifty Cents ($3.50) per Share (the "Put Option Price"), which shall be paid at the Closing (as hereinafter defined) in the manner provided in this Agreement. (b) The purchase price to be paid, if the Call Option is exercised, shall be Four Dollars and Fifty Cents ($4.50) per Share (the "Call Option Price"), which shall be paid at the Closing in the manner provided in this Agreement. 3. Exercise of Put Option. The following provisions shall apply to exercise of the Put Option: (a) Holder shall exercise the Put Option by sending a notice of election (the "Put Notice of Election") to the Company in the form attached hereto and incorporated herein by reference. The Put Notice of Election shall be in writing, shall be sent to the Company at the address and in the manner set forth in subparagraph 10(c) hereof (or to such other address as shall then be applicable if such address has been changed in the manner set forth in such subparagraph), and shall contain the information about the Closing set forth in subparagraph 9(a) hereof. (b) If exercised, the Put Option may be exercised as to some or all of the Shares. (c) The Put Option may be exercised only during the period between 12:01 a.m. E.S.T. January 1, 2000 and 5:00 p.m. E.S.T. January 10, 2000 (the "Effective Period"). The date and time of the exercise of the Put Option shall be that date and time when the Put Notice of Election is actually received by the Company. (d) Payment for Shares shall be made by certified check payable to the order of Holder, or at the option of Holder, by wire transfer of immediately available funds to the bank account set forth on the Put Notice of Election. 4. Exercise of Call Option. The following provisions shall apply to exercise of the Call Option: (a) The Company shall exercise the Call Option by sending a notice of election (the "Call Notice of Election") to the Holder in the form attached hereto and incorporated herein by reference. The Call Notice of Election shall be in writing, shall be sent to the Holder at the address and in the manner set forth in subparagraph 10(c) hereof (or to such other address as shall then be applicable if such address has been changed in the manner set forth in such subparagraph), and shall contain the information about the Closing set forth in subparagraph 9(a) hereof. (b) If exercised, the Call Option may be exercised as to some or all of the Shares. (c) The Call Option may be exercised only during the Effective Period. The date and time of the exercise of the Call Option shall be that date and time when the Call Notice of Election is actually received by the Holder. (d) Payment for Shares shall be made by certified or bank cashier's check payable to the order of Holder. 2 (e) In the event that Holder exercises the Put Option and the Company exercises the Call Option, then the Call Option exercise shall be void ab initio and Closing shall be held pursuant to the Put Option. 5. Term. Except for any obligations arising under this Agreement as a result of the proper exercise of the Call Option or the Put Option (which obligations shall survive termination of this Agreement), this Agreement shall terminate at the end of the Effective Period. 6. Change or Exchange of Capital Stock. (a) In the event that the outstanding shares of Class A Common Stock of the Company shall be changed into or exchanged for a different number or kind of shares of capital stock of the Company or shall be changed into or exchanged for a different number or kind of shares of capital stock or other securities of the Company or of another company (whether by reason of merger, consolidation, recapitalization, reclassification, split-up, or otherwise), then there shall be substituted for each remaining Share not acquired by exercise of either the Put Option or the Call Option prior to the record date for such merger, consolidation, recapitalization, reclassification, split-up, or otherwise, the number and kind of shares of capital stock or other securities into which each outstanding share of Class A Common Stock of the Company shall be so changed or for which each such share of capital stock shall be so exchanged. In the event that there shall be any such change or exchange, then (i) Holder shall be entitled to sell to the Company pursuant to the Put Option all of such capital stock and other securities into which each Share shall have been changed or for which it shall have been exchanged for the Put Option Price which would have been required to be paid for such Share assuming there had been no such change or exchange, and otherwise in accordance with the terms of this Agreement; and (ii) the Company shall be entitled to purchase from the Holder pursuant to the Call Option all of such capital stock and other securities into which each Share shall have been changed or for which it shall have been exchanged for the Call Option Price which would have been required to be paid for such Share assuming there had been no such change or exchange, and otherwise in accordance with the terms of this Agreement. (b) In the event that the outstanding Shares shall be subdivided into a greater or combined into a lesser number of such shares, whether by stock dividend, stock split or combination of shares, the Put Option Price and the Call Option Price shall be proportionately decreased or increased, as the case may be, and the number of remaining Shares (those not acquired by exercise of either the Put or Call Option prior to the record date of such stock dividend, stock split, or combination of shares) subject to the Put or Call Option shall be proportionately increased or decreased as the case may be, so as appropriately to reflect such subdivision or combination, effective immediately upon the effectiveness of such subdivision or combination. 3 (c) No such adjustment shall be made, however, by reason of the issuance of shares of common stock of the Company for cash, property, or services; by way of stock options, stock warrants, subscription rights; or otherwise. 7. Representations and Warranties of Company. The Company hereby represents and warrants that this Agreement constitutes the valid and binding obligation of the Company, and is enforceable against it in accordance with its terms, except to the extent that the enforcement thereof is limited by bankruptcy, reorganization, insolvency, moratorium, or other similar laws or orders affecting the enforcement of creditors' rights generally, or by equitable principles. 8. Transfers. The Put Option is not transferable by Holder (otherwise than (if Holder is an individual) by will or pursuant to the laws of descent and distribution in the event of Holder`s death, in which event the Put Option may be exercised by the heirs or legal representatives of Holder). Any attempt at assignment, transfer, pledge or disposition of the Put Option contrary to the provisions hereof or the levy of any execution, attachment or similar process upon the Put Option shall be null and void and without force or effect. Any exercise of the Put Option by a person other than Holder shall be accompanied by appropriate proofs, satisfactory in form and substance to the Company, of the right of each person to exercise the Put Option. 9. Closing. (a) The Closing shall be held at a date and time to be selected by Holder or by the Company in the Put Notice of Election or Call Notice of Election, respectively; provided, however, that the date specified in the Put Notice of Election or Call Notice of Election shall not be less than fourteen (14) nor more than sixty (60) days after the date of such Put Notice of Election or Call Notice of Election, as the case may be. (b) Closing shall be held at the chief executive offices of the Company, or such other place as shall be agreed upon by the parties. (c) At Closing, the Company shall deliver or cause to be delivered to Holder the Put Option Price per Share or Call Option Price per Share, as applicable, for all of the Shares to be purchased by Company pursuant to the Put Notice of Election or Call Notice of Election and Holder shall deliver to the Company all of the Shares (or other securities) being purchased duly endorsed for transfer or with an executed stock power attached, in either such case with signature guaranteed by a member of the Stock Transfer Agents' Medallion Program. 10. Miscellaneous. (a) Indulgences, Etc. Neither the failure nor any delay on the part of either party to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or of any other right, remedy, power or privilege, nor shall any waiver of any right, remedy, power or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power or privilege with respect to any other occurrence. No waiver shall be effective unless it is in writing and is signed by the party asserted to have granted such waiver. 4 (b) Controlling Law. This Agreement and all questions relating to its validity, interpretation, performance and enforcement (including, without limitation, provisions concerning limitations of actions), shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania, notwithstanding any conflict-of-laws doctrines of such jurisdiction to the contrary, and without the aid of any canon, custom or rule of law requiring construction against the draftsman. (c) Notices. All notices, requests, demands and other communications required or permitted under this Agreement shall be in writing and shall be deemed to have been duly given, made and received when personally delivered or when deposited in the United States mails, registered or certified mail, postage prepaid, return receipt requested, addressed as set forth below: (i) If to Holder: c/o Sovereign Capital Advisors, LLC Tower Place - Suite 1965 3340 Peachtree Road, NE Atlanta, GA 30328 (ii) If to Company: Interactive Flight Technologies, Inc. 4041 North Central Avenue B-200 Phoenix, AZ 85014 Attn: Mr. Morris C. Aaron with a copy, given in the manner prescribed above, to: Mesirov Gelman Jaffe Cramer & Jamieson, LLP 1735 Market Street, 38th Floor Philadelphia, PA 19103 Attn: Steven B. King, Esquire In addition, notice by mail shall be by air mail if posted outside of the continental United States. Either party may alter the address to which communications or copies are to be sent by giving notice of such change of address in conformity with the provisions of this subparagraph (c) for the giving of notice. (d) Binding Nature of Agreement; No Assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns, except that neither party may assign or transfer its rights nor delegate its obligations under this Agreement without the prior written consent of the other party hereto. 5 (e) Provisions Separable. The provisions of this Agreement are independent of and separable from each other, and no provision shall be affected or rendered invalid or unenforceable by virtue of the fact that for any reason any other or others of them may be invalid or unenforceable in whole or in part. (f) Entire Agreement. This Agreement contains the entire understanding between the parties hereto with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements and understandings, inducements or conditions, express or implied, oral or written, except as herein contained. The express terms hereof control and supersede any course of performance and/or usage of the trade inconsistent with any of the terms hereof. This Agreement may not be modified or amended other than by an agreement in writing. (g) Paragraph Headings. The Paragraph and subparagraph headings in this Agreement have been inserted for convenience of reference only; they form no part of this Agreement and shall not affect its interpretation. (h) Gender, Etc. Words used herein, regardless of the number and gender specifically used, shall be deemed and construed to include any other number, singular or plural, and any other gender, masculine, feminine or neuter, as the context indicates is appropriate. (i) Number of Days. In computing the number of days for purposes of this Agreement, all days shall be counted, including Saturdays, Sundays and Holidays; provided, however, that if the final day of any time period falls on a Saturday, Sunday or Holiday, then the final day shall be deemed to be the next day which is not a Saturday, Sunday or Holiday. For purposes of this subparagraph (i), the term "Holiday" shall mean a day, other than a Saturday or Sunday, on which national banks with branches in the Commonwealth of Pennsylvania are or may elect to be closed. 6 (j) Currency. All monetary amounts referred to in this Agreement shall be and be deemed to be references to lawful currency of the United States of America. IN WITNESS WHEREOF, the parties have executed this Agreement the date first above written. ATTEST: INTERACTIVE FLIGHT TECHNOLOGIES, INC. - ------------------------------- ----------------------------- Secretary Name: [Corporate Seal] Title: HOLDER: - ------------------------------- ----------------------------- [Corporate Seal] (if applicable) Sui Wa Chau Shares of Class A Common Stock of the Company 8,109 7 PUT NOTICE OF ELECTION The undersigned and Interactive Flight Technologies, Inc. (the "Company") are parties to that certain Put/Call Agreement dated __________ __, 1999. Pursuant to the terms thereof, the undersigned hereby exercises his, her or its option to require the Company to purchase the number of shares of the Class A common stock of the Company, (the "Shares") set forth below. Closing hereunder shall be held at the chief executive offices of the Company at _____ _.m. local time, on __________ ___, 2000. The undersigned elects to have the purchase price paid by wire transfer of immediately available funds to the following bank account: Bank Name: ___________________________ Branch (if applicable): ___________________ Bank Location: _________________________ Bank Routing Number: __________________ For Credit to Account No. ________________ Name of Account: _______________________ (If the foregoing bank information is not included in this Notice of Election, the undersigned agrees to accept payment by delivery of a certified or bank cashier's check payable to the order of the undersigned.) The undersigned represents and acknowledges that (i) the undersigned knows, or has had the opportunity to acquire, all information concerning the business, affairs, financial condition and prospects of the Company which the undersigned deems relevant to making a fully informed decision regarding the consummation of the transactions contemplated hereby and (ii) he, she, or it has been supplied with copies of the Company's latest Annual Report on Form 10-K (or 10-KSB, as the case may be), the Company's latest quarterly report on Form 10-Q (or 10-QSB, as the case may be), Company's latest proxy statement, and Company's latest Annual Report to Stockholders. Date: --------------------------- ---------------------------------- Name: Address: Number of Shares: ----------------------------- CALL NOTICE OF ELECTION Interactive Flight Technologies, Inc. (the "Company") and _________________ ("Holder") are parties to that certain Put/Call Agreement dated ___________ __, 1999. Pursuant to the terms thereof, the Company hereby exercises its option to purchase ____________ shares of the Class A common stock of the Company (the "Shares") owned by Holder. Closing hereunder shall be held at the chief executive offices of the Company at _____ _.m. local time, on __________ ___, 2000. INTERACTIVE FLIGHT TECHNOLOGIES, INC. Date: BY: --------------------------- ----------------------------------- Name: Title: PUT/CALL AGREEMENT THIS PUT/CALL AGREEMENT is made this _____ day of July, 1999 by and between Interactive Flight Technologies, Inc., a Delaware corporation (the "Company") and Peter Che Nan Chen ("Holder"). W I T N E S S E T H: WHEREAS, Holder is the owner of the number of shares of the Class A Common Stock of the Company (the "Shares") set forth on the signature page of this Agreement; WHEREAS, Company desires to grant to Holder the option to put the Shares to the Company at a price of $3.50 per Share at any time in the ten day period ending January 10, 2000; and WHEREAS, Holder desires to grant to Company the option to call the Shares at a price of $4.50 per Share at any time in the ten day period ending January 10, 2000. NOW, THEREFORE, in consideration of the foregoing, the mutual covenants herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, each intending to be legally bound hereby, agree as follows: 1. Put/Call Options. (a) The Company hereby grants to Holder the right and option to require Company to purchase any or all of the Shares on the terms and subject to the conditions hereinafter set forth in this Agreement (the "Put Option"). (b) Holder hereby grants to Company the right and option to purchase all or any of the Shares held by Holder, on the terms and subject to the conditions hereinafter set forth in this Agreement (the "Call Option"). 2. Price. (a) The purchase price to be paid, if the Put Option is exercised, shall be Three Dollars and Fifty Cents ($3.50) per Share (the "Put Option Price"), which shall be paid at the Closing (as hereinafter defined) in the manner provided in this Agreement. (b) The purchase price to be paid, if the Call Option is exercised, shall be Four Dollars and Fifty Cents ($4.50) per Share (the "Call Option Price"), which shall be paid at the Closing in the manner provided in this Agreement. 3. Exercise of Put Option. The following provisions shall apply to exercise of the Put Option: (a) Holder shall exercise the Put Option by sending a notice of election (the "Put Notice of Election") to the Company in the form attached hereto and incorporated herein by reference. The Put Notice of Election shall be in writing, shall be sent to the Company at the address and in the manner set forth in subparagraph 10(c) hereof (or to such other address as shall then be applicable if such address has been changed in the manner set forth in such subparagraph), and shall contain the information about the Closing set forth in subparagraph 9(a) hereof. (b) If exercised, the Put Option may be exercised as to some or all of the Shares. (c) The Put Option may be exercised only during the period between 12:01 a.m. E.S.T. January 1, 2000 and 5:00 p.m. E.S.T. January 10, 2000 (the "Effective Period"). The date and time of the exercise of the Put Option shall be that date and time when the Put Notice of Election is actually received by the Company. (d) Payment for Shares shall be made by certified check payable to the order of Holder, or at the option of Holder, by wire transfer of immediately available funds to the bank account set forth on the Put Notice of Election. 4. Exercise of Call Option. The following provisions shall apply to exercise of the Call Option: (a) The Company shall exercise the Call Option by sending a notice of election (the "Call Notice of Election") to the Holder in the form attached hereto and incorporated herein by reference. The Call Notice of Election shall be in writing, shall be sent to the Holder at the address and in the manner set forth in subparagraph 10(c) hereof (or to such other address as shall then be applicable if such address has been changed in the manner set forth in such subparagraph), and shall contain the information about the Closing set forth in subparagraph 9(a) hereof. (b) If exercised, the Call Option may be exercised as to some or all of the Shares. (c) The Call Option may be exercised only during the Effective Period. The date and time of the exercise of the Call Option shall be that date and time when the Call Notice of Election is actually received by the Holder. (d) Payment for Shares shall be made by certified or bank cashier's check payable to the order of Holder. 2 (e) In the event that Holder exercises the Put Option and the Company exercises the Call Option, then the Call Option exercise shall be void ab initio and Closing shall be held pursuant to the Put Option. 5. Term. Except for any obligations arising under this Agreement as a result of the proper exercise of the Call Option or the Put Option (which obligations shall survive termination of this Agreement), this Agreement shall terminate at the end of the Effective Period. 6. Change or Exchange of Capital Stock. (a) In the event that the outstanding shares of Class A Common Stock of the Company shall be changed into or exchanged for a different number or kind of shares of capital stock of the Company or shall be changed into or exchanged for a different number or kind of shares of capital stock or other securities of the Company or of another company (whether by reason of merger, consolidation, recapitalization, reclassification, split-up, or otherwise), then there shall be substituted for each remaining Share not acquired by exercise of either the Put Option or the Call Option prior to the record date for such merger, consolidation, recapitalization, reclassification, split-up, or otherwise, the number and kind of shares of capital stock or other securities into which each outstanding share of Class A Common Stock of the Company shall be so changed or for which each such share of capital stock shall be so exchanged. In the event that there shall be any such change or exchange, then (i) Holder shall be entitled to sell to the Company pursuant to the Put Option all of such capital stock and other securities into which each Share shall have been changed or for which it shall have been exchanged for the Put Option Price which would have been required to be paid for such Share assuming there had been no such change or exchange, and otherwise in accordance with the terms of this Agreement; and (ii) the Company shall be entitled to purchase from the Holder pursuant to the Call Option all of such capital stock and other securities into which each Share shall have been changed or for which it shall have been exchanged for the Call Option Price which would have been required to be paid for such Share assuming there had been no such change or exchange, and otherwise in accordance with the terms of this Agreement. (b) In the event that the outstanding Shares shall be subdivided into a greater or combined into a lesser number of such shares, whether by stock dividend, stock split or combination of shares, the Put Option Price and the Call Option Price shall be proportionately decreased or increased, as the case may be, and the number of remaining Shares (those not acquired by exercise of either the Put or Call Option prior to the record date of such stock dividend, stock split, or combination of shares) subject to the Put or Call Option shall be proportionately increased or decreased as the case may be, so as appropriately to reflect such subdivision or combination, effective immediately upon the effectiveness of such subdivision or combination. (c) No such adjustment shall be made, however, by reason of the issuance of shares of common stock of the Company for cash, property, or services; by way of stock options, stock warrants, subscription rights; or otherwise. 3 7. Representations and Warranties of Company. The Company hereby represents and warrants that this Agreement constitutes the valid and binding obligation of the Company, and is enforceable against it in accordance with its terms, except to the extent that the enforcement thereof is limited by bankruptcy, reorganization, insolvency, moratorium, or other similar laws or orders affecting the enforcement of creditors' rights generally, or by equitable principles. 8. Transfers. The Put Option is not transferable by Holder (otherwise than (if Holder is an individual) by will or pursuant to the laws of descent and distribution in the event of Holder`s death, in which event the Put Option may be exercised by the heirs or legal representatives of Holder). Any attempt at assignment, transfer, pledge or disposition of the Put Option contrary to the provisions hereof or the levy of any execution, attachment or similar process upon the Put Option shall be null and void and without force or effect. Any exercise of the Put Option by a person other than Holder shall be accompanied by appropriate proofs, satisfactory in form and substance to the Company, of the right of each person to exercise the Put Option. 9. Closing. (a) The Closing shall be held at a date and time to be selected by Holder or by the Company in the Put Notice of Election or Call Notice of Election, respectively; provided, however, that the date specified in the Put Notice of Election or Call Notice of Election shall not be less than fourteen (14) nor more than sixty (60) days after the date of such Put Notice of Election or Call Notice of Election, as the case may be. (b) Closing shall be held at the chief executive offices of the Company, or such other place as shall be agreed upon by the parties. (c) At Closing, the Company shall deliver or cause to be delivered to Holder the Put Option Price per Share or Call Option Price per Share, as applicable, for all of the Shares to be purchased by Company pursuant to the Put Notice of Election or Call Notice of Election and Holder shall deliver to the Company all of the Shares (or other securities) being purchased duly endorsed for transfer or with an executed stock power attached, in either such case with signature guaranteed by a member of the Stock Transfer Agents' Medallion Program. 10. Miscellaneous. (a) Indulgences, Etc. Neither the failure nor any delay on the part of either party to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or of any other right, remedy, power or privilege, nor shall any waiver of any right, remedy, power or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power or privilege with respect to any other occurrence. No waiver shall be effective unless it is in writing and is signed by the party asserted to have granted such waiver. 4 (b) Controlling Law. This Agreement and all questions relating to its validity, interpretation, performance and enforcement (including, without limitation, provisions concerning limitations of actions), shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania, notwithstanding any conflict-of-laws doctrines of such jurisdiction to the contrary, and without the aid of any canon, custom or rule of law requiring construction against the draftsman. (c) Notices. All notices, requests, demands and other communications required or permitted under this Agreement shall be in writing and shall be deemed to have been duly given, made and received when personally delivered or when deposited in the United States mails, registered or certified mail, postage prepaid, return receipt requested, addressed as set forth below: (i) If to Holder: c/o Sovereign Capital Advisors, LLC Tower Place - Suite 1965 3340 Peachtree Road, NE Atlanta, GA 30328 (ii) If to Company: Interactive Flight Technologies, Inc. 4041 North Central Avenue B-200 Phoenix, AZ 85014 Attn: Mr. Morris C. Aaron with a copy, given in the manner prescribed above, to: Mesirov Gelman Jaffe Cramer & Jamieson, LLP 1735 Market Street, 38th Floor Philadelphia, PA 19103 Attn: Steven B. King, Esquire In addition, notice by mail shall be by air mail if posted outside of the continental United States. Either party may alter the address to which communications or copies are to be sent by giving notice of such change of address in conformity with the provisions of this subparagraph (c) for the giving of notice. (d) Binding Nature of Agreement; No Assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns, except that neither party may assign or transfer its rights nor delegate its obligations under this Agreement without the prior written consent of the other party hereto. 5 (e) Provisions Separable. The provisions of this Agreement are independent of and separable from each other, and no provision shall be affected or rendered invalid or unenforceable by virtue of the fact that for any reason any other or others of them may be invalid or unenforceable in whole or in part. (f) Entire Agreement. This Agreement contains the entire understanding between the parties hereto with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements and understandings, inducements or conditions, express or implied, oral or written, except as herein contained. The express terms hereof control and supersede any course of performance and/or usage of the trade inconsistent with any of the terms hereof. This Agreement may not be modified or amended other than by an agreement in writing. (g) Paragraph Headings. The Paragraph and subparagraph headings in this Agreement have been inserted for convenience of reference only; they form no part of this Agreement and shall not affect its interpretation. (h) Gender, Etc. Words used herein, regardless of the number and gender specifically used, shall be deemed and construed to include any other number, singular or plural, and any other gender, masculine, feminine or neuter, as the context indicates is appropriate. (i) Number of Days. In computing the number of days for purposes of this Agreement, all days shall be counted, including Saturdays, Sundays and Holidays; provided, however, that if the final day of any time period falls on a Saturday, Sunday or Holiday, then the final day shall be deemed to be the next day which is not a Saturday, Sunday or Holiday. For purposes of this subparagraph (i), the term "Holiday" shall mean a day, other than a Saturday or Sunday, on which national banks with branches in the Commonwealth of Pennsylvania are or may elect to be closed. 6 (j) Currency. All monetary amounts referred to in this Agreement shall be and be deemed to be references to lawful currency of the United States of America. IN WITNESS WHEREOF, the parties have executed this Agreement the date first above written. ATTEST: INTERACTIVE FLIGHT TECHNOLOGIES, INC. - ------------------------------- ----------------------------- Secretary Name: [Corporate Seal] Title: HOLDER: - ------------------------------- ----------------------------- [Corporate Seal] (if applicable) Peter Che Nan Chen Shares of Class A Common Stock of the Company 13,544 7 PUT NOTICE OF ELECTION The undersigned and Interactive Flight Technologies, Inc. (the "Company") are parties to that certain Put/Call Agreement dated __________ __, 1999. Pursuant to the terms thereof, the undersigned hereby exercises his, her or its option to require the Company to purchase the number of shares of the Class A common stock of the Company, (the "Shares") set forth below. Closing hereunder shall be held at the chief executive offices of the Company at _____ _.m. local time, on __________ ___, 2000. The undersigned elects to have the purchase price paid by wire transfer of immediately available funds to the following bank account: Bank Name: ___________________________ Branch (if applicable): ___________________ Bank Location: _________________________ Bank Routing Number: __________________ For Credit to Account No. ________________ Name of Account: _______________________ (If the foregoing bank information is not included in this Notice of Election, the undersigned agrees to accept payment by delivery of a certified or bank cashier's check payable to the order of the undersigned.) The undersigned represents and acknowledges that (i) the undersigned knows, or has had the opportunity to acquire, all information concerning the business, affairs, financial condition and prospects of the Company which the undersigned deems relevant to making a fully informed decision regarding the consummation of the transactions contemplated hereby and (ii) he, she, or it has been supplied with copies of the Company's latest Annual Report on Form 10-K (or 10-KSB, as the case may be), the Company's latest quarterly report on Form 10-Q (or 10-QSB, as the case may be), Company's latest proxy statement, and Company's latest Annual Report to Stockholders. Date: --------------------------- ---------------------------------- Name: Address: Number of Shares: ----------------------------- CALL NOTICE OF ELECTION Interactive Flight Technologies, Inc. (the "Company") and _________________ ("Holder") are parties to that certain Put/Call Agreement dated ___________ __, 1999. Pursuant to the terms thereof, the Company hereby exercises its option to purchase ____________ shares of the Class A common stock of the Company (the "Shares") owned by Holder. Closing hereunder shall be held at the chief executive offices of the Company at _____ _.m. local time, on __________ ___, 2000. INTERACTIVE FLIGHT TECHNOLOGIES, INC. Date: BY: --------------------------- ----------------------------------- Name: Title: PUT/CALL AGREEMENT THIS PUT/CALL AGREEMENT is made this _____ day of July, 1999 by and between Interactive Flight Technologies, Inc., a Delaware corporation (the "Company") and Keyway Holdings Co. ("Holder"). W I T N E S S E T H: WHEREAS, Holder is the owner of the number of shares of the Class A Common Stock of the Company (the "Shares") set forth on the signature page of this Agreement; WHEREAS, Company desires to grant to Holder the option to put the Shares to the Company at a price of $3.50 per Share at any time in the ten day period ending January 10, 2000; and WHEREAS, Holder desires to grant to Company the option to call the Shares at a price of $4.50 per Share at any time in the ten day period ending January 10, 2000. NOW, THEREFORE, in consideration of the foregoing, the mutual covenants herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, each intending to be legally bound hereby, agree as follows: 1. Put/Call Options. (a) The Company hereby grants to Holder the right and option to require Company to purchase any or all of the Shares on the terms and subject to the conditions hereinafter set forth in this Agreement (the "Put Option"). (b) Holder hereby grants to Company the right and option to purchase all or any of the Shares held by Holder, on the terms and subject to the conditions hereinafter set forth in this Agreement (the "Call Option"). 2. Price. (a) The purchase price to be paid, if the Put Option is exercised, shall be Three Dollars and Fifty Cents ($3.50) per Share (the "Put Option Price"), which shall be paid at the Closing (as hereinafter defined) in the manner provided in this Agreement. (b) The purchase price to be paid, if the Call Option is exercised, shall be Four Dollars and Fifty Cents ($4.50) per Share (the "Call Option Price"), which shall be paid at the Closing in the manner provided in this Agreement. 3. Exercise of Put Option. The following provisions shall apply to exercise of the Put Option: (a) Holder shall exercise the Put Option by sending a notice of election (the "Put Notice of Election") to the Company in the form attached hereto and incorporated herein by reference. The Put Notice of Election shall be in writing, shall be sent to the Company at the address and in the manner set forth in subparagraph 10(c) hereof (or to such other address as shall then be applicable if such address has been changed in the manner set forth in such subparagraph), and shall contain the information about the Closing set forth in subparagraph 9(a) hereof. (b) If exercised, the Put Option may be exercised as to some or all of the Shares. (c) The Put Option may be exercised only during the period between 12:01 a.m. E.S.T. January 1, 2000 and 5:00 p.m. E.S.T. January 10, 2000 (the "Effective Period"). The date and time of the exercise of the Put Option shall be that date and time when the Put Notice of Election is actually received by the Company. (d) Payment for Shares shall be made by certified check payable to the order of Holder, or at the option of Holder, by wire transfer of immediately available funds to the bank account set forth on the Put Notice of Election. 4. Exercise of Call Option. The following provisions shall apply to exercise of the Call Option: (a) The Company shall exercise the Call Option by sending a notice of election (the "Call Notice of Election") to the Holder in the form attached hereto and incorporated herein by reference. The Call Notice of Election shall be in writing, shall be sent to the Holder at the address and in the manner set forth in subparagraph 10(c) hereof (or to such other address as shall then be applicable if such address has been changed in the manner set forth in such subparagraph), and shall contain the information about the Closing set forth in subparagraph 9(a) hereof. (b) If exercised, the Call Option may be exercised as to some or all of the Shares. (c) The Call Option may be exercised only during the Effective Period. The date and time of the exercise of the Call Option shall be that date and time when the Call Notice of Election is actually received by the Holder. (d) Payment for Shares shall be made by certified or bank cashier's check payable to the order of Holder. 2 (e) In the event that Holder exercises the Put Option and the Company exercises the Call Option, then the Call Option exercise shall be void ab initio and Closing shall be held pursuant to the Put Option. 5. Term. Except for any obligations arising under this Agreement as a result of the proper exercise of the Call Option or the Put Option (which obligations shall survive termination of this Agreement), this Agreement shall terminate at the end of the Effective Period. 6. Change or Exchange of Capital Stock. (a) In the event that the outstanding shares of Class A Common Stock of the Company shall be changed into or exchanged for a different number or kind of shares of capital stock of the Company or shall be changed into or exchanged for a different number or kind of shares of capital stock or other securities of the Company or of another company (whether by reason of merger, consolidation, recapitalization, reclassification, split-up, or otherwise), then there shall be substituted for each remaining Share not acquired by exercise of either the Put Option or the Call Option prior to the record date for such merger, consolidation, recapitalization, reclassification, split-up, or otherwise, the number and kind of shares of capital stock or other securities into which each outstanding share of Class A Common Stock of the Company shall be so changed or for which each such share of capital stock shall be so exchanged. In the event that there shall be any such change or exchange, then (i) Holder shall be entitled to sell to the Company pursuant to the Put Option all of such capital stock and other securities into which each Share shall have been changed or for which it shall have been exchanged for the Put Option Price which would have been required to be paid for such Share assuming there had been no such change or exchange, and otherwise in accordance with the terms of this Agreement; and (ii) the Company shall be entitled to purchase from the Holder pursuant to the Call Option all of such capital stock and other securities into which each Share shall have been changed or for which it shall have been exchanged for the Call Option Price which would have been required to be paid for such Share assuming there had been no such change or exchange, and otherwise in accordance with the terms of this Agreement. (b) In the event that the outstanding Shares shall be subdivided into a greater or combined into a lesser number of such shares, whether by stock dividend, stock split or combination of shares, the Put Option Price and the Call Option Price shall be proportionately decreased or increased, as the case may be, and the number of remaining Shares (those not acquired by exercise of either the Put or Call Option prior to the record date of such stock dividend, stock split, or combination of shares) subject to the Put or Call Option shall be proportionately increased or decreased as the case may be, so as appropriately to reflect such subdivision or combination, effective immediately upon the effectiveness of such subdivision or combination. (c) No such adjustment shall be made, however, by reason of the issuance of shares of common stock of the Company for cash, property, or services; by way of stock options, stock warrants, subscription rights; or otherwise. 3 7. Representations and Warranties of Company. The Company hereby represents and warrants that this Agreement constitutes the valid and binding obligation of the Company, and is enforceable against it in accordance with its terms, except to the extent that the enforcement thereof is limited by bankruptcy, reorganization, insolvency, moratorium, or other similar laws or orders affecting the enforcement of creditors' rights generally, or by equitable principles. 8. Transfers. The Put Option is not transferable by Holder (otherwise than (if Holder is an individual) by will or pursuant to the laws of descent and distribution in the event of Holder`s death, in which event the Put Option may be exercised by the heirs or legal representatives of Holder). Any attempt at assignment, transfer, pledge or disposition of the Put Option contrary to the provisions hereof or the levy of any execution, attachment or similar process upon the Put Option shall be null and void and without force or effect. Any exercise of the Put Option by a person other than Holder shall be accompanied by appropriate proofs, satisfactory in form and substance to the Company, of the right of each person to exercise the Put Option. 9. Closing. (a) The Closing shall be held at a date and time to be selected by Holder or by the Company in the Put Notice of Election or Call Notice of Election, respectively; provided, however, that the date specified in the Put Notice of Election or Call Notice of Election shall not be less than fourteen (14) nor more than sixty (60) days after the date of such Put Notice of Election or Call Notice of Election, as the case may be. (b) Closing shall be held at the chief executive offices of the Company, or such other place as shall be agreed upon by the parties. (c) At Closing, the Company shall deliver or cause to be delivered to Holder the Put Option Price per Share or Call Option Price per Share, as applicable, for all of the Shares to be purchased by Company pursuant to the Put Notice of Election or Call Notice of Election and Holder shall deliver to the Company all of the Shares (or other securities) being purchased duly endorsed for transfer or with an executed stock power attached, in either such case with signature guaranteed by a member of the Stock Transfer Agents' Medallion Program. 10. Miscellaneous. (a) Indulgences, Etc. Neither the failure nor any delay on the part of either party to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or of any other right, remedy, power or privilege, nor shall any waiver of any right, remedy, power or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power or privilege with respect to any other occurrence. No waiver shall be effective unless it is in writing and is signed by the party asserted to have granted such waiver. 4 (b) Controlling Law. This Agreement and all questions relating to its validity, interpretation, performance and enforcement (including, without limitation, provisions concerning limitations of actions), shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania, notwithstanding any conflict-of-laws doctrines of such jurisdiction to the contrary, and without the aid of any canon, custom or rule of law requiring construction against the draftsman. (c) Notices. All notices, requests, demands and other communications required or permitted under this Agreement shall be in writing and shall be deemed to have been duly given, made and received when personally delivered or when deposited in the United States mails, registered or certified mail, postage prepaid, return receipt requested, addressed as set forth below: (i) If to Holder: c/o Sovereign Capital Advisors, LLC Tower Place - Suite 1965 3340 Peachtree Road, NE Atlanta, GA 30328 (ii) If to Company: Interactive Flight Technologies, Inc. 4041 North Central Avenue B-200 Phoenix, AZ 85014 Attn: Mr. Morris C. Aaron with a copy, given in the manner prescribed above, to: Mesirov Gelman Jaffe Cramer & Jamieson, LLP 1735 Market Street, 38th Floor Philadelphia, PA 19103 Attn: Steven B. King, Esquire In addition, notice by mail shall be by air mail if posted outside of the continental United States. Either party may alter the address to which communications or copies are to be sent by giving notice of such change of address in conformity with the provisions of this subparagraph (c) for the giving of notice. (d) Binding Nature of Agreement; No Assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns, except that neither party may assign or transfer its rights nor delegate its obligations under this Agreement without the prior written consent of the other party hereto. 5 (e) Provisions Separable. The provisions of this Agreement are independent of and separable from each other, and no provision shall be affected or rendered invalid or unenforceable by virtue of the fact that for any reason any other or others of them may be invalid or unenforceable in whole or in part. (f) Entire Agreement. This Agreement contains the entire understanding between the parties hereto with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements and understandings, inducements or conditions, express or implied, oral or written, except as herein contained. The express terms hereof control and supersede any course of performance and/or usage of the trade inconsistent with any of the terms hereof. This Agreement may not be modified or amended other than by an agreement in writing. (g) Paragraph Headings. The Paragraph and subparagraph headings in this Agreement have been inserted for convenience of reference only; they form no part of this Agreement and shall not affect its interpretation. (h) Gender, Etc. Words used herein, regardless of the number and gender specifically used, shall be deemed and construed to include any other number, singular or plural, and any other gender, masculine, feminine or neuter, as the context indicates is appropriate. (i) Number of Days. In computing the number of days for purposes of this Agreement, all days shall be counted, including Saturdays, Sundays and Holidays; provided, however, that if the final day of any time period falls on a Saturday, Sunday or Holiday, then the final day shall be deemed to be the next day which is not a Saturday, Sunday or Holiday. For purposes of this subparagraph (i), the term "Holiday" shall mean a day, other than a Saturday or Sunday, on which national banks with branches in the Commonwealth of Pennsylvania are or may elect to be closed. 