Sample Business Plan Umagic Systems

Name: "_nl'_ Number: "J_ _'_" C_.c_ Umagic Systems, Inc. DISCLOSURE PACKAGE Included in the DisclosurePackage are the following: Exhibit A Exhibit B Exhibit C Exhibit D Exhibit E Executive Summary describing the Company Offering Term Sheet describing the securities being offered Form of Promissory Note to be issued to investors Form of Warrant to be issued to investors Preliminary Term Sheet for proposed private offering of Series A Preferred Stock 6168.1 _o Executive Overview summary Umagic Systems Inc. ("Umagic" or the "Company") has developed a proprietary technology platform that enables an Internet application to display an unprecedented amount of intelligence, memory and personality. The foundation of this technology rests on the Company's proprietary 'FutureThink' process, which replicates the thought process and personality of an advice-giving expert. The applications of this technology are diverse and widespread, from online expert advice to e-commerce to distance learning. The Company's first application of its proprietary technology is the Company's consumer website of Umagic.com, which it is currently developing. At Umagic.com, users will be able to consult for the first time with 'virtual' experts constructed to replicate the personalities and methodologies of the world-class experts retained by Umagic. These experts will give advice in a range of topics of consumer interest,,such as personal finance, parenting.diet/nutrition and _pany also intends to pursue a range of additional applications for its proprietary te_ecnology, including business-to-business opportunities (such as corporate intranets and extranets), small business advice and corporate training, as well as e-commerce and personal Internet management applications. Umagic's FutureThink technology is the culmination of a significant investment in research and development, which the Company believes cannot easily be replicated. Research in artificial intelligence began in tile 1980's with the U.S. Government's attempts to advance national security technologies. The Company's technology has been developed in conjunction with Science Applications International Corporation ("SAIC"), one of the Govemment's chief artificial intelligence technology partners, which has invested millions of dollars in research and product-enhancement expenditures. In addition, SAIC's artificial intelligence research has benefited from hundreds of millions of dollars of government and private investment in the AI field. Umagic's FutureThink technology aggregates existing and proprietary new artificial intelligence components into an interlocking assembly, creating an important new paradigm in artificial intelligence. The Company .has brought together three layers of proprietary advanced technologies t •5698.2 Executive summary Overview Umagic Systems Inc. ("Umagic" or the "Company") has developed a proprietary technology platform that enables an Internet application to display an unprecedented amount of intelligence, memory and personality. The foundation of this technology rests on the Company's proprietary 'FutureThink' process, which replicates the thought process and personality of an advice-giving expert. The applications of this technology are diverse and widespread, from online expert advice to e-commerce to distance learning. The Company's first application of its proprietary technology is the Company's consumer website of Umagic.com, which it is currently developing, At Umagic.com, users will be able to consult for the first time with 'virtual' experts constructed to replicate the personalities and methodologies of the world-class experts retained by Umagic. These experts will give advice in a range of topics of consumer interest, such as personal finance, parenting, diet/nutrition and fitness. The Company also intends to pursue a range of additional applications for its proprietary technology, including business-to-business opportunities (such as corporate intranets and extranets), small business advice and corporate training, as well as e-commerce and personal Internet management applications. Umagic's FutureThink technology is the culmination of a significant investment in research and development, which the Company believes cannot easily be replicated. Research in artificial intelligence began in the 1980's with the U.S. Government's attempts to advance national security technologies. The Company's technology has been developed in conjunction with Science Applications International Corporation ("SAIC"), one of the Government's chief artificial intelligence technology partners, which has invested millions of dollars in research and product-enhancement expenditures. In addition, SAIC's artificial intelligence research has benefited from hundreds of millions of dollars of government and private investment in the AI field. Umagic's FutureThink technology aggregates existing and proprietary new artificial intelligence components into an interlocking assembly, creating an important new paradigm in artificial intelligence. The Company has brought together three layers of proprietary advanced technologies to form its intelligent systems. The first layer is the platform for the Company's expert systems. Umagic has devised a proprietary standardized platform upon which any of its virtual experts or other technology applications can