6 (j) Currency. All monetary amounts referred to in this Agreement shall be and be deemed to be references to lawful currency of the United States of America. IN WITNESS WHEREOF, the parties have executed this Agreement the date first above written. ATTEST: INTERACTIVE FLIGHT TECHNOLOGIES, INC. - ------------------------------- ----------------------------- Secretary Name: [Corporate Seal] Title: KEYWAY HOLDINGS CO. - ------------------------------- ----------------------------- [Corporate Seal] (if applicable) Name: Title: Shares of Class A Common Stock of the Company 13,374 7 PUT NOTICE OF ELECTION The undersigned and Interactive Flight Technologies, Inc. (the "Company") are parties to that certain Put/Call Agreement dated __________ __, 1999. Pursuant to the terms thereof, the undersigned hereby exercises his, her or its option to require the Company to purchase the number of shares of the Class A common stock of the Company, (the "Shares") set forth below. Closing hereunder shall be held at the chief executive offices of the Company at _____ _.m. local time, on __________ ___, 2000. The undersigned elects to have the purchase price paid by wire transfer of immediately available funds to the following bank account: Bank Name: ___________________________ Branch (if applicable): ___________________ Bank Location: _________________________ Bank Routing Number: __________________ For Credit to Account No. ________________ Name of Account: _______________________ (If the foregoing bank information is not included in this Notice of Election, the undersigned agrees to accept payment by delivery of a certified or bank cashier's check payable to the order of the undersigned.) The undersigned represents and acknowledges that (i) the undersigned knows, or has had the opportunity to acquire, all information concerning the business, affairs, financial condition and prospects of the Company which the undersigned deems relevant to making a fully informed decision regarding the consummation of the transactions contemplated hereby and (ii) he, she, or it has been supplied with copies of the Company's latest Annual Report on Form 10-K (or 10-KSB, as the case may be), the Company's latest quarterly report on Form 10-Q (or 10-QSB, as the case may be), Company's latest proxy statement, and Company's latest Annual Report to Stockholders. Date: --------------------------- ---------------------------------- Name: Address: Number of Shares: ----------------------------- CALL NOTICE OF ELECTION Interactive Flight Technologies, Inc. (the "Company") and _________________ ("Holder") are parties to that certain Put/Call Agreement dated ___________ __, 1999. Pursuant to the terms thereof, the Company hereby exercises its option to purchase ____________ shares of the Class A common stock of the Company (the "Shares") owned by Holder. Closing hereunder shall be held at the chief executive offices of the Company at _____ _.m. local time, on __________ ___, 2000. INTERACTIVE FLIGHT TECHNOLOGIES, INC. Date: BY: --------------------------- ----------------------------------- Name: Title: PUT/CALL AGREEMENT THIS PUT/CALL AGREEMENT is made this _____ day of July, 1999 by and between Interactive Flight Technologies, Inc., a Delaware corporation (the "Company") and Lufeng Investments, Ltd. ("Holder"). W I T N E S S E T H: WHEREAS, Holder is the owner of the number of shares of the Class A Common Stock of the Company (the "Shares") set forth on the signature page of this Agreement; WHEREAS, Company desires to grant to Holder the option to put the Shares to the Company at a price of $3.50 per Share at any time in the ten day period ending January 10, 2000; and WHEREAS, Holder desires to grant to Company the option to call the Shares at a price of $4.50 per Share at any time in the ten day period ending January 10, 2000. NOW, THEREFORE, in consideration of the foregoing, the mutual covenants herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, each intending to be legally bound hereby, agree as follows: 1. Put/Call Options. (a) The Company hereby grants to Holder the right and option to require Company to purchase any or all of the Shares on the terms and subject to the conditions hereinafter set forth in this Agreement (the "Put Option"). (b) Holder hereby grants to Company the right and option to purchase all or any of the Shares held by Holder, on the terms and subject to the conditions hereinafter set forth in this Agreement (the "Call Option"). 2. Price. (a) The purchase price to be paid, if the Put Option is exercised, shall be Three Dollars and Fifty Cents ($3.50) per Share (the "Put Option Price"), which shall be paid at the Closing (as hereinafter defined) in the manner provided in this Agreement. (b) The purchase price to be paid, if the Call Option is exercised, shall be Four Dollars and Fifty Cents ($4.50) per Share (the "Call Option Price"), which shall be paid at the Closing in the manner provided in this Agreement. 3. Exercise of Put Option. The following provisions shall apply to exercise of the Put Option: (a) Holder shall exercise the Put Option by sending a notice of election (the "Put Notice of Election") to the Company in the form attached hereto and incorporated herein by reference. The Put Notice of Election shall be in writing, shall be sent to the Company at the address and in the manner set forth in subparagraph 10(c) hereof (or to such other address as shall then be applicable if such address has been changed in the manner set forth in such subparagraph), and shall contain the information about the Closing set forth in subparagraph 9(a) hereof. (b) If exercised, the Put Option may be exercised as to some or all of the Shares. (c) The Put Option may be exercised only during the period between 12:01 a.m. E.S.T. January 1, 2000 and 5:00 p.m. E.S.T. January 10, 2000 (the "Effective Period"). The date and time of the exercise of the Put Option shall be that date and time when the Put Notice of Election is actually received by the Company. (d) Payment for Shares shall be made by certified check payable to the order of Holder, or at the option of Holder, by wire transfer of immediately available funds to the bank account set forth on the Put Notice of Election. 4. Exercise of Call Option. The following provisions shall apply to exercise of the Call Option: (a) The Company shall exercise the Call Option by sending a notice of election (the "Call Notice of Election") to the Holder in the form attached hereto and incorporated herein by reference. The Call Notice of Election shall be in writing, shall be sent to the Holder at the address and in the manner set forth in subparagraph 10(c) hereof (or to such other address as shall then be applicable if such address has been changed in the manner set forth in such subparagraph), and shall contain the information about the Closing set forth in subparagraph 9(a) hereof. (b) If exercised, the Call Option may be exercised as to some or all of the Shares. (c) The Call Option may be exercised only during the Effective Period. The date and time of the exercise of the Call Option shall be that date and time when the Call Notice of Election is actually received by the Holder. (d) Payment for Shares shall be made by certified or bank cashier's check payable to the order of Holder. 2 (e) In the event that Holder exercises the Put Option and the Company exercises the Call Option, then the Call Option exercise shall be void ab initio and Closing shall be held pursuant to the Put Option. 5. Term. Except for any obligations arising under this Agreement as a result of the proper exercise of the Call Option or the Put Option (which obligations shall survive termination of this Agreement), this Agreement shall terminate at the end of the Effective Period. 6. Change or Exchange of Capital Stock. (a) In the event that the outstanding shares of Class A Common Stock of the Company shall be changed into or exchanged for a different number or kind of shares of capital stock of the Company or shall be changed into or exchanged for a different number or kind of shares of capital stock or other securities of the Company or of another company (whether by reason of merger, consolidation, recapitalization, reclassification, split-up, or otherwise), then there shall be substituted for each remaining Share not acquired by exercise of either the Put Option or the Call Option prior to the record date for such merger, consolidation, recapitalization, reclassification, split-up, or otherwise, the number and kind of shares of capital stock or other securities into which each outstanding share of Class A Common Stock of the Company shall be so changed or for which each such share of capital stock shall be so exchanged. In the event that there shall be any such change or exchange, then (i) Holder shall be entitled to sell to the Company pursuant to the Put Option all of such capital stock and other securities into which each Share shall have been changed or for which it shall have been exchanged for the Put Option Price which would have been required to be paid for such Share assuming there had been no such change or exchange, and otherwise in accordance with the terms of this Agreement; and (ii) the Company shall be entitled to purchase from the Holder pursuant to the Call Option all of such capital stock and other securities into which each Share shall have been changed or for which it shall have been exchanged for the Call Option Price which would have been required to be paid for such Share assuming there had been no such change or exchange, and otherwise in accordance with the terms of this Agreement. (b) In the event that the outstanding Shares shall be subdivided into a greater or combined into a lesser number of such shares, whether by stock dividend, stock split or combination of shares, the Put Option Price and the Call Option Price shall be proportionately decreased or increased, as the case may be, and the number of remaining Shares (those not acquired by exercise of either the Put or Call Option prior to the record date of such stock dividend, stock split, or combination of shares) subject to the Put or Call Option shall be proportionately increased or decreased as the case may be, so as appropriately to reflect such subdivision or combination, effective immediately upon the effectiveness of such subdivision or combination. (c) No such adjustment shall be made, however, by reason of the issuance of shares of common stock of the Company for cash, property, or services; by way of stock options, stock warrants, subscription rights; or otherwise. 3 7. Representations and Warranties of Company. The Company hereby represents and warrants that this Agreement constitutes the valid and binding obligation of the Company, and is enforceable against it in accordance with its terms, except to the extent that the enforcement thereof is limited by bankruptcy, reorganization, insolvency, moratorium, or other similar laws or orders affecting the enforcement of creditors' rights generally, or by equitable principles. 8. Transfers. The Put Option is not transferable by Holder (otherwise than (if Holder is an individual) by will or pursuant to the laws of descent and distribution in the event of Holder`s death, in which event the Put Option may be exercised by the heirs or legal representatives of Holder). Any attempt at assignment, transfer, pledge or disposition of the Put Option contrary to the provisions hereof or the levy of any execution, attachment or similar process upon the Put Option shall be null and void and without force or effect. Any exercise of the Put Option by a person other than Holder shall be accompanied by appropriate proofs, satisfactory in form and substance to the Company, of the right of each person to exercise the Put Option. 9. Closing. (a) The Closing shall be held at a date and time to be selected by Holder or by the Company in the Put Notice of Election or Call Notice of Election, respectively; provided, however, that the date specified in the Put Notice of Election or Call Notice of Election shall not be less than fourteen (14) nor more than sixty (60) days after the date of such Put Notice of Election or Call Notice of Election, as the case may be. (b) Closing shall be held at the chief executive offices of the Company, or such other place as shall be agreed upon by the parties. (c) At Closing, the Company shall deliver or cause to be delivered to Holder the Put Option Price per Share or Call Option Price per Share, as applicable, for all of the Shares to be purchased by Company pursuant to the Put Notice of Election or Call Notice of Election and Holder shall deliver to the Company all of the Shares (or other securities) being purchased duly endorsed for transfer or with an executed stock power attached, in either such case with signature guaranteed by a member of the Stock Transfer Agents' Medallion Program. 10. Miscellaneous. (a) Indulgences, Etc. Neither the failure nor any delay on the part of either party to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or of any other right, remedy, power or privilege, nor shall any waiver of any right, remedy, power or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power or privilege with respect to any other occurrence. No waiver shall be effective unless it is in writing and is signed by the party asserted to have granted such waiver. 4 (b) Controlling Law. This Agreement and all questions relating to its validity, interpretation, performance and enforcement (including, without limitation, provisions concerning limitations of actions), shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania, notwithstanding any conflict-of-laws doctrines of such jurisdiction to the contrary, and without the aid of any canon, custom or rule of law requiring construction against the draftsman. (c) Notices. All notices, requests, demands and other communications required or permitted under this Agreement shall be in writing and shall be deemed to have been duly given, made and received when personally delivered or when deposited in the United States mails, registered or certified mail, postage prepaid, return receipt requested, addressed as set forth below: (i) If to Holder: c/o Sovereign Capital Advisors, LLC Tower Place - Suite 1965 3340 Peachtree Road, NE Atlanta, GA 30328 (ii) If to Company: Interactive Flight Technologies, Inc. 4041 North Central Avenue B-200 Phoenix, AZ 85014 Attn: Mr. Morris C. Aaron with a copy, given in the manner prescribed above, to: Mesirov Gelman Jaffe Cramer & Jamieson, LLP 1735 Market Street, 38th Floor Philadelphia, PA 19103 Attn: Steven B. King, Esquire In addition, notice by mail shall be by air mail if posted outside of the continental United States. Either party may alter the address to which communications or copies are to be sent by giving notice of such change of address in conformity with the provisions of this subparagraph (c) for the giving of notice. (d) Binding Nature of Agreement; No Assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns, except that neither party may assign or transfer its rights nor delegate its obligations under this Agreement without the prior written consent of the other party hereto. 5 (e) Provisions Separable. The provisions of this Agreement are independent of and separable from each other, and no provision shall be affected or rendered invalid or unenforceable by virtue of the fact that for any reason any other or others of them may be invalid or unenforceable in whole or in part. (f) Entire Agreement. This Agreement contains the entire understanding between the parties hereto with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements and understandings, inducements or conditions, express or implied, oral or written, except as herein contained. The express terms hereof control and supersede any course of performance and/or usage of the trade inconsistent with any of the terms hereof. This Agreement may not be modified or amended other than by an agreement in writing. (g) Paragraph Headings. The Paragraph and subparagraph headings in this Agreement have been inserted for convenience of reference only; they form no part of this Agreement and shall not affect its interpretation. (h) Gender, Etc. Words used herein, regardless of the number and gender specifically used, shall be deemed and construed to include any other number, singular or plural, and any other gender, masculine, feminine or neuter, as the context indicates is appropriate. (i) Number of Days. In computing the number of days for purposes of this Agreement, all days shall be counted, including Saturdays, Sundays and Holidays; provided, however, that if the final day of any time period falls on a Saturday, Sunday or Holiday, then the final day shall be deemed to be the next day which is not a Saturday, Sunday or Holiday. For purposes of this subparagraph (i), the term "Holiday" shall mean a day, other than a Saturday or Sunday, on which national banks with branches in the Commonwealth of Pennsylvania are or may elect to be closed. 6 (j) Currency. All monetary amounts referred to in this Agreement shall be and be deemed to be references to lawful currency of the United States of America. IN WITNESS WHEREOF, the parties have executed this Agreement the date first above written. ATTEST: INTERACTIVE FLIGHT TECHNOLOGIES, INC. - ------------------------------- ----------------------------- Secretary Name: [Corporate Seal] Title: LUFENG INVESTMENTS, LTD. - ------------------------------- ----------------------------- [Corporate Seal] (if applicable) Name: Title: Shares of Class A Common Stock of the Company 9,010 7 PUT NOTICE OF ELECTION The undersigned and Interactive Flight Technologies, Inc. (the "Company") are parties to that certain Put/Call Agreement dated __________ __, 1999. Pursuant to the terms thereof, the undersigned hereby exercises his, her or its option to require the Company to purchase the number of shares of the Class A common stock of the Company, (the "Shares") set forth below. Closing hereunder shall be held at the chief executive offices of the Company at _____ _.m. local time, on __________ ___, 2000. The undersigned elects to have the purchase price paid by wire transfer of immediately available funds to the following bank account: Bank Name: ___________________________ Branch (if applicable): ___________________ Bank Location: _________________________ Bank Routing Number: __________________ For Credit to Account No. ________________ Name of Account: _______________________ (If the foregoing bank information is not included in this Notice of Election, the undersigned agrees to accept payment by delivery of a certified or bank cashier's check payable to the order of the undersigned.) The undersigned represents and acknowledges that (i) the undersigned knows, or has had the opportunity to acquire, all information concerning the business, affairs, financial condition and prospects of the Company which the undersigned deems relevant to making a fully informed decision regarding the consummation of the transactions contemplated hereby and (ii) he, she, or it has been supplied with copies of the Company's latest Annual Report on Form 10-K (or 10-KSB, as the case may be), the Company's latest quarterly report on Form 10-Q (or 10-QSB, as the case may be), Company's latest proxy statement, and Company's latest Annual Report to Stockholders. Date: --------------------------- ---------------------------------- Name: Address: Number of Shares: ----------------------------- CALL NOTICE OF ELECTION Interactive Flight Technologies, Inc. (the "Company") and _________________ ("Holder") are parties to that certain Put/Call Agreement dated ___________ __, 1999. Pursuant to the terms thereof, the Company hereby exercises its option to purchase ____________ shares of the Class A common stock of the Company (the "Shares") owned by Holder. Closing hereunder shall be held at the chief executive offices of the Company at _____ _.m. local time, on __________ ___, 2000. INTERACTIVE FLIGHT TECHNOLOGIES, INC. Date: BY: --------------------------- ----------------------------------- Name: Title: EX-10.29 11 SECURITIES PURCHASE AGREEMENT SECURITIES PURCHASE AGREEMENT THIS SECURITIES PURCHASE AGREEMENT is made this 9th day of August, 1999, between XCEL CAPITAL, LLC a Georgia limited liability company, ("XCEL"), ELAINE MARTIN, an individual ("Martin"), and INTERACTIVE FLIGHT TECHNOLOGIES, INC., a Delaware corporation ("IFT"). W I T N E S S E T H: WHEREAS, XCEL and Martin are, respectively, the holders of notes dated October 20, 1998 and October 21, 1998 issued by The Network Connection, Inc., a Georgia corporation with principal executive offices at 1324 Union Hill Road, Alpharetta, Georgia 30201 ("TNC") having an aggregate face value of $350,000 (the "Series D Notes"), and which have aggregate accrued interest, redemption premiums, and other amounts due thereon totaling $127,750 (the "Redemption Premium"); WHEREAS, TNC as lessor and XCEL Investments, LLC as lessee are parties to that certain Lease Agreement and Leased Product Agreement, each dated November 4, 1997 (collectively, the "Equipment Lease"); WHEREAS, TNC as Payee and XCEL Investments, LLC, as Obligor are parties to that certain note dated September 4, 1997 in the original face amount of One Hundred Thousand Dollars ($100,000) (the "XCEL Note"); WHEREAS, there is approximately Twenty-One Thousand Dollars ($21,000) of accrued interest due on the XCEL Note; and WHEREAS, IFT has agreed to purchase the Series D Notes in exchange for a total of 105,000 shares of the Class A Common Stock of IFT, par value $.01 per share (the "Common Stock") and the assignment to XCEL without recourse of the Equipment Lease and the endorsement to XCEL without recourse of the XCEL Note. NOW THEREFORE, for and in consideration of the premises and the mutual covenants contained herein, the parties hereto, intending to be legally bound, hereby agree as follows: I. PURCHASE AND SALE OF SERIES D NOTES A. Transaction. XCEL and Martin hereby severally agree to sell to IFT, and IFT agrees to purchase from XCEL and Martin, the Series D Notes (including all principal and the Redemption Premium, having an aggregate balance due of $477,750), in a transaction exempt from the registration and prospectus delivery requirements of the Securities Act of 1933, as amended (the "Securities Act"), in accordance with the information set forth on Schedule A hereto. B. Purchase Price; Form of Payment. The consideration for the Series D Notes to be purchased by IFT shall be 105,000 shares of Common Stock payable to XCEL and Martin as set forth on Schedule A attached hereto, and the assignment to XCEL without recourse of the Equipment Lease and the endorsement to XCEL without recourse of the XCEL Note. II. XCEL AND MARTIN'S REPRESENTATIONS AND WARRANTIES XCEL and Martin severally represent and warrant to IFT as follows: A. XCEL and Martin are each acquiring the Common Stock for their own account, for investment purposes only and not with a view towards or in connection with the public sale or distribution thereof in violation of the Securities Act. B. XCEL and Martin are each (i) experienced in making investments of the kind contemplated by this Agreement, (ii) capable, by reason of their respective business and financial experience, of evaluating the relative merits and risks of an investment in the Common Stock, and (iii) able to afford the loss of their investment in the Common Stock. C. XCEL and Martin each understand that the Common Stock is being offered and sold by IFT in reliance on an exemption from the registration requirements of the Securities Act and equivalent state securities and "blue sky" laws, and that IFT is relying upon the accuracy of, and XCEL and Martin's compliance with, XCEL and Martin's respective representations, warranties and covenants set forth in this Agreement to determine the availability of such exemption and the eligibility of XCEL and Martin to purchase the Common Stock. D. XCEL and Martin have each been furnished with or provided access to all materials relating to the business, financial position and results of operations of IFT and TNC, and all other materials requested by XCEL and Martin to enable them to each make an informed investment decision with respect to the Common Stock and the Series D Notes. E. XCEL and Martin acknowledge that they have each been furnished with copies of IFT's Annual Report on Form 10-KSB for the fiscal year ended October 31, 1998, IFT's Quarterly Report on Form 10-QSB for the fiscal quarters ended January 31, 1999 and April 30, 1999, IFT's Schedule 13D dated May 11, 1999; and all other reports and documents heretofore filed by IFT with the Securities and Exchange Commission (the "Commission") pursuant to the Securities Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), since April 30, 1999 (collectively the "Commission Filings"). XCEL and Martin also acknowledge that they have each been furnished with copies of TNC's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1998; TNC's Quarterly Report on Form 10-QSB for the fiscal quarter ended March 31, 1999; and all other reports and documents heretofore filed by TNC with the Commission pursuant to the Securities Act and the Exchange Act, since December 31, 1998. F. XCEL and Martin each acknowledge that in making their decision to acquire the Common Stock they have each been given an opportunity to ask questions of and to receive 2 answers from IFT's and TNC's respective executive officers, directors and management personnel concerning the business and affairs of IFT and TNC, respectively. G. XCEL and Martin each understand that the Common Stock has not been approved or disapproved by the Commission or any state securities commission and that the foregoing authorities have not reviewed any documents or instruments in connection with the offer and sale to it of the Common Stock and have not confirmed or determined the adequacy or accuracy of any such documents or instruments. H. This Agreement has been duly and validly authorized, executed and delivered by XCEL and Martin and is a valid and binding agreement of both XCEL and Martin enforceable against each of them in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally. I. Neither XCEL nor Martin nor their affiliates nor any person acting on the behalf of XCEL or Martin have the intention of entering, or will enter into, prior to the closing, any put option, short position or other similar instrument or position with respect to the Common Stock and neither XCEL nor Martin nor any of their affiliates nor any person acting on the behalf of XCEL or Martin will use at any time shares of Common Stock acquired pursuant to this Agreement to settle any put option, short position or other similar instrument or position that may have been entered into prior to the execution of this Agreement. J. XCEL owns the Series D Notes acquired from Sara Ann and Robert E. Benninger, Jr. and from Will D. Brantley on April 13, 1999 and April 23, 1999, respectively, for value and in good faith. XCEL and Martin have good, marketable, and unencumbered title to their respective Series D Notes, free and clear of all liens, security interests, pledges, claims, options, and rights of others. There are no restriction on XCEL and Martin's right to transfer the Series D Notes to IFT pursuant to the terms of this Agreement. None of the Series D Notes have been modified or amended. The Series D Notes are binding obligations of TNC, in full force and effect, and enforceable in accordance with their terms and the amounts set forth in Schedule A are a true, complete, and accurate statement of the amounts due under the Series D Notes as of the date hereof. K. XCEL is a Limited Liability Company duly organized, validly existing and in good standing under the laws of the State of Georgia with its principal place of business at 5500 Interstate North Parkway, Suite 515, Atlanta, GA 30328. Martin resides at 2274 E. Yunsoo Big Canoe, Jasper, GA 30143. XCEL and Martin each have the power to acquire the Common Stock pursuant to the terms hereof. XCEL was not organized for the purpose of acquiring the Common Stock. L. XCEL understands and acknowledges that by virtue of the non-recourse assignment of the Equipment Lease and the non-recourse endorsement of the XCEL Note, respectively, and further by virtue of the General Release contemplated to be delivered at Closing pursuant to Section VII. C, XCEL shall have no recourse against IFT or TNC in connection with either such instrument. 3 III. IFT'S REPRESENTATIONS AND WARRANTIES IFT represents and warrants to and covenants and agrees with XCEL and Martin as follows: A. Capitalization. The authorized capital stock of IFT consists of 40,000,000 shares of Common Stock, of which 5,744,699 shares are outstanding on the date hereof and 5,000,000 shares of Preferred Stock, of which 3,000 Series A Preferred Shares are outstanding on the date hereof. All of the issued and outstanding shares of Common Stock and Preferred Stock have been duly authorized and validly issued and are fully paid and non-assessable. The Common Stock has been duly and validly authorized, and when issued by IFT, will be duly and validly issued, fully paid and non-assessable and will not subject the holder thereof to personal liability by reason of being such holder. B. Organization; Reporting IFT Status. IFT is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and is duly qualified as a foreign corporation in all jurisdictions in which the failure to so qualify would have a material adverse effect on the business, properties, prospects, condition (financial or otherwise) or results of operations of IFT or on the consummation of any of the transactions contemplated by this Agreement (a "Material Adverse Effect"). C. Authority; Validity and Enforceability. IFT has the requisite corporate power and authority to enter into this Agreement and the Registration Rights Agreement to be dated and delivered at Closing as referred to in Section VIII. F (collectively, the "Transaction Documents"), and to perform all of its obligations hereunder and thereunder (including the issuance, sale and delivery to XCEL and Martin of the Common Stock). The execution, delivery and performance by IFT of the Transaction Documents, and the consummation by IFT of the transactions contemplated hereby and thereby, has been duly authorized by all necessary corporate action on the part of IFT. Each Transaction Document constitutes a valid and binding obligation of IFT enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally. The Common Stock has been duly and validly authorized for issuance by IFT and, when executed and delivered by IFT, will be valid and binding obligations of IFT enforceable against it in accordance with their terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally. D. Non-contravention. The execution and delivery by IFT of the Transaction Documents, the issuance of the Common Stock, and the consummation by IFT of the other transactions contemplated hereby and thereby, do not and will not conflict with or result in a breach by IFT of any of the terms or provisions of, or constitute a default (or an event which, with notice, passage of time or both, would constitute a default) under (i) the Certificate of Incorporation or By-laws of IFT or (ii) except for such conflict, breach or default which would not have a Material Adverse Effect, any indenture, mortgage, deed of trust or other material agreement or instrument to which IFT is a party or by which its properties or assets are bound, or 4 any law, rule, regulation, decree, judgment or order of any court or public or governmental authority having jurisdiction over IFT or any of IFT's properties or assets. E. Approvals. No authorization, approval or consent of any court or public or governmental authority is required to be obtained by IFT for the issuance of the Common Stock to XCEL and Martin as contemplated by this Agreement, except such authorizations, approvals and consents that have been obtained by IFT prior to the date hereof. F. Commission Filings. None of the Commission Filings contained at the time they were filed any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they were made, not misleading. G. Absence of Certain Changes. Except as disclosed in the Commission Filings, since October 31, 1998, there has not occurred any change, event or development in the business, financial condition, or results of operations of IFT constituting, and there has not existed any condition having or reasonably likely to have, a Material Adverse Effect. H. Securities Law Matters. Based in part on the representations and warranties of XCEL and Martin set forth in Article II hereof, the offer and issuance by IFT of the Common Stock pursuant to the terms of this Agreement is exempt from (i) the registration and prospectus delivery requirements of the Securities Act and the rules and regulations of the Commission thereunder and (ii) the registration and/or qualification provisions of all applicable United States state securities and "blue sky" laws. IFT shall not directly or indirectly take, and shall not permit any of its directors, officers or Affiliates directly or indirectly to take, any action, so as to make unavailable the exemption from the Securities Act registration being relied upon by IFT for the issuance to XCEL and Martin of the Common Stock as contemplated by this Agreement. No form of general solicitation or advertising has been used or authorized by IFT or any of its officers, directors or Affiliates in connection with the offer or sale of the Common Stock as contemplated by this Agreement or any other agreement to which IFT is a party. I. Adequacy of Consideration. The Board of Directors of IFT has determined that the consideration to be received for the Common Stock to be issued pursuant to the terms of this Agreement is adequate in accordance with Section 153 of the Delaware General Corporation Law. IV. COVENANTS AND ACKNOWLEDGMENTS. A. Restrictive Legend. XCEL and Martin acknowledge and agree that, upon issuance pursuant to this Agreement, the Common Stock shall have endorsed thereon legends in substantially the following forms: THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE, AND ARE BEING OFFERED AND SOLD PURSUANT TO AN EXEMPTION FROM THE REGISTRATION 5 REQUIREMENTS OF THE SECURITIES ACT AND SUCH LAWS. THESE SECURITIES MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR SUCH OTHER LAWS. THESE SECURITIES HAVE BEEN ISSUED OR SOLD IN RELIANCE ON PARAGRAPH (13) OF CODE SECTION 10-5-9 OF THE "GEORGIA SECURITIES ACT OF 1973," AND MAY NOT BE SOLD OR TRANSFERRED EXCEPT IN A TRANSACTION WHICH IS EXEMPT UNDER SUCH ACT OR PURSUANT TO AN EFFECTIVE REGISTRATION UNDER SUCH ACT. B. Filings. IFT shall make all necessary SEC and "blue sky" filings required to be made by IFT in connection with the issuance of the Common Stock to XCEL and Martin as required by all applicable laws, and shall provide a copy thereof to XCEL and Martin promptly after such filing. VI. CLOSING. The date and time of the closing pursuant to this Agreement (the "Closing Date") shall be August 12, 1999 at 11:00 a.m. local time or such other time as shall be mutually agreed upon in writing at the offices of Mesirov Gelman Jaffe Cramer & Jamieson, LLP, 1735 Market Street, Philadelphia, PA 19103. VII. CONDITIONS TO IFT'S OBLIGATIONS. IFT's obligation to close hereunder is conditioned upon the following, any of which may be waived by IFT: A. The accuracy in all material respects on the Closing Date of the representations and warranties of XCEL and Martin contained in this Agreement as if made on the Closing Date (except for representations and warranties which, by their express terms, speak as of and relate to a specified date, in which case such accuracy shall be measured as of such specified date) and the performance by XCEL and Martin in all material respects on or before the Closing Date of their respective covenants and agreements of XCEL and Martin required to be performed by each of them pursuant to this Agreement on or before the Closing Date; B. The absence of any law or order, ruling, judgment or writ of any court or public or governmental authority restraining, enjoining or otherwise prohibiting any of the transactions contemplated by this Agreement; C. IFT's receipt of (1) a duly executed Irrevocable Proxy from each of XCEL and Martin in form and substance satisfactory to IFT; (2) a duly executed Allonge to Secured Promissory Note from TNC in form and substance satisfactory to IFT; (3) a duly executed Registration Rights Agreement in form and substance satisfactory to IFT; (4) Series D Notes duly endorsed to the order of IFT; (5) a duly executed General Release in form and substance 6 satisfactory to IFT from each of XCEL and Martin in form and substance satisfactory to IFT; (6) a duly executed Put and Call Agreement with each of XCEL and Martin in form and substance satisfactory to IFT; and (7) a Mutual Release between TNC and First Atlanta Financial Group, LLC in form and substance satisfactory to IFT. VIII. CONDITIONS TO XCEL and Martin'S OBLIGATIONS. XCEL and Martin's obligation to close hereunder is conditioned upon the following, any of which may be waived by XCEL and Martin severally: A. The receipt by XCEL and Martin, respectively, of one or more certificates (registered in its or her name, respectively) evidencing the Common Stock to be acquired by XCEL and Martin, respectively, pursuant to this Agreement, as set forth on Schedule A attached hereto. B. The accuracy in all material respects on the Closing Date of the representations and warranties made by IFT in this Agreement as if made on the Closing Date (except for representations and warranties which, by their express terms, speak as of and relate to a specified date, in which case such accuracy shall be measured as of such specified date) and the performance by IFT in all material respects on or before the Closing Date of all covenants and agreements of IFT required to be performed by it pursuant to this Agreement on or before the Closing Date. C. There not having occurred (i) any general suspension of trading in, or limitation on prices listed for, the Common Stock of IFT on NASDAQ, (ii) the declaration of a banking moratorium or any suspension of payments in respect of banks in the United States, or (iii) in the case of the foregoing existing at the date of this Agreement, a material acceleration or worsening thereof. D. There not having occurred any event or development, and there being in existence no condition, having or which reasonably and forseeably would have a Material Adverse Effect. E. The absence of any law or order, ruling, judgment or writ of any court or public or governmental authority restraining, enjoining or otherwise prohibiting any of the transactions contemplated by this Agreement. F. XCEL's and Martin's receipt of (1) a duly executed Registration Rights Agreement in form and substance satisfactory to them and (2) a duly executed Put and Call Agreement in form and substance satisfactory to them. G. XCEL's receipt of an Assignment of the Equipment Lease without recourse and the XCEL Note duly endorsed to the order of XCEL without recourse and a Mutual Release between TNC and First Atlanta Financial Group, LLC in form and substance satisfactory to XCEL. 7 IX. SURVIVAL; INDEMNIFICATION. A. The representations, warranties and covenants made by each of IFT, XCEL and Martin in this Agreement, and any annexes, schedules and exhibits hereto and in each instrument, agreement and certificate entered into and delivered by either of them pursuant to this Agreement, shall survive the Closing and the consummation of the transactions contemplated hereby for a period of one year. In the event of a breach or violation of any of such representations, warranties or covenants, the party to whom such representations, warranties or covenants have been made shall have all rights and remedies for such breach or violation available to it under the provisions of this Agreement or otherwise, whether at law or in equity, irrespective of any investigation made by or on behalf of such party on or prior to the Closing Date. B. IFT hereby agrees to indemnify and hold harmless XCEL, Martin, their respective affiliates and their respective officers, directors, partners and members (collectively, the "XCEL Indemnitees"), from and against any and all losses, claims, damages, judgments, penalties, liabilities and deficiencies (collectively, "Losses"), and agrees to reimburse XCEL Indemnitees for all out-of-pocket expenses (including the reasonable fees and expenses of legal counsel), in each case promptly as incurred by XCEL Indemnitees and to the extent arising out of or in connection with: 1. any misrepresentation, omission of fact or breach of any of IFT's representations or warranties contained in this Agreement, the exhibits hereto or any instrument, agreement or certificate entered into or delivered by IFT pursuant to this Agreement; or 2. any failure by IFT to perform in any material respect any of its covenants, agreements, undertakings or obligations set forth in this Agreement, the exhibits hereto or any instrument, agreement or certificate entered into or delivered by IFT pursuant to this Agreement. C. XCEL and Martin hereby agree severally to indemnify and hold harmless IFT, its Affiliates and their respective officers, directors, partners and members (collectively, the "IFT Indemnitees"), from and against any and all Losses, and agrees to reimburse IFT Indemnitees for all out-of-pocket expenses (including the reasonable fees and expenses of legal counsel), in each case promptly as incurred by IFT Indemnitees and to the extent arising out of or in connection with: 1. any misrepresentation, omission of fact, or breach of any of XCEL or Martin's representations or warranties contained in this Agreement, the exhibits hereto or any instrument, agreement or certificate entered into or delivered by XCEL and Martin pursuant to this Agreement; or 2. any failure by XCEL or Martin to perform in any material respect any of its covenants, agreements, undertakings or obligations set forth in this Agreement or any instrument, certificate or agreement entered into or delivered by XCEL or Martin pursuant to this Agreement. 8 D. Promptly after receipt by either party hereto seeking indemnification pursuant to this Section IX (an "Indemnified Party") of written notice of any investigation, claim, proceeding or other action in respect of which indemnification is being sought (each, a "Claim"), the Indemnified Party promptly shall notify the party against whom indemnification pursuant to this Section IX is being sought (the "Indemnifying Party") of the commencement thereof; but the omission to so notify the Indemnifying Party shall not relieve it from any liability that it otherwise may have to the Indemnified Party, except to the extent that the Indemnifying Party is materially prejudiced and forfeits substantive rights and defenses by reason of such failure. In connection with any Claim, the Indemnifying Party shall be entitled to assume the defense thereof. Notwithstanding the assumption of the defense of any Claim by the Indemnifying Party, the Indemnified Party shall have the right to employ separate legal counsel (together with appropriate local counsel) and to participate in the defense of such Claim, and the Indemnifying Party shall bear the reasonable fees, out-of-pocket costs and expenses of such separate legal counsel to the Indemnified Party if (and only if): (x) the Indemnifying Party shall have agreed to pay such fees, out-of-pocket costs and expenses, (y) the Indemnified Party and the Indemnifying Party reasonably shall have concluded that representation of the Indemnified Party and the Indemnifying Party by the same legal counsel would not be appropriate (i) due to actual or, as reasonably determined by legal counsel to the Indemnified Party, potentially differing interests between such parties in the conduct of the defense of such Claim, or (ii) if there may be legal defenses available to the Indemnified Party that are in addition to or disparate from those available to the Indemnifying Party and which can not be presented by counsel to the Indemnifying Party, or (z) the Indemnifying Party shall have failed to employ legal counsel reasonably satisfactory to the Indemnified Party within a reasonable period of time after notice of the commencement of such Claim. If the Indemnified Party employs separate legal counsel in circumstances other than as described in clauses (x), (y) or (z) above, the fees, costs and expenses of such legal counsel shall be borne exclusively by the Indemnified Party. Except as provided above, the Indemnifying Party shall not, in connection with any Claim in the same jurisdiction, be liable for the fees and expenses of more than one firm of legal counsel for the Indemnified Party (together with appropriate local counsel). The Indemnifying Party shall not, without the prior written consent of the Indemnified Party (which consent shall not unreasonably be withheld), settle or compromise any Claim or consent to the entry of any judgment that does not include an unconditional release of the Indemnified Party from all liabilities with respect to such Claim or judgment. E. In the event one party hereunder should have a claim for indemnification that does not involve a claim or demand being asserted by a third party, the Indemnified Party promptly shall deliver notice of such claim to the Indemnifying Party. If the Indemnified Party disputes the claim, such dispute shall be resolved by mutual agreement of the Indemnified Party and the Indemnifying Party or by binding arbitration conducted in accordance with the procedures and rules of the American Arbitration Association. Judgment upon any award rendered by any arbitrators may be entered in any court having competent jurisdiction thereof. 9 X. GOVERNING LAW: MISCELLANEOUS. This Agreement shall be governed by and interpreted in accordance with the laws of the Commonwealth of Pennsylvania, without regard to the conflicts of law principles of such state. Each of the parties consents to the jurisdiction of the federal courts whose districts encompass any part of the City of Philadelphia or the state courts of Commonwealth of Pennsylvania sitting in the City of Philadelphia in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. A facsimile transmission of this signed Agreement shall be legal and binding on all parties hereto. This Agreement may be signed in one or more counterparts, each of which shall be deemed an original. The headings of this Agreement have been inserted for convenience of reference only and shall not form part of, or affect the interpretation of, this Agreement. 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. This Agreement may be amended only by an instrument in writing signed by the party to be charged with enforcement. This Agreement supersedes all prior agreements and understandings among the parties hereto with respect to the subject matter hereof. XI. NOTICES. Except as may be otherwise provided herein, any notice or other communication or delivery required or permitted hereunder shall be in writing and shall be delivered personally or sent by certified mail, postage prepaid, or by a nationally recognized overnight courier service, by facsimile with confirmation back if followed promptly by first class mail, and shall be deemed given when so delivered personally or by overnight courier service, or, if mailed, three (3) days after the date of deposit in the United States mails, as follows: (1) if to XCEL: 5500 Interstate North Parkway Suite 515 Atlanta, GA 30328 (2) if to Elaine Martin: 2274 E. Yunsoo Big Canoe Jasper, GA 30143 (3) if to IFT: 10 Interactive Flight Technologies, Inc. 222 N. 44th Street Phoenix, AZ 85034 Attention: Irvin L. Gross with a copy to: Mesirov Gelman Jaffe Cramer Jamieson, LLP 1735 Market Street Suite 3800 Philadelphia, PA 19103-7598 Attn: Steven B. King, Esquire IFT, Martin or XCEL may change their respective foregoing address for notices by notice given pursuant to this Article XI. XII. CONFIDENTIALITY. Each of IFT, XCEL and Martin agrees to keep confidential and not to disclose to or use for the benefit of any third party the terms of this Agreement or any other information which at any time is communicated by the other party as being confidential without the prior written approval of the other party; provided, however, that this provision shall not apply to information which, at the time of disclosure, is already part of the public domain (except by breach of this Agreement) and information which is required to be disclosed by law (including, without limitation, pursuant to Item 10 of Rule 601 of Regulation S-K under the Securities Act and the Exchange Act). IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Agreement on the date first above written. INTERACTIVE FLIGHT TECHNOLOGIES, INC. By: ------------------------------ Name: Title: XCEL CAPITAL, LLC By: ------------------------------ Name: Title: (SEAL) ------------------------------ Elaine Martin 11 SCHEDULE A
Shares of Class A Face Amount of Redemption Common Stock of Series D Notes Premium to Holder IFT to be Received Held August 12, 1999 Total Due ------ ------------------ -------------- --------------- --------- XCEL Capital, LLC 75,000 $250,000 $ 91,250 $341,250 Elaine Martin 30,000 $100,000 $ 36,500 $136,500 ------ -------- ------- -------- Totals 105,000 $350,000 $127,750 $477,750 - ------ ------- -------- -------- --------
EX-10.30 12 WARRANT PURCHASE AGREEMENT WARRANT PURCHASE AGREEMENT THIS WARRANT PURCHASE AGREEMENT is made this 9th day of August, 1999, between ROBERT E. BENNINGER, JR. and SARA ANNE BENNINGER, husband and wife (collectively, the "Seller"), and INTERACTIVE FLIGHT TECHNOLOGIES, INC., a Delaware corporation ("IFT"). W I T N E S S E T H: WHEREAS, Seller is the holder of a Warrant dated October 20, 1998, to purchase 20,000 shares of the Common Stock of The Network Connection, Inc., a Georgia corporation, with principal executive offices at 1324 Union Hill Road, Alpharetta, Georgia 30201 ("TNC") (the "Warrant"); WHEREAS, IFT has agreed to purchase the Warrant in exchange for 2,857 shares of the Class A Common Stock of IFT, par value $.01 per share (the "Common Stock"), to be paid to Seller. NOW THEREFORE, for and in consideration of the premises and the mutual covenants contained herein, the parties hereto, intending to be legally bound, hereby agree as follows: I. PURCHASE AND SALE OF WARRANT A. Transaction. Seller hereby agrees to sell to IFT, and IFT agrees to purchase from the Seller, the Warrant, in a transaction exempt from the registration and prospectus delivery requirements of the Securities Act of 1933, as amended (the "Securities Act"). B. Purchase Price; Form of Payment. The consideration for the Warrant to be purchased by IFT shall be 2,857 shares of Common Stock payable to the Seller as set forth on Schedule A attached hereto. II. SELLER'S REPRESENTATIONS AND WARRANTIES The Seller represents and warrants to IFT as follows: A. The Seller is acquiring the Common Stock for Seller's own account, for investment purposes only and not with a view towards or in connection with the public sale or distribution thereof in violation of the Securities Act. B. The Seller is (i) experienced in making investments of the kind contemplated by this Agreement, (ii) capable, by reason of Seller's business and financial experience, of evaluating the relative merits and risks of an investment in the Common Stock, and (iii) able to afford the loss of Seller's investment in the Common Stock. C. The Seller understands that the Common Stock is being offered and sold by IFT in reliance on an exemption from the registration requirements of the Securities Act and equivalent state securities and "blue sky" laws, and that IFT is relying upon the accuracy of, and Seller's compliance with, the Seller's representations, warranties and covenants set forth in this Agreement to determine the availability of such exemption and the eligibility of the Seller to purchase the Common Stock. D. The Seller has been furnished with or provided access to all materials relating to the business, financial position and results of operations of IFT and TNC, and all other materials requested by the Seller to enable Seller to make an informed investment decision with respect to the Common Stock and the Warrant. E. The Seller acknowledges that Seller has been furnished with copies of IFT's Annual Report on Form 10-KSB for the fiscal year ended October 31, 1998, IFT's Quarterly Report on Form 10-QSB for the fiscal quarters ended January 31, 1999 and April 30, 1999, IFT's Schedule 13D dated May 11, 1999; and all other reports and documents heretofore filed by IFT with the Securities and Exchange Commission (the "Commission") pursuant to the Securities Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), since April 30, 1999 (collectively the "Commission Filings"). The Seller also acknowledges that Seller has been furnished with copies of TNC's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1998; TNC's Quarterly Report on Form 10-QSB for the fiscal quarter ended March 31, 1999; and all other reports and documents heretofore filed by TNC with the Commission pursuant to the Securities Act and the Exchange Act, since December 31, 1998. F. The Seller acknowledges that in making his decision to acquire the Common Stock, he has been given an opportunity to ask questions of and to receive answers from IFT's and TNC's respective executive officers, directors and management personnel concerning the business and affairs of IFT and TNC, respectively. G. The Seller understands that the Common Stock has not been approved or disapproved by the Commission or any state securities commission and that the foregoing authorities have not reviewed any documents or instruments in connection with the offer and sale to it of the Common Stock and have not confirmed or determined the adequacy or accuracy of any such documents or instruments. H. This Agreement has been duly and validly authorized, executed and delivered by the Seller and is a valid and binding agreement of the Seller enforceable against the Seller in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally. I. Neither the Seller nor any person acting on the behalf of the Seller has the intention of entering, or will enter into, prior to the closing, any put option, short position or other similar instrument or position with respect to the Common Stock and neither the Seller nor any person acting on the behalf of the Seller will use at any time shares of Common Stock acquired pursuant to this Agreement to settle any put option, short position or other similar instrument or position that may have been entered into prior to the execution of this Agreement. 2 J. The Seller has good, marketable, and unencumbered title to Seller's Warrant, free and clear of all liens, security interests, pledges, claims, options, and rights of others. There is no restriction on the Seller's right to transfer the Warrant to IFT pursuant to the terms of this Agreement. The Warrant has not been modified or amended. The Warrant is a binding obligation of TNC, in full force and effect, and is enforceable in accordance with its terms. The Warrant has not been exercised in whole or in part. K. Seller resides at 375 Champions View Drive, Alpharetta, GA 30004, and has the power to acquire the Common Stock pursuant to the terms hereof. III. IFT'S REPRESENTATIONS AND WARRANTIES IFT represents and warrants to and covenants and agrees with the Seller as follows: A. Capitalization. The authorized capital stock of IFT consists of 40,000,000 shares of Common Stock, of which 5,744,699 shares are outstanding on the date hereof and 5,000,000 shares of Preferred Stock, of which 3,000 Series A Preferred Shares are outstanding on the date hereof. All of the issued and outstanding shares of Common Stock and Preferred Stock have been duly authorized and validly issued and are fully paid and non-assessable. The Common Stock has been duly and validly authorized, and when issued by IFT, will be duly and validly issued, fully paid and non-assessable and will not subject the holder thereof to personal liability by reason of being such holder. B. Organization; Reporting IFT Status. IFT is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and is duly qualified as a foreign corporation in all jurisdictions in which the failure to so qualify would have a material adverse effect on the business, properties, prospects, condition (financial or otherwise) or results of operations of IFT or on the consummation of any of the transactions contemplated by this Agreement (a "Material Adverse Effect"). C. Authority; Validity and Enforceability. IFT has the requisite corporate power and authority to enter into this Agreement and to perform all of its obligations. The execution, delivery and performance by IFT of this Agreement, and the consummation by IFT of the transactions contemplated hereby has been duly authorized by all necessary corporate action on the part of IFT. This Agreement constitutes a valid and binding obligation of IFT enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally. The Common Stock has been duly and validly authorized for issuance by IFT and, when executed and delivered by IFT, will be valid and binding obligations of IFT enforceable against it in accordance with their terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally. D. Non-contravention. The execution and delivery by IFT of the this Agreement, the issuance of the Common Stock, and the consummation by IFT of the other 3 transactions contemplated hereby and thereby, do not and will not conflict with or result in a breach by IFT of any of the terms or provisions of, or constitute a default (or an event which, with notice, passage of time or both, would constitute a default) under (i) the Certificate of Incorporation or By-laws of IFT or (ii) except for such conflict, breach or default which would not have a Material Adverse Effect, any indenture, mortgage, deed of trust or other material agreement or instrument to which IFT is a party or by which its properties or assets are bound, or any law, rule, regulation, decree, judgment or order of any court or public or governmental authority having jurisdiction over IFT or any of IFT's properties or assets. E. Approvals. No authorization, approval or consent of any court or public or governmental authority is required to be obtained by IFT for the issuance of the Common Stock to the Sellers as contemplated by this Agreement, except such authorizations, approvals and consents that have been obtained by IFT prior to the date hereof. F. Commission Filings. None of the Commission Filings contained at the time they were filed any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they were made, not misleading. G. Absence of Certain Changes. Except as disclosed in the Commission Filings, since October 31, 1998, there has not occurred any change, event or development in the business, financial condition, or results of operations of IFT constituting, and there has not existed any condition having or reasonably likely to have, a Material Adverse Effect. H. Securities Law Matters. Based in part on the representations and warranties of The Sellers set forth in Article II hereof, the offer and issuance by IFT of the Common Stock pursuant to the terms of this Agreement is exempt from (i) the registration and prospectus delivery requirements of the Securities Act and the rules and regulations of the Commission thereunder and (ii) the registration and/or qualification provisions of all applicable United States state securities and "blue sky" laws. IFT shall not directly or indirectly take, and shall not permit any of its directors, officers or Affiliates directly or indirectly to take, any action, so as to make unavailable the exemption from the Securities Act registration being relied upon by IFT for the issuance to Seller of the Common Stock as contemplated by this Agreement. No form of general solicitation or advertising has been used or authorized by IFT or any of its officers, directors or Affiliates in connection with the offer or sale of the Common Stock as contemplated by this Agreement or any other agreement to which IFT is a party. I. Adequacy of Consideration. The Board of Directors of IFT has determined that the consideration to be received for the Common Stock to be issued pursuant to the terms of this Agreement is adequate in accordance with Section 153 of the Delaware General Corporation Law. 4 IV. COVENANTS AND ACKNOWLEDGMENTS. A. Restrictive Legend. The Seller acknowledges and agrees that, upon issuance pursuant to this Agreement, the Common Stock shall have endorsed thereon a legend in substantially the following form: THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE, AND ARE BEING OFFERED AND SOLD PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH LAWS. THESE SECURITIES MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR SUCH OTHER LAWS. THESE SECURITIES HAVE BEEN ISSUED OR SOLD IN RELIANCE ON PARAGRAPH (13) OF CODE SECTION 10-5-9 OF THE `GEORGIA SECURITIES ACT OF 1973,' AND MAY NOT BE SOLD OR TRANSFERRED EXCEPT IN A TRANSACTION WHICH IS EXEMPT UNDER SUCH ACT OR PURSUANT TO AN EFFECTIVE REGISTRATION UNDER SUCH ACT. B. Filings. IFT shall make all necessary SEC and "blue sky" filings required to be made by IFT in connection with the issuance of the Common Stock to the Seller as required by all applicable laws, and shall provide a copy thereof to the Seller promptly after such filing. VI. CLOSING. The date and time of the closing pursuant to this Agreement (the "Closing Date") shall be August 12, 1999, at 11:00 a.m. local time or such other time as shall be mutually agreed upon in writing at the offices of Mesirov Gelman Jaffe Cramer & Jamieson, LLP, 1735 Market Street, Philadelphia, PA 19103. VII. CONDITIONS TO IFT'S OBLIGATIONS. IFT's obligation to close hereunder is conditioned upon the following, any of which may be waived by IFT: A. The accuracy in all material respects on the Closing Date of the representations and warranties of the Seller contained in this Agreement as if made on the Closing Date (except for representations and warranties which, by their express terms, speak as of and relate to a specified date, in which case such accuracy shall be measured as of such specified date) and the performance by the Seller in all material respects on or before the Closing Date of the covenants and agreements of the Seller required to be performed by Seller pursuant to this Agreement on or before the Closing Date. 5 B. The absence of any law or order, ruling, judgment or writ of any court or public or governmental authority restraining, enjoining or otherwise prohibiting any of the transactions contemplated by this Agreement; C. IFT's receipt of (1) a duly executed Assignment of Warrant to IFT in form and substance satisfactory to IFT, (2) a General Release in form and substance satisfactory to IFT, and (3) the original Warrant. VIII. CONDITIONS TO SELLER'S OBLIGATIONS. The Seller's obligation to close hereunder is conditioned upon the following, any of which may be waived by the Seller: A. Seller's receipt of one or more certificates registered in the name of Seller evidencing the Common Stock to be acquired by the Seller, pursuant to this Agreement. B. The accuracy in all material respects on the Closing Date of the representations and warranties made by IFT in this Agreement as if made on the Closing Date (except for representations and warranties which, by their express terms, speak as of and relate to a specified date, in which case such accuracy shall be measured as of such specified date) and the performance by IFT in all material respects on or before the Closing Date of all covenants and agreements of IFT required to be performed by it pursuant to this Agreement on or before the Closing Date. C. There not having occurred (i) any general suspension of trading in, or limitation on prices listed for, the Common Stock of IFT on NASDAQ, (ii) the declaration of a banking moratorium or any suspension of payments in respect of banks in the United States, or (iii) in the case of the foregoing existing at the date of this Agreement, a material acceleration or worsening thereof. D. There not having occurred any event or development, and there being in existence no condition, having or which reasonably and forseeably would have a Material Adverse Effect. E. The absence of any law or order, ruling, judgment or writ of any court or public or governmental authority restraining, enjoining or otherwise prohibiting any of the transactions contemplated by this Agreement. F. Seller's receipt of a duly executed Registration Rights Agreement in form and substance satisfactory to Seller. IX. SURVIVAL; INDEMNIFICATION. A. The representations, warranties and covenants made by IFT and the Seller in this Agreement, and in each instrument, agreement and certificate entered into and delivered by either of them pursuant to this Agreement, shall survive the Closing and the consummation of the transactions contemplated hereby for a period of one year. In the event of a breach or violation 6 of any of such representations, warranties or covenants, the party to whom such representations, warranties or covenants have been made shall have all rights and remedies for such breach or violation available to it under the provisions of this Agreement or otherwise, whether at law or in equity, irrespective of any investigation made by or on behalf of such party on or prior to the Closing Date. B. IFT hereby agrees to indemnify and hold harmless Seller and Seller's executors, administrators, heirs and assigns (collectively, the "Seller Indemnitees"), from and against any and all losses, claims, damages, judgments, penalties, liabilities and deficiencies (collectively, "Losses"), and agrees to reimburse Seller Indemnitees for all out-of-pocket expenses (including the reasonable fees and expenses of legal counsel), in each case promptly as incurred by Seller Indemnitees and to the extent arising out of or in connection with: 1. any misrepresentation, omission of fact or breach of any of IFT's representations or warranties contained in this Agreement, or any instrument, agreement or certificate entered into or delivered by IFT pursuant to this Agreement; or 2. any failure by IFT to perform in any material respect any of its covenants, agreements, undertakings or obligations set forth in this Agreement, or any instrument, agreement or certificate entered into or delivered by IFT pursuant to this Agreement. C. The Seller hereby agrees to indemnify and hold harmless IFT, its affiliates and their respective officers, directors, partners and members (collectively, the "IFT Indemnitees"), from and against any and all Losses, and agrees to reimburse IFT Indemnitees for all out-of-pocket expenses (including the reasonable fees and expenses of legal counsel), in each case promptly as incurred by IFT Indemnitees and to the extent arising out of or in connection with: 1. any misrepresentation, omission of fact, or breach of any of the Seller's representations or warranties contained in this Agreement, or any instrument, agreement or certificate entered into or delivered by the Seller pursuant to this Agreement; or 2. any failure by the Seller to perform in any material respect any of Seller's covenants, agreements, undertakings or obligations set forth in this Agreement or any instrument, certificate or agreement entered into or delivered by the Seller pursuant to this Agreement. D. Promptly after receipt by either party hereto seeking indemnification pursuant to this Section IX (an "Indemnified Party") of written notice of any investigation, claim, proceeding or other action in respect of which indemnification is being sought (each, a "Claim"), the Indemnified Party promptly shall notify the party against whom indemnification pursuant to this Section IX is being sought (the "Indemnifying Party") of the commencement thereof; but the omission to so notify the Indemnifying Party shall not relieve it from any liability that it otherwise may have to the Indemnified Party, except to the extent that the Indemnifying Party is materially prejudiced and forfeits substantive rights and defenses by reason of such failure. In connection with any Claim, the Indemnifying Party shall be entitled to assume the defense thereof. Notwithstanding the assumption of the defense of any Claim by the Indemnifying Party, the Indemnified Party shall have the right to employ separate legal counsel (together with appropriate local counsel) and to 7 participate in the defense of such Claim, and the Indemnifying Party shall bear the reasonable fees, out-of-pocket costs and expenses of such separate legal counsel to the Indemnified Party if (and only if): (x) the Indemnifying Party shall have agreed to pay such fees, out-of-pocket costs and expenses, (y) the Indemnified Party and the Indemnifying Party reasonably shall have concluded that representation of the Indemnified Party and the Indemnifying Party by the same legal counsel would not be appropriate (i) due to actual or, as reasonably determined by legal counsel to the Indemnified Party, potentially differing interests between such parties in the conduct of the defense of such Claim, or (ii) if there may be legal defenses available to the Indemnified Party that are in addition to or disparate from those available to the Indemnifying Party and which can not be presented by counsel to the Indemnifying Party, or (z) the Indemnifying Party shall have failed to employ legal counsel reasonably satisfactory to the Indemnified Party within a reasonable period of time after notice of the commencement of such Claim. If the Indemnified Party employs separate legal counsel in circumstances other than as described in clauses (x), (y) or (z) above, the fees, costs and expenses of such legal counsel shall be borne exclusively by the Indemnified Party. Except as provided above, the Indemnifying Party shall not, in connection with any Claim in the same jurisdiction, be liable for the fees and expenses of more than one firm of legal counsel for the Indemnified Party (together with appropriate local counsel). The Indemnifying Party shall not, without the prior written consent of the Indemnified Party (which consent shall not unreasonably be withheld), settle or compromise any Claim or consent to the entry of any judgment that does not include an unconditional release of the Indemnified Party from all liabilities with respect to such Claim or judgment. E. In the event one party hereunder should have a claim for indemnification that does not involve a claim or demand being asserted by a third party, the Indemnified Party promptly shall deliver notice of such claim to the Indemnifying Party. If the Indemnified Party disputes the claim, such dispute shall be resolved by mutual agreement of the Indemnified Party and the Indemnifying Party or by binding arbitration conducted in accordance with the procedures and rules of the American Arbitration Association. Judgment upon any award rendered by any arbitrators may be entered in any court having competent jurisdiction thereof. X. GOVERNING LAW: MISCELLANEOUS. This Agreement shall be governed by and interpreted in accordance with the laws of the Commonwealth of Pennsylvania, without regard to the conflicts of law principles of such state. Each of the parties consents to the jurisdiction of the federal courts whose districts encompass any part of the City of Philadelphia or the state courts of Commonwealth of Pennsylvania sitting in the City of Philadelphia in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. A facsimile transmission of this signed Agreement shall be legal and binding on all parties hereto. This Agreement may be signed in one or more counterparts, each of which shall be deemed an original. The headings of this Agreement have been inserted for convenience of reference only and shall not form part of, or affect the interpretation of, this Agreement. 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 8 Agreement or the validity or enforceability of this Agreement in any other jurisdiction. This Agreement may be amended only by an instrument in writing signed by the party to be charged with enforcement. This Agreement supersedes all prior agreements and understandings among the parties hereto with respect to the subject matter hereof. XI. NOTICES. Except as may be otherwise provided herein, any notice or other communication or delivery required or permitted hereunder shall be in writing and shall be delivered personally or sent by certified mail, postage prepaid, or by a nationally recognized overnight courier service, by facsimile with confirmation back if followed promptly by first class mail, and shall be deemed given when so delivered personally or by overnight courier service, or, if mailed, three (3) days after the date of deposit in the United States mails, as follows: (1) if to Seller: 375 Champions View Drive Alpharetta, GA 30004 (2) if to IFT: Interactive Flight Technologies, Inc. 222 N. 44th Street Phoenix, AZ 85034 Attention: Irvin L. Gross with a copy to: Mesirov Gelman Jaffe Cramer Jamieson, LLP 1735 Market Street Suite 3800 Philadelphia, PA 19103-7598 Attn: Steven B. King, Esquire IFT and Seller may change their respective foregoing addresses for notices by notice given pursuant to this Article XI. XII. CONFIDENTIALITY. Seller and IFT agree to keep confidential and not to disclose to or use for the benefit of any third party the terms of this Agreement or any other information which at any time is communicated by the other party as being confidential without the prior written approval of the other party; provided, however, that this provision shall not apply to information which, at the time of disclosure, is already part of the public domain (except by breach of this Agreement) and information which is required to be disclosed by law 9 (including, without limitation, pursuant to Item 10 of Rule 601 of Regulation S-K under the Securities Act and the Exchange Act). XIII. GENDER CLAUSE. Whenever used herein, the singular number shall include the plural, the plural the singular, the use of any gender shall include all genders, and the words "Seller" and "IFT" wherever used, shall include their respective heirs, executors, administrators, successors and assigns. IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Agreement on the date first above written. INTERACTIVE FLIGHT TECHNOLOGIES, INC. By: ------------------------------ Name: Title: (SEAL) ----------------------------- Robert E. Benninger, Jr. (SEAL) ----------------------------- Sara Anne Benninger 10 EX-10.31 13 REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT is dated this 12th day of August, 1999 (this "Agreement") between Interactive Flight Technologies, Inc., a Delaware corporation, with principal offices located at 222 N. 44th Street, Phoenix, Arizona 85034 (the "Company"), and the undersigned (the "Initial Investors"). W I T N E S S E T H: WHEREAS, upon the terms and subject to the conditions of that certain Securities Purchase Agreement dated August 9, 1999, between the Initial Investors and the Company (the "Securities Purchase Agreement"), the Company has agreed to issue to the Initial Investors in the aggregate 105,000 shares of its Class A Common Stock (the "Common Stock"); and WHEREAS, to induce the Initial Investors to execute and deliver the Securities Purchase Agreement, the Company has agreed to provide with respect to the Common Stock issued certain registration rights under the Securities Act (as hereinafter defined); NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Definitions. (a) As used in this Agreement, the following terms shall have the following respective meanings: (i) "Commission" means the Securities and Exchange Commission. (ii) "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder, or any similar successor statute. (iii) "Investors" means the Initial Investors and any transferee or assignee of Registrable Securities who agrees to become bound by all of the terms and provisions of this Agreement in accordance with Section 8 hereof. (iv) "Person" means any individual, partnership, corporation, limited liability company, joint stock company, association, trust, unincorporated organization, or a government or agency or political subdivision thereof. (v) "Prospectus" means the prospectus (including, without limitation, any preliminary prospectus and any final prospectus filed pursuant to Rule 424(b) under the Securities Act, including any prospectus that discloses information previously omitted from a prospectus filed as part of an effective registration statement in reliance on Rule 430A under the Securities Act) included in the Registration Statement, as amended or supplemented by any prospectus supplement with respect to the terms of the offering of any portion of the Registrable Securities covered by the Registration Statement and by all other amendments and supplements to such prospectus, including all material incorporated by reference in such prospectus and all documents filed after the date of such prospectus by the Company under the Exchange Act and incorporated by reference therein. (vi) "Registrable Securities" means the Common Stock issued or issuable pursuant to the Securities Purchase Agreement; provided, however, a share of Common Stock shall cease to be a Registrable Security for purposes of this Agreement when it no longer is a Restricted Security. (vii) "Registration Statement" means a registration statement of the Company filed on an appropriate form under the Securities Act providing for the registration of, and the sale on a continuous or delayed basis by the holders of, all of the Registrable Securities pursuant to Rule 415 under the Securities Act, including the Prospectus contained therein and forming a part thereof, any amendments to such registration statement and supplements to such Prospectus, and all exhibits and other material incorporated by reference in such registration statement and Prospectus. (viii) "Restricted Security" means any share of Common Stock issued or issuable pursuant to the Securities Purchase Agreement except any such share that (i) has been registered pursuant to an effective registration statement under the Securities Act and sold in a manner contemplated by the Prospectus included in the Registration Statement, (ii) has been transferred in compliance with the resale provisions of Rule 144 under the Securities Act (or any successor provision thereto) or is transferable pursuant to paragraph (k) of Rule 144 under the Securities Act (or any successor provision thereto), or (iii) otherwise has been transferred and a new share of Common Stock not subject to transfer restrictions under the Securities Act has been delivered by or on behalf of the Company. (ix) "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder, or any similar successor statute. (b) All capitalized terms used and not defined herein have the respective meaning assigned to them in the Securities Purchase Agreement. 2. Registration. (a) Filing and Effectiveness of Registration Statement. The Company shall use its best efforts to prepare and file with the Commission not later than December 31, 1999, a Registration Statement relating to the offer and sale of the Registrable 2 Securities, and shall use its best efforts to cause the Commission to declare such Registration Statement effective under the Securities Act as promptly as practicable after filing. The Company shall notify the Initial Investors by written notice that such Registration Statement has been declared effective by the Commission promptly after such declaration by the Commission. Notwithstanding the foregoing provisions of this Section 2(a), the Company may defer such filing one time for a period not to exceed 30 days if the Board of Directors of the Company determines in good faith that because of valid business reasons, including pending mergers or other business combination transactions, the planned acquisition or divestiture of assets, pending material corporate developments and similar events, it is in the best interests of the Company to defer such filing. In such event, the Company shall provide the Investors with written notice of such deferral, which notice need not specify the nature of the event giving rise to such deferral. (b) Eligibility for Use of Form S-3. The Company represents and warrants that it meets the requirements for use of Form S-3 for registration of the sale by the Initial Investors, and the Company shall file all reports and information required to be filed by it with the Commission in a timely manner and take all such other action so as to maintain such eligibility for the use of such form. (c) Piggyback Obligation. (i) If the Company, after the date of this Agreement, proposes to register any of its warrants or any other shares of common stock of the Company under the Securities Act (other than a registration (A) on Form S-8 or S-4 or any successor or similar forms, (B) relating to Common Shares or any other shares of common stock of the Company issuable upon exercise of employee share options or in connection with any employee benefit or similar plan of the Company, (C) in connection with a direct or indirect acquisition by the Company of another Person or any transaction with respect to which Rule 145 (or any successor provision) under the Securities Act applies, or (D) on behalf of the Shaar Fund, Ltd. and its permitted successors and assigns), whether or not for sale for its own account, it will each such time, give prompt written notice at least twenty (20) days prior to the anticipated filing date of the registration statement relating to such registration to the Investors, which notice shall set forth such Investors' rights under this Section 2(c) and shall offer the Investors the opportunity to include in such registration statement such number of Registrable Securities owned by such Investors as the Investors may request. Upon the written request of an Investor made within ten (10) days after the receipt of notice from the Company (which request shall specify the number of Registrable Securities intended to be disposed of by such Investor), the Company will use its best efforts to effect the registration under the Securities Act of all Registrable Securities that the Company has been so requested to register by the Investors, to the extent requisite to permit the disposition of the Registrable Securities so to be registered; provided, however, that (A) if such registration involves an underwritten offering, the Investors who elect to participate in such offering must sell their Registrable Securities to the underwriters selected as provided in Section 2(c)(ii) hereof on the same terms and conditions as apply to the Company and the other prospective sellers (if any) and (B) if, at any time after giving written notice of its intention to register any securities pursuant to this Section 2(c) and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to register such securities, the Company shall give written notice to the Investors and, thereupon, shall be relieved of its obligation to register any securities in connection with such registration. The Company's obligations under this 3 Section 2(c) shall terminate on the date that the registration statement to be filed in accordance with Section 2(a) is declared effective by the Commission. (ii) If a registration pursuant to this Section 2(c) involves an underwritten offering and the managing underwriter thereof advises the Company that, in its view, the number of warrants or other shares of Common Stock that the Company and the Investors and all other prospective sellers holding registration rights intend to include in such registration exceeds the largest number of shares of Common Stock or warrants that can be sold without having an adverse effect on such offering (the "Maximum Offering Size"), the Company will include in such registration, only that number of shares of common stock or warrants, as applicable, such that the number of Registrable Securities registered does not exceed the Maximum Offering Size, with the difference between the number of shares in the Maximum Offering Size and the number of shares to be issued by the Company and by the Shaar Fund, Ltd. (if any) in the aggregate to be allocated among the Investors and such other prospective sellers (other than the Company and the Shaar Fund, Ltd.) pro rata on the basis of the relative number of Registrable Securities to be offered for sale under such registration by each of the Investors and such other prospective sellers (other than the Company and the Shaar Fund, Ltd.). If as a result of the proration provisions of this Section 2(c)(ii), any Investor is not entitled to include all such Registrable Securities in such registration, any such Investor may elect to withdraw its request to include any Registrable Securities in such registration. With respect to registrations pursuant to this Section 2(c), the number of securities required to satisfy any underwriters' over-allotment option shall be allocated pro rata among the Company, the Investors, the Shaar Fund, Ltd., and the other prospective sellers on the basis of the relative number of securities otherwise to be included by each of them in the registration with respect to which such over-allotment option relates. 3. Obligations of the Company. In connection with any required registration of the Registrable Securities under this Agreement, the Company shall: (a) Promptly (i) prepare and file with the Commission such amendments (including post-effective amendments) to the Registration Statement and supplements to the Prospectus as may be necessary to keep the Registration Statement continuously effective and in compliance with the provisions of the Securities Act applicable thereto so as to permit the Prospectus forming part thereof to be current and useable by Investors for resales of the Registrable Securities for a period of two (2) years from the date on which the Registration Statement is first declared effective by the Commission (the "Effective Time") or such shorter period that will terminate when all the Registrable Securities covered by the Registration Statement have been sold pursuant thereto in accordance with the plan of distribution provided in the Prospectus, redeemed by the Company, transferred pursuant to Rule 144 under the Securities Act or otherwise transferred in a manner that results in the delivery of new securities not subject to transfer restrictions under the Securities Act (the "Registration Period") and (ii) take all lawful action such that each of (A) the Registration Statement and any amendment thereto does not, when it becomes effective, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, not misleading and (B) the Prospectus forming part of the Registration 4 Statement, and any amendment or supplement thereto, does not at any time during the Registration Period include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Notwithstanding the foregoing provisions of this Section 3(a), the Company may, during the Registration Period, suspend the use of the Prospectus for a period not to exceed 60 days (whether or not consecutive) in any 12-month period if the Board of Directors of the Company determines in good faith that because of valid business reasons, including pending mergers or other business combination transactions, the planned acquisition or divestiture of assets, pending material corporate developments and similar events, it is in the best interests of the Company to suspend such use, and prior to or contemporaneously with suspending such use the Company provides the Investors with written notice of such suspension, which notice need not specify the nature of the event giving rise to such suspension. At the end of any such suspension period, the Company shall provide the Investors with written notice of the termination of such suspension. (b) During the Registration Period, comply with the provisions of the Securities Act with respect to Registrable Securities covered by the Registration Statement until such time as all of such Registrable Securities have been disposed of in accordance with the intended methods of disposition by the Investors as set forth in the Prospectus forming part of the Registration Statement; (c) (i) Prior to the filing with the Commission of any Registration Statement (including any amendments thereto) and the distribution or delivery of any Prospectus (including any supplements thereto), provide (A) draft copies thereof to the Investors and reflect in such documents all such comments as the Investors (and their counsel) reasonably may propose and (B) to the Investors a copy of the accountant's consent letter to be included in the filing and (ii) furnish to each Investor whose Registrable Securities are included in the Registration Statement and its legal counsel identified to the Company, (A) promptly after the same is prepared and publicly distributed, filed with the Commission, or received by the Company, one copy of the Registration Statement, each Prospectus, and each amendment or supplement thereto, and (B) such number of copies of the Prospectus and all amendments and supplements thereto and such other documents, as such Investor may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such Investor; (d) (i) Register or qualify the Registrable Securities covered by the Registration Statement under such securities or "blue sky" laws of such jurisdictions as the Investors who hold a majority-in-interest of the Registrable Securities being offered reasonably request, (ii) prepare and file in such jurisdictions such amendments (including post-effective amendments) and supplements to such registrations and qualifications as may be necessary to maintain the effectiveness thereof at all times during the Registration Period, (iii) take all such other lawful actions as may be necessary to maintain such registrations and qualifications in effect at all times during the Registration Period, and (iv) take all such other lawful actions reasonably necessary or advisable to qualify the Registrable Securities for sale in such jurisdictions; provided, however, that the Company shall not be required in connection therewith or as a condition thereto to (A) qualify to do business in any jurisdiction where it would not 5 otherwise be required to qualify but for this Section 3(d), (B) subject itself to general taxation in any such jurisdiction or (C) file a general consent to service of process in any such jurisdiction; (e) As promptly as practicable after becoming aware of such event, notify each Investor of the occurrence of any event, as a result of which the Prospectus included in the Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and promptly prepare an amendment to the Registration Statement and supplement to the Prospectus to correct such untrue statement or omission, and deliver a number of copies of such supplement and amendment to each Investor as such Investor may reasonably request; (f) As promptly as practicable after becoming aware of such event, notify each Investor who holds Registrable Securities being sold (or, in the event of an underwritten offering, the managing underwriters) of the issuance by the Commission of any stop order or other suspension of the effectiveness of the Registration Statement at the earliest possible time and take all lawful action to effect the withdrawal, recession or removal of such stop order or other suspension; (g) Cause all the Registrable Securities covered by the Registration Statement to be listed on the principal national securities exchange or included in an inter-dealer quotation system of a registered national securities association, on or in which securities of the same class or series issued by the Company are then listed or included; (h) Maintain a transfer agent and registrar, which may be a single entity, for the Registrable Securities not later than the effective date of the Registration Statement; (i) Cooperate with the Investors who hold Registrable Securities being offered to facilitate the timely preparation and delivery of certificates for the Registrable Securities to be offered pursuant to the Registration Statement and enable such certificates for the Registrable Securities to be in such denominations or amounts, as the case may be, as the Investors reasonably may request and registered in such names as the Investor may request; and, within three (3) business days after a Registration Statement which includes Registrable Securities is declared effective by the Commission, deliver and cause legal counsel selected by the Company to deliver to the transfer agent for the Registrable Securities (with copies to the Investors whose Registrable Securities are included in such Registration Statement) an appropriate instruction and, to the extent necessary, an opinion of such counsel; (j) Take all such other lawful actions reasonably necessary to expedite and facilitate the disposition by the Investors of their Registrable Securities in accordance with the intended methods therefor provided in the Prospectus which are customary under the circumstances; (k) Make generally available to its security holders as soon as practicable, but in any event not later than eighteen (18) months after (i) the effective date (as 6 defined in Rule 158(c) under the Securities Act) of the Registration Statement, and (ii) the effective date of each post-effective amendment to the Registration Statement, as the case may be, an earnings statement of the Company and its subsidiaries complying with Section 11(a) of the Securities Act and the rules and regulations of the Commission thereunder (including, at the option of the Company, Rule 158); (l) In the event of an underwritten offering, promptly include or incorporate in a Prospectus supplement or post-effective amendment to the Registration Statement such information as the managers reasonably agree should be included therein and to which the Company does not reasonably object and make all required filings of such Prospectus supplement or post-effective amendment as soon as practicable after it is notified of the matters to be included or incorporated in such Prospectus supplement or post-effective amendment; (m) (i) Make reasonably available for inspection by any underwriter participating in any disposition pursuant to the Registration Statement, and any attorney, accountant or other agent retained by any such underwriter all relevant financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries, and (ii) cause the Company's officers, directors and employees to supply all information reasonably requested by such underwriter, attorney, accountant or agent in connection with the Registration Statement, in each case, as is customary for similar due diligence examinations; provided, however, that all records, information and documents that are designated in writing by the Company, in good faith, as confidential, proprietary or containing any material non-public information shall be kept confidential by such underwriter, attorney, accountant or agent (pursuant to an appropriate confidentiality agreement in the case of any such holder or agent), unless such disclosure is made pursuant to judicial process in a court proceeding (after first giving the Company an opportunity promptly to seek a protective order or otherwise limit the scope of the information sought to be disclosed) or is required by law, or such records, information or documents become available to the public generally or through a third party not in violation of an accompanying obligation of confidentiality; and provided further that, if the foregoing inspection and information gathering would otherwise disrupt the Company's conduct of its business, such inspection and information gathering shall, to the maximum extent possible, be coordinated by parties entitled thereto by one firm of counsel designed by and on behalf of the majority in interest of Investors and other parties; (n) In connection with any underwritten offering, make such representations and warranties to the Investors participating in such underwritten offering and to the managers, in form, substance and scope as are customarily made by the Company to underwriters in secondary underwritten offerings; (o) In connection with any underwritten offering, obtain opinions of counsel to the Company (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the managers) addressed to the underwriters, covering such matters as are customarily covered in opinions requested in secondary underwritten offerings (it being agreed that the matters to be covered by such opinions shall include, without limitation, as of the date of the opinion and as of the Effective Time of the Registration Statement or most recent post-effective amendment thereto, as the case may be, the absence from the Registration 7 Statement and the Prospectus, including any documents incorporated by reference therein, of an untrue statement of a material fact or the omission of a material fact required to be stated therein or necessary to make the statements therein (in the case of the Prospectus, in light of the circumstances under which they were made) not misleading, subject to customary limitations); (p) In connection with any underwritten offering, obtain "cold comfort" letters and updates thereof from the independent public accountants of the Company (and, if necessary, from the independent public accountants of any subsidiary of the Company or of any business acquired by the Company, in each case for which financial statements and financial data are, or are required to be, included in the Registration Statement), addressed to each underwriter participating in such underwritten offering (if such underwriter has provided such letter, representations or documentation, if any, required for such cold comfort letter to be so addressed), in customary form and covering matters of the type customarily covered in "cold comfort" letters in connection with secondary underwritten offerings; (q) In connection with any underwritten offering, deliver such documents and certificates as may be reasonably required by the managers, if any; and (r) In the event that any broker-dealer registered under the Exchange Act shall be an "Affiliate" (as defined in Rule 2729(b)(1) of the rules and regulations of the National Association of Securities Dealers, Inc. (the "NASD Rules") (or any successor provision thereto)) of the Company or has a "conflict of interest" (as defined in Rule 2720(b)(7) of the NASD Rules (or any successor provision thereto)) and such broker-dealer shall underwrite, participate as a member of an underwriting syndicate or selling group or assist in the distribution of any Registrable Securities covered by the Registration Statement, whether as a holder of such Registrable Securities or as an underwriter, a placement or sales agent or a broker or dealer in respect thereof, or otherwise, the Company shall assist such broker-dealer in complying with the requirements of the NASD Rules, including, without limitation, by (A) engaging a "qualified independent underwriter" (as defined in Rule 2720(b)(15) of the NASD Rules (or any successor provision thereto)) to participate in the preparation of the Registration Statement relating to such Registrable Securities, to exercise usual standards of due diligence in respect thereof and to recommend the public offering price of such Registrable Securities, (B) indemnifying such qualified independent underwriter to the extent of the indemnification of underwriters provided in Section 5 hereof, and (C) providing such information to such broker-dealer as may be required in order for such broker-dealer to comply with the requirements of the NASD Rules. 