rest. The middle layer is a set of raw functions and algorithms that allow the technology to search, compare, assess, compute and store data. Unlike other artificial intelligence and knowledge engineering systems, which are geared to answer brief questions with generic answers, Umagic's second layer has been constructed to work with a user over time and support the achievement of long-term goals. To support and enrich the relationship that develops over time between the user and the system, the top layer of the Company's systems adds five additional features to give the system the qualities of human intelligence: memory, learning, 5698.2 intelligence, personality and agenda. These allow the system to make inferences and deductions and to identify patterns. All three layers of the Company's systems are highly proprietary and together they create a system that displays both intelligence and a human touch. The Company believes that this technology represents a major advancement in the field of artificial intelligence. As stated above, the initial application to showcase the Company's technology will be its consumer website, Umagic.com, which will address the $160+ billion market for personal advice. The Company's technology essentially replicates the thought process, diagnostic algorithm method and personality of experts retained by Umagic. Through its complex, highly proprietary series of artificial intelligence algorithms, Umagic creates 'virtual' alter egos of highly recognized experts (e.g., Andrew Tobias for personal finance, Dr. Judy Kuriansky for sex, dating and relationship advice) who think, talk, and act like the 'live' experts on whom they are based. The virtual expert remembers everything about the user, makes inferences and deductions, and reads patterns, creating highly personal responses. Traditionally, individuals have had an extremely limited ability to access personal advice from world-class experts. Books are inexpensive, but are written so broadly that few points apply directly to any given individual's situation. Seminars are expensive, and offer only limited interaction with an expert. A live one-on-one session with a world-class expert is available only on a limited basis at significant cost. Umagic has developed a solution that enables a broad audience to experience this type of one-on-one session affordably and at any time. Through a series of one-on-one interactive sessions, often on a daily basis, users can develop a dynamic and intimate relationship with the virtual expert. Unlike other advice sites on the Internet that offer generic guidance, Umagic's virtual experts will recognize that no two people are alike. From the first interaction, the virtual expert will begin developing a dynamic personal profile that incorporates every response the user gives. Taking the user's personality and history into consideration, Umagic's virtual experts will be able to give personally tailored replies, unique to each user. The Company believes that consulting with Umagic's experts provides consumers with an experience that delivers exceptional value: • Individuals can obtain the personalized attention and guidance of a world-class expert in a one-on-one, real time interactive session. Unlike books, tapes or lectures, which force individuals to sift through material unrelated to their situation, individuals focus their Umagic sessions on what is of particular importance to them • Individuals can have unlimited consultations with a Umagic expert, at the individual's convenience, for a fiat monthly price 5698.2 2 • At only $4.95/month for the first expert, and $1.95/month for additional experts, Umagic is less expensive than books or tapes, yet delivers the value and satisfaction of a personal session with a live expert This past summer, the Company completed a beta test with approximately 100 representative users obtained from iVillage.com, among others, which successfully confirmed the attractiveness of the personalized expert system technology to users. Additionally, the test provided valuable feedback about the design and utility of the UMagic site. In October 1999, the Company participated in "Health Expo," a public exposition in Dallas. Over 6,000 people viewed the demonstration of Umagic's Diet/Nutrition and Fitness experts. Of the 2,149 people who completed a survey, a total of 2,144 (99.8 percent) said they would use the service if it were available to them. 2,096 people, or 97.5 percent of those surveyed, said they would be willing to pay $4.95 per month for such a service. The Company is currently developing its website and expects to launch its site nationally in January 2000. Umagic offers users the opportunity to interact with world-class experts. Umagic has already developed sites with several top-tier experts and is currently in negotiations with a number of 'household name' experts for future sites. These experts are of sufficient stature that there will be widespread consumer interest in the opportunity to consult with them 'personally.' In addition, these experts regularly appear on television and other media, which will provide opportunities for them to market Umagic through these outlets. The Company intends to introduce its diet/nutrition site in December 1999. The "soft" launch, which will add the fitness site, is scheduled to occur in January 2000 and will be supported by print and online advertising. The Personal Finance site is scheduled for release February 2000. Current plans call for the subsequent introduction of Relationships, Dating, Parenting and Fashion at the speed of approximately one new site per month. Best-selling author and financial software designer andrew Tobias is Uma_ic's exoeeee_ the in domain of Personal Finance. Dr. Judy Kuriansky ("Dr. Judy"), one of the world's foremost relationship experts, will be Umagic's _ationships expert. Kacy Duke, Umagic's fitness expert, is the personal trainer to a roster of celebrity clients including Denzel Washington. In addition to appearing frequently as a guest on national television programs and in print magazines, Ms. Duke also trains George Clooney, Barbara Waiters, and the singers Lenny Kravitz and Maxwell. Katlean de Monchy is among the leading fashion experts on television and often appears as a fashion consultant on "Live with Regis and Kathie Lee," "The View," and "CBS This Morning." Denise Doerman, R.D., Umagic's diet and nutrition expert, has extensive experience consulting with corporations, universities and individuals in addition to maintaining a private practice, advising clients on weight loss and medical nutrition issues. 5698.2 3 Experienced management team The Company brings an experienced, entrepreneurial and sophisticated management team to this effort. • David Post, CEO and Co-Chairman, is the founder of the Company and creator of the Umagic concept. Previously, hewas the founder and Chairman of Page America Group, growing it into one of the paging industry's premier brands before selling control of the company to RCA. Mr. Post was also one of the pioneers in the cellular telephone industry. He is also credited with putting the first in-flight telephone service on a commercial airline. • John Krasno, President and COO, has extensive experience in developing and growing companies. He was a general manager of Panavision Hollywood, he co-founded Kino Flo, a leader in fluorescent lighting for motion pictures, and launched Sequoia Illumination, a motion picture lighting rental company. Steven G. Chrust, Co-Chairman, is the co-founder and former Vice-Chairman of Winstar Communications and has extensive telecommunications and Internet experience. He was the Chairman and CEO of AMNEX, Inc., an operator services long distance company, and Executive Vice President of Executone Information Services, Inc. Prior to working directly in telecommunications, Mr. Chrust was Director of Technology Research at Sanford C. Bernstein and Co. While at Bernstein, he was named top telecommunications analyst each year for more than a decade by Institutional Investor and was ranked #1 analyst in the sector for five consecutive years in the magazine's all-star ranking. Mr. Chrust is Chairman of the Association for Local Telecommunications Services, the national organization representing facilities-based competitive local exchange carriers and is the founder and also President of SGC Advisory Services, Inc., a discretionary money-management telecommunications and technology. • service firm specializing in • Lance Miller, Ph.D., Chief Scientist and CTO, has 30 years of systems development experience. Previously, he was Vice President and Director, Artificial Intelligence Technologies at SAIC for 11 years. At SAIC, his executive duties included marketing, program management, chief scientist oversight and system engineering in the acquisition and development of advanced technology projects. Prior to his SAIC experience, Dr. Miller was Chief Knowledge Engineer for AI activity at the IBM Federal Systems Division, where his responsibilities included acquisitions of automated knowledge, technical and marketing leadership on AI projects, and strategic business planning. Dr. Miller was also Senior Manager for Human Computer Interaction in the Watson Research Center at IBM, where his duties included user-interface design, studies of the cognitive problems of programming, program testing, and user language development for database access. Dr. Miller has contributed to over 40 publications and has been invited to numerous conference talks and tutorials. He is considered one of the world's leading authorities in the field of artificial intelligence. 5698.2 4 The Company has also assembled a skilled team of advertising and public relations professionals who are preparing the Company for launch. Competition The Company believes that it can offer superior value propositions relative to its competitors. The Company considers its competition to fall into five categories across two sectors. The first sector is technology, where the subsectors are expert systems and Natural Language Recognition (NLP). • Competitors in the expert systems field include Multilogic, which receives and distributes information using a static and linear mechanistic paradigm. It is not capable of making inferences or deductions or recognizing patterns, features that distinguish Umagic's FutureThink technology from typical expert systems-based artificial intelligence. • Ask Jeeves utilizes NLP technology in a search engine environment to enhance search results. While Umagic's technology will incorporate NLP, ask.com is not capable of recreating the depth of intelligence and human personality that are the hallmarks of the Company's FutureThink technology. The second sector is expert sites, which consist