4. Obligations of the Investors. In connection with the registration of the Registrable Securities, the Investors shall have the following obligations: (a) It shall be a condition precedent to the obligations of the Company to complete the registration pursuant to this Agreement with respect to the Registrable Securities of a particular Investor that such Investor shall furnish to the Company such information regarding itself, the Registrable Securities held by it and the intended method of disposition of the Registrable Securities held by it as shall be reasonably required to effect the registration of such Registrable Securities and shall execute such documents in connection with such registration as the Company may reasonably request. At least seven (7) days prior to the first 8 anticipated filing date of the Registration Statement, the Company shall notify each Investor of the information the Company requires from each such Investor (the "Requested Information") if such Investor elects to have any of its Registrable Securities included in the Registration Statement. If at least two (2) business days prior to the anticipated filing date the Company has not received the Requested Information from an Investor (a "Non-Responsive Investor"), then the Company may file the Registration Statement without including Registrable Securities of such Non-Responsive Investor and have no further obligations to the Non-Responsive Investor with respect to such Registration Statement; (b) Each Investor by its acceptance of the Registrable Securities agrees to cooperate with the Company in connection with the preparation and filing of the Registration Statement hereunder, unless such Investor has notified the Company in writing of its election to exclude all of its Registrable Securities from the Registration Statement; and (c) Each Investor agrees that, upon receipt of any notice from the Company of the occurrence of any event of the kind described in Section 3(e) or 3(f) or of a notice pursuant to Section 3(a), it shall immediately discontinue its disposition of Registrable Securities pursuant to the Registration Statement covering such Registrable Securities until such Investor's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 3(e) or of receipt of notice from the Company pursuant to Section 3(a), as applicable, and, if so directed by the Company, such Investor shall deliver to the Company (at the expense of the Company) or destroy (and deliver to the Company a certificate of destruction) all copies in such Investor's possession, of the Prospectus covering such Registrable Securities current at the time of receipt of such notice. 5. Expenses of Registration. All expenses, other than underwriting discounts and commissions, incurred in connection with registrations, filings or qualifications pursuant to Section 2, but including, without limitation, all registration, listing, and qualifications fees, printing and engraving fees, accounting fees, and the fees and disbursements of counsel for the Company shall be borne by the Company. The Investors shall be responsible for payment of their share of any underwriting discounts or commissions and for expenses of their counsel. 6. Indemnification and Contribution. (a) Indemnification by Company. The Company shall indemnify and hold harmless each Investor and each underwriter, if any, which facilitates the disposition of Registrable Securities and each of their respective officers and directors and each person who controls such Investor or underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act (each such person being sometimes hereinafter referred to as an "Indemnified Person") from and against any losses, claims, damages or liabilities, joint or several, to which such Indemnified Person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Registration Statement or an omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, not misleading, or arise out of or are based upon an untrue statement or alleged untrue statement of a 9 material fact contained in any Prospectus or an omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and the Company hereby agrees to reimburse such Indemnified Person for all reasonable legal and other expenses incurred by them in connection with investigating or defending any such action or claim as and when such expenses are incurred; provided, however, that the Company shall not be liable to any such Indemnified Person in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon (i) an untrue statement or alleged untrue statement made in, or an omission or alleged omission from, such Registration Statement or Prospectus in reliance upon and in conformity with written information furnished to the Company by such Indemnified Person expressly for use therein or (ii) in the case of the occurrence of an event of the type specified in Section 3(e) or of the delivery of a notice pursuant to Section 3(a) or 3(f), the use by the Indemnified Person of an outdated or defective Prospectus after the Company has provided to such Indemnified Person an updated Prospectus correcting the untrue statement or alleged untrue statement or omission or alleged omission giving rise to such loss, claim, damage or liability. (b) Indemnification by the Investors and Underwriters. Each Investor agrees, as a consequence of the inclusion of any of its Registrable Securities in a Registration Statement, and each underwriter, if any, which facilitates the disposition of Registrable Securities shall agree, as a consequence of facilitating such disposition of Registrable Securities, severally and not jointly, to (i) indemnify and hold harmless the Company, its directors (including any person who, with his or her consent, is named in the Registration Statement as a director nominee of the Company), its officers who sign any Registration Statement and each person, if any, who controls the Company within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, against any losses, claims, damages or liabilities to which the Company or such other persons may become subject, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in such Registration Statement or Prospectus or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein (in light of the circumstances under which they were made, in the case of the Prospectus), not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such holder or underwriter expressly for use therein, and (ii) reimburse the Company for any legal or other expenses incurred by the Company in connection with investigating or defending any such action or claim as such expenses are incurred. (c) Notice of Claims, etc. Promptly after receipt by a party seeking indemnification pursuant to this Section 6 (an "Indemnified Party") of written notice of any investigation, claim, proceeding or other action in respect of which indemnification is being sought (each, a "Claim"), the Indemnified Party promptly shall notify the party against whom indemnification pursuant to this Section 6 is being sought (the "Indemnifying Party") of the commencement thereof; but the omission to so notify the Indemnifying Party shall not relieve it from any liability that it otherwise may have to the Indemnified Party, except to the extent that the Indemnifying Party is materially prejudiced and forfeits substantive rights and defenses by 10 reason of such failure. In connection with any Claim the Indemnifying Party shall be entitled to assume the defense thereof. Notwithstanding the assumption of the defense of any Claim by the Indemnifying Party, the Indemnified Party shall have the right to employ separate legal counsel and to participate in the defense of such Claim at the reasonable cost and expense of the Indemnifying Party if the Indemnified Party and the Indemnifying Party shall reasonably have concluded that representation of the Indemnified Party and the Indemnifying Party by the same legal counsel would not be appropriate due to actual or, as reasonably determined by legal counsel to the Indemnified Party, potentially differing interests between such parties in the conduct of the defense of such Claim, or if there may be legal defenses available to the Indemnified Party that are in addition to or disparate from those available to the Indemnifying Party, or the Indemnifying Party shall have failed to employ legal counsel reasonably satisfactory to the Indemnified Party within a reasonable period of time after notice of the commencement of such Claim. Except as provided above, the Indemnifying Party shall not, in connection with any Claim in the same jurisdiction, be liable for the fees and expenses of more than one firm of counsel for the Indemnified Party (together with appropriate local counsel). The Indemnifying Party shall not, without the prior written consent of the Indemnifying Party (which consent shall not unreasonably be withheld), settle or compromise any Claim or consent to the entry of any judgment that does not include an unconditional release of the Indemnifying Party from all liabilities with respect to such Claim or judgment. (d) Contribution. If the indemnification provided for in this Section 6 is unavailable to or insufficient to hold harmless an Indemnified Person under subsection (a) or (b) above in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each Indemnifying Party shall contribute to the amount paid or payable by such Indemnified Party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and the Indemnified Party in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative fault of such Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by such Indemnified Party or by such Indemnified Party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 6(d) were determined by pro rata allocation (even if the Investors or any underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in this Section 6(d). The amount paid or payable by an Indemnified Party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above shall be deemed to include any legal or other fees or expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The obligations of the Investors and any underwriters in this Section 6(d) to contribute shall be 11 several in proportion to the percentage of Registrable Securities registered or underwritten, as the case may be, by them and not joint. (e) Limitations on Indemnification. Notwithstanding any other provision of this Section 6, in no event shall any (i) Investor be required to undertake liability to any person under this Section 6 for any amounts in excess of the dollar amount of the proceeds to be received by such Investor from the sale of such Investor's Registrable Securities (after deducting any fees, discounts and commissions applicable thereto) pursuant to any Registration Statement under which such Registrable Securities are to be registered under the Securities Act and (ii) underwriter be required to undertake liability to any Person hereunder for any amounts in excess of the aggregate discount, commission or other compensation payable to such underwriter with respect to the Registrable Securities underwritten by it and distributed pursuant to the Registration Statement. (f) Non-Exclusive Obligations. The obligations of the Company under this Section 6 shall be in addition to any liability which the Company may otherwise have to any Indemnified Person and the obligations of any Indemnified Person under this Section 6 shall be in addition to any liability which such Indemnified Person may otherwise have to the Company. The remedies provided in this Section 6 are not exclusive and shall not limit any rights or remedies which may otherwise be available to an indemnified party at law or in equity. 7. Rule 144. With a view to making available to the Investors the benefits of Rule 144 under the Securities Act or any other similar rule or regulation of the Commission that may at any time permit the Investors to sell securities of the Company to the public without registration ("Rule 144"), the Company agrees to use reasonable commercial efforts to: (a) comply with the provisions of paragraph (c)(1) of Rule 144; and (b) file with the Commission in a timely manner all reports and other documents required to be filed by the Company pursuant to Section 13 or 15(d) under the Exchange Act; and, if at any time it is not required to file such reports but in the past had been required to or did file such reports, it will, upon the request of any Holder, make available other information as required by, and so long as necessary to permit sales of, its Registrable Securities pursuant to Rule 144. 8. Assignment. The rights to have the Company register Registrable Securities pursuant to this Agreement shall be automatically assigned by the Investors to any permitted transferee of all or any portion of such Registrable Securities only if: (a) the Investor agrees in writing with the transferee or assignee to assign such rights, and a copy of such agreement is furnished to the Company within a reasonable time after such assignment, (b) the Company is, within a reasonable time after such transfer or assignment, furnished with written notice of (i) the name and address of such transferee or assignee and (ii) the securities with respect to which such registration rights are being transferred or assigned, (c) immediately following such transfer or assignment, the securities so transferred or assigned to the transferee or assignee constitute Restricted Securities, and (d) at or before the time the Company received 12 the written notice contemplated by clause (b) of this sentence, the transferee or assignee agrees in writing with the Company to be bound by all of the provisions contained herein. 9. Amendment and Waiver. Any provision of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and Investors who hold a majority-in-interest of the Registrable Securities. Any amendment or waiver effected in accordance with this Section 9 shall be binding upon each Investor and the Company. 10. Miscellaneous. (a) A person or entity shall be deemed to be a holder of Registrable Securities whenever such person or entity owns of record such Registrable Securities. If the Company receives conflicting instructions, notices or elections from two or more persons or entities with respect to the same Registrable Securities, the Company shall act upon the basis of instructions, notice or election received from the registered owner of such Registrable Securities. (b) If, after the date hereof and prior to the Commission declaring the Registration Statement to be filed pursuant to Section 2(a) effective under the Securities Act, the Company grants to any Person any registration rights with respect to any Company securities which are more favorable to such other Person than those provided in this Agreement, then the Company forthwith shall grant (by means of an amendment to this Agreement or otherwise) identical registration rights to all Investors hereunder. (c) Except as may be otherwise provided herein, any notice or other communication or delivery required or permitted hereunder shall be in writing and shall be delivered personally or sent by certified mail, postage prepaid, or by a nationally recognized overnight courier service, and shall be deemed given when so delivered personally or by overnight courier service, or, if mailed, three (3) days after the date of deposit in the United States mails, as follows: 13 (1) if to the Company, to: The address set forth on Page 1 of this Agreement with a copy to: Mesirov Gelman Jaffe Cramer & Jamieson, LLP 1735 Market Street 38th Floor Philadelphia, Pennsylvania 19103-7598 Attn: Steven B. King, Esquire 2) if to the Initial Investors, to: XCEL Capital, LLC 5500 Interstate North Parkway Suite 515 Atlanta, GA 30328 and Elaine Martin 2274 E. Yunsoo Big Canoe Jasper, GA 30143 3) if to any other Investor, at such address as such Investor shall have provided in writing to the Company. The Company, the Initial Investors or any Investor may change the foregoing address by notice given pursuant to this Section 10(c). (d) Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof. (e) This Agreement shall be governed by and interpreted in accordance with the laws of the Commonwealth of Pennsylvania. Each of the parties consents to the jurisdiction of the Federal courts whose districts encompass any part of the City of Philadelphia, Pennsylvania or the state courts of the Commonwealth of Pennsylvania sitting in the City of Philadelphia in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. (f) The remedies provided in this Agreement are cumulative and not exclusive of any remedies provided by law. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provision, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their best efforts to find and employ an alternative means to achieve 14 the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable. (g) The Company shall not enter into any agreement with respect to its securities that is inconsistent with the rights granted to the holders of Registrable Securities in this Agreement or otherwise conflicts with the provisions hereof. Without limiting the generality of the foregoing, without the written consent of the Holders of a majority in interest of the Registrable Securities, the Company shall not grant to any person the right to request it to register any of its securities under the Securities Act unless the rights so granted are not otherwise in conflict or inconsistent with the provisions of this Agreement. The restrictions on the Company's rights to grant registration rights under this paragraph shall terminate on the date the Registration Statement to be filed pursuant to Section 2(a) is declared effective by the Commission. (h) This Agreement and the Securities Purchase Agreement, between the Company and the Initial Investors constitute the entire agreement among the parties hereto with respect to the subject matter hereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein. This Agreement and the Securities Purchase Agreement, supersede all prior agreements and undertakings among the parties hereto with respect to the subject matter hereof. (i) Subject to the requirements of Section 8 hereof, this Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties hereto. (j) All pronouns and any variations thereof refer to the masculine, feminine or neuter, singular or plural, as the context may require. (k) The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning thereof. (l) The Company acknowledges that any failure by the Company to perform its obligations under Section 2, or any delay in such performance could result in direct damages to the Investors and the Company agrees that, in addition to any other liability the Company may have by reason of any such failure or delay, the Company shall be liable for all direct damages caused by such failure or delay. (m) This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which shall constitute one and the same 15 agreement. A facsimile transmission of this signed Agreement shall be legal and binding on all parties hereto. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first above written. INTERACTIVE FLIGHT TECHNOLOGIES, INC. By: --------------------------------- Name: Title: XCEL CAPITAL, LLC By: --------------------------------- Name: Title: Managing Member (SEAL) -------------------------------- ELAINE MARTIN 16 EX-10.32 14 REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT is dated this 12th day of August, 1999 (this "Agreement"), between Interactive Flight Technologies, Inc., a Delaware corporation, with principal offices located at 222 N. 44th Street, Phoenix, Arizona 85034 (the "Company"), and the undersigned (the "Initial Investors"). W I T N E S S E T H: WHEREAS, upon the terms and subject to the conditions of those certain arrant Purchase Agreements each dated as of August 9, 1999, between each of the Initial Investors and the Company (collectively, the "Warrant Purchase Agreements"), the Company has agreed to issue to the Initial Investors in the aggregate 10,000 shares of its Class A Common Stock (the "Common Stock"); and WHEREAS, to induce each Initial Investor to execute and deliver his or her respective Warrant Purchase Agreement, the Company has agreed to provide with respect to the Common Stock issued certain registration rights under the Securities Act (as hereinafter defined); NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Definitions. (a) As used in this Agreement, the following terms shall have the following respective meanings: (i) "Commission" means the Securities and Exchange Commission. (ii) "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder, or any similar successor statute. (iii) "Investors" means the Initial Investors and any transferee or assignee of Registrable Securities who agrees to become bound by all of the terms and provisions of this Agreement in accordance with Section 8 hereof. (iv) "Person" means any individual, partnership, corporation, limited liability company, joint stock company, association, trust, unincorporated organization, or a government or agency or political subdivision thereof. (v) "Prospectus" means the prospectus (including, without limitation, any preliminary prospectus and any final prospectus filed pursuant to Rule 424(b) under the Securities Act, including any prospectus that discloses information previously omitted from a prospectus filed as part of an effective registration statement in reliance on Rule 430A under the Securities Act) included in the Registration Statement, as amended or supplemented by any prospectus supplement with respect to the terms of the offering of any portion of the Registrable Securities covered by the Registration Statement and by all other amendments and supplements to such prospectus, including all material incorporated by reference in such prospectus and all documents filed after the date of such prospectus by the Company under the Exchange Act and incorporated by reference therein. (vi) "Registrable Securities" means the Common Stock issued or issuable pursuant to the Warrant Purchase Agreements; provided, however, a share of Common Stock shall cease to be a Registrable Security for purposes of this Agreement when it no longer is a Restricted Security. (vii) "Registration Statement" means a registration statement of the Company filed on an appropriate form under the Securities Act providing for the registration of, and the sale on a continuous or delayed basis by the holders of, all of the Registrable Securities pursuant to Rule 415 under the Securities Act, including the Prospectus contained therein and forming a part thereof, any amendments to such registration statement and supplements to such Prospectus, and all exhibits and other material incorporated by reference in such registration statement and Prospectus. (viii) "Restricted Security" means any share of Common Stock issued or issuable pursuant to the Warrant Purchase Agreements except any such share that (i) has been registered pursuant to an effective registration statement under the Securities Act and sold in a manner contemplated by the Prospectus included in the Registration Statement, (ii) has been transferred in compliance with the resale provisions of Rule 144 under the Securities Act (or any successor provision thereto) or is transferable pursuant to paragraph (k) of Rule 144 under the Securities Act (or any successor provision thereto), or (iii) otherwise has been transferred and a new share of Common Stock not subject to transfer restrictions under the Securities Act has been delivered by or on behalf of the Company. (ix) "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder, or any similar successor statute. (b) All capitalized terms used and not defined herein have the respective meaning assigned to them in the Warrant Purchase Agreements. 2. Registration. (a) Filing and Effectiveness of Registration Statement. The Company shall use its best efforts to prepare and file with the Commission not later than December 31, 1999, a Registration Statement relating to the offer and sale of the Registrable Securities, and shall use its best efforts to cause the Commission to declare such Registration 2 Statement effective under the Securities Act as promptly as practicable after filing. The Company shall notify the Initial Investors by written notice that such Registration Statement has been declared effective by the Commission promptly after such declaration by the Commission. (b) Eligibility for Use of Form S-3. The Company agrees that at such time after December 31, 1999 as it meets all the requirements for the use of Securities Act Registration Statement on Form S-3 it shall file all reports and information required to be filed by it with the Commission in a timely manner and take all such other action so as to maintain such eligibility for the use of such form. (c) Piggyback Obligation. (i) If the Company, after the date of this Agreement, proposes to register any of its warrants or any other shares of common stock of the Company under the Securities Act (other than a registration (A) on Form S-8 or S-4 or any successor or similar forms, (B) relating to Common Shares or any other shares of common stock of the Company issuable upon exercise of employee share options or in connection with any employee benefit or similar plan of the Company, or (C) in connection with a direct or indirect acquisition by the Company of another Person or any transaction with respect to which Rule 145 (or any successor provision) under the Securities Act applies), whether or not for sale for its own account, it will each such time, give prompt written notice at least twenty (20) days prior to the anticipated filing date of the registration statement relating to such registration to the Investors, which notice shall set forth such Investors' rights under this Section 2(c) and shall offer the Investors the opportunity to include in such registration statement such number of Registrable Securities owned by such Investors as the Investors may request. Upon the written request of an Investor made within ten (10) days after the receipt of notice from the Company (which request shall specify the number of Registrable Securities intended to be disposed of by such Investor), the Company will use its best efforts to effect the registration under the Securities Laws of all Registrable Securities that the Company has been so requested to register by the Investors, to the extent requisite to permit the disposition of the Registrable Securities so to be registered; provided, however, that (A) if such registration involves an underwritten offering, the Investors who elect to participate in such offering must sell its Registrable Securities to the underwriters selected as provided in Section 2(c)(ii) hereof on the same terms and conditions as apply to the Company and the other prospective sellers (if any) (B) if, at any time after giving written notice of its intention to register any securities pursuant to this Section 2(c) and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to register such securities, the Company shall give written notice to the Investors and, thereupon, shall be relieved of its obligation to register any Registrable Securities in connection with such registration. The Company's obligations under this Section 2(c) shall terminate on the date that the registration statement to be filed in accordance with Section 2(a) is declared effective by the Commission. (ii) If a registration pursuant to this Section 2(c) involves an underwritten offering and the managing underwriter thereof advises the Company that, in its view, the number of warrants or other shares of Common Stock that the Company and the Investors and all other prospective sellers holding registration rights intend to include in such registration exceeds the largest number of shares of Common Stock or warrants that can be sold without having an adverse effect on such offering (the "Maximum Offering Size"), the Company 3 will include in such registration, only that number of shares of common stock or warrants, as applicable, such that the number of Registrable Securities registered does not exceed the Maximum Offering Size, with the difference between the number of shares in the Maximum Offering Size and the number of shares to be issued by the Company and by the Shaar Fund, Ltd. (if any) in the aggregate to be allocated among the Investors and such other prospective sellers (other than the Company and the Shaar Fund, Ltd.) pro rata on the basis of the relative number of Registrable Securities offered for sale under such registration by each of the Investors and such other prospective sellers (other than the Company and the Shaar Fund, Ltd.). If as a result of the proration provisions of this Section 2(c)(ii), any Investor is not entitled to include all such Registrable Securities in such registration, such Investor may elect to withdraw its request to include any Registrable Securities in such registration. With respect to registrations pursuant to this Section 2(c), the number of securities required to satisfy any underwriters' over-allotment option shall be allocated pro rata among the Company, the Shaar Fund, Ltd., the Investors and the other prospective sellers on the basis of the relative number of securities otherwise to be included by each of them in the registration with respect to which such over-allotment option relates. 3. Obligations of the Company. In connection with any required registration of the Registrable Securities under this Agreement, the Company shall: (a) Promptly (i) prepare and file with the Commission such amendments (including post-effective amendments) to the Registration Statement and supplements to the Prospectus as may be necessary to keep the Registration Statement continuously effective and in compliance with the provisions of the Securities Act applicable thereto so as to permit the Prospectus forming part thereof to be current and useable by Investors for resales of the Registrable Securities for a period of two (2) years from the date on which the Registration Statement is first declared effective by the Commission (the "Effective Time") or such shorter period that will terminate when all the Registrable Securities covered by the Registration Statement have been sold pursuant thereto in accordance with the plan of distribution provided in the Prospectus, redeemed by the Company, transferred pursuant to Rule 144 under the Securities Act or otherwise transferred in a manner that results in the delivery of new securities not subject to transfer restrictions under the Securities Act (the "Registration Period") and (ii) take all lawful action such that each of (A) the Registration Statement and any amendment thereto does not, when it becomes effective, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, not misleading and (B) the Prospectus forming part of the Registration Statement, and any amendment or supplement thereto, does not at any time during the Registration Period include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Notwithstanding the foregoing provisions of this Section 3(a), the Company may, during the Registration Period, suspend the use of the Prospectus for a period not to exceed 60 days (whether or not consecutive) in any 12-month period if the Board of Directors of the Company determines in good faith that because of valid business reasons, including pending mergers or other business combination transactions, the planned acquisition or divestiture of assets, pending material corporate developments and 4 similar events, it is in the best interests of the Company to suspend such use, and prior to or contemporaneously with suspending such use the Company provides the Investors with written notice of such suspension, which notice need not specify the nature of the event giving rise to such suspension. At the end of any such suspension period, the Company shall provide the Investors with written notice of the termination of such suspension. (b) During the Registration Period, comply with the provisions of the Securities Act with respect to Registrable Securities covered by the Registration Statement until such time as all of such Registrable Securities have been disposed of in accordance with the intended methods of disposition by the Investors as set forth in the Prospectus forming part of the Registration Statement; (c) (i) Prior to the filing with the Commission of any Registration Statement (including any amendments thereto) and the distribution or delivery of any Prospectus (including any supplements thereto), provide (A) draft copies thereof to the Investors and reflect in such documents all such comments as the Investors (and their counsel) reasonably may propose and (B) to the Investors a copy of the accountant's consent letter to be included in the filing and (ii) furnish to each Investor whose Registrable Securities are included in the Registration Statement and its legal counsel identified to the Company, (A) promptly after the same is prepared and publicly distributed, filed with the Commission, or received by the Company, one copy of the Registration Statement, each Prospectus, and each amendment or supplement thereto, and (B) such number of copies of the Prospectus and all amendments and supplements thereto and such other documents, as such Investor may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such Investor; (d) (i) Register or qualify the Registrable Securities covered by the Registration Statement under such securities or "blue sky" laws of such jurisdictions as the Investors who hold a majority-in-interest of the Registrable Securities being offered reasonably request, (ii) prepare and file in such jurisdictions such amendments (including post-effective amendments) and supplements to such registrations and qualifications as may be necessary to maintain the effectiveness thereof at all times during the Registration Period, (iii) take all such other lawful actions as may be necessary to maintain such registrations and qualifications in effect at all times during the Registration Period, and (iv) take all such other lawful actions reasonably necessary or advisable to qualify the Registrable Securities for sale in such jurisdictions; provided, however, that the Company shall not be required in connection therewith or as a condition thereto to (A) qualify to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(d), (B) subject itself to general taxation in any such jurisdiction or (C) file a general consent to service of process in any such jurisdiction; (e) As promptly as practicable after becoming aware of such event, notify each Investor of the occurrence of any event, as a result of which the Prospectus included in the Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and promptly prepare an amendment to the Registration Statement and supplement to the Prospectus to correct 5 such untrue statement or omission, and deliver a number of copies of such supplement and amendment to each Investor as such Investor may reasonably request; (f) As promptly as practicable after becoming aware of such event, notify each Investor who holds Registrable Securities being sold (or, in the event of an underwritten offering, the managing underwriters) of the issuance by the Commission of any stop order or other suspension of the effectiveness of the Registration Statement at the earliest possible time and take all lawful action to effect the withdrawal, recession or removal of such stop order or other suspension; (g) Cause all the Registrable Securities covered by the Registration Statement to be listed on the principal national securities exchange or included in an inter-dealer quotation system of a registered national securities association on or in which securities of the same class or series issued by the Company are then listed or included; (h) Maintain a transfer agent and registrar, which may be a single entity, for the Registrable Securities not later than the effective date of the Registration Statement; (i) Cooperate with the Investors who hold Registrable Securities being offered to facilitate the timely preparation and delivery of certificates for the Registrable Securities to be offered pursuant to the Registration Statement and enable such certificates for the Registrable Securities to be in such denominations or amounts, as the case may be, as the Investors reasonably may request and registered in such names as the Investor may request; and, within three (3) business days after a Registration Statement which includes Registrable Securities is declared effective by the Commission, deliver and cause legal counsel selected by the Company to deliver to the transfer agent for the Registrable Securities (with copies to the Investors whose Registrable Securities are included in such Registration Statement) an appropriate instruction and, to the extent necessary, an opinion of such counsel; (j) Take all such other lawful actions reasonably necessary to expedite and facilitate the disposition by the Investors of their Registrable Securities in accordance with the intended methods therefor provided in the Prospectus which are customary under the circumstances; (k) Make generally available to its security holders as soon as practicable, but in any event not later than eighteen (18) months after (i) the effective date (as defined in Rule 158(c) under the Securities Act) of the Registration Statement, and (ii) the effective date of each post-effective amendment to the Registration Statement, as the case may be, an earnings statement of the Company and its subsidiaries complying with Section 11(a) of the Securities Act and the rules and regulations of the Commission thereunder (including, at the option of the Company, Rule 158); (l) In the event of an underwritten offering, promptly include or incorporate in a Prospectus supplement or post-effective amendment to the Registration Statement such information as the managers reasonably agree should be included therein and to 6 which the Company does not reasonably object and make all required filings of such Prospectus supplement or post-effective amendment as soon as practicable after it is notified of the matters to be included or incorporated in such Prospectus supplement or post-effective amendment; (m) (i) Make reasonably available for inspection by any underwriter participating in any disposition pursuant to the Registration Statement, and any attorney, accountant or other agent retained by any such underwriter all relevant financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries, and (ii) cause the Company's officers, directors and employees to supply all information reasonably requested by such underwriter, attorney, accountant or agent in connection with the Registration Statement, in each case, as is customary for similar due diligence examinations; provided, however, that all records, information and documents that are designated in writing by the Company, in good faith, as confidential, proprietary or containing any material non-public information shall be kept confidential by such underwriter, attorney, accountant or agent (pursuant to an appropriate confidentiality agreement in the case of any such holder or agent), unless such disclosure is made pursuant to judicial process in a court proceeding (after first giving the Company an opportunity promptly to seek a protective order or otherwise limit the scope of the information sought to be disclosed) or is required by law, or such records, information or documents become available to the public generally or through a third party not in violation of an accompanying obligation of confidentiality; and provided further that, if the foregoing inspection and information gathering would otherwise disrupt the Company's conduct of its business, such inspection and information gathering shall, to the maximum extent possible, be coordinated by parties entitled thereto by one firm of counsel designed by and on behalf of the majority in interest of Investors and other parties; (n) In connection with any underwritten offering, make such representations and warranties to the Investors participating in such underwritten offering and to the managers, in form, substance and scope as are customarily made by the Company to underwriters in secondary underwritten offerings; (o) In connection with any underwritten offering, obtain opinions of counsel to the Company (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the managers) addressed to the underwriters, covering such matters as are customarily covered in opinions requested in secondary underwritten offerings (it being agreed that the matters to be covered by such opinions shall include, without limitation, as of the date of the opinion and as of the Effective Time of the Registration Statement or most recent post-effective amendment thereto, as the case may be, the absence from the Registration Statement and the Prospectus, including any documents incorporated by reference therein, of an untrue statement of a material fact or the omission of a material fact required to be stated therein or necessary to make the statements therein (in the case of the Prospectus, in light of the circumstances under which they were made) not misleading, subject to customary limitations); (p) In connection with any underwritten offering, obtain "cold comfort" letters and updates thereof from the independent public accountants of the Company (and, if necessary, from the independent public accountants of any subsidiary of the Company or of any business acquired by the Company, in each case for which financial statements and 7 financial data are, or are required to be, included in the Registration Statement), addressed to each underwriter participating in such underwritten offering (if such underwriter has provided such letter, representations or documentation, if any, required for such cold comfort letter to be so addressed), in customary form and covering matters of the type customarily covered in "cold comfort" letters in connection with secondary underwritten offerings; (q) In connection with any underwritten offering, deliver such documents and certificates as may be reasonably required by the managers, if any; and (r) In the event that any broker-dealer registered under the Exchange Act shall be an "Affiliate" (as defined in Rule 2729(b)(1) of the rules and regulations of the National Association of Securities Dealers, Inc. (the "NASD Rules") (or any successor provision thereto)) of the Company or has a "conflict of interest" (as defined in Rule 2720(b)(7) of the NASD Rules (or any successor provision thereto)) and such broker-dealer shall underwrite, participate as a member of an underwriting syndicate or selling group or assist in the distribution of any Registrable Securities covered by the Registration Statement, whether as a holder of such Registrable Securities or as an underwriter, a placement or sales agent or a broker or dealer in respect thereof, or otherwise, the Company shall assist such broker-dealer in complying with the requirements of the NASD Rules, including, without limitation, by (A) engaging a "qualified independent underwriter" (as defined in Rule 2720(b)(15) of the NASD Rules (or any successor provision thereto)) to participate in the preparation of the Registration Statement relating to such Registrable Securities, to exercise usual standards of due diligence in respect thereof and to recommend the public offering price of such Registrable Securities, (B) indemnifying such qualified independent underwriter to the extent of the indemnification of underwriters provided in Section 5 hereof, and (C) providing such information to such broker-dealer as may be required in order for such broker-dealer to comply with the requirements of the NASD Rules. 4. Obligations of the Investors. In connection with the registration of the Registrable Securities, the Investors shall have the following obligations: (a) It shall be a condition precedent to the obligations of the Company to complete the registration pursuant to this Agreement with respect to the Registrable Securities of a particular Investor that such Investor shall furnish to the Company such information regarding itself, the Registrable Securities held by him or her, and the intended method of disposition of the Registrable Securities held by him or her, as shall be reasonably required to effect the registration of such Registrable Securities, and shall execute such documents in connection with such registration as the Company may reasonably request. As least seven (7) days prior to the first anticipated filing date of the Registration Statement, the Company shall notify each Investor of the information the Company requires from each such Investor (the "Requested Information") if such Investor elects to have any of its Registrable Securities included in the Registration Statement. If at least two (2) business days prior to the anticipated filing date the Company has not received the Requested Information from an Investor (a "Non-Responsive Investor"), then the Company may file the Registration Statement without including Registrable Securities of such Non-Responsive Investor and have no further obligations to the Non-Responsive Investor with respect to such Registration Statement; 8 (b) Each Investor by its acceptance of the Registrable Securities agrees to cooperate with the Company in connection with the preparation and filing of the Registration Statement hereunder, unless such Investor has notified the Company in writing of its election to exclude all of its Registrable Securities from the Registration Statement; and (c) Each Investor agrees that, upon receipt of any notice from the Company of the occurrence of any event of the kind described in Section 3(e) or 3(f) or of a notice pursuant to Section 3(a), it shall immediately discontinue its disposition of Registrable Securities pursuant to the Registration Statement covering such Registrable Securities until such Investor's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 3(e) or of receipt of notice from the Company pursuant to Section 3(a), as applicable, and, if so directed by the Company, such Investor shall deliver to the Company (at the expense of the Company) or destroy (and deliver to the Company a certificate of destruction) all copies in such Investor's possession, of the Prospectus covering such Registrable Securities current at the time of receipt of such notice. 5. Expenses of Registration. All expenses, other than underwriting discounts and commissions, incurred in connection with registrations, filings or qualifications pursuant to Section 2, but including, without limitation, all registration, listing, and qualifications fees, printing and engraving fees, accounting fees, and the fees and disbursements of counsel for the Company shall be borne by the Company. The Investors shall be responsible for payment of their share of any underwriting discounts or commissions and for expenses of their counsel. 6. Indemnification and Contribution. (a) Indemnification by Company. The Company shall indemnify and hold harmless each Investor and each underwriter, if any, which facilitates the disposition of Registrable Securities and each of their respective officers and directors and each person who controls such Investor or underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act (each such person being sometimes hereinafter referred to as an "Indemnified Person") from and against any losses, claims, damages or liabilities, joint or several, to which such Indemnified Person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Registration Statement or an omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, not misleading, or arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Prospectus or an omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and the Company hereby agrees to reimburse such Indemnified Person for all reasonable legal and other expenses incurred by them in connection with investigating or defending any such action or claim as and when such expenses are incurred; provided, however, that the Company shall not be liable to any such Indemnified Person in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon (i) an untrue statement or alleged untrue statement made in, or an omission or alleged omission from, such Registration Statement or Prospectus in reliance upon 9 and in conformity with written information furnished to the Company by such Indemnified Person expressly for use therein or (ii) in the case of the occurrence of an event of the type specified in Section 3(e) or of the delivery of a notice pursuant to Section 3(a) or 3(f), the use by the Indemnified Person of an outdated or defective Prospectus after the Company has provided to such Indemnified Person an updated Prospectus correcting the untrue statement or alleged untrue statement or omission or alleged omission giving rise to such loss, claim, damage or liability. (b) Indemnification by the Investors and Underwriters. Each Investor agrees, as a consequence of the inclusion of any of its Registrable Securities in a Registration Statement, and each underwriter, if any, which facilitates the disposition of Registrable Securities shall agree, as a consequence of facilitating such disposition of Registrable Securities, severally and not jointly, to (i) indemnify and hold harmless the Company, its directors (including any person who, with his or her consent, is named in the Registration Statement as a director nominee of the Company), its officers who sign any Registration Statement and each person, if any, who controls the Company within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, against any losses, claims, damages or liabilities to which the Company or such other persons may become subject, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in such Registration Statement or Prospectus or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein (in light of the circumstances under which they were made, in the case of the Prospectus), not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such holder or underwriter expressly for use therein, and (ii) reimburse the Company for any legal or other expenses incurred by the Company in connection with investigating or defending any such action or claim as such expenses are incurred. (c) Notice of Claims, etc. Promptly after receipt by a party seeking indemnification pursuant to this Section 6 (an "Indemnified Party") of written notice of any investigation, claim, proceeding or other action in respect of which indemnification is being sought (each, a "Claim"), the Indemnified Party promptly shall notify the party against whom indemnification pursuant to this Section 6 is being sought (the "Indemnifying Party") of the commencement thereof; but the omission to so notify the Indemnifying Party shall not relieve it from any liability that it otherwise may have to the Indemnified Party, except to the extent that the Indemnifying Party is materially prejudiced and forfeits substantive rights and defenses by reason of such failure. In connection with any Claim the Indemnifying Party shall be entitled to assume the defense thereof. Notwithstanding the assumption of the defense of any Claim by the Indemnifying Party, the Indemnified Party shall have the right to employ separate legal counsel and to participate in the defense of such Claim at the reasonable cost and expense of the Indemnifying Party if the Indemnified Party and the Indemnifying Party shall reasonably have concluded that representation of the Indemnified Party and the Indemnifying Party by the same legal counsel would not be appropriate due to actual or, as reasonably determined by legal counsel to the Indemnified Party, potentially differing interests between such parties in the conduct of the defense of such Claim, or if there may be legal defenses available to the 10 Indemnified Party that are in addition to or disparate from those available to the Indemnifying Party, or the Indemnifying Party shall have failed to employ legal counsel reasonably satisfactory to the Indemnified Party within a reasonable period of time after notice of the commencement of such Claim. Except as provided above, the Indemnifying Party shall not, in connection with any Claim in the same jurisdiction, be liable for the fees and expenses of more than one firm of counsel for the Indemnified Party (together with appropriate local counsel). The Indemnifying Party shall not, without the prior written consent of the Indemnifying Party (which consent shall not unreasonably be withheld), settle or compromise any Claim or consent to the entry of any judgment that does not include an unconditional release of the Indemnifying Party from all liabilities with respect to such Claim or judgment. (d) Contribution. If the indemnification provided for in this Section 6 is unavailable to or insufficient to hold harmless an Indemnified Person under subsection (a) or (b) above in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each Indemnifying Party shall contribute to the amount paid or payable by such Indemnified Party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and the Indemnified Party in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative fault of such Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by such Indemnified Party or by such Indemnified Party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 6(d) were determined by pro rata allocation (even if the Investors or any underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in this Section 6(d). The amount paid or payable by an Indemnified Party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above shall be deemed to include any legal or other fees or expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The obligations of the Investors and any underwriters in this Section 6(d) to contribute shall be several in proportion to the percentage of Registrable Securities registered or underwritten, as the case may be, by them and not joint. (e) Limitations on Indemnification. Notwithstanding any other provision of this Section 6, in no event shall any (i) Investor be required to undertake liability to any person under this Section 6 for any amounts in excess of the dollar amount of the proceeds to be received by such Investor from the sale of such Investor's Registrable Securities (after deducting any fees, discounts and commissions applicable thereto) pursuant to any Registration Statement under which such Registrable Securities are to be registered under the Securities Act and (ii) underwriter be required to undertake liability to any Person hereunder for any amounts in excess of the aggregate discount, commission or other compensation payable to such underwriter 11 with respect to the Registrable Securities underwritten by it and distributed pursuant to the Registration Statement. (f) Non-Exclusive Obligations. The obligations of the Company under this Section 6 shall be in addition to any liability which the Company may otherwise have to any Indemnified Person and the obligations of any Indemnified Person under this Section 6 shall be in addition to any liability which such Indemnified Person may otherwise have to the Company. The remedies provided in this Section 6 are not exclusive and shall not limit any rights or remedies which may otherwise be available to an indemnified party at law or in equity. 7. Rule 144. With a view to making available to the Investors the benefits of Rule 144 under the Securities Act or any other similar rule or regulation of the Commission that may at any time permit the Investors to sell securities of the Company to the public without registration ("Rule 144"), the Company agrees to use reasonable commercial efforts to: (a) comply with the provisions of paragraph (c)(1) of Rule 144; and (b) file with the Commission in a timely manner all reports and other documents required to be filed by the Company pursuant to Section 13 or 15(d) under the Exchange Act; and, if at any time it is not required to file such reports but in the past had been required to or did file such reports, it will, upon the request of any Holder, make available other information as required by, and so long as necessary to permit sales of, its Registrable Securities pursuant to Rule 144. 8. Assignment. The rights to have the Company register Registrable Securities pursuant to this Agreement shall be automatically assigned by the Investors to any permitted transferee of all or any portion of such Registrable Securities only if: (a) the Investor agrees in writing with the transferee or assignee to assign such rights, and a copy of such agreement is furnished to the Company within a reasonable time after such assignment, (b) the Company is, within a reasonable time after such transfer or assignment, furnished with written notice of (i) the name and address of such transferee or assignee and (ii) the securities with respect to which such registration rights are being transferred or assigned, (c) immediately following such transfer or assignment, the securities so transferred or assigned to the transferee or assignee constitute Restricted Securities, and (d) at or before the time the Company received the written notice contemplated by clause (b) of this sentence, the transferee or assignee agrees in writing with the Company to be bound by all of the provisions contained herein. 12 9. Amendment and Waiver. Any provision of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and Investors who hold a majority-in-interest of the Registrable Securities. Any amendment or waiver effected in accordance with this Section 9 shall be binding upon each Investor and the Company. 10. Miscellaneous. (a) A person or entity shall be deemed to be a holder of Registrable Securities whenever such person or entity owns of record such Registrable Securities. If the Company receives conflicting instructions, notices or elections from two or more persons or entities with respect to the same Registrable Securities, the Company shall act upon the basis of instructions, notice or election received from the registered owner of such Registrable Securities. (b) If, after the date hereof and prior to the Commission declaring the Registration Statement to be filed pursuant to Section 2(a) effective under the Securities Act, the Company grants to any Person any registration rights with respect to any Company securities which are more favorable to such other Person than those provided in this Agreement, then the Company forthwith shall grant (by means of an amendment to this Agreement or otherwise) identical registration rights to all Investors hereunder. (c) Except as may be otherwise provided herein, any notice or other communication or delivery required or permitted hereunder shall be in writing and shall be delivered personally or sent by certified mail, postage prepaid, or by a nationally recognized overnight courier service, and shall be deemed given when so delivered personally or by overnight courier service, or, if mailed, three (3) days after the date of deposit in the United States mails, as follows: (1) if to the Company, to: The address set forth on the first page of this Agreement with a copy to: Mesirov Gelman Jaffe Cramer & Jamieson, LLP 1735 Market Street 38th Floor Philadelphia, Pennsylvania 19103-7598 Attn: Steven B. King, Esquire (2) to the Initial Investors, to: Robert E. Benninger, Jr. and Sara Anne Benninger 375 Champions View Drive Alpharetta, GA 30004 13 and Will Brantley 510 Champion Hill Drive Alpharetta, GA 30004 and Elaine Martin 2274 E. Yunsoo Big Canoe Jasper, GA 30143 (3) if to any other Investor, at such address as such Investor shall have provided in writing to the Company. The Company, the Initial Investors or any Investor may change the foregoing address by notice given pursuant to this Section 10(c). (d) Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof. (e) This Agreement shall be governed by and interpreted in accordance with the laws of the Commonwealth of Pennsylvania. Each of the parties consents to the jurisdiction of the federal courts whose districts encompass any part of the City of Philadelphia, Pennsylvania or the state courts of the Commonwealth of Pennsylvania sitting in the City of Philadelphia in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. (f) The remedies provided in this Agreement are cumulative and not exclusive of any remedies provided by law. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provision, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their best efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable. (g) The Company shall not enter into any agreement with respect to its securities that is inconsistent with the rights granted to the holders of Registrable Securities in 14 this Agreement or otherwise conflicts with the provisions hereof. Without limiting the generality of the foregoing, without the written consent of the Holders of a majority in interest of the Registrable Securities, the Company shall not grant to any person the right to request it to register any of its securities under the Securities Act unless the rights so granted are subject in all respect to the prior rights of the holders of Registrable Securities set forth herein, and are not otherwise in conflict or inconsistent with the provisions of this Agreement. The restrictions on the Company's rights to grant registration rights under this paragraph shall terminate on the date the Registration Statement to be filed pursuant to Section 2(a) is declared effective by the Commission. (h) This Agreement and the Warrant Purchase Agreements between the Company and the respective Initial Investors constitute the entire agreement among the parties hereto with respect to the subject matter hereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein. This Agreement and the Warrant Purchase Agreements supersede all prior agreements and undertakings among the parties hereto with respect to the subject matter hereof. (i) Subject to the requirements of Section 8 hereof, this Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties hereto. (j) All pronouns and any variations thereof refer to the masculine, feminine or neuter, singular or plural, as the context may require. (k) The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning thereof. (l) The Company acknowledges that any failure by the Company to perform its obligations under Section 2, or any delay in such performance could result in direct damages to the Investors and the Company agrees that, in addition to any other liability the Company may have by reason of any such failure or delay, the Company shall be liable for all direct damages caused by such failure or delay. 15 (m) This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement. A facsimile transmission of this signed Agreement shall be legal and binding on all parties hereto. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first above written. INTERACTIVE FLIGHT TECHNOLOGIES, INC. By: --------------------------------- Name: Title: (SEAL) ------------------------------- Robert E. Benninger, Jr. (SEAL) ------------------------------- Sara Anne Benninger (SEAL) ------------------------------- Will Brantley (SEAL) ------------------------------- Elaine Martin 16 EX-10.33 15 PUT/CALL AGREEMENT PUT/CALL AGREEMENT THIS PUT/CALL AGREEMENT is made this 12th day of August 1999 by and between Interactive Flight Technologies, Inc., a Delaware corporation (the "Company") and Elaine Martin ("Holder"). W I T N E S S E T H: WHEREAS, Holder is the owner of the number of shares of the Class A Common Stock of the Company (the "Shares") set forth on the signature page of this Agreement; WHEREAS, Company desires to grant to Holder the option to put the Shares to the Company at a price of $3.75 per Share at any time in the ten day period ending January 10, 2000; and WHEREAS, Holder desires to grant to Company the option to call the Shares at a price of $4.50 per Share at any time in the ten day period ending January 10, 2000. NOW, THEREFORE, in consideration of the foregoing, the mutual covenants herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, each intending to be legally bound hereby, agree as follows: 1. Put/Call Options. (a) The Company hereby grants to Holder the right and option to require Company to purchase any or all of the Shares on the terms and subject to the conditions hereinafter set forth in this Agreement (the "Put Option"). (b) Holder hereby grants to Company the right and option to purchase all or any of the Shares held by Holder, on the terms and subject to the conditions hereinafter set forth in this Agreement (the "Call Option"). 2. Price. (a) The purchase price to be paid, if the Put Option is exercised, shall be Three Dollars and Seventy-Five Cents ($3.75) per Share (the "Put Option Price"), which shall be paid at the Closing (as hereinafter defined) in the manner provided in this Agreement. (b) The purchase price to be paid, if the Call Option is exercised, shall be Four Dollars and Fifty Cents ($4.50) per Share (the "Call Option Price"), which shall be paid at the Closing in the manner provided in this Agreement. 3. Exercise of Put Option. The following provisions shall apply to exercise of the Put Option: (a) Holder shall exercise the Put Option by sending a notice of election (the "Put Notice of Election") to the Company in the form attached hereto and incorporated herein by reference. The Put Notice of Election shall be in writing, shall be sent to the Company at the address and in the manner set forth in subparagraph 10(c) hereof (or to such other address as shall then be applicable if such address has been changed in the manner set forth in such subparagraph), and shall contain the information about the Closing set forth in subparagraph 9(a) hereof. (b) If exercised, the Put Option may be exercised as to some or all of the Shares. (c) The Put Option may be exercised only during the period between 12:01 a.m. E.S.T. January 1, 2000 and 5:00 p.m. E.S.T. January 10, 2000 (the "Effective Period"). The date and time of the exercise of the Put Option shall be that date and time when the Put Notice of Election is actually received by the Company. (d) Payment for Shares shall be made by certified check payable to the order of Holder, or at the option of Holder, by wire transfer of immediately available funds to the bank account set forth on the Put Notice of Election. 4. Exercise of Call Option. The following provisions shall apply to exercise of the Call Option: (a) The Company shall exercise the Call Option by sending a notice of election (the "Call Notice of Election") to the Holder in the form attached hereto and incorporated herein by reference. The Call Notice of Election shall be in writing, shall be sent to the Holder at the address and in the manner set forth in subparagraph 10(c) hereof (or to such other address as shall then be applicable if such address has been changed in the manner set forth in such subparagraph), and shall contain the information about the Closing set forth in subparagraph 9(a) hereof. (b) If exercised, the Call Option may be exercised as to some or all of the Shares. (c) The Call Option may be exercised only during the Effective Period. The date and time of the exercise of the Call Option shall be that date and time when the Call Notice of Election is actually received by the Holder. (d) Payment for Shares shall be made by certified or bank cashier's check payable to the order of Holder. (e) In the event that Holder exercises the Put Option and the Company exercises the Call Option, then the Call Option exercise shall be void ab initio and Closing shall be held pursuant to the Put Option. 2 5. Term. Except for any obligations arising under this Agreement as a result of the proper exercise of the Call Option or the Put Option (which obligations shall survive termination of this Agreement), this Agreement shall terminate at the end of the Effective Period. 6. Change or Exchange of Capital Stock. (a) In the event that the outstanding shares of Class A Common Stock of the Company shall be changed into or exchanged for a different number or kind of shares of capital stock of the Company or shall be changed into or exchanged for a different number or kind of shares of capital stock or other securities of the Company or of another company (whether by reason of merger, consolidation, recapitalization, reclassification, split-up, or otherwise), then there shall be substituted for each remaining Share not acquired by exercise of either the Put Option or the Call Option prior to the record date for such merger, consolidation, recapitalization, reclassification, split-up, or otherwise, the number and kind of shares of capital stock or other securities into which each outstanding share of Class A Common Stock of the Company shall be so changed or for which each such share of capital stock shall be so exchanged. In the event that there shall be any such change or exchange, then (i) Holder shall be entitled to sell to the Company pursuant to the Put Option all of such capital stock and other securities into which each Share shall have been changed or for which it shall have been exchanged for the Put Option Price which would have been required to be paid for such Share assuming there had been no such change or exchange, and otherwise in accordance with the terms of this Agreement; and (ii) the Company shall be entitled to purchase from the Holder pursuant to the Call Option all of such capital stock and other securities into which each Share shall have been changed or for which it shall have been exchanged for the Call Option Price which would have been required to be paid for such Share assuming there had been no such change or exchange, and otherwise in accordance with the terms of this Agreement. (b) In the event that the outstanding Shares shall be subdivided into a greater or combined into a lesser number of such shares, whether by stock dividend, stock split or combination of shares, the Put Option Price and the Call Option Price shall be proportionately decreased or increased, as the case may be, and the number of remaining Shares (those not acquired by exercise of either the Put or Call Option prior to the record date of such stock dividend, stock split, or combination of shares) subject to the Put or Call Option shall be proportionately increased or decreased as the case may be, so as appropriately to reflect such subdivision or combination, effective immediately upon the effectiveness of such subdivision or combination. (c) No such adjustment shall be made, however, by reason of the issuance of shares of common stock of the Company for cash, property, or services; by way of stock options, stock warrants, subscription rights; or otherwise. 7. Representations and Warranties of Company. The Company hereby represents and warrants that this Agreement constitutes the valid and binding obligation of the Company, and is enforceable against it in accordance with its terms, except to the extent that the enforcement thereof is limited by bankruptcy, reorganization, insolvency, moratorium, or other similar laws or orders affecting the enforcement of creditors' rights generally, or by equitable principles. 3 8. Transfers. The Put Option is not transferable by Holder (otherwise than (if Holder is an individual) by will or pursuant to the laws of descent and distribution in the event of Holder`s death, in which event the Put Option may be exercised by the heirs or legal representatives of Holder). Any attempt at assignment, transfer, pledge or disposition of the Put Option contrary to the provisions hereof or the levy of any execution, attachment or similar process upon the Put Option shall be null and void and without force or effect. Any exercise of the Put Option by a person other than Holder shall be accompanied by appropriate proofs, satisfactory in form and substance to the Company, of the right of each person to exercise the Put Option. 9. Closing. (a) The Closing shall be held at a date and time to be selected by Holder or by the Company in the Put Notice of Election or Call Notice of Election, respectively; provided, however, that the date specified in the Put Notice of Election or Call Notice of Election shall not be less than fourteen (14) nor more than sixty (60) days after the date of such Put Notice of Election or Call Notice of Election, as the case may be. (b) Closing shall be held at the chief executive offices of the Company, or such other place as shall be agreed upon by the parties. (c) At Closing, the Company shall deliver or cause to be delivered to Holder the Put Option Price per Share or Call Option Price per Share, as applicable, for all of the Shares to be purchased by Company pursuant to the Put Notice of Election or Call Notice of Election and Holder shall deliver to the Company all of the Shares (or other securities) being purchased duly endorsed for transfer or with an executed stock power attached, in either such case with signature guaranteed by a member of the Stock Transfer Agents' Medallion Program. (d) If the Company defaults in the payment of any sums required to be paid pursuant to a valid exercise of the Put Option or of the Call Option, then all overdue amounts shall bear interest until paid from the date of closing as specified in the Put Notice of Election or Call Notice of Election, as the case may be, at a rate equal to the lower of (i) (2%) two percent per month (prorated for any partial month) or (ii) the maximum rate allowable by applicable law. 10. Miscellaneous. (a) Indulgences, Etc. Neither the failure nor any delay on the part of either party to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or of any other right, remedy, power or privilege, nor shall any waiver of any right, remedy, power or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power or privilege with respect to any other occurrence. No waiver shall be effective unless it is in writing and is signed by the party asserted to have granted such waiver. (b) Controlling Law. This Agreement and all questions relating to its validity, interpretation, performance and enforcement (including, without limitation, provisions concerning 4 limitations of actions), shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania, notwithstanding any conflict-of-laws doctrines of such jurisdiction to the contrary, and without the aid of any canon, custom or rule of law requiring construction against the draftsman. (c) Notices. All notices, requests, demands and other communications required or permitted under this Agreement shall be in writing and shall be deemed to have been duly given, made and received when personally delivered or when deposited in the United States mails, registered or certified mail, postage prepaid, return receipt requested, addressed as set forth below: (i) If to Holder: 2274 E. Yunsoo 690 Big Canoe Jasper, GA 30143-5114 (ii) If to Company: Interactive Flight Technologies, Inc. 222 N 44th Street Phoenix, AZ 85034 Attn: Mr. Morris C. Aaron with a copy, given in the manner prescribed above, to: Mesirov Gelman Jaffe Cramer & Jamieson, LLP 1735 Market Street, 38th Floor Philadelphia, PA 19103 Attn: Steven B. King, Esquire In addition, notice by mail shall be by air mail if posted outside of the continental United States. Either party may alter the address to which communications or copies are to be sent by giving notice of such change of address in conformity with the provisions of this subparagraph (c) for the giving of notice. (d) Binding Nature of Agreement; No Assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns, except that neither party may assign or transfer its rights nor delegate its obligations under this Agreement without the prior written consent of the other party hereto. (e) Provisions Separable. The provisions of this Agreement are independent of and separable from each other, and no provision shall be affected or rendered invalid or unenforceable by virtue of the fact that for any reason any other or others of them may be invalid or unenforceable in whole or in part. 5 (f) Entire Agreement. This Agreement contains the entire understanding between the parties hereto with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements and understandings, inducements or conditions, express or implied, oral or written, except as herein contained. The express terms hereof control and supersede any course of performance and/or usage of the trade inconsistent with any of the terms hereof. This Agreement may not be modified or amended other than by an agreement in writing. (g) Paragraph Headings. The Paragraph and subparagraph headings in this Agreement have been inserted for convenience of reference only; they form no part of this Agreement and shall not affect its interpretation. (h) Gender, Etc. Words used herein, regardless of the number and gender specifically used, shall be deemed and construed to include any other number, singular or plural, and any other gender, masculine, feminine or neuter, as the context indicates is appropriate. (i) Number of Days. In computing the number of days for purposes of this Agreement, all days shall be counted, including Saturdays, Sundays and Holidays; provided, however, that if the final day of any time period falls on a Saturday, Sunday or Holiday, then the final day shall be deemed to be the next day which is not a Saturday, Sunday or Holiday. For purposes of this subparagraph (i), the term "Holiday" shall mean a day, other than a Saturday or Sunday, on which national banks with branches in the Commonwealth of Pennsylvania are or may elect to be closed. 6 (j) Currency. All monetary amounts referred to in this Agreement shall be and be deemed to be references to lawful currency of the United States of America. IN WITNESS WHEREOF, the parties have executed this Agreement the date first above written. ATTEST: INTERACTIVE FLIGHT TECHNOLOGIES, INC. - ----------------------------- ------------------------------------- Secretary Name: Title: WITNESS: ELAINE MARTIN - ----------------------------- ------------------------------------- Shares of Class A Common Stock of the Company 32,857 7 PUT NOTICE OF ELECTION The undersigned and Interactive Flight Technologies, Inc. (the "Company") are parties to that certain Put/Call Agreement dated August 12, 1999. Pursuant to the terms thereof, the undersigned hereby exercises his, her or its option to require the Company to purchase the number of shares of the Class A common stock of the Company, (the "Shares") set forth below. Closing hereunder shall be held at the chief executive offices of the Company at _____ _.m. local time, on __________ ___, 2000. The undersigned elects to have the purchase price paid by wire transfer of immediately available funds to the following bank account: Bank Name: ________________________________ Branch (if applicable): ___________________ Bank Location: ____________________________ Bank Routing Number: _____________________ For Credit to Account No. _________________ Name of Account: __________________________ (If the foregoing bank information is not included in this Notice of Election, the undersigned agrees to accept payment by delivery of a certified or bank cashier's check payable to the order of the undersigned.) The undersigned represents and acknowledges that (i) the undersigned knows, or has had the opportunity to acquire, all information concerning the business, affairs, financial condition and prospects of the Company which the undersigned deems relevant to making a fully informed decision regarding the consummation of the transactions contemplated hereby and (ii) he, she, or it has been supplied with copies of the Company's latest Annual Report on Form 10-K (or 10-KSB, as the case may be), the Company's latest quarterly report on Form 10-Q (or 10-QSB, as the case may be), Company's latest proxy statement, and Company's latest Annual Report to Stockholders. Date: ------------------------------ ----------------------------------- Name: Address: Number of Shares: -------------------------- 8 CALL NOTICE OF ELECTION Interactive Flight Technologies, Inc. (the "Company") and _________________ ("Holder") are parties to that certain Put/Call Agreement dated August 12, 1999. Pursuant to the terms thereof, the Company hereby exercises its option to purchase ____________ shares of the Class A common stock of the Company (the "Shares") owned by Holder. Closing hereunder shall be held at the chief executive offices of the Company at _____ _.m. local time, on __________ ___, 2000. INTERACTIVE FLIGHT TECHNOLOGIES, INC. Date: BY: ----------------------- --------------------------------- 9 EX-10.34 16 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT THIS AGREEMENT is effective January 1, 1999, between INTERACTIVE FLIGHT TECHNOLOGIES, INC. ("Company") and James W. Fox ("Executive"). W I T N E S S E T H: Company wishes to employ Executive and Executive wishes to enter into the employ of Company on the terms and conditions contained in this Agreement. NOW, THEREFORE, in consideration of the facts, mutual promises and covenants contained herein and intending to be legally bound hereby, Company and Executive agree as follows: 1. Employment. Company hereby employs Executive and Executive hereby accepts employment by Company for the period and upon the terms and conditions contained in this Agreement. 2. Office and Duties. (a) The Executive is engaged hereunder as the Company's President and Chief Operating Officer and agrees to perform the duties and services incident to that position, and such other duties and services as may reasonably be requested of him by the Chief Executive Officer or the Chairman of the Board of Company. The Executive will report directly to the Chief Executive Officer and shall report to the Board of Directors of Company on a regular basis. (b) Throughout the term of this Agreement, Executive shall devote his entire working time, energy, skill and best efforts to the performance of his duties hereunder in a manner which will faithfully and diligently further the business and interests of Company. The foregoing shall not be construed, however, as preventing the Executive from investing his assets in such form or manner as will not require services on the part of the Executive in the operations of the business in which such investment is made and provided such business is not in competition with the company or, if in competition, such business has a class of securities registered under the Securities Exchange Act of 1934 and the interest of Executive therein is solely that of an investor owning not more than 5% of any class of the outstanding equity securities of such business. 3. Term. This Agreement shall be for a term of twenty-four (24) months, commencing on January 1, 1999, and ending on December 31, 2000, unless sooner terminated as hereinafter provided. This Agreement shall terminate at the end of the original term, provided, however, that the parties hereto shall, at least sixty (60) days prior to the end of the term hereof, use their best efforts to determine whether the Agreement will be renewed or negotiated. 4. Compensation. (a) For all services to be rendered by Executive to Company, Executive shall receive an annual base salary of Two Hundred and Twenty-Five Dollars ($225,000), payable in accordance with Company's regular payroll practices in effect from time to time. (b) In addition to Executive's base salary, Company shall pay to Executive, on July 31 and January 31 for the preceding six-month periods ending on June 30 and December 31 of each year during the term of this Agreement, such bonuses or other additional compensation as the Board of Directors may determine based upon the achievement of the goals assigned to Executive as set forth in a Board-approved Business Plan or as may otherwise be determined or agreed to by the Board. Subject to the achievement of the assigned goals, the total and aggregate bonuses to be paid to Executive in any year during the term of this Agreement should not be less than twenty percent (20%) of Executive's annual salary. (c) Throughout the term of this Agreement and as long as they are kept in force by Company, Executive shall be entitled to participate in and receive the benefits of any profit sharing or retirement plans and any health, life, accident or disability insurance plans or programs made available to other similarly situated executives of Company. Specifically, Executive shall be provided family medical and dental coverage at Company's expense. Executive shall be entitled to four (4) weeks paid vacation during each year of the term of this Agreement. Company shall pay Executive for any unused vacation at December 31st of each year. (d) Company will provide Executive with an automobile allowance of $450 per month and Company will reimburse Executive for all reasonable expenses incurred by Executive in connection with the performance of Executive's duties hereunder, including car phone, cellular phone, and club memberships, upon receipt of vouchers therefor and in accordance with Company's regular reimbursement procedures and practices in effect from time to time. (e) In addition to the stock options granted to Executive in November, 1998 in accordance with the terms of Executive's appointment as a Director of the Company, pursuant to the Company's 1997 Plan, the Company shall grant to Executive seventy thousand (70,000) options under the Interactive Flight Technologies, Inc. Stock Option Plan. Such options shall vest as follows: fourteen thousand (14,000) on January 1, 1999; fourteen thousand (14,000) on January 1, 2000; fourteen thousand (14,000) on December 31, 2000; fourteen thousand (14,000) on January 1, 2002; and fourteen thousand (14,000) on December 31, 2002. The options shall be for a term of ten (10) years from the date of the grant of such options. If Company does not renew this Agreement or terminates this Agreement without Cause, fifty percent (50%) of all options granted hereunder will vest and become exercisable (to the extent not already vested and exercisable). If Executive leaves Company or is terminated for Cause, Executive shall be entitled to exercise such options that have vested as of the date of such event, but no additional options shall vest or be exercisable. Upon a Change of Control, or if Executive leaves the Company for Good Reason , as hereinafter defined, all options granted hereunder shall vest as of immediately prior to such Change of Control. In the event of Executive's disability or death, Executive's estate shall be entitled to exercise such options that have vested as of the date of disability or death. 5. Disability. If Executive becomes unable to perform his duties hereunder due to partial or total disability or incapacity resulting from a mental or physical illness, injury or any other cause, Company will continue the payment of Executive's base salary at its then current rate for a 2 period of twelve (12) weeks following the date Executive is first unable to perform his duties due to such disability or incapacity. Thereafter, Company shall have no obligation for base salary or other compensation payments to Executive during the continuance of such disability or incapacity, except as provided in the Company's disability policy, if any. 6. Death. If Executive dies, all payments hereunder shall cease at the end of the month in which Executive's death shall occur and Company shall have no further obligations or liabilities hereunder to Executive's estate or legal representative or otherwise. 7. Termination of Company's Business. If (i) Company shall discontinue the business operation in which Executive is employed, Company may immediately terminate Executive's employment upon written notice, or (ii) there is a change of control ("Change in Control", as defined herein), and as a result of such Change in Control, the Executive is terminated without Cause (as defined in Paragraph 8 below), then, on the occurrence of either event, Company shall have no further obligations or liabilities hereunder to Executive, except Company shall (i) pay Executive an amount equal to two times the remaining base salary due the Executive for the then current term, but in no event shall Executive receive less than his base salary for one year, to be paid in accordance with the regular payroll practices of Company; and (ii) continue to provide Executive with family medical and dental coverage for a period of 12 months. (a) Change in Control. The term "Change in Control" shall mean a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A issued under the Securities Exchange Act of 1934, as amended (the "Exchange Act") as in effect as of the date hereof, or if Item 6(e) is no longer in effect, any subsequent regulation issued under the Exchange Act for a similar purpose, whether or not the Company is subject to such reporting requirements; provided, that without limitation, such a change in control shall be deemed to have occurred if: (i) any "person" is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities. (ii) during any period of two consecutive years (not including any period prior to the date of the Agreement), individuals who at the beginning of such period constitute the Board of Directors, and any new director, whose election by the Board or nomination or election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for elections was previously approved, cease for any reason to constitute a majority of the Board; or (iii) the business of the Company is disposed of by the Company pursuant to a liquidation, sale of assets of the Company, or otherwise. (b) Good Reason. "Good Reason" shall mean the occurrence after a Change in Control of any of the following events without the Executive's express written consent: (i) any change in the Executive's title, authorities, responsibilities (including reporting responsibilities), which represent a demotion from his status, title, position or 3 responsibilities (including reporting responsibilities) as in effect immediately prior to the Change in Control; the assignment to him of any duty or work responsibilities which, in his reasonable judgment, are inconsistent with such status, title, position or work responsibilities; or any removal of the Executive from or failure to appoint or reelect him to any of such positions, except in connection with the termination of his employment for Disability, Retirement or Cause as a result of the Executive's death or by him other than for Good Reason; (ii) a reduction by the Company in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time; (iii) the failure of the Company to obtain a satisfactory agreement from any successor or assign of the Company to assume and agree to perform this Agreement. 8. Termination For Cause. Company may discharge the Executive and thereby terminate his employment hereunder for the following reasons (for "Cause"): (a) habitual intoxication; (b) habitual illegal drug use or drug addition; (c) conviction of a felony, materially adversely affecting Company where such conviction significantly impairs the Executive's ability to perform his duties hereunder; (d) while acting in his capacity as Executive of Company, knowingly engaging in any unlawful activity which could materially adversely affect the Company; (e) gross insubordination, gross negligence, or willful and knowing violation of any expressed direction or regulation established by Company which is materially injurious to the business or reputation of Company; (f) misappropriation of corporate funds or other acts of dishonesty; (g) the Executive's material breach of this Agreement in any other respect. In the event that Company discharges the executive for Cause, Company shall pay to Executive the portion, if any, of the Executive's base salary for the period up to the date of termination which remains unpaid. The Company shall have no further obligation or liability under this Agreement. 9. Termination Without Cause. In the event Company terminates this Agreement without Cause at any time, the Company's sole liability for compensation to Executive shall be to pay the Executive two times the remaining balance of the base salary due the Executive for the remainder of the then current term to be paid in accordance with the regular payroll practices of Company and provide Executive with family medical and dental coverage for the same period. 4 10. Company Property. All advertising, sales, manufacturers' and other materials or articles or information, including without limitation data processing reports, customer sales analyses, invoices, price lists or information, samples, budgets, business plans, strategic plans, financing applications, reports, memoranda, correspondence, financial statements, and any other materials or data of any kind furnished to Executive by Company or developed by Executive on behalf of Company or at Company's direction or for Company's use or otherwise in connection with Executive's employment hereunder, are and shall remain the sole and confidential property of Company; if Company requests the return of any such materials at any time during or at or after the termination of Executive's employment, Executive shall immediately deliver the same to Company. 11. Noncompetition, Trade Secrets, Etc. (a) During the term of this Agreement and for a period of one (1) year after the termination of his employment with Company for any reason whatsoever, Executive shall not directly or indirectly induce or attempt to influence any executive of Company to terminate his or her employment with Company and shall not engage in (as a principal, partner, director, officer, agent, executive, consultant or otherwise) or be financially interested in any business operating within the geographical area described in Exhibit "A", attached hereto, which is involved in business activities which are the same as, similar to, or in competition with business activities carried on by Company, or being definitely planned by Company, at the time of the termination of Executive's employment. However, nothing contained in this Paragraph 13 shall prevent Executive from holding for investment no more than five percent (5%) of any class of equity securities of a company whose securities are traded on a national securities exchange or on the NASDAQ System. (b) During the term of this Agreement and at all times thereafter, Executive shall not use for his personal benefit, or disclose, communicate or divulge to, or use for the direct or indirect benefit of any person, firm, association or company other than the Company, any material referred to in Paragraph 10 above or any information regarding the business methods, business policies, procedures, techniques, research or development projects or results, trade secrets, or other knowledge or processes of or developed by the Company or any names and addresses of customers or clients, any data on or relating to past, present or prospective customers or clients, or any other confidential information relating to or dealing with the business operations or activities of Company, made known to Executive or learned or acquired by Executive while in the employ of Company. (c) Any and all reports, plans, budgets, writings, inventions, improvements, processes, procedures and/or techniques which Executive may make, conceive, discover or develop, either solely or jointly with any other person or persons, at any time during the term of this Agreement, whether during working hours or at any other time and whether at the request or upon the suggestion of the Company or otherwise, which relate to or are useful in connection with any business now or hereafter carried on or contemplated by the Company, including developments or expansions of its present fields of operations, shall be the sole and exclusive property of Company. Executive shall make full disclosure to Company of all such reports, plans, budgets, writings, inventions, improvements, processes, procedures and techniques, and shall do everything reasonably necessary or desirable to vest the absolute title thereto in Company. Executive shall write and prepare all specifications and procedures regarding such inventions, improvements, processes, procedures and techniques and otherwise aid and assist Company so that Company can prepare and 5 present applications for copyright or Letters Patent therefor and can secure such copyright or Letters Patent wherever possible, as well as reissues, renewals, and extensions thereof, and can obtain the record title to such copyright or patents so that Company shall be the sole and absolute owner thereof in all countries in which it may desire to have copyright or patent protection. Executive shall not be entitled to any additional or special compensation or reimbursement regarding any and all such writings, inventions, improvements, processes, procedures and techniques. (d) Executive acknowledges that the restrictions contained in the foregoing subparagraphs (a), (b) and (c), in view of the nature of the business in which Company is engaged, are reasonable and necessary in order to protect the legitimate interests of Company, and that any violation thereof would result in irreparable injuries to Company, and Executive therefore acknowledges that, in the event of his violation of any of these restrictions, Company shall be entitled to obtain from any court of competent jurisdiction preliminary and permanent injunctive relief as well as damages and an equitable accounting of all earnings, profits and other benefits arising from such violation, which rights shall be cumulative and in addition to any other rights or remedies to which Company may be entitled. (e) If the period of time or the area specified in subparagraph (a) above should be adjudged unreasonable in any proceeding, then the period of time shall be reduced by such number of months or the area shall be reduced by the elimination of such portion thereof or both so that such restrictions may be enforced in such area and for such time as is adjudged to be reasonable. If Executive violates any of the restrictions contained in such subparagraph (a), the restrictive period shall not run in favor of Executive from the time of the commencement of any such violation until such time as such violation shall be cured by Executive to the satisfaction of Company. 12. Prior Agreements. Executive represents to Company (a) that there are no restrictions, agreements or understandings whatsoever to which Executive is a party which would prevent or make unlawful his execution of this Agreement or his employment hereunder, (b) that his execution of this Agreement and his employment hereunder shall not constitute a breach of any contract, agreement or understanding, oral or written, to which he is a party or by which he is bound and (c) that he is free and able to execute this Agreement and to enter into employment by Company. 13. Indemnification. Company shall maintain a Directors and Officers Errors and Omission Policy with a minimum coverage of Fifteen Million Dollars ($15,000,000). Any deductible and all other costs and expenses which may be incurred by Executive as a result of his acting in his capacity as an Officer of the Company shall be paid by Company. 14. Miscellaneous. (a) Indulgences, Etc. Neither the failure nor any delay on the part of either party to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or of any other right, remedy, power or privilege, nor shall any waiver of any right, remedy, power or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power or privilege with respect to any other occurrence. No waiver 6 shall be effective unless it is in writing and is signed by the party asserted to have granted such waiver. (b) Controlling Law. This Agreement and all questions relating to its validity, interpretation, performance and enforcement (including, without limitation, provisions concerning limitations of actions), shall be governed by and construed in accordance with the laws of the State of Delaware, notwithstanding any conflict-of-laws doctrines of any jurisdiction to the contrary, and without the aid of any canon, custom or rule of law requiring construction against the draftsman. (c) Notices. All notices, requests, demands and other communications required or permitted under this Agreement shall be in writing and shall be deemed to have been duly given, made and received only when delivered (personally, by courier service such FedEx or by other messenger) against receipt or upon actual receipt of registered or certified mail, postage prepaid, return receipt requested, addressed as set forth below: (i) If to Company: Irwin L. Gross, Chairman and CEO Interactive Flight Technologies, Inc. 1811 Chestnut Street Suite 120 Philadelphia, PA 19103 with a copy, given in the manner prescribed above, to: Richard P. Jaffe, Esquire Mesirov Gelman Jaffe Cramer & Jamieson, LLP 1735 Market Street - 38th Floor Philadelphia, PA 19103-7598 (ii) If to Executive: James W. Fox 70 Bickford Lane New Canaan, CT 06840 with a copy, given in the manner prescribed above, to: Stephen Marcovich, Esquire Cummings & Lockwood Four Stamford Plaza P.O. Box 120 Stamford, CT 06904-0120 In addition, notice by mail shall be by air mail if posted outside of the continental United States. Either party may alter the address to which communications or copies are to be sent by giving notice 7 of such change of address in conformity with the provisions of this subparagraph for the giving of notice. (d) Exhibits. All Exhibits attached hereto are hereby incorporated by reference into, and made a part of, this Agreement. (e) Binding Nature of Agreement; No Assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns, except that no party may assign or transfer its rights nor delegate its obligations under this Agreement without the prior written consent of the other parties hereto. (f) Execution in Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original as against any party whose signature appears thereon, and all of which shall together constitute one and the same instrument. This Agreement shall become binding when one or more counterparts hereof, individually or taken together, shall bear the signatures of all of the parties reflected hereon as the signatories. (g) Provisions Separable. The provisions of this Agreement are independent of and separable from each other, and no provision shall be affected or rendered invalid or unenforceable by virtue of the fact that for any reason any other or others of them may be invalid or unenforceable in whole or in part. (h) Entire Agreement. This Agreement contains the entire understanding between the parties hereto with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements and understandings, inducements or conditions, express or implied, oral or written, except as herein contained. The express terms hereof control and supersede any course of performance and/or usage of the trade inconsistent with any of the terms hereof. This Agreement may not be modified or amended other than by an agreement in writing. (i) Paragraph Headings. The Paragraph and subparagraph headings in this Agreement have been inserted for convenience of reference only; they form no part of this Agreement and shall not affect its interpretation. (j) Gender, Etc. Words used herein, regardless of the number and gender specifically used, shall be deemed and construed to include any other number, singular or plural, and any other gender, masculine, feminine or neuter, as the context indicates is appropriate. (k) Number of Days. In computing the number of days for purposes of this Agreement, all days shall be counted, including Saturdays, Sundays and Holidays; provided, however, that if the final day of any time period falls on a Saturday, Sunday or Holiday, then the final day shall be deemed to be the next day which is not a Saturday, Sunday or Holiday. For purposes of this Agreement, the term "Holiday" shall mean a day, other than a Saturday or Sunday, on which national banks with branches in the Commonwealth of Pennsylvania are or may elect to be closed. 8 (l) Expenses of the Parties. Company shall be responsible for up to $4,000 in legal expenses incurred in the negotiation and preparation of this Agreement. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered in Philadelphia, Pennsylvania, as of the date first above written. INTERACTIVE FLIGHT TECHNOLOGIES, INC. By: --------------------------------- IRWIN L. GROSS, Chairman and CEO EXECUTIVE: ------------------------------------- JAMES W. FOX 9 EXHIBIT "A" Under Paragraph 11, Noncompetition, Trade Secrets, Etc., the geographic area shall be as follows: Continental United States 10 EX-21 17 SUBSIDIARIES EXHIBIT 21 SUBSIDIARIES OF INTERACTIVE FLIGHT TECHNOLOGIES, INC. Exclusive of immaterial subsidiaries and companies in which Registrant hold a majority interest, Registrant as of October 15, 1999 had the following subsidiaries: Place of Name Incorporation ---- ------------- The Network Connection, Inc. Georgia IFT Holdings Limited England IFT Management Limited England IFT Leasing Limited England IFT Lottoco, Inc. Delaware IFT Subco, Inc. Delaware Interactive Flight Technologies (Gibraltar) Ltd. Gibraltar EX-23 18 INDEPENDENT AUDITORS' CONSENT INDEPENDENT AUDITORS' CONSENT The Stockholders and Board of Directors Global Technologies, Ltd. and subsidiaries: We consent to incorporation by reference in the registration statements (Nos. 333-15767 and 333-49319) on Forms S-8 and (No. 333-14013) on Form S-3 of Global Technologies, Ltd. and subsidiaries of our report dated October 22, 1999, relating to the consolidated balance sheets of Global Technologies, Ltd. and subsidiaries as of June 30, 1999 and October 31, 1998, and the related consolidated statements of operations, changes in stockholders' equity and comprehensive income and cash flows for the Transition Period ended June 30, 1999 and each of the years in the two year period ended October 31, 1998, which report appears in the June 30, 1999, annual report on Form 10-KSB of Global Technologies, Ltd. and subsidiaries. KPMG LLP Phoenix, Arizona October 22, 1999 EX-27 19 FDS
5 This Schedule contains summary financial information extracted from the Consolidated Financial Statements as of June 30, 1999 and is qualified in its entirety by reference to such Consolidated Financial Statements. 12-MOS JUN-30-1999 NOV-01-1998 JUN-30-1999 15,521,275 4,594,751 3,919,712 3,791,223 1,400,000 25,034,356 2,285,293 915,901 39,412,621 5,282,362 0 0 30 54,606 27,599,730 39,412,621 875,957 1,582,461 1,517,323 1,962,908 2,573,080 30,092 74,684 (2,375,835) 0 (2,375,835) 0 0 0 (2,375,835) (.44) (.44)
EX-99.5 20 AGREEMENT OF SALE DATED 1999 CROWN LEISURE SALES LIMITED and IFT HOLDINGS LIMITED AGREEMENT FOR THE SALE AND PURCHASE OF SHARES IN INTER LOTTO (UK) LIMITED Chaffe Street Brook House 77 Fountain Street Manchester M2 2EE Draft : 23 April 1999 THIS AGREEMENT is made the day of 1999 BETWEEN:- (1) CROWN LEISURE SALES LIMITED a company registered in England and Wales under number 02724379 whose registered office is at 139 Brookfield Place, Walton Summit Centre, Bamber Bridge, Preston PR5 8BF (hereinafter called "the Seller"); and (2) IFT HOLDINGS LIMITED a company registered in England under number 3721699 whose registered office is at Brook House, 77 Fountain Street, Manchester M2 2EE (hereinafter called "the Buyer") 1. INTERPRETATION In this Agreement and in the Schedules below where the context so admits the expression: "associated company" means in respect of any body corporate, a body corporate which is its subsidiary or holding company or a company which is a subsidiary of that holding company and each such company; "the Company" means Inter Lotto (UK) Limited a company registered in England under number 3036866 and incorporated on 2nd March 1995 as a private company limited by shares under the Companies Act 1985; "the Loan Agreement" means a loan agreement between the Seller and the Company dated 29th April 1999 relating to the repayment by the Company to the Seller of a loan of (pound)400,000; "Sale Shares" means the 3,793 Ordinary Shares of 1p each in the capital of the Company and the 6,207 Deferred Shares of 1p each in the capital of the Company in each case registered in the name of the Seller; "Warranties" means the warranties and representations set out in the Schedule. 2. SALE OF SHARES (1) Subject to the terms of this Agreement the Seller shall sell with full title guarantee and the Buyer shall purchase free from all liens, charges, incumbrances and together with all benefits and rights now or hereafter attaching thereto the Sale Shares. (2) The Buyer shall not be obliged to complete the purchase of any of the Sale Shares unless the purchase of all the Sale Shares is completed simultaneously. 3. CONSIDERATION The total consideration for the Sale Shares shall be the sum of (pound)1 receipt of which the Seller hereby acknowledges. 4. COMPLETION (1) Completion of the sale and purchase of the Sale Shares is conditional upon:- (A) the execution of the Loan Agreement; (B) the execution of a Deed of Termination in a form and substance acceptable to the Seller between (1) the Seller, (2)-(7) The Right Hon. Lord Mancroft and others and (8) the Company, relating to the termination of a shareholders agreement between such parties; and (C) the written waiver of each of the shareholders of the Company of any pre-emption rights in respect of the Sale Shares. (2) Subject to Clause 4(1) above completion of the sale and purchase of the Sale Shares shall take place on 29th April 1999 whereupon the Seller shall: (i) deliver to the Buyer duly executed transfers of the Sale Shares by the registered holders thereof in favour of the Buyer or its nominees together with the relative share certificates or an indemnity in respect of lost share certificates in the agreed form; (ii) forthwith cause Paul Roden and Michael Gemson to retire from their respective offices as directors of the Company each delivering to the Buyer a letter in the agreed form executed as a deed made out in favour of the Company acknowledging that the person so retiring has no claim outstanding for compensation or otherwise and without any payment under the Employment Rights Act 1996. 5. WARRANTIES (1) The Seller hereby warrants and represents to the Buyer in the terms of the Warranties and acknowledges and accepts that the Buyer is entering into this Agreement in reliance upon each of the Warranties. (2) The aggregate liability of the Seller for all claims in respect of liability for breach of this Agreement shall be limited to(pound)400,000. (3) The Seller will be under no liability in respect of any claim for breach of this Agreement, unless written particulars of this claim (giving reasonable details of the specific matter in respect of which such claim is made) shall have been given to the Seller within a period of two years from the date of this Agreement. 6. RESTRICTION OF SELLER The Seller undertakes with the Buyer (as trustee for itself and the Company) and its successors in title that it will not and that it will procure that no associated company of the Seller shall for the period of one year after this Agreement either on its own account or in conjunction with or on behalf of any person, firm or company carry on or be engaged, concerned or interested (directly or indirectly and whether as principal, shareholder, director, employee, agent, consultant, partner or otherwise) in carrying on any daily lottery or the management of any daily lottery in Great Britain (other than as a holder of less than 5 per cent of any class of shares or debentures listed on the London Stock Exchange or any other recognised stock exchange). 7. JURISDICTION The validity performance and extent of this Agreement shall be construed in accordance with English law and the parties hereto submit to the non-exclusive jurisdiction of the English Courts. IN WITNESS whereof these presents have been executed the day and year first above written. THE SCHEDULE The Warranties 1. The Sale Shares comprise the whole of the Seller's legal and/or beneficial interest in the issued and allotted share capital of the Company. The Sale Shares are fully paid and are beneficially owned by the Seller free from any encumbrances. 2. The Seller does not have the right (whether exercisable now or in the future and whether contingent or not) to call for the allotment, issue, sale, transfer or conversion of any share or loan capital in the Company under any option or other agreement (including conversion rights and rights of pre-emption). 3. The Seller has full power and authority to enter into and perform this Agreement, may execute and deliver this Agreement and perform its obligations under this Agreement and this Agreement constitutes valid and binding obligations on the Seller in accordance with its terms. EXECUTED AND DELIVERED as a Deed ) by THE SELLER acting by:- ) Director Director/Secretary EXECUTED AND DELIVERED as a Deed ) by THE BUYER acting by:- ) Director Director/Secretary EX-99.6 21 SHAREHOLDERS AGREEMENT DATED - -------------------------------------------------------------------------------- NORMAN FEINSTEIN & OTHERS and IFT HOLDINGS LIMITED and INTER LOTTO (UK) LIMITED - -------------------------------------------------------------------------------- SHAREHOLDERS AGREEMENT in respect of INTER LOTTO (UK) LIMITED - -------------------------------------------------------------------------------- Nabarro Nathanson 50 Stratton Street London W1X 6NX Tel: 0171 493 9933 CONTENTS
Clause Subject matter Page - ------ -------------- ---- 1. DEFINITIONS.....................................................................................2 2. PURCHASE OF SHARES BY IFT.......................................................................6 3. APPOINTMENT OF DIRECTORS........................................................................7 4. SHARE TRANSFERS.................................................................................9 5. APPLICATION OF PROFITS/DIVIDEND DISTRIBUTION....................................................9 6. WARRANTIES.....................................................................................10 7. BOARD MEETINGS AND INFORMATION.................................................................13 8. OPERATION OF THE COMPANY.......................................................................13 9. OPTION.........................................................................................14 10. COUNTERPARTS...................................................................................16 11. GENERAL........................................................................................16 12. TERMS OF THIS AGREEMENT TO PREVAIL.............................................................17 13. SEVERANCE......................................................................................17 14. EXERCISE OF POWERS.............................................................................17 15. UNLAWFUL FETTER ON THE POWERS OF THE COMPANY...................................................18 16. NO PARTNERSHIP.................................................................................18 17. NOTICES........................................................................................19 18. COMPLIANCE WITH THE TERMS OF THE SETTLEMENT AGREEMENT..........................................19 19. FURTHER ASSURANCE..............................................................................20 20. DURATION.......................................................................................20 21. APPLICABLE LAW.................................................................................20 SCHEDULE 1 Current Shareholdings.....................................................21 Current Directors.........................................................21
SCHEDULE 3 Part 1 - Matters Requiring Shareholders Consent...........................31 Part 2 - Matters Requiring Board Approval.................................33 SCHEDULE 4 The Property..............................................................35 SCHEDULE 5 Intellectual Property.....................................................36
SHAREHOLDERS AGREEMENT DATE: 1999 PARTIES: (1) NORMAN A. FEINSTEIN of 11 Aspen Drive, N. Caldwell Road, New Jersey 07013, USA ("NF"); (2) THE RIGHT HON. THE LORD MANCROFT of 19 Tremadoc Road, London, SW4 7NF ("BM"); (3) GARY S. REDISH of 110 Rolling Hills Road, Clifton, New Jersey 07013, USA ("GR"); (4) SIR DAVID TRIPPIER of Dowry Head, Helmshore, Rossendale, Lancashire, BB4 5AE ("DT"); (5) VISCOUNT STRATHALLAN of The Tower House, 46 Tite Street, London SW3 ("ES"); (6) ROY FISHER of 503 Drake House, Dolphin Square, London SW1V 3NW ("RF"); (7) DOUGLAS SMITH of The Buckstone House, Staunton, Coleford GL16 8PD ("DS"); (8) HGI HOUSE & GENERAL INVESTMENT FOUNDATION, a Liechtenstein Foundation of Post Office Box 154, 9490 Vaduz, Liechenstein ("HGI"); (9) IRWIN GROSS of 722 Pine Street, Philadelphia, Pennsylvania, USA, 19106; (10) JAMES FOX of 70 Bickford Lane, New Canaan, Connecticut, USA 06840; (11) CHARLES CONDY of 90 Century Drive, Mill Valley, California, USA 94941; (12) IFT HOLDINGS LIMITED (Company Number 3721699) whose registered office is at Brook House, 77 Fountain Street, Manchester M2 2EE ("IFT"); and (13) INTER LOTTO (UK) LIMITED (Company Number 3036866) whose registered office is at 50 Stratton Street, London W1X 6NX ("the Company"). RECITALS: (A) The Company was incorporated on 23rd March 1995 and has at the date hereof an authorised capital of (pound)1,000 divided into 100,000 Shares of 1p each. (B) HGI, BM, GR, DT, ES, RF and DS are, together with Crown Leisure Sales Limited, the registered holders and beneficial owners of all of the issued shares in the Company as set out in the First Schedule. (C) IFT wishes to become a holder of Shares on the terms and subject to the provisions of this Agreement by purchasing from Crown Leisure Sales Limited its entire holding of ordinary and deferred shares in the Company. (D) The parties have agreed to enter into this Agreement to regulate their rights in relation to the Company. IT IS AGREED as follows: 1. DEFINITIONS 1.1 In this Agreement (including the Recitals and Schedules): "A Directors" means the directors of the Company from time to time appointed by the A Shareholders and includes their alternates duly appointed in accordance with the Articles; "A Shares" means the A Ordinary Shares of 1p each in the capital of the Company from time to time; "A Shareholders" means HGI, BM, GR, DT, ES, RF and DS and any other holder for the time being of the A Shares; "the Accounts" means the audited balance sheet of the Company made up as at the Balance Sheet Date and the audited profit and loss account of the Company for the period of twelve months ended on the Balance Sheet Date true copies of which are annexed hereto marked `A' and initialled by or on behalf of the parties for the purposes of identification; "agreed form" means in relation to any document such document in the form agreed between the parties and initialled by or on behalf of the parties for the purpose of identification; "Articles" means the new Articles of Association of the Company in the agreed form to be adopted pursuant to the resolutions set out in the Notice of Meeting and as amended from time to time and any reference to an "Article" shall be a reference to that article of the said Articles; 2 "Associate" means in relation to any person, a person (wherever situated) connected with that person (and for this purpose the question whether a person is so connected shall be determined in accordance with Section 286 of the Taxation of Chargeable Gains Tax Act 1992); "B Directors" means the directors of the Company from time to time appointed by the B Shareholder(s) and includes their alternates duly appointed in accordance with the Articles; "B Shares" means the B Ordinary Shares of 1p each in the capital of the Company from time to time; "B Shareholders" means IFT and any other holder for the time being of the B Shares; "Balance Sheet Date" means 31st August 1998; "Board" means the Directors for the time being of the Company present at a duly convened quorate meeting or otherwise taking decisions and passing resolutions in conformity with the provisions of this Agreement and the Articles; "Board Minutes" means the minutes of a meeting of the Board in the agreed form; "Business" means the business of managing lotteries and such other business as the Board (with the prior consent of IFT) may agree from time to time should be carried on by the Company; "Business Day" means any day which is not a Saturday, Sunday or a bank or public holiday in England and Wales; "Business Plan Documents" means the documentation annexed hereto marked 'B' and initialled by or on behalf of the parties for the purpose of identification; "C Shares" means the C Ordinary Shares of 1p each in the capital of the Company from time to time; 3 "C Shareholders" means MMK Europe Limited or MMK UK Limited and any other holder for the time being of the C Shares; "Deferred Shares" means Deferred Shares of 1p each in the capital of the Company from time to time; "Deferred Shareholders" means IFT and any other holder for the time being of the Deferred Shares; "Director" means any director for the time being of the Company including where applicable any alternate director; "Disclosure Letter" means the letter of disclosure of even date herewith from the Warrantors to IFT; "holding company" shall have the meaning ascribed to such expression by Section 736 of the Companies Act 1985; "IFT Agreement" means the agreement to be made between the Company and IFT Management Limited in the agreed form; "the Loan Agreement" means the Loan Agreement between Crown Leisure Sales Limited and the Company of even date herewith; "the Management Accounts" means the draft unaudited balance sheet of the Company made up as at 31st January 1999 and the draft unaudited profit and loss account of the Company for the period from 1st September 1997 to 31st January 1999 true copies of which are annexed hereto marked "C" and initialled by or on behalf of the parties for the purposes of identification; "Notice of Meeting" means the notice of extraordinary general meeting of the Company in the agreed form; "the Property" means the property described in the Fourth Schedule; 4 "Shareholder" means the A Shareholders or the B Shareholders or the C Shareholders or the Deferred Shareholders from time to time and the expression "Shareholders" shall be construed accordingly; "Shares" means the A Shares, the B Shares, the C Shares and the Deferred Shares; "subsidiary" shall have the meaning ascribed to such expression in Section 736 of the Companies Act 1985; "Subsidiary" means a subsidiary of the Company; "Taxation" includes (without limitation) corporation tax, income tax, capital gains tax, development land tax, value added tax, customs and other import duties, inheritance tax, foreign taxation and any payment whatsoever which the Company may be or become bound to make to any person as a result of the operation of any enactment relating to taxation and all penalties charges and interest relating to any claim for taxation or resulting from a failure to comply with the provisions of any enactment relating to taxation; "Taxes Act" means the Income and Corporation Taxes Act 1988; "Warranties" means the warranties contained in Clause 6 or the Second Schedule; and "Warrantors" means NF, BM, RF and DS. 1.2 The Schedules following the operative part of this Agreement shall be deemed to be incorporated in this Agreement. 1.3 In this Agreement: 1.3.1 the Index and Clause headings are inserted for convenience only and shall not affect the construction of this Agreement; 1.3.2 words denoting the singular shall include the plural and vice versa; 1.3.3 words denoting one gender shall include each gender and all genders; 1.3.4 references to persons shall be deemed to include references to natural persons, to firms, to partnerships, to bodies corporate, to associations and to trusts (in each case whether or not having separate legal personality). 5 1.4 References in this Agreement to "Clauses" and "Schedules" are references to Clauses of this Agreement and Schedules to this Agreement; references to Paragraphs are, unless otherwise expressly provided, references to Paragraphs of the Schedule in which the references appear and references to the "parties" or "party" are references to the parties or a party to this Agreement. 1.5 Words and phrases defined for the purposes of or in connection with any statutory provision shall, where the context so requires, be construed as having the same respective meanings in this Agreement. 1.6 References in this Agreement to statutory provisions shall, where the context so admits, and unless expressly provided otherwise, be construed as references to those provisions as respectively amended, consolidated, extended or re-enacted at the date hereof and shall, where the context so admits or requires, be construed as references to the corresponding provisions of any earlier legislation (whether repealed or not) directly or indirectly amended consolidated extended or replaced thereby or re-enacted and shall include where appropriate any orders, regulations, instruments or other subordinate legislation made under the relevant statute. 2. PURCHASE OF SHARES BY IFT Upon the execution of this Agreement: 2.1 IFT shall purchase from Crown Leisure Sales Limited 3,793 Ordinary Shares of 1p each in the Company which shall be re-designated as B Shares pursuant to the special resolutions referred to in Clause 2.2 and 6,207 Deferred Shares. 2.2 The Shareholders shall procure that an extraordinary general meeting of the Company shall be held on short notice at which the special resolutions set out in the Notice of Meeting shall be passed. 2.3 The Shareholders shall procure that: 2.3.1 a board meeting of the Directors shall be held at which the business referred to in the Board Minutes shall be transacted and the documents and forms referred to therein shall be executed and signed; and 2.3.2 the register of members of the Company shall be written up to reflect the transfers referred to in Clause 2.1 and share certificates in respect of the B Shares and Deferred Shares referred to in Clause 2.1 shall be issued in favour of and delivered to the B Shareholder. 2.4 The Company and IFT Management Limited shall enter into the IFT Agreement. 3. APPOINTMENT OF DIRECTORS 3.1 The appointment, dismissal and conduct of Directors shall be regulated in accordance with this Agreement and the Articles. 6 3.2 The number of Directors holding office at any time shall be seven unless otherwise expressly agreed in writing by each of the Shareholders. 3.3 The A Shareholders shall be entitled to appoint three Directors and the B Shareholders shall be entitled to appoint three Directors. NF, RF and BM shall be the first A Directors and Irwin Gross, James Fox and Charles Condy shall be the first B Directors. The A and B Shareholders respectively shall at any time be entitled to require the removal or substitution of any such Director so appointed by them pursuant to the powers conferred on the relevant Shareholders by the Articles. Any Director so appointed by the A Shareholders shall be designated as an A Director and any Director so appointed by the B Shareholders shall be designated as a B Director. 3.4 In addition, an independent Director shall be appointed by the A Directors and the B Directors acting by a simple majority (which majority must include all the B Directors). Peter Lynch shall be the first such independent director. 3.5.1 In the case of an equality of votes at any meeting of the Board or the Company, the Chairman of the meeting shall not be entitled to a second vote. 3.5.2.1 Notwithstanding any provision to the contrary contained in this Agreement or the Articles of Association of the Company from time to time or the Articles or the IFT Agreement, if the Warrantors commit an event of default, IFT (at any time thereafter) may serve a notice in writing upon the Company specifying that with effect from the date of such notice the B Directors shall have such number of votes in relation to resolutions of the Board which exceed by one the number of votes in aggregate of the other directors (including (if applicable) the vote of any independent director or Chairman) whereupon this Agreement shall be read and construed accordingly and the parties hereto shall forthwith cause the Articles of Association of the Company to be amended accordingly. 3.5.2.2 For the purposes of Clause 3.5.2.1 an event of default is committed by the Warrantors if there shall be any material breach of any material warranty included in the Warranties contained in the Second Schedule arising in consequence of fraud or knowing non-disclosure by the Warrantors or any of them and, in the case of a breach capable of remedy, such breach is not remedied within 90 days of the Warrantors being given written notice from IFT requiring them to do so and referring to the consequences arising under Clause 3.5.2.1 of any failure to do so. 3.6.1. On the execution of this Agreement BM, RF and DS shall each enter into service agreements with the Company in the agreed form. Each of BM, RF and DS hereby agrees and acknowledges that if he commits an event of default then such event of default shall be deemed to be a breach by him of his said service agreement entitling the Company to terminate that service agreement summarily without liability to pay compensation or damages to him and upon any such termination he shall forthwith resign as a director of the Company and its subsidiaries. 3.6.2 For the purposes of Clause 3.6.1 an event of default is committed by BM, RF or DS if there shall be any material breach by him in his capacity as a Warrantor of any of any material warranty included in the Warranties arising in consequence of his fraud 7 or knowing non-disclosure and, in the case of a breach capable of remedy, such breach is not remedied within 90 days of him being given written notice from IFT requiring him to do so and referring to the consequences arising under Clause 3.6.1 of any failure to do so. 3.6.3 Save pursuant to the agreements referred to in Clause 3.6.1 and as hereinafter provided, no Director nor any of NF, BM, GR, DT, ES, RF or DS shall receive any remuneration, emoluments or benefits or directors fees from the Company PROVIDED that non-executive directors shall be paid directors fees of an amount agreed by the Board. 3.6.4 The Directors (insofar as the same is not provided for in any contract with the Company) shall be reimbursed for all reasonable expenses properly incurred by them in connection with the business of the Company subject to production of vouchers or other evidence of payment in support and subject to agreement by the Board. 3.7 Each Director shall be entitled in accordance with the Articles to appoint an alternate Director of his choice to represent his principal in all respects. 3.8 Without prejudice to their rights hereunder it is agreed that the A Shareholders proposing to appoint or remove an A Director under this Clause and the Articles will consult with the B Shareholders before giving notice under the Articles to do so and vice versa. 3.9 The A Shareholders and the B Shareholders undertake to each other that at any one time there will be at least one Director appointed by them or it pursuant to Clause 3.3 able and willing to act as such Director and further undertake that they will procure that such Director (or his alternate) shall not wilfully absent himself from any Board Meeting so as to prevent the transaction of business thereat. 3.10 If all of the A Shareholders cease to be the registered holders of any A Shares for whatever reason or all the B Shareholders cease to be the registered holders of any B Shares for whatever reason, then upon them or it so ceasing to be the holder(s) of such Shares, they or it shall procure that the Director(s) nominated by them or it will resign immediately without payment for compensation for loss of office or otherwise. 3.11 IFT shall be entitled to bring any advisor and/or observer to any meeting of the Directors of the Company (or any committee thereof) but for the avoidance of doubt no such advisor or observer shall be entitled to vote at any such meeting. 4. SHARE TRANSFERS 4.1 The transfer of Shares shall be regulated in accordance with the Articles and each Shareholder shall exercise all voting rights and powers available to it in relation to the Company so as to procure registration of any transfer of shares permitted by the Articles. 8 4.2 Save as expressly provided in the Articles, no Shareholder shall: 4.2.1 pledge, mortgage (whether by way of fixed or floating charge) or otherwise encumber its legal or beneficial interest in its Shares; or 4.2.2 sell, transfer or otherwise dispose of any of such Shares (or any legal or beneficial interest therein); or 4.2.3 enter into any agreement in respect of the votes or other rights attached to Shares; or 4.2.4 agree, whether or not subject to any condition precedent or subsequent, to do any of the foregoing. 4.3 In Clause 4.2 the expression "Shares" includes all Shares owned or to be acquired by any Shareholder after the date of this Agreement under or pursuant to this Agreement or by virtue of its shareholding in the Company. 4.4 If any of the Shareholders shall purport to deal with any of its Shares in contravention of the provisions of Clause 4.2 the Company shall not register any transfer made in breach of Clause 4.2 and the Shares comprised in any transfer so made shall carry no rights whatsoever unless and until, in each case, the breach is rectified. 4.5 It shall be a condition precedent to any transfer or transmission of any Shares by any party during the continuance in force of this Agreement that the proposed transferee of such Shares shall have first agreed in writing with the then parties to this Agreement (who shall be bound to enter into such agreement) that upon the transfer or transmission of the Shares concerned such transferee will observe and be bound by and have the benefit of all provisions hereof so far as they affect the transferor of such Shares as though the transferee were a party to this Agreement and that such transferee shall procure an agreement on the part of the transferee of any of the said Shares from him in similar terms. 5. APPLICATION OF PROFITS/DIVIDEND DISTRIBUTION Subject as hereinafter provided after making appropriate provisions for Taxation, the Company's earnings available for distribution as determined by the audited accounts of the Company for any financial year or other accounting period shall be applied in making distributions to the Shareholders by way of dividend, subject to such reasonable and proper reserves being retained for working capital requirements or other liabilities of the Company as the Board may consider appropriate PROVIDED that no such distributions shall be made unless and until: (a) any payments due in respect of the Continuing Loan (as defined in the Loan Agreement) have been paid in full; and (b) any loans, loan stock or preference shares (or any payments due thereon) payable to the Shareholders or their Associates or other indebtedness of the Company to the Shareholders or their Associates (including without limitation any amount then outstanding in respect of the loan of (pound)200,000 made to the Company by IFT to 9 enable the Company to repay part of its indebtedness to Crown Leisure Sales Limited) have been paid in full. 6. WARRANTIES 6.1.1 The Warrantors hereby jointly and severally warrant to IFT in the terms of the Second Schedule. 6.1.2 Each of the Warrantors hereby agrees and acknowledges that IFT will in purchasing shares in the capital of the Company as referred to in Clause 2.1 and further investing in the Company be doing so in reliance on the Warranties. 6.1.3 The Warranties shall continue in full force and effect notwithstanding completion of this Agreement. 6.1.4 It is hereby expressly agreed and declared that where any statement contained in any of the Warranties is qualified by the expression "so far as the Warrantors are aware" or "to the best of the Warrantors knowledge and belief" or any similar expression that statement shall in any case be deemed to include an additional statement that it has been made after due and careful enquiry. 6.2.1. If any fact or matter comes to the notice of any of the Warrantors which may give grounds for a claim under the Warranties the Warrantors shall: (1) as soon as reasonably practicable give written notice thereof to IFT; (2) not on behalf of the Company make any agreement or compromise with any person body or authority in relation thereto without prior consultation with or the prior agreement of IFT; (3) (so far as they are able) give to IFT and its professional advisers reasonable access to the premises and personnel of the Company and the Subsidiaries as the case may be and to any relevant chattels documents and records within the power permission or control of the Company and the Subsidiaries to enable IFT and its professional advisers to examine such chattels accounts documents and records and to take copies or photographs thereof at their own expense. 6.2.2 The Company shall at its own expense take all such action as IFT may reasonably request to pursue any such claim as aforesaid (including without prejudice to the generality of the foregoing the institution of legal proceedings) but so that (for the avoidance of doubt) IFT shall not be required to indemnify the Company as to any costs and expenses which it may incur by reason of such action. 6.3 Each of NF, BM, RF and DS hereby severally warrants to IFT and each of Irwin Gross, James Fox and Charles Condy severally warrants to the A Shareholders that: (a) he has never been a director shareholder partner or proprietor or otherwise connected with any company firm or partnership which has been the subject of an inspection by the Department of Trade and Industry or an investigation by the 10 police, the Inland Revenue, the Department of Health and Social Security or the Customs and Excise or any professional body or any other similar authority or professional body in any country of the World; (b) he has never been convicted of a criminal offence (other than road traffic offences not involving personal injury or dishonesty); (c) he has not been a director or senior executive employee of any company in respect of which a receiver has been appointed or which has gone into liquidation whilst he was a director or employee of such Company or within the period of 12 months following his ceasing to be a director or employee of such company. 6.4.1 The following sub-clauses of this Clause 6.4 shall operate to limit the liability of the Warrantors for damages for breach of the Warranties contained in the Second Schedule (which for the avoidance of doubt exclude the warranties contained in Clause 6.3) but shall not apply further or otherwise and in particular, but without prejudice to the generality of the foregoing this Clause 6.4 shall not apply in relation to, or prejudice or in any way affect the provisions of Clauses 3.5.2, 3.6.1, 3.6.2 or 9 of this Agreement. Accordingly, in this clause, "Relevant Claim" means any claim for damages under the Warranties. 6.4.2 (a) The liability of the Warrantors in respect of all and any Relevant Claims shall be limited so that NF shall not in any circumstances be liable for more than 70% of any Relevant Claim, BM shall not in any circumstances be liable for more than 11.5% of any Relevant Claim, RF shall not be liable for more than 11.5% of any Relevant Claim and DS shall not be liable for more than 7% of any Relevant Claim. (b) Except for Relevant Claims arising from fraud or knowing non-disclosure, IFT's sole recourse and the Warrantors' sole liability for Relevant Claims shall be against and from the Warrantors' interest in the Company, whether as shares in the Company or rights to distributions from the Company. HGI and NF hereby undertake to take all action necessary to procure that this Clause (b) can be enforced at all times and in all respects as if NF were the holder of all the Shares held by HGI and entitled to all the rights attached to those shares. 6.4.3. The Warrantors shall not be liable in respect of a Relevant Claim unless the aggregate liability of the Warrantors in respect of all Relevant Claims exceeds (pound)20,000 in which case the Warrantors shall be liable for the whole amount and not merely the excess over (pound)20,000. 6.4.4 The Warrantors shall have no liability in respect of any Relevant Claim unless IFT shall have given notice in writing to the Warrantors of such claim specifying (in reasonable detail) the matter which give rises rise to the claim, the nature of the claim and the amount claimed in respect thereof not later than: (A) in the case of a Relevant Claim relating to Taxation, seven years after the date of this Agreement; or (B) in any other case, the date 18 months after the date of this Agreement. 11 6.4.5 The Warrantors shall have no liability in respect of any Relevant Claim: (a) if and to the extent that such liability arises, occurs or increases as a result of any retrospective legislation not in force at the date hereof or as a result of any retrospective change in law or published practice of a tax authority hereafter; (b) if and to the extent that such liability arises, occurs or increases as a result of any change in the basis or method of calculation of or any increase in the rate or rates of Taxation in force at the date hereof or any change or new form of Taxation made after the date hereof, in each case having retrospective effect; (c) if and to the extent that liability arises, occurs or increases as a result of any voluntary act of the Company acting at the express direction of IFT Management Limited pursuant to the IFT Agreement or with the express prior written consent of IFT after the date hereof otherwise than in the ordinary course or proper course or business; or (d) if and to the extent that allowance, provision (excluding the deferred tax provision), reserve or note has been made in the Accounts in respect of such liability or to the extent that the existence or payment or discharge of such liability has been taken into account in the Accounts. 6.4.6 IFT shall not be entitled to claim that any facts or circumstances constitute or give rise to any liability in respect of any Relevant Claim if such fact or circumstance has been fairly disclosed in the Disclosure Letter. 6.4.7 IFT shall reimburse to the Warrantors an amount equal to any sum paid by the Warrantors in respect of any Relevant Claim which is recovered by IFT or the Company from any insurance company less the costs and expenses of recovery to the extent that payment has been made by the Warrantors or any of them to settle a claim pursuant to the Warranties in respect of the same matter which has resulted in such recovery and if the recovery is more than the amount paid by the Warrantors then IFT shall only be liable to account for the said amount less the costs and expenses of recovery. 6.4.8 The Warrantors shall have no liability in respect of any Relevant Claim relating to a breach capable of remedy unless such breach is not remedied within 90 days of the Warrantors being given written notice from IFT requiring them to do so and referring to the consequences arising under this Clause 6.4.8 of any failure to do so. 6.4.9 The Warrantors will (so far as they are able) procure that the Company will use all reasonable efforts to obtain the approval of the Gaming Board for Great Britain of the purchases and issues of Shares referred to in Clauses 2.1 and 9 and the changes in directors and all other constitutional changes relating to the Company provided for in this Agreement or the Articles and confirmation from the Gaming Board for Great Britain that it will regard the Company as a fit and proper person to manage a lottery following such transfer, issues and changes. 12 7. BOARD MEETINGS AND INFORMATION 7.1 The Company hereby authorises IFT to consult fully with the bankers to the Company as to its affairs and to exchange information whether oral or written in such manner as IFT and the said bankers shall deem necessary. 7.2 The parties agree to procure that: (a) Board Meetings of the Company shall be held at not less than three monthly intervals and at such other times as IFT may reasonably require ("meeting" shall include video conferencing or teleconferencing); (b) the Company will enforce from time to time the terms of the Service Agreements and the IFT Agreement; (c) IFT shall have the right to attend at any time during normal business hours at the premises of the Company for the purposes of inspecting books and records and (at times mutually convenient to the parties) consultation with the directors and employees of the Company and otherwise as it may require; (d) (Without prejudice to any rights of IFT or the B Directors): (i) IFT shall be entitled to receive at least five working days' prior written notice of any meeting of the directors of the Company giving full particulars of the subject matter to be considered (other than in an emergency when as much notice and as many particulars as are reasonably practicable shall be given); and (ii) the Company shall thereafter provide to IFT copies of all documents, papers and reports that are given to the directors of the Company or otherwise considered at any Board meeting of the Company and at the same time as such documents, papers and reports are given to the Directors. 8. OPERATION OF THE COMPANY 8.1 Notwithstanding any other provision hereof or contained in the Articles of Association of the Company from time to time or the Articles or the IFT Agreement during the continuance of this Agreement the Company shall not without first obtaining the prior consent in writing of at least three A Shareholders together holding not less than 75% of the issued A Shares and the holder(s) of more than half of the issued B Shares allow or permit to occur any of the events referred to in Part 1 of the Third Schedule in relation to the Company or any Subsidiary. 8.2 Notwithstanding any other provision hereof or contained in the Articles of Association of the Company from time to time or the Articles or the IFT Agreement during the continuance of this Agreement the Company shall not without the prior approval of the Board allow or permit to occur any of the events referred to in Part 2 of the Third Schedule in relation to the Company or any Subsidiary. 13 8.3 Notwithstanding any provision to the contrary contained in the Articles of Association of the Company from time to time or the Articles or the IFT Agreement the parties hereby mutually agree and undertake and shall use their respective powers to procure that: (a) the business of the Company consists exclusively of the Business; (b) all cheques or other bankers payment instructions (or series of related cheques or other bankers payment instructions) drawn by the Company or any of the Subsidiaries in excess of (pound)15,000 are signed by at least one A Director and one B Director PROVIDED that this sub-clause (b) shall not apply in respect of any payments to any of the following: the Inland Revenue, H.M. Customs & Excise, any Society Trust Account or Prize Fund Trust Account maintained by the Company, IFT, IFT Management Limited or the principal service provider or to the payment of regular monthly salaries via the Company's pay-roll system; (c) the board of directors of the Company determines the general policy of the Company (including all strategies, budgets and guidelines) (subject to the express provisions of this Agreement), including the scope of its respective activities and operations. 8.4.1. Where this Agreement provides that any particular transaction or matter requires the consent, approval or agreement of IFT or the A Shareholders or the B Shareholders (or any of them) such consent approval or agreement may be given subject to such terms and conditions as IFT or such A Shareholders or B Shareholders may impose and any breach of such terms and conditions by any person subject thereto shall ipso facto be deemed to be a breach of the terms of this Agreement. 8.4.2 If the consent approval or agreement of IFT or any A Shareholders or B Shareholders is required under more than one provision of this Agreement for any one transaction or matter then any consent approval or agreement given in relation to that transaction or matter by IFT or any A Shareholders or B Shareholders shall be deemed to cover all consents approvals or agreements required for that transaction or matter unless otherwise specified by IFT or such A Shareholders or B Shareholders. 8.4.3 Where this Agreement provides that any transaction or matter is required to be done at the discretion of IFT or the A Shareholders or B Shareholders (or any of them) then such discretion may be exercised by IFT or such A Shareholders or B Shareholders or on its or their behalf in an absolute and unfettered manner (subject as herein expressly stated). 9. OPTION 9.1 Notwithstanding any provision to the contrary contained in this Agreement or the Articles if any A or B Shareholder commits or suffers an event of default, the other A and B Shareholders shall be entitled, within 60 days of becoming aware of the occurrence of the event of default, to require the defaulting Shareholder to sell all (but not some only) of the Shares held or beneficially owned by the defaulting Shareholder or its Associates to the other A and B Shareholders for the prescribed price. The option shall be exercised by the other A and B Shareholders or any of them delivering written 14 notice to the defaulting Shareholder stating that the option is exercised. As between the said other Shareholders the option shall be exercisable and the shares held or beneficially owned by the defaulting shareholders shall be allocated (so near as may be) in accordance with the provisions of paragraph 6 of the Articles to the extent that such provisions are consistent with this clause and excluding the C Shareholders from any entitlement. 9.2 If the option is exercised, the defaulting Shareholder shall deliver to the other A and B Shareholders, within 14 days of the date of the prescribed price being agreed or determined under Clause 9.3(c) (a) duly executed transfer(s) of all the Shares held or beneficially owned by it or its Associates in favour of the other A and B Shareholders upon full payment to it in sterling in London of the prescribed price. The Shares which are transferred shall be deemed to be sold by the transferor as beneficial owner with effect from the date of the transfer, free from any lien, charge or encumbrance and with all rights attaching to them as at the date of exercise of the option. 9.3 For the purpose of this Clause: (a) an event of default is committed or suffered by an A or B Shareholder if: (i) he commits a material breach of his obligations under this Agreement (including without limitation any material breach of any material warranty included in the Warranties) and, in the case of a breach capable of remedy, such breach is not remedied within 90 days of him being given written notice from all or any of the other shareholders requiring him to do so and referring to the consequences arising under this clause of any failure to do so; or (ii) a distress, execution, sequestration or other process is levied or enforced upon or sued out against his property which is not discharged within 10 days or he shall be adjudged bankrupt or enter into a formal voluntary arrangement with his creditors; (b) any event of default committed or suffered by Norman Feinstein shall be deemed to be an event of default committed or suffered by HGI; (c) "the prescribed price" means such sum in respect of the Shares forming the subject matter of the option as may be agreed between the Shareholders within 21 days of the date of the notice exercising the option or (in default of agreement between them) such sum as the specified experts certify to be, in their opinion, the fair value of those Shares as between a willing buyer and a willing seller contracting on arm's length terms, having regard to the fair value of the Business as a going concern as at the date of the notice exercising the option, but without taking into account (if it is the case) that the relevant Shares represent a minority interest in the Company; (d) "the specified experts" means such firm of accountants as, on a request by any Shareholder the making of which is promptly notified to the other, is nominated by the President of the Institute of Chartered Accountants in England and Wales. 9.4 The specified experts shall be instructed to determine which of the Shareholders should bear, or in what proportions they should share, the specified experts' costs of certifying the prescribed price. In making their determination, the specified experts shall have 15 regard to the efforts made by each of the Shareholders to agree the prescribed price under this Clause 9. 10. COUNTERPARTS This Agreement may be executed in two or more counterparts, each of which when either delivered personally or transmitted by facsimile shall be deemed to be an original, and which together shall constitute one and the same Agreement. Unless otherwise provided in this Agreement, this Agreement shall become effective and be dated (and each counterpart shall be dated) on the date on which this Agreement (or a counterpart of this Agreement) is signed by the last of the parties to execute this Agreement or, as the case may be, a counterpart thereof. 11. GENERAL 11.1 None of the Shareholders shall assign or transfer or purport to assign or transfer any of its rights or obligations under this Agreement without the prior written consent of the other Shareholders. 11.2 This Agreement shall be binding on and shall enure for the benefit of the respective successors in title of each party to this Agreement. 11.3 The rights of any party hereto shall not be prejudiced or restricted by any indulgence or forbearance extended to any other party and no waiver by any party in respect of any breach shall operate as a waiver in respect of any subsequent breach. 11.4.1. This Agreement together with the agreements referred to herein supersedes any previous agreement between the parties in relation to the matters dealt with herein and represents the entire understanding between the parties in relation thereto. 11.4.2 Save as otherwise expressly provided, no modifications, amendments or waiver of any of the provisions of the Agreement shall be effective unless made in writing specifically referring to this Agreement and duly signed by the parties hereto. 11.5 Notwithstanding the terms of the IFT Agreement all fees of Chaffe Street and Mesirov Gelman and any finders fee payable to Henry Kauftheil in connection with the transactions contemplated by this Agreement shall be payable by the IFT Group (as defined in the IFT Agreement) in the first instance and all fees of Nabarro Nathanson in connection with the transactions contemplated by this Agreement shall be payable by the Warrantors (in proportion to their shareholdings) in the first instance and such fees shall be reimbursed as provided in the IFT Agreement save that such reimbursement shall only be made by payment by the Company of lawful dividends or in such other manner as shall not constitute unlawful financial assistance within the meaning of Section 151 of the Companies Act 1985. To the extent that any payments are made by way of dividend, the parties shall take all steps as shall be necessary in relation to the dividend payments to put all parties in the 16 same position (as near as may be) as if such reimbursement by way of dividend had been a payment of Inter Lotto Revenue Share pursuant to Clause 7.1 of the IFT Agreement. 12. TERMS OF THIS AGREEMENT TO PREVAIL 12.1 As between the parties (other than the Company) in the event of any ambiguity or conflict arising between the terms of this Agreement and those of the Company's Memorandum and Articles of Association from time to time, to the extent of any such ambiguity or conflict the terms of this Agreement shall prevail and the Shareholders shall cause the Memorandum of Association and Articles of Association of the Company to be amended accordingly. 12.2 As between the parties in the event of any ambiguity or conflict arising between the terms of this Agreement and those of the IFT Agreement, to the extent of any such ambiguity or conflict the terms of this Agreement shall prevail, save in relation to Clause 5 in relation to which the terms of the IFT Agreement shall prevail. 13. SEVERANCE 13.1 Each provision of this Agreement shall be enforceable independently of all other provisions and its validity, legality or enforceability shall not be affected if any other provision becomes invalid, illegal or unenforceable in any respect under any law. 13.2 If at any time any provision of this Agreement becomes invalid, illegal or unenforceable in any respect by reason that the Company is a party to that provision and that provision purports lawfully to fetter the Company's statutory powers, the provisions of Clause 15 (Unlawful Fetter on the Powers of the Company) shall determine what action shall be taken by the parties to this Agreement (other than the Company). 13.3 In respect of all provisions of this Agreement (but in those cases where the provisions of Clause 14.2 must be complied with, following compliance therewith) if at any time any provision of this Agreement is or becomes invalid, illegal or unenforceable in any respect under any law but would be or become valid, legal or enforceable if some part of the provision were deleted or amended, the provision in question shall remain in force with such deletion or with such amendment as may be necessary to make the provision valid, legal and enforceable. 14. EXERCISE OF POWERS 14.1 Where the parties to this Agreement (other than the Company) are required under this Agreement to exercise their powers in relation to the Company to procure a particular matter or thing, such obligation shall be deemed to include the obligation to exercise their powers both as shareholders and as Directors (where applicable) of the Company to procure such matter or thing. 17 14.2 In order to discharge their obligations under Clause 14.1 each of the said parties to this Agreement shall join with the other said parties to convene meetings, propose resolutions and vote for resolutions and procure that any Director appointed by it (whether alone or jointly with any other person) shall exercise its votes as a Director to procure such matter or thing referred to in Clause 14.1. 14.3 The parties hereto shall procure as far as each is lawfully able to do so that there shall be a quorum for any general meeting or board meeting of the Company by whomsoever called. 15. UNLAWFUL FETTER ON THE POWERS OF THE COMPANY 15.1 If and to the extent that any provision of this Agreement to which the Company is a party shall purport unlawfully to fetter the Company's statutory powers the parties to this Agreement (other than the Company) agree that such provision shall be read and construed as though the Company is not a party thereto and that no obligation is imposed upon the Company. 15.2 If any other party or parties to this Agreement other than the Company is a party to such a clause containing such provision, such clause shall continue in full force and effect to the fullest extent possible (but so that such provision shall not bind the Company) and shall in all other respects remain binding upon the said party or parties and the said party or parties in accordance with the provisions of Clause 14 shall procure the Company to do and perform all the obligations imposed on it and which it had undertaken to do or perform. 15.3 If the only party to such a clause containing such a provision is the Company the other party or parties to this Agreement (other than the Company) in accordance with the provisions of Clause 14 shall procure the Company to do and perform all the obligations imposed on it and which it had undertaken to do or perform. 16. NO PARTNERSHIP 16.1 Nothing in this Agreement shall be deemed to constitute a partnership between the parties nor constitute any party the agent of any other party for any purpose. 16.2 No party shall (save as expressly provided herein) have any authority to bind any other party in any way. 16.3 The Shareholders will account separately to the relevant taxation authorities for the taxation of their respective proportions of the dividends of and/or payments by the Company and will bear no liability whatsoever for taxation in respect of the portion of the dividends of and/or payments by the Company attributable to the other Shareholders. 18 17. NOTICES 17.1 Any notice given under this Agreement shall either be delivered personally or sent by first class recorded delivery post (air mail if overseas) or telex, facsimile transmission or comparable means of communication. The address for service of each party shall be (in the case of an individual) the address set out at the head of this Agreement or at such other address within the United Kingdom for service previously notified to the other parties or (in the case of IFT) Interactive Flight Technologies, Inc., Office of the Chairman, 1811 Chestnut Street, Suite 120, Philadelphia, PA 19103, USA or such other address for service previously notified to the other parties or (in the case of any other company) its registered office for the time being. A notice shall be deemed to have been served as follows: 17.1.1 if personally delivered, at the time of delivery; 17.1.2 if posted, at the expiration of 48 hours or (in the case of air mail) seven days after the envelope containing the same was delivered into the custody of the postal authorities; and 17.1.3 if sent by facsimile transmission or comparable means of communication, at the time of transmission (if the notice is sent before 5.00 p.m. on a Business Day) otherwise at 9.00 a.m. on the next following Business Day. 17.2 In proving such service (without prejudice to any other means of proof) it shall be sufficient to prove that personal delivery was made, or that the envelope containing such notice was properly addressed and delivered into the custody of the postal authority of the country of despatch as a prepaid first class recorded delivery or air mail letter (as appropriate) or that in relation to a facsimile transmission or other comparable means of communication, that a confirming copy thereof was personally delivered or sent by first class recorded delivery or air mail letter (as appropriate) within 24 hours after transmission. 17.3 The address for service of any notice to be served on the Directors from time to time pursuant to this Agreement shall be the address stated in the Companies form notifying their appointment as Directors, or such other address notified in writing by the Directors to the Company. 18. compliance with the terms of the settlement agreement Notwithstanding any other provision of this Agreement the Shareholders shall cause such amendments (if any) to be made to the terms of this Agreement and/or the Memorandum and/or Articles of Association of the Company from time to time as IFT shall determine to be necessary to ensure that the Company is not in breach of the terms of the Settlement Agreement and IFT is irrevocably authorised to appoint any person in the name of any Shareholders and on his/its behalf to sign any document and to do all other things requisite to give effect to such amendments. 19 19. FURTHER ASSURANCE Each of the parties shall co-operate with the others and execute and deliver to the other such other instruments or documents and take such other actions as may be reasonably requested from time to time in order to carry out, evidence and confirm their rights and intended purpose of this Agreement. 20. DURATION This Agreement shall continue in full force and effect until the first to occur of the following dates: (a) the date on which the Shareholders cease to be beneficially entitled in aggregate to 51 per cent or more of the equity share capital of the Company or otherwise cease between them to control (as defined by Section 839/840 of the Taxes Act) the affairs of the Company; or (b) the date of commencement of the Company's winding-up; Provided that the terms of this Agreement shall nevertheless continue to bind the parties hereto thereafter to such extent and for so long as may be necessary to give effect to the rights and obligations embodied herein. 21. APPLICABLE LAW This Agreement shall be governed by and construed in accordance with English law and each of the parties submits to the non-exclusive jurisdiction of the Supreme Court of Judicature of England in relation to any claim, dispute or difference which may arise in relation to the Agreement. IN WITNESS whereof this Deed has been duly executed and delivered the day and year first above written. 20 SCHEDULE 1 Current Shareholdings
Name of Shareholder Number of Ordinary Shares Number of Deferred Shares - ------------------- ------------------------- ------------------------- HGI 6,695 The Right Hon. Lord Mancroft 1,103 Gary S. Redish 276 Sir David Trippier 66 Viscount Strathallan 66 Roy Fisher 1,103 Douglas Smith 691 Crown Leisure Sales Limited 3,793 6,207 ======== ====== 13,793 6,207 ======== ======
Current Directors Lord Mancroft Norman A. Feinstein (alternate G. Redish) Roy Fisher Michael Gemson Paul Roden 21 SCHEDULE 2 Warranties (1) The Company (a) The Company: (i) has no subsidiaries; (ii) has not passed any elective resolution (within the meaning of Section 379A of the Companies Act 1985); (iii) is validly incorporated under the laws of England and entitled to do business wherever necessary. (b) The persons listed as such in the First Schedule are the only directors and the only shareholders of the Company and their shareholdings are as set out in the First Schedule all of which shares are fully paid up. (c) There are no options or agreements outstanding which call for the issue of or accord to any person or company the right to call for the issue of any shares in the capital of the Company and the authorised share capital of the Company immediately following completion of this Agreement will be (pound)1,000. (d) The entering into this Agreement by the Company has been decided on by the directors of the Company. (e) There is annexed to this Agreement a true copy of the Memorandum and Articles of Association of the Company together with a copy of every such resolution or agreement as is referred to in Section 380 of the Companies Act 1985. (f) No administrator, administrative receiver, receiver, manager or receiver and manager has been appointed of the whole or any part of the assets or undertaking of the Company and no such appointment has been threatened. (g) No order has been made or petition presented or threatened or resolution passed for the winding up of the Company or for an administrator to be appointed in respect of the Company. (h) All returns, particulars and other documents required to be filed with the Registrar of Companies in respect of the Company have been properly filed. (2) Information All written information furnished by the Warrantors (or any of them) to IFT or its Associates or their respective advisers (or any of them) in connection with the negotiation of the investment by and involvement of IFT or its Associates (or any of them) in the Company and in particular but without limitation each of the Business Plan Documents: 22 (i) insofar as it constitutes statements of facts was when given and remains true and accurate in all material respects; and (ii) insofar as it constitutes forecasts opinions and estimates was when given and remains bona fide and based on reasonable and proper bases and assumptions; and there is no information known to the Warrantors which has not been disclosed to IFT in writing which would make any such information or any of the Business Plan Documents untrue inaccurate or misleading. (3) Share Capital and Company Information The facts and information contained in the First Schedule and the Recitals to this Agreement in relation to the Company are true and accurate in all respects; and none of the share capital of the Company is under mortgage or charge and no dividends or other rights or benefits have been declared made or paid or agreed to be declared made or paid. (4) Accounts and Management Accounts (a) The Accounts give a true and fair view of the state of affairs of the Company as at the Balance Sheet Date and of the profits of the Company for the period of twelve months ended on the Balance Sheet Date. (b) The Management Accounts give a true and fair view of the state of affairs of the Company as at 31st January 1999 and of the profits of the Company for the period from 1st September 1997 to 31st January 1999. (5) The Accounts comply with all relevant statutory requirements and with all statements of standard accounting practice and generally accepted accounting principles current at the Balance Sheet Date. (6) To the best of the Warrantors' knowledge the assets of the Company at the Balance Sheet Date are not overstated nor are any liabilities understated in the Accounts. (7) To the best of the Warrantors' knowledge full disclosure has been made in the Accounts of all known or foreseeable liabilities of the Company whether actual or contingent including provisions and reserves for taxation on profits earned up to the Balance Sheet Date and of all encumbrances and onerous commitments in existence or contemplation. (8) The Accounts were prepared on a basis consistent with that on which accounts were prepared for the Company in respect of the two previous financial periods save as stated in the notes to the Accounts. (9) The assets of the Company referred to in the Accounts and any additions made since the Balance Sheet Date and all other assets used or employed by the Company are the absolute property of the Company free from any mortgage charge lien equity or other encumbrance whatsoever and all such assets are in the possession or under the control of the Company. 23 (10) Position since the Balance Sheet Date Since the Balance Sheet Date (a) the business of the Company has been continued in a proper manner in the ordinary course and there has been no adverse change in the financial or trading position or in the prospects of the Company; (b) there has been no material reduction in the value of the net assets of the Company on the basis of the valuations adopted in the Accounts; (c) no dividend or other distribution (within the meaning of Section 233 or 234 of ICTA 1970) has been declared paid or made by the Company; (d) the Company has not entered into any arrangement which is outside the ordinary and normal course of its business; (e) there has been no extraordinary profit or loss. (11) Intellectual Property Except for the trade marks and other matter listed in the Fifth Schedule the Company does not own use or require to use any trade marks, copyright, letters patent, registered designs, confidential know how or business names in connection with the carrying on of the Business. (12) Immediately prior to the execution of this Agreement the Company had all licences authorisations and consents required for the carrying on of the Business (including without limitation a full and valid certificate to manage a society's lottery or a local lottery issued in pursuance of the Lotteries and Amusements Act 1976 (as amended) ("the Lottery Manager's Certificate")) and to the best of the Warrantors' knowledge there are no factors which might in any way prejudice the continuance or renewal thereof. (13) Insurance (a) Immediately following the date hereof there will be valid insurances in respect of the assets of the Company of an insurable nature and the business of the Company to the full replacement value thereof against all risks normally insured against by other companies with similar assets or carrying on similar business and nothing has been done or omitted to be done which would or might make such insurances void or voidable. (b) The Schedule of Insurance enclosed with the Disclosure Letter is true and accurate and gives details of all current insurances. (14) Confidential Information The Warrantors have not at any time disclosed or undertaken to disclose to any party other than IFT and its advisers any secret or confidential information relating to the Business which could adversely affect the Company or its prospects. 24 (15) There are no agreements or arrangements in existence which restrict the activities of the Company in any part of the world or which have or should have been registered or notified under or which infringe the Restrictive Trade Practices Act 1976, the Monopolies and Mergers Acts 1965, the Fair Trading Act 1973, the Competition Act 1980, Articles 85 or 86 of the Treaty of Rome or any other anti-trust or anti-cartel legislation. (16) Litigation No litigation arbitration prosecution or other proceedings are outstanding or are pending or threatened in respect of the Company or of its assets and no governmental or official investigation or inquiry concerning the Company is in progress or pending and there are no circumstances likely to give rise to any such proceedings investigations or inquiry. (17) Employees (a) The Disclosure Letter contains accurate and complete details of the identities, dates of appointment to office or commencement of continuous employment, emoluments, notice periods and other terms of employment of each officer and employee of the Company including, without limitation, share option, share incentive, profit sharing, commission and discretionary bonus arrangements and other benefits provided by custom or practice of all employees of the Company whose employment cannot be terminated by three months notice or less without giving rise to any claim for damages or compensation (other than a statutory redundancy payment or compensation for unfair or constructive dismissal). (b) The Company has in relation to each of its employees paid all income tax due and payable under the PAYE System and payments due and payable in respect of national insurance contributions (including employer's contributions). (18) Material Commitments Liabilities and Trading Practices (a) The Company does not have outstanding: (i) any contract transaction commitment (whether in respect of capital expenditure or otherwise) liability or obligation of whatsoever nature which is either long term (that is to say not capable of complete performance within six months from the date hereof) or involves or is likely to involve an obligation of an onerous or material nature or magnitude including a capital commitment (that is to say involving a capital commitment in excess of (pound)50,000 in aggregate); (ii) any agreement or arrangement of a material nature or magnitude with any other party which will or may be terminated or materially affected as a result of making this Agreement; (iii) any sale or purchase option or similar agreement or arrangements affecting any assets owned or used by the Company. 25 (b) There is no default under any legally binding agreement to which Company is a party which will have a material adverse effect on the financial or trading position or prospects of the Company. (c) There are no authorities by which any person may enter into any commitment to do any act on behalf of the Company other than authorities to officers and employees to enter into routine contracts in the normal course of their duties. (d) All agreements or arrangements between the Company on the one hand and any of its directors or shareholders or any person or company connected with any of them on the other hand have been disclosed in writing to IFT. (19) Properties (A) Title to the Property The particulars of the Property shown in the Fourth Schedule hereto are true and correct and the Company has good and marketable title to and exclusive occupation of the Property free from any lien, charge or encumbrance, sub-lease, tenancy or right of occupation, reservation, easement, quasi-easement, covenant, condition, agreement, declaration or privilege in favour of any third party which is or is likely to be detrimental to the carrying on of the Business of the Company in its usual and normal course and there are appurtenant to the Property all rights and easement necessary for its use and enjoyment and the Company has no other interest in land and does not own or occupy any other property. (B) Matters affecting the Property (a) The Property is not affected by any of the following matters nor is the Property likely to become so affected: (i) any outstanding dispute, notice or complaint or any exception, reservation, right, covenant, restriction or condition which is of an unusual nature or which affects or might in the future affect the use of the Property for the purpose for which it is now used or which affects or might in the future affect the value of the Property; or (ii) any notice, order, demand, requirement or proposal made or issued by or on behalf of any government or statutory authority, department or body for acquisition, clearance, demolition or closing, the carrying out of any work upon any building, the modification of any planning permission, or the continuance of any use or the imposition of any building or improvement line; or (iii) any compensation received as a result of any refusal of any application for planning consent or the imposition of any restrictions in relation to any planning consent; or (iv) any commutation or agreement for the commutation of rent or payment of rent in advance of the due dates of payment thereof; 26 (b) There are no development works, redevelopment works or fitting out works outstanding in respect of the Property. (c) All restrictions conditions and covenants (including any imposed by or pursuant to any lease) affecting the Property have been observed and performed and no notice of any breach of any of the same has been received or is likely to be received. (d) The use and occupation of the Property and all machinery and equipment therein and the conduct of any business therein complies in all respects with all relevant statutes and regulations including without prejudice to the generality of the foregoing the Factories Act 1961, the Office Shops and Railway Premises Act 1963, the Fire Precautions Act 1971, the Health and Safety at Work etc, Act 1974 and with all rules regulations and delegated legislation thereunder and all; necessary licences and consents required thereunder have been obtained. (e) There are no restrictive covenants or provisions, legislation or orders, charges, restrictions, agreements, conditions or other matters which preclude the use of the Property for the purposes for which the Property is now used and such user is the permitted user under the provisions of the Town & Country Planning Acts 1971 to 1974 and regulations made thereunder and is in accordance with the requirements of the Local Authority and all restrictions, conditions and covenants imposed by or pursuant to the Town & Country Planning Acts have been observed and performed and no agreements have been entered into under s.52 of the Town and Country Planning Act 1971 in respect of the Property. (C) Properties previously owned The Company has no existing or contingent liabilities in respect of any properties previously occupied by it or in which it owned or held any interest, including, without limitation, leasehold premises assigned or otherwise disposed of. (20) Conduct of Business To the best of the Warrantors' knowledge, the Company has conducted its business in accordance with all applicable laws and regulations (including without limitation the Lotteries and Amusements Act 1976 (as amended) and all other laws and regulations relating to betting, gaming, lotteries or amusements) and all necessary licences consents and permits have been obtained to enable the Company to carry on its business. No written notices have been received by the Company to the contrary. (21) VAT All amounts due to be paid to H.M. Customs & Excise by the Company prior to the date hereof will have been paid and at the date hereof no dispute exists between the Company and H.M. Customs & Excise. 27 (22) Taxation (a) All Taxation for which the Company is liable as a result of any act or omission by the Company prior to the date hereof will if and so far as such Taxation ought to be paid prior to the date hereof have been paid at or before the date hereof and the Company is under no liability to pay any fine penalty surcharge or interest in connection with any claim for Taxation. (b) No provision or reserve has or ought to have been made in the Accounts for Taxation liable to be assessed on the Company or for which it is accountable in respect of income, profits or gains earned, accrued or received on or before the Balance Sheet Date or any act, omission, transaction or event on or before the Balance Sheet Date including distributions made down to the Balance Sheet Date or provided for in the Accounts and no provision has or ought to have been made in the Accounts for deferred Taxation in accordance with generally accepted accounting principles. (c) The Company has properly and punctually made all returns and provided all information required for Taxation purposes and none of such returns is disputed by the Inland Revenue or any other authority concerned (in the United Kingdom or elsewhere). (d) All payments by the Company to any person which ought to have been made under deduction of tax have been so made and the Company has (if required by law to do so) accounted to the Inland Revenue for the tax so deducted. (e) To the best of the Warrantors' knowledge, the Company is not (otherwise than in the ordinary and proper course of the Company's business) liable to Taxation in respect of any transaction effected by the Company since the Balance Sheet Date. (23) Pensions No agreement or arrangement exists for the provision by the Company of any relevant benefits (as defined in s.612(1) of the Taxes Act with the omission of the exception in that definition) for any officer or employee or former officer or employee of the Company or for any dependent of any such person. (24) Debts (a) Any debts owed to the Company at the Balance Sheet Date will realise their full face value and be good and collectable in the ordinary course of business and no amount included in the Accounts as owing to the Company at the Balance Sheet Date has been released for an amount less than the value at which it was included in the Accounts or is now regarded by the Warrantors as irrecoverable in whole or in part. (b) The Company has not factored or discounted its debts or agreed to do so. (c) All debts owed to the Company at completion are good and collectable in the ordinary course of business. 28 (25) Liabilities (a) Other than as contained in the Accounts or the Management Accounts or as disclosed in the Disclosure Letter the Company does not have any known or foreseeable liability whatsoever whether actual or contingent to all or any of MMK, MMKUK, MMK Guernsey Limited, Greene King Brewing & Retailing Limited, Mansfield Breweries, The Wolverhampton & Dudley Breweries plc, Pubmaster Limited, Corporate Catering Company Limited, On Line Broadcasting Limited, Freud Communications Limited, Luther Pendragon and Nabarro Nathanson. (b) Without prejudice to sub-paragraph 25(a), the aggregate amount of all known or foreseeable liabilities of the Company whatsoever whether actual or contingent does not exceed a total of (pound)850,000. (26) Ownership and Condition of Assets (a) All assets included in the Accounts (save for real property) and all assets acquired since the Balance Sheet Date (except for current assets subsequently disposed of or applied in the ordinary and normal course of business): (i) are legally and beneficially owned by the Company; and (ii) have been in the possession of or under the control of it at all material times. (b) None of the undertaking or assets of any of the Company are the subject of any mortgage, charge, pledge, lien, option, pre-emption right, encumbrance, equity or other third party claim or right or of any outstanding agreement or commitment to give or create any of the foregoing. (c) None of the assets of any of the Company have been acquired on terms that property in it is not to pass until full payment is made or other indebtedness discharged except for retention of title clauses arising in the ordinary course of business. (d) No circumstance has arisen in relation to any asset held under any hire purchase agreement or a similar agreement whereby the amounts payable by the Company under the hire purchase agreement have been or are likely to be increased. (e) Each material item of plant, machinery vehicles and other equipment used by the Company is: (i) in good repair and condition and has been properly serviced and maintained in all material respects; (ii) capable of doing the work for which it was designed or acquired during the period in which it is written down to nil in the accounts of the Company; in each case having regard to its age, the use to which it is put, and fair wear and tear excepted. (f) all of the plant, machinery, vehicles and other equipment used by the Company materially complies with appropriate safety regulations. 29 (27) Judgments and Court Orders There is no unfulfilled or unsatisfied judgment or court order outstanding against the Company. (28) The Warrantors have disclosed in writing to IFT all material information relating to the terms and conditions of any former or existing employment of the directors of the Company (other than the B Directors) and any resignation or proposed resignation of any such directors of the Company from any such employment has been or shall be conducted in strict compliance with the provisions of any contract of employment or agreement regulating such employment and there are no claims which may arise from such earlier employment. (29) None of the Warrantors has wrongfully made use of or exploited or proposes to make use of or exploit in the business of the Company any trade secret or other intellectual property which an existing or former employer of any of the Directors is legally entitled to protect and none of the Warrantors has engaged in any business or activity or proposes to engage in any business or activity in competition with the business of any such employer which such employer was legally entitled to protect. (30) The Disclosure Letter is true and accurate in all material respects and fairly presented and nothing is omitted therefrom which renders the same misleading. (31) There are no companies or other businesses in which the Warrantors or any of them have any interest of any nature whether directly or indirectly. 30 SCHEDULE 3 Part 1 Matters Requiring Shareholders Consent (1) The entering into of any guarantee or indemnity or standing surety for any obligations of any third party. (2) The acquisition of or making any investment in another company or business or incorporating or acquiring or forming any subsidiary or entering into any partnership, joint venture or other risk sharing arrangement. (3) The sale transfer or other disposal of or cessation in any way to exercise control over (whether by one transaction or a series of transactions and whether at one time or over a period of time) the whole or any material part of its undertaking or assets. (4) The making of any alterations to the nature of its business as would constitute an alteration to the business of the Company and its subsidiaries taken as a whole being carried on at the time of such alteration. (5) The payment of any remuneration or expenses to any person other than as proper remuneration for work or services provided or as proper reimbursement for expenses incurred in connection with its business. (6) The sale transfer assignment or other disposal of or cessation in any way to exercise direct control over any part of its interest in any share capital mortgage charge debt or other obligation of any subsidiary except to or in favour of another subsidiary. (7) The alteration of the Memorandum or Articles of Association of the Company or any of its subsidiaries and in particular but without limitation any variation to the authorised or issued share capital of the Company or any Subsidiary. (8) The offer or grant of any option over or the sale of the whole or any part of the share capital of the Company or any Subsidiary whether issued or unissued. (9) The forming, entering into, termination or withdrawal from any partnership consortium or any other unincorporated association carrying on a trade or business or any other similar arrangement whether or not with a view to profit. (10) The creation allotment or issue of any shares or securities of the Company or any Subsidiary or the grant of any right to require the allotment or issue of any such shares or securities (other than the creation allotment or issue or the grant of any right to require the allotment or issue of any shares or securities pursuant to this Agreement or the Settlement Agreement made on 15th January 1999 between the Company, MMK Europe Limited and MMK UK Limited). (11) Any increase, reduction, repayment, redemption, sub-division, consolidation or other variation of the authorised or issued share capital of the Company or any Subsidiary (including early redemption of any of the preference share capital of the Company or any 31 Subsidiary) or the rights attaching thereto or any reduction in the amount, if any, standing to the credit of the share premium account or capital redemption reserve. (12) The evolution, expansion or development of the business of the Company or any Subsidiary (whether conducted as part of or in connection with the business of the Company or any Subsidiary or ancillary to it) otherwise than through the Company or a wholly-owned subsidiary of the Company. (13) The creation of any fixed or floating charge, lien (other than a lien arising by operation of law) or other encumbrance over the whole or any part of the undertaking, property or assets of the Company or any Subsidiary, except for the purpose of securing indebtedness to its bankers for sums borrowed in the ordinary and proper course of the Business. 32 Part 2 Matters Requiring Board Approval (1) The incurring of any liability of a capital nature over any capital expenditure plan approved from time to time by IFT (and so that for the purposes of this paragraph (1) the expression "liability of a capital nature" shall include the capital value of all items purchased or leased on hire purchase, lease purchase, lease agreements and any other form of credit sale or asset financing agreement). (2) The entering into of any transaction or contract otherwise than on arm's length terms and in the ordinary course of business of the Company and its subsidiaries. (3) The entering into or varying of any transaction or agreement with or for the benefit of any director from time to time of the Company or any of its subsidiaries or any Associate of such a director save as contemplated by this Agreement. (4) The commencement by the Company or any Subsidiary of any legal or arbitration proceedings save for legal proceedings for the recovery of debts. (5) The loan of any money to any person (otherwise than by way of deposit with a bank or other institution the normal business of which includes the acceptance of deposits) or the granting of any credit to any person other than in the ordinary course of business. (6) The making of any change in the appointment of its auditors from BDO Stoy Hayward or changing the accounting reference date of the Company or any subsidiary from 31st August. (7) The entering into or varying of any contract or arrangement (whether legally binding or not) with any director from time to time of the Company or any of its subsidiaries or with any Associate of any such director. (8) The entering into of any lease licence tenancy or similar obligation relating to land or buildings. (9) The employment of any person (whether under a contract of service or for services) or the grant of any increase in the remuneration of any employee whereby such person's aggregate emoluments (including without limitation all salaries, bonuses and benefits in kind (the cost of which shall be calculated by reference to the actual annual cost thereof to the Company and/or its subsidiaries as the case may be but disregarding any corresponding reduction to liability to Taxation which arises to the Company or any Subsidiary in relation thereto)) and pension benefits will or may exceed the sum of (pound)30,000 in any year or whereby any budgeted expenditure approved from time to time by IFT may be exceeded. (10) The employment by the Company or any Subsidiary of any person who is a relative or an Associate of any Director of the Company or any Subsidiary or the increase in the remuneration of any such person. 33 (11) The granting by the Company or any Subsidiary of an increase in the remuneration of any director or the payment of any fee or bonus or commission to any director or any Associate of any director. (12) The making of any change in the appointment of the bankers of the Company or any Subsidiary. (13) Any variation to or amendment of or any time or indulgence granted by the Company under the IFT Agreement. 34 SCHEDULE 4 The Property First floor premises at Chichester House, Kennington Park, London SW9 comprised in a Lease dated 19 April 1995 made between Brixton Estate Plc (1) and Inter Lotto (UK) Limited (3036871). 35 SCHEDULE 5 Intellectual Property TRADE MARK REGISTRATIONS IN THE NAME OF INTER LOTTO (UK) LIMITED 19TH APRIL 1999
Application Country Mark Classes Filing Date Number - ------- ---- ------- ----------- ------------ UK Pronto! 16, 18, 20, 21, 11.7.1997 2138823 A 26, 28, 36 Pronto UK Pronto! 16, 18, 20, 21, 23.10.1997 2148852 25, 26, 28, 36, The Lively Lottery (& 38, 41 and 42 Shooting Stars Device)
Registration Registration Country Date Number Status - ------- ------------- ------------ ------ UK 11.7.1997 2138823 A Registered - renewal due 11.7.2007 UK 11.9.1998 2148852 Registered - renewal due 23.10.2007
36 IN THE AGREED FORM 1. Notice of Meeting. 2. Board Minutes. 3. Articles of Association. 4. IFT Agreement. 5. Service Agreements. 37 EXECUTED AND DELIVERED as a Deed ) by NORMAN A. FEINSTEIN in the ) presence of: ) EXECUTED AND DELIVERED as a Deed ) by THE RIGHT HON. THE LORD ) MANCROFT in the presence of: ) EXECUTED AND DELIVERED as a Deed ) by GARY S. REDISH ) in the presence of: ) EXECUTED AND DELIVERED as a Deed ) by SIR DAVID TRIPPIER ) in the presence of: ) EXECUTED AND DELIVERED as a Deed ) by VISCOUNT STRATHALLAN ) in the presence of: ) EXECUTED AND DELIVERED as a Deed ) by ROY FISHER ) in the presence of: ) EXECUTED AND DELIVERED as a Deed ) by DOUGLAS SMITH ) in the presence of: ) EXECUTED AND DELIVERED as a Deed ) by IRWIN GROSS ) in the presence of: ) 38 EXECUTED AND DELIVERED as a Deed ) by JAMES FOX ) in the presence of: ) EXECUTED AND DELIVERED as a Deed ) by CHARLES CONDY ) in the presence of: ) EXECUTED AND DELIVERED as a Deed ) by HGI HOUSE & GENERAL INVESTMENT ) FOUNDATION acting by: ) EXECUTED AND DELIVERED as a Deed ) by IFT HOLDINGS LIMITED ) acting by: ) EXECUTED AND DELIVERED as a Deed ) by INTER LOTTO (UK) LIMITED ) acting by: ) 39 EX-99.7 22 OPERATING AGREEMENT DATED APRIL 27, 1999 -------------- INTER LOTTO (UK) LIMITED and IFT MANAGEMENT LIMITED --------------------------------------------------------- OPERATING AGREEMENT --------------------------------------------------------- CONTENTS Clause Subject Matter Page - ------ -------------- ---- 1. DEFINITIONS AND INTERPRETATION......................................... 1 2. APPOINTMENT............................................................ 4 3. OPERATING AUTHORITY.................................................... 5 4. SERVICES............................................................... 6 5. EXCLUDED AUTHORITY AND CONTROL OF SERVICES............................. 6 6. FINANCIAL TERMS AND MANAGEMENT FEE..................................... 7 7. INTER LOTTO REVENUE SHARE.............................................. 8 8. NON-DISCLOSURE OF INFORMATION.......................................... 8 9. TERM................................................................... 8 10. LAUNCH................................................................. 8 11. TERMINATION............................................................ 9 12. INTER LOTTO ACTIONS AND DETERMINATIONS................................. 9 13. ACCOUNTING CALCULATIONS................................................ 9 14. SHAREHOLDERS' AGREEMENT................................................ 10 15. COUNTERPARTS........................................................... 10 16. ASSIGNMENT............................................................. 10 17. SUCCESSORS............................................................. 10 18. WAIVER AND FORBEARANCE................................................. 11 19. NO THIRD PARTY BENEFICIARIES........................................... 11 20. ENTIRE AGREEMENT AND VARIATION......................................... 11 21. SEVERANCE.............................................................. 11 22. NO PARTNERSHIP......................................................... 12 23. NOTICES................................................................ 12 24. APPLICABLE LAW AND SUBMISSION TO JURISDICTION.......................... 12 OPERATING AGREEMENT DATE April 27, 1999 PARTIES (1) INTER LOTTO (UK) LIMITED (Company number 303 6866) whose registered office is at 50 Stratton Street, London WIX 6NX ("Inter Lotto") (2) IFT MANAGEMENT LIMITED (Company number 3721405) whose registered office is at Brook House, 77 Fountain Street, Manchester M2 2EE ("the Operating Company") RECITALS (A) Inter Lotto manages Lotteries in the United Kingdom pursuant to a Certificate issued by the Gaming Board. (B) Inter Lotto desires to engage the Operating Company to participate in the conduct and administration of the operation of the Business subject to Applicable Requirements and to the authority and control of Inter Lotto. (C) The Operating Company has agreed to such engagement and to provide the Services described in this Agreement on the terms and subject to the conditions of this Agreement. IT IS AGREED AS FOLLOWS: 1. DEFINITIONS AND INTERPRETATION 1.1 In this Agreement (including the Recitals) the following words and expressions shall have the following meanings: "Accountants" The chartered accounting firm of BDO Stoy Hayward, or such other firm of chartered accountants as may be selected by the Board. "Act" The Lotteries and Amusement Act 1976 (as amended); "Applicable Requirements" the Act, The Charities Act 1992 and all other legislation relating to lotteries and all legal requirements of the Gaming Board from time to time; 1 "Articles" the Articles of Association of Inter Lotto from time to time; "Board" the Directors for the time being of Inter Lotto acting at a duly convened quorate meeting or otherwise taking decisions and passing resolutions in conformity with the provisions of the Shareholders Agreement and the Articles; "Business" the business of Inter Lotto of operating Lotteries using On-Line Facilities and such other business as the Board may agree from time to time should be carried on by Inter Lotto; "Capital Participation" all amounts paid by Inter Lotto, on the one hand, or by all or any of the IFT Group, on the other hand, for overhead and expenses of Inter Lotto for the period up to Launch, including standstill payments, travel expenses, legal fees, audit and accounting expenses, taxes, finders' fees, back pay payments, consultant fees, advertising and marketing and development costs. In addition, Capital Participation shall include advertising costs for the first 12 months after Launch. The term "Percentage Capital Participation" shall mean the percentage of the amount of capital participation at any time contributed and paid by Inter Lotto or by the IFT Group; "Certificate" the Certificate to manage Society Lotteries dated 14 March 1997 and issued by the Gaming Board to Inter Lotto and any amendments and successors thereto; "Charity Account" the Account or Accounts maintained by Inter Lotto for monies due to Charities from sales of Lottery tickets; "Director" any director of Inter Lotto including where applicable any alternate director; "First Party" has the meaning given in Clause 11.1; "Gaming Board" the Gaming Board for Great Britain; 2 "Gross Revenues" the face value of all Lottery tickets sold in an applicable period during the term of this Agreement (consisting of the total receipts to all persons or entities from such sales), before any expenses or payments. "IFT Group" the Operating Company, IFT Holdings Limited ("Holdings") and Interactive Flight Technologies, Inc.; "Inter Lotto Revenue Share" has the meaning given in Clause 7; "Launch" has the meaning given in Clause 10.1; "Lottery" a Lottery managed by Inter Lotto pursuant to the terms of this Agreement; "On-Line Facilities" facilities at Outlets which enable the Lotteries to be played on-line and all equivalent or similar facilities, including the central system for Lotteries; "Outlet" a location or facility at which tickets or other Lottery participations are sold to the public; "Party" a party to this Agreement (and "Parties" shall be construed accordingly); "Prize Fund Account" the Account maintained by Inter Lotto for all monies due on account of prizes; "Second Party" has the meaning given in Clause 11.1; "Services" the services to be provided by the Operating Company under Clause 4 and other provisions of this Agreement; 3 "Shareholders' Agreement" the agreement dated April 27, 1999 and made between the Shareholders and Inter Lotto and others; 1.2 In this Agreement: 1.2.1 the Index and Clause headings are inserted for convenience only and shall not affect the construction of this Agreement; 1.2.2 words denoting the singular shall include the plural and vice versa; 1.2.3 words denoting one gender shall include each gender and all genders; 1.2.4 references to persons shall be deemed to include references to natural persons, to firms, to partnerships, to bodies corporate, to associations, and to trusts (in each case whether or not having separate legal personality). 1.3 References in this Agreement to "Clauses" and "Paragraphs" are references to Clauses and Paragraphs of this Agreement. 1.4 Words and phrases defined for the purposes of or in connection with any statutory provision shall, where the context so requires, be construed as having the same respective meanings in this Agreement. 1.5 Reference in this Agreement to statutory provisions shall, where the context so admits, and unless expressly provided otherwise, be construed as references to those provisions as respectively amended, consolidated, extended or re-enacted at the date hereof and shall, where the context so admits or requires, be construed as references to the corresponding provisions of any earlier legislation (whether repealed or not) directly or indirectly amended consolidated extended or replaced thereby or re-enacted and shall include where appropriate any orders, regulations, instruments or other subordinate legislation made under the relevant statute. 2. APPOINTMENT Inter Lotto hereby appoints and engages the Operating Company as Inter Lotto's exclusive agent and designee throughout the term of this Agreement to exercise such authority and perform such services as are provided in this Agreement, subject to Applicable Requirements and the direction and control of Inter Lotto, and the Operating Company accepts such appointment and engagement. 4 3. OPERATING AUTHORITY 3.1 Subject to the terms of this Agreement and Applicable Requirements, Inter Lotto grants to the Operating Company the authority to participate as Inter Lotto's agent and designee in the operation and conduct of all of the business and affairs and operations of Inter Lotto, including without limitation the operations and affairs of the Business, throughout the term of this Agreement. 3.2 Subject to Clauses 3.4, 3.5 and 5 and all other provisions of this Agreement, the Operating Company's authority under this Agreement shall include, without limitation, all authority necessary or appropriate to perform all of the Services provided for in Paragraph 4; authority to make and implement all decisions and determinations with respect to the day to day business and affairs of Inter Lotto, the operation of the Business and all matters relating thereto; the authority to negotiate, execute and deliver agreements, instruments (including instruments of indebtedness) and other documents for and in the name of Inter Lotto, subject to such restrictions as may be imposed by specific action by the Board under the terms of this Agreement; the authority to receive, hold, invest and expend the receipts and funds of Inter Lotto, subject to such limitations as may be imposed by Applicable Requirements or the Board under this Agreement; and the authority to take all actions that the Operating Company in good faith believes necessary or appropriate for the conduct of the Business and Inter Lotto's operations and affairs. 3.3 Subject to Clauses 3.4, 3.5 and 5 and all other provisions of this Agreement, the Operating Company may exercise its authority and perform Services through such employees and contractors as it deems appropriate, and the Operating Company may delegate any portion of its authority under this Agreement to such employees or contractors; provided that no such delegation shall relieve the Operating Company of its responsibilities and obligations to Inter Lotto under this Agreement. The Operating Company shall notify Inter Lotto in advance of the delegation of any material portion of its management authority and services under this Agreement to a contractor who is not the Operating Company's employee. 3.4 The Operating Company shall at such intervals as the Board may determine (but not less frequently than monthly) submit to the Board a written summary report of the activities of the Operating Company under this Agreement for the period to which the report applies. The report shall be in such format and include such information in such detail as the Board may from time to time require in writing but shall in any event include summaries of actions taken by the Operating Company under this Agreement with respect to the Business for the period to which the report applies and substantial and material actions outside of the regular course of business proposed or expected promptly after such period. 3.5 Throughout the term of this Agreement, the Board of Inter Lotto shall at all times retain and have the authority provided for in Clause 5 and the full authority to make and implement decisions with respect to the policies of Inter Lotto in its operations and 5 affairs, including general operating policies, management and operating strategies, and annual and regular periodic budgets, and the authority and Services of the Operating Company shall be subject to such authority of the Board. 4. SERVICES 4.1 Throughout the term of this Agreement, the Operating Company shall perform such services that it deems reasonably necessary or appropriate for the operation of the Business and the operations and affairs of Inter Lotto and all services that Inter Lotto directs the Operating Company to perform in accordance with the terms of this Agreement and subject to the authority of the Board (including authority under Clauses 3.5 and 5.2) and all other restrictions herein, including without limitation the following: 4.1.1 Administrative services, including supervision of the administration and conduct of the Business; 4.1.2 Bookkeeping and accounting services, including the maintenance, custody and supervision of books of account and other books and records; 4.1.3 Contract administration, including supervision of contracts and other agreements for On-Line Facilities and all other aspects of the Business; 4.1.4 Personnel, including supervision, hiring and firing of personnel conducting the operations and affairs of the Business, subject to the authority and responsibility of the Board as to personnel who are employees of Inter Lotto; 4.1.5 Lottery operations, including supervision of all aspects of On-Line Facilities and the conduct of the Business through and in connection with such facilities, subject to Applicable Requirements; 4.1.6 Participation in procedures for receipt and disbursement of funds, subject to and to the extent permitted by Applicable Requirements; 4.1.7 All other services as may be necessary or appropriate for the conduct of the Business and all aspects of the operations and affairs of Inter Lotto in accordance with Applicable Requirements and the terms of this Agreement. 4.2 The Operating Company will perform all Services for and on behalf of Inter Lotto diligently in accordance with good business practices and shall use its best efforts to increase and enhance the business and good will of Inter Lotto and its Business. 5. EXCLUDED AUTHORITY AND CONTROL OF SERVICES 5.1 Nothing in this Agreement does, or is intended to, grant to the Operating Company any authority with respect to the Business or grant any right or obligation to perform any 6 services which, under the Act or any other Applicable Requirements, may not be performed by the Operating Company. In the event that this Agreement provides, or may be construed to provide, for the Operating Company to have authority or to perform services which the Operating Company may not exercise or perform in the manner and under the terms provided in this Agreement under Applicable Requirements, the Parties shall cooperate in such manner as may be necessary to cause the services to be performed and the authority to be exercised in a manner consistent with Applicable Requirements. 5.2 Inter Lotto shall at all times during the term of this Agreement have final control over the activities and services of the Operating Company in connection with the operation of the Business. Inter Lotto may at any time, by written notice to the Operating Company reverse or "veto" any action taken or proposed to be taken by the Operating Company with respect to the operation of the Business; provided that such reversal or veto is not contrary to Applicable Requirements and does not violate the contractual or other proprietary rights of any third party. A reversal or veto by Inter Lotto of any action or proposed action by the Operating Company may be taken and implemented only by written notice to the Operating Company expressly authorized by the Board, and no reversal or veto shall be effective if taken or attempted to be taken orally, by implication or estoppel or in any manner other than as expressly provided in this Clause 5.2. 6. FINANCIAL TERMS AND MANAGEMENT FEE 6.1 The Operating Company shall submit to Inter Lotto reports of revenues and disbursements at such intervals as the Parties may determine on an on-line basis, and in hard copy at such times and for such periods as the parties deem appropriate. The reports shall include a statement of Gross Revenues and disbursements and such other financial information and data as the Parties may determine to be reasonably appropriate. Within 60 days after the end of each calendar year during the term of this Agreement, the Operating Company shall submit to Inter Lotto annual reports of financial information for each such calendar year, which annual reports shall reconcile all information in the periodic reports. 6.2 The Operating Company shall pay and be responsible for, at such intervals and in such manner as may be necessary or appropriate for the proper operation of the Business and performance of Services, administrative, overhead and other regular expenses of the Business and operation of Inter Lotto arising from and after the date of this Agreement. 6.3 The Operating Company shall receive as a management fee the balance of Gross Revenues for each applicable period, after the payments provided for in this Paragraph. Inter Lotto hereby authorizes the Operating Company to make whatever payments or transfers or disbursements of funds may be necessary or appropriate for the payment of such management fee and shall take such action and execute such documents, and otherwise cooperate with the Operating Company in all respects in effecting the payment of the management fee. 7 7. INTER LOTTO REVENUE SHARE The Inter Lotto Revenue Share for any period for which a determination or calculation shall be necessary or appropriate shall be four percent of the Gross Revenues of Inter Lotto for the period and shall be paid to Inter Lotto or to Holdings, on behalf of the IFT Group, as follows: 7.1 From the date of Launch until the Capital Participation of Inter Lotto and the IFT Group has been paid in full under the terms of this Paragraph, the Inter Lotto Revenue Share shall be paid (i) one-half (equal to two percent of Gross Revenues) to Inter Lotto, and (ii) one-half (equal to two percent of Gross Revenues) to Inter Lotto and to Holdings (on behalf of the IFT Group) in proportion to the Percentage Capital Participation of Inter Lotto and the IFT Group at the time of the payment. 7.2 From and after such time as the payments under Clause 7.1 have repaid the Capital Participations of Inter Lotto and of the IFT Group in full, the entire Inter Lotto Revenue Share shall be paid to Inter Lotto. 8. NON-DISCLOSURE OF INFORMATION Except to the extent necessary to comply with the law or any requirements of The International Stock Exchange of the United Kingdom and the Republic of Ireland Limited from time to time in force or any other regulatory requirements in force from time to time affecting the Parties and save as permitted pursuant to this Agreement, neither of the Parties shall divulge or communicate to any person (other than those whose province it is to know the same or with property authority) or use or exploit for any purpose whatever any of the trade secrets or confidential knowledge or information or any financial or trading information relating to the other which the relevant Party may receive or obtain as a result of entering into this Agreement, and shall use all reasonable endeavours to prevent its holding company, subsidiaries or employees from so acting. This restriction shall continue to apply after the expiration or sooner termination of this Agreement without limit in point of time but shall cease to apply to information or knowledge which may properly come into the public domain through no fault of the Party so restricted. 9. TERM The term of this Agreement shall begin on the date hereof and shall continue until this Agreement is terminated pursuant to Paragraph 10 or Paragraph 11. 10. LAUNCH 10.1 For purposes of this Agreement, the "Launch" of the Business as operated by the Operating Company shall mean the management by Inter Lotto of a Lottery in the United Kingdom with 1,000 On-Line Facilities, and the date of Launch shall be deemed the first day of the first calendar month after which Launch is complete. 8 10.2 The Operating Company may terminate this Agreement by giving Inter Lotto written notice of termination if Launch has not occurred before October 15, 1999, and Inter Lotto may terminate this Agreement by giving the Operating Company written notice of termination if Launch has not occurred by March 15, 2000. If Launch occurs at any time after March 15, 2000 but before either Party has exercised the right of termination hereunder, the Operating Company may at any time after Launch by written notice to Inter Lotto extinguish the right of termination under this Paragraph 10.2, in which event this Agreement may be terminated only as provided in Paragraph 11. 11. TERMINATION 11.1 Without prejudice to the provisions of Clause 10, this Agreement may be terminated forthwith by either Party (the "First Party") giving to the other (the "Second Party") notice in writing in the following circumstances; 11.1.1 If, in respect of the Second Party, a petition is presented (other than a petition which is frivolous or vexatious and which is withdrawn or stayed within 20 Business Days) or a notice of resolution is given for the winding up of the Second Party (except for the purpose of a solvent amalgamation or reconstruction) or the Second Party has suffered the appointment of a receiver, an administrator or administrative receiver to manage its business affairs and property or if the Second Party has ceased to be able to pay its debts as they fall due; or 11.1.2 Unless otherwise provided in this Agreement, if the Second Party has committed a material breach of its obligations under this Agreement and (where such breach can be remedied) has failed to remedy it within 28 days after service upon it of a written notice specifying the breach in question and requiring it to be remedied. 12. INTER LOTTO ACTIONS AND DETERMINATIONS In all instances in which this Agreement makes the authority or activities of the Operating Company subject to the authority of Inter Lotto or otherwise provides for or refers to authority of or actions or determinations by Inter Lotto, such authority, actions and determinations may be exercised and taken only by proper and duly authorized actions of Inter Lotto's Board. No authority, action or determination by Inter Lotto under this Agreement may be exercised or taken in any manner by any of Inter Lotto's officers or any other person or entity acting or purporting to act on behalf of Inter Lotto without the express and specific approval and authorization by Inter Lotto's Board. 13. ACCOUNTING CALCULATIONS In all instances in which this Agreement requires or permits accounting calculations or determinations, in the event of a disagreement or dispute, the calculations or determinations shall be made by the Accountants and shall be reported in writing to all 9 Parties. Unless manifestly arbitrary or unreasonable or made in bad faith, all calculations or determinations by the Accountants shall be final and binding on all Parties and not subject to reconsideration or appeal. 14. SHAREHOLDERS' AGREEMENT This Agreement is intended to be consistent with the Shareholders' Agreement and rights and obligations thereunder, and this Agreement shall be so construed to the extent reasonably practicable. To the extent that the terms of this Agreement necessarily conflict with the terms of the Shareholders' Agreement, the Shareholders' Agreement shall prevail. 15. COUNTERPARTS This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, and which together shall constitute one and the same Agreement. Unless otherwise provided in this Agreement, this Agreement shall become effective and be dated (and each counterpart shall be dated) on the date on which this Agreement (or a counterpart of this Agreement) is signed by the last of the Parties to execute this Agreement or, as the case may be, a counterpart thereof. 16. ASSIGNMENT Except as provided in Paragraph 3.3 with respect to subcontracting by the Operating Company, neither of the Parties shall assign or transfer or purport to assign or transfer any of its rights or obligations under this Agreement without the prior written consent of the other Party. 17. SUCCESSORS This Agreement shall be binding on and shall enure for the benefit of the respective successors in title of each of the Parties. 10 18. WAIVER AND FORBEARANCE The rights of each of the Parties shall not be prejudiced or restricted by any indulgence or forbearance extended to the other and no waiver by either Party in respect of any breach shall operate as a waiver in respect of any subsequent breach. 19. NO THIRD PARTY BENEFICIARIES This Agreement does not confer any rights or remedies upon any person or entity other than the parties hereto and their respective successors and permitted assigns, and no person or entity other than the parties and such successors and assigns shall have the right to enforce all or any portion of this Agreement. 20. ENTIRE AGREEMENT AND VARIATION 20.1 This Agreement together with the agreements referred to herein supersedes any previous agreement between the Parties in relation to the matters dealt with herein and represents the entire understanding between the Parties in relation thereto. Each of the Parties acknowledges that in entering into this Agreement it has not relied on any warranty, representation, agreement or statement not set out in this Agreement and that (in the absence of fraud) it will not have any right or remedy arising out of such warranty, representation, agreement or statement. 20.2 Save as otherwise expressly provided, no modifications, amendment or waiver of any of the provisions of the Agreement shall be effective unless made in writing specifically referring to this Agreement and duly signed by each of the Parties. 21. SEVERANCE 21.1 Each provision of this Agreement shall be enforceable independently of all other provisions and its validity, legality or enforceability shall not be affected if any other provision becomes invalid, illegal or unenforceable in any respect under any law. 21.2 In respect of all provisions of this Agreement if at any time any provision of this Agreement is or becomes invalid, illegal or unenforceable in any respect under any law but would be or become valid, legal or enforceable if some part of the provision were deleted or amended, the provision in question shall remain in force with such deletion or with such amendment as may be necessary to make the provision valid, legal and enforceable. 11 22. NO PARTNERSHIP 22.1 Nothing in this Agreement shall be deemed to constitute a partnership between the Parties nor constitute either Party the agent of the other for any purpose. 22.2 Neither Party shall (save as expressly provided herein) have any authority to bind the other in any way. 23. NOTICES 23.1 Any notice given under this Agreement shall either be delivered personally or sent by first class recorded delivery post (air mail if overseas) or telex, facsimile transmission or comparable means of communication. The address for service of each Party shall be (in the case of an individual) the address set out at the head of this Agreement or at such other address within the United Kingdom for service previously notified to the other parties or (in the case of a company) its registered office for time being. A notice shall be deemed to have been served as follows: 23.1.1 if personally delivered, at the time of delivery; 23.1.2 if posted, at the expiration of 48 hours or (in the case of air mail) seven days after the envelope containing the same was delivered into the custody of the postal authorities; and 23.1.3 if sent by facsimile transmission or comparable means of communication, at the time of transmission (if the notice is sent before 5 pm on a Business Day) otherwise at 9 am on the next following Business Day. 23.2 In proving such service (without prejudice to any other means of proof) it shall be sufficient to prove that personal delivery was made or that the envelope containing such notice was properly addressed and delivered into the custody of the postal authority of the country of dispatch as a prepaid first class recorded delivery or air mail letter (as appropriate) or that in relation to a facsimile transmission or other comparable means of communication, that a confirming copy thereof was personally delivered or sent by first class recorded delivery or air mail letter (as appropriate) within 24 hours after transmission. 24. APPLICABLE LAW AND SUBMISSION TO JURISDICTION This Agreement shall be governed by and construed in accordance with English law and 12 each of the Parties submits the non-exclusive jurisdiction of the Supreme Court of Judicature of England in relation to any claim, dispute or difference which may arise in relation to the Agreement. IN WITNESS of which this Agreement has been duly signed for and on behalf of each of the Parties on the day and year first above written. INTER LOTTO (UK) LIMITED By: ------------------------------- IFT MANAGEMENT LIMITED By: ------------------------------- 13 EX-99.13 23 FIFTH ALLONGE TO SECURED PROMISSORY NOTE FIFTH ALLONGE TO SECURED PROMISSORY NOTE ALLONGE, dated July 16, 1999, attached to and forming a part of the Secured Promissory Note, dated January 26, 1999, as amended by the Allonge to Secured Promissory Note dated January 29, 1999, the Second Allonge to Secured Promissory Note dated March 19, 1999, the Third Allonge to Secured Promissory Note dated March 24, 1999, and the Fourth Allonge to Secured Promissory Note dated May 10, 1999 (collectively, the "Note"), made by THE NETWORK CONNECTION, INC., a Georgia corporation ("Maker"), payable to the order of Interactive Flight Technologies, Inc., a Delaware corporation ("Payee") in the original principal amount of $500,000 and in the current principal amount of $750,000. 1. In consideration of the cancellation of the notes referred to on Annex I attached to this Allonge which were issued by Maker, have been acquired by Payee, and are in the aggregate principal amount of One Million Two Hundred Fifty Four Thousand and Eighty Two Dollars ($1,254,082), with interest, redemption premiums, and other charges incurred but unpaid thereon to the date hereof totaling Six Hundred Forty Thousand Nine Hundred Twenty Five Dollars ($640,925) (the "Series Notes"), the principal amount of the Note is hereby increased to Two Million Six Hundred Forty-Five Thousand Seven Dollars ($2,645,007). Accordingly, the first paragraph of the Note is hereby amended as follows: FOR VALUE RECEIVED, the undersigned, The Network Connection, Inc., a Georgia corporation (the "Maker"), hereby promises to pay to the order of Interactive Flight Technologies, Inc., a Delaware corporation, its successors and assigns (the "Payee"), the principal sum of Two Million Six Hundred Forty-Five Thousand Seven Dollars ($2,645,007), together with interest on the outstanding principal balance thereof accrued from the date hereof: (a) at the fixed rate of 9.5% per annum in respect of all periods during which no Event of Default (as such term is hereinafter defined) is continuing; and (b) at the fixed rate of 12.5% in respect of all periods during which any Event of Default is continuing. All payments of principal and/or interest shall be paid in lawful money of the United States of America in immediately available funds to an account designated by Payee. 2. Any agreement to subordinate, or any subordination, of the indebtedness represented by the Note to bank or finance company indebtedness, which may heretofore have been given by Payee, is null and void and of no force or effect. Maker represents and warrants to Payee that since execution of the Note, Payee retains a first priority security interest in the Collateral granted by Maker to Payee pursuant to that certain Security Agreement dated January 25, 1999 as amended ("Security Agreement"). The Maker's obligations under the Note, as amended here-by, shall be and be deemed to be secured by the Collateral and subject to the terms of the Secur-ity Agreement, all of which are confirmed and ratified as of the date hereof, including, but not limited to, all of the representations, warranties and covenants therein, subject to the waivers provided by Payee contained in the Fourth Allonge. 3. In all other respects, the Note is confirmed, ratified, and approved and, as amended by this Allonge, shall continue in full force and effect. IN WITNESS WHEREOF, Maker and Payee have caused this Allonge to be executed and delivered by their respective duly authorized officers as of the day and year first above written. THE NETWORK CONNECTION INC. By: --------------------------------- Accepted and agreed to: INTERACTIVE FLIGHT TECHNOLOGIES, INC. By: --------------------------------- 2 Annex I Principal Date of Note Payee Amount - ------------ ----- ---------- October 11, 1998 Sui Wan Chan $ 108,333 October 11, 1998 Peter Che Nan Chen $ 108,333 October 12, 1998 Correllus International, Ltd. $ 108,333 October 12, 1998 Galapaco Holdings, Ltd. $ 270,750 October 12, 1998 Keyway Holdings, Co. $ 108,333 November 17, 1998 Correllus International, Ltd. $ 100,000 November 19, 1998 Peter Che Nan Chen $ 100,000 November 24, 1998 Lufeng Investments, Ltd. $ 50,000 November 27, 1998 Keyway Holdings, Co. $ 100,000 December 11, 1998 Matterhorn, Ltd. $ 200,000 ---------- TOTAL $1,254,082 ========== EX-99.14 24 SIXTH ALLONGE TO SECURED PROMISSORY NOTE SIXTH ALLONGE TO SECURED PROMISSORY NOTE ALLONGE, dated August 9, 1999, attached to and forming a part of the Secured Promissory Note, dated January 26, 1999, as amended by the Allonge to Secured Promissory Note dated January 29, 1999, the Second Allonge to Secured Promissory Note dated March 19, 1999, the Third Allonge to Secured Promissory Note dated March 24, 1999, the Fourth Allonge to Secured Promissory Note dated May 10, 1999, and the Fifth Allonge to Secured Promissory Note dated July 16, 1999 (collectively, the "Note"), made by THE NETWORK CONNECTION, INC., a Georgia corporation ("Maker"), payable to the order of Interactive Flight Technologies, Inc., a Delaware corporation ("Payee") in the original principal amount of $500,000 and in the current principal amount of $2,645,007. 1. In consideration of the cancellation of the notes referred to on Annex I attached to this Allonge which were issued by Maker, have been acquired by Payee, and are in the aggregate principal amount of Three Hundred Fifty Thousand Dollars ($350,000), with interest, redemption premiums, and other charges incurred but unpaid thereon to the date hereof totaling One Hundred Twenty Seven Thousand Seven Hundred Fifty Dollars ($127,750) (the "Series D Notes"), the principal amount of the Note is hereby increased to Three Million One Hundred and Twenty Two Thousand and Seven Hundred Fifty Seven Dollars ($3,122,757). Accordingly, the first paragraph of the Note is hereby amended as follows: FOR VALUE RECEIVED, the undersigned, The Network Connection, Inc., a Georgia corporation (the "Maker"), hereby promises to pay to the order of Interactive Flight Technologies, Inc., a Delaware corporation, its successors and assigns (the "Payee"), the principal sum of Three Million One Hundred Twenty-Two Thousand Seven Hundred Fifty-Seven Dollars ($3,122,757), together with interest on the outstanding principal balance thereof accrued from the date hereof: (a) at the fixed rate of 9.5% per annum in respect of all periods during which no Event of Default (as such term is hereinafter defined) is continuing; and (b) at the fixed rate of 12.5% in respect of all periods during which any Event of Default is continuing. All payments of principal and/or interest shall be paid in lawful money of the United States of America in immediately available funds to an account designated by Payee. 2. Any agreement to subordinate, or any subordination, of the indebtedness represented by the Note to bank or finance company indebtedness, which may heretofore have been given by Payee, is null and void and of no force or effect. Maker represents and warrants to Payee that since execution of the Note, Payee retains a first priority security interest in the Collateral granted by Maker to Payee pursuant to that certain Security Agreement dated January 25, 1999 as amended, ("Security Agreement"). The Maker's obligations under the Note, as amended hereby, shall be and be deemed to be secured by the Collateral and subject to the terms of the Security Agreement, all of which are confirmed and ratified as of the date hereof, including, but not limited to, all of the representations, warranties and covenants therein. 3. In all other respects, the Note is confirmed, ratified, and approved and, as amended by this Fifth Allonge, shall continue in full force and effect, subject to the waivers provided by Payee contained in the Fourth Allonge. IN WITNESS WHEREOF, Maker and Payee have caused this Sixth Allonge to be executed and delivered by their respective duly authorized officers as of the day and year first above written. THE NETWORK CONNECTION INC. By: --------------------------------- Accepted and agreed to: INTERACTIVE FLIGHT TECHNOLOGIES, INC. By: --------------------------------- 2 Annex I Series D Notes of the Network Connection, Inc.
Date of Note Original Payee Principal Amount Transferred to - ------------ -------------- ---------------- -------------- October 20, 1998 Robert E. Benninger, Jr. $100,000 XCEL Capital LLC on and Sara Anne Benninger April 13, 1999 October 20, 1998 Will D. Brantley $150,000 XCEL Capital LLC on April 23, 1999 October __, 1998 Elaine Martin $100,000 Not Transferred -------- TOTAL $350,000 ========
3 EX-99.15 25 SEVENTH ALLONGE TO SECURED PROMISSORY NOTE SEVENTH ALLONGE TO SECURED PROMISSORY NOTE ALLONGE, dated August 24, 1999, attached to and forming a part of the Secured Promissory Note, dated January 26, 1999, as amended by the Allonge to Secured Promissory Note dated January 29, 1999, the Second Allonge to Secured Promissory Note dated March 19, 1999, the Third Allonge to Secured Promissory Note dated March 24, 1999, the Fourth Allonge to Secured Promissory Note dated May 10, 1999, the Fifth Allonge to Secured Promissory Note dated July 16, 1999, and the Sixth Allonge to Secured Promissory Note dated August 9, 1999 (collectively, the "Note"), made by THE NETWORK CONNECTION, INC., a Georgia corporation ("Maker"), payable to the order of Interactive Flight Technologies, Inc., a Delaware corporation ("Payee") in the original principal amount of $500,000 and in the current principal amount of $3,122,757. 1. In consideration of the payment by Payee of certain obligations of Maker, the principal amount of the Note is hereby increased by One Million Two Hundred Thousand Dollars ($1,200,000) to Four Million Three Hundred Twenty-Two Thousand Seven Hundred Fifty Seven Dollars ($4,322,757). Accordingly, the first paragraph of the Note is hereby amended as follows: FOR VALUE RECEIVED, the undersigned, The Network Connection, Inc., a Georgia corporation (the "Maker"), hereby promises to pay to the order of Interactive Flight Technologies, Inc., a Delaware corporation, its successors and assigns (the "Payee"), the principal sum of Four Million Three Hundred Twenty-Two Thousand Seven Hundred Fifty-Seven Dollars ($4,322,757), together with interest on the outstanding principal balance thereof accrued from the date hereof: (a) at the fixed rate of 9.5% per annum in respect of all periods during which no Event of Default (as such term is hereinafter defined) is continuing; and (b) at the fixed rate of 12.5% in respect of all periods during which any Event of Default is continuing. All payments of principal and/or interest shall be paid in lawful money of the United States of America in immediately available funds to an account designated by Payee. 2. Paragraph 16 is hereby amended and restated in full to read as follows: 16. Conversion Rights. Payee shall be entitled, at any time and from time to time and in its sole discretion, to convert all or a portion of the principal amount and accrued interest due under this Note into shares of the Maker's Series C 8% Convertible Preferred Stock, $.01 par value, Stated Value $1,000 per share (the "Preferred Stock") or, at the option of Payee, into the Maker's Common Stock (the "Common Stock"). Any such conversion into Preferred Stock shall be effected at the rate of one share of Preferred Stock for each $1,000 due hereunder which Payee has elected to convert (the "Conversion Rate"). If Payee elects to convert all or a portion of the principal amount and accrued interest due under this Note directly into the Common Stock, the number of shares to be issued shall be calculated as if such amount had first been converted to Preferred Stock hereunder (calculated without regard to any insufficiency of authorized shares of Preferred Stock) and such resulting shares of Preferred Stock had, in turn, immediately been converted to Common Stock at a conversion price per share equal to the lowest of (a) $1.50, (b) 66.67% of the Current Market Price (as hereafter defined), (c) the price per share at which the Maker, after the date of this Allonge, issues and sells any Common Stock, or (d) where coupled with the right of the purchaser(s) thereof to demand that the Corporation register under the Securities Act of 1933 any Common Shares (not theretofore registered) for which any warrants or options may be exercised or any convertible, exchangeable or exercisable securities may be converted, exercised or exchanged, (i) the exercise price of any such warrants or options issued by the Maker after the date of this Allonge, or (ii) the conversion rate, exchange rate or exercise price, respectively, of any such convertible, exchangeable or exercisable security issued by the Maker after the date of this Allonge, except for stock option agreements or stock incentive agreements issued pursuant to employee benefit plans. For purposes of this Paragraph 16, the term "Current Market Price" means the closing bid price as reported on the Nasdaq Stock Market (or if not then traded on such market, on such exchange or quotation system where such shares are then traded) for the trading day immediately preceding the Conversion Date. Payee may elect to convert by delivering to Maker, by facsimile, telecopier or other expedient means of transmission, a notice of conversion stating (i) the principal amount and/or accrued interest to be converted, (ii) the number of shares of Preferred Stock or Common Stock to be issued as a result of such conversion; and (iii) the person(s) in whose name the Preferred Stock or Common Stock is to be issued. The conversion of any portion of this Note and the resulting issuance of Preferred Stock or Common Stock shall be effective upon the date that Maker receives the corresponding notice of conversion, and Maker shall deliver to Payee one or more certificates evidencing such shares no later than five days following such effective date. Upon a conversion of all amounts due hereunder, Payee shall deliver the original Note (including all Allonges), marked "PAID," to Maker no later than five days following the delivery to Maker of the conversion notice. In the event of a conversion of less than all amounts due hereunder, (A) no principal amount under the Note shall be deemed converted unless and until all accrued interest under the Note shall be first converted; and (B) the portion of the amounts due hereunder that are so converted shall be deemed repaid. The parties shall mark on the grid attached to the Fourth Allonge to Secured Promissory Note dated May 10, 1999 the facts related to such partial conversion and shall confirm the accuracy of the entry by signing next to each such entry. 2 3. Any agreement to subordinate, or any subordination, of the indebtedness represented by the Note to bank or finance company indebtedness, which may heretofore have been given by Payee, is null and void and of no force or effect. Maker represents and warrants to Payee that since execution of the Note, Payee retains a first priority security interest in the Collateral granted by Maker to Payee pursuant to that certain Security Agreement dated January 25, 1999 as amended, ("Security Agreement"). The Maker's obligations under the Note, as amended hereby, shall be and are deemed to be secured by the Collateral and subject to the terms of the Security Agreement, all of which are confirmed and ratified as of the date hereof, including, but not limited to, all of the representations, warranties and covenants therein. 4. In all other respects, the Note is confirmed, ratified, and approved and, as amended by this Seventh Allonge, shall continue in full force and effect. IN WITNESS WHEREOF, Maker and Payee have caused this Seventh Allonge to be executed and delivered by their respective duly authorized officers as of the day and year first above written. THE NETWORK CONNECTION INC. By: --------------------------------- Accepted and agreed to: INTERACTIVE FLIGHT TECHNOLOGIES, INC. By: --------------------------------- 3 -----END PRIVACY-ENHANCED MESSAGE-----