of expert clearinghouses, databases, and portal/referral sites. • Clearinghouses such as exp.com and keen.tom allow 'experts' of unknown quality to market off-line services to potential customers. Unlike Umagic, these sites do not offer interactive sessions with brand-name experts or allow users to meet with an expert at their convenience, for a fiat monthly fee. • Expert databases, such as drkoop.com and CBS HealthWatch, deliver the same information in response to the same general question, without adjusting for nuances across differing users. These sites provide advice that is nothing more than a searchable compendium of voluminous content. Alternatively, Umagic's FutureThink technology remembers answers and learns about the user over time, giving different users individual responses to the same specific questions. Portal or referral sites, such as about.com, simply refer users to a list oflnternet links on a specific subject. The Company's combination of its FutureThink technology and its proprietary experts enables Umagic to provide personal expert advice, a service with far more depth than simply providing links to information which may or may not be relevant to a user. • 5698.2 5 _o Do UMagic Systems, Inc. Preliminary Interim Financing Term Sheet Issuer." Type of Security: UMagic Systems, Inc., a Delaware Corporation (the "Company"). Convertible Notes sold in principal amounts of $50,000 or more (lower amounts accepted only with Company consent). Up to $3 million. No minimum amount - - the Company will close on accepted subscriptions from accredited investors as received. 8% per annum. Principal and interest will be paid on January 1, 2001, subject to the holders' conversion rights, described below. At the option of the holder, the principal owed on the Convertible Notes may be converted in whole, but not in part, at the closing of the Company's proposed $20 million private offering ("Private Offering") of Series A Convertible Preferred Stock (the "Series A Stock"). The holders may convert their Notes into Series A Stock at a 15% discount to the Private Offering price per share of the Series A Stock. Interest shall be payable in cash to all holders who convert. If the Private Offering is not consummated, the holder will have the right to convert into the next subsequent equity offering consummated by the Company while the notes remain unpaid, at a 15% discount to the offering price. Holders of the Convertible Notes will receive five-year warrants to purchase a number of shares of common stock equal to 15% of the principal amount of the Notes divided by $3.10. The exercise price shall be $2.64. The warrants shall become exercisable on the earlier of (1) January 1,2001; or (ii) the closing of the Private Offering (or next subsequent offering, if the Private Offering is not consummated); provided, however, that the warrants shall terminate at the closing of the Private Offering (or next subsequent offering, if the Private Offering is not consummated) prior to becoming exercisable if the holder does not elect to convert his Note. The shares underlying the Warrants shall be afforded the same registration rights as the securities into which the Convertible Notes are converted. The Warrants will be redeemable by the Company after the Company's initial public offering if (i) there is an effective registration statement to cover the resale of the underlying shares; and (ii) the last sale price of the common stock has been at least 140% of the exercise price of the Warrants for at least 20 out of any 30 consecutive trading days. Amount." Interest." Maturity: Conversion." Warrant coverage." ( 5046.3 Umagic Systems, Inc, NEGOTIABLE PROMISSORY NOTE THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER ANY STATE SECURITIES LAW AND MAY NOT BE PLEDGED, SOLD, ASSIGNED OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT WITH RESPECT THERETO UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAW, OR UNLESSTHE COMPANY RECEIVES AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED. THE COMPANY'S SUBSCRIPTION AGREEMENT WITH THE HOLDER CONTAINS ADDITIONAL PROVISIONS RESTRICTING THE TRANSFER OF THIS NOTE. A COPYOF SUCH AGREEMENT IS AVAILABLE FOR INSPECTION AT THE COMPANY'S OFFICE. $FIELD(Principal Amount) ,2000 FOR VALUE RECEIVED, Umagic Systems, Inc., a Delaware corporation ("Company"),withitsprincipalofficeat 800 ThirdAvenue, Suite 2602i New York, New York,10022 promisesto pay to the order of FIELD(Investor Name) ("Holder"), residing at FIELD(Investor Address),or registeredassigns,on the earlierof (i) January1,2001, (ii) the date of consummation of a sale by the Companyof all or substantially of itsassets, or (iii)the date of consummation all of a merger orconsolidation the Companywithanothercompany,as a resultof whichthe holderof of the Company'soutstanding votingsecurities priortothe merger orconsolidation lessthan50% are of thevotingsecuritiesof the Companyor thesurviving corporation after theconsolidation ormerger (inany suchevent, and as suchdate maybe acceleratedunderSection1 hereof, "MaturityDate"), the principalamountof FIELD(DollarAmount) Dollars($FIELD(PrincipalAmount)),in suchcoinor currencyof the UnitedStates of America as at the time of payment shall be legaltender for the paymentof publicor privatedebts, togetherwith intereston the unpaidbalanceof said principal amountfrom time totime outstanding the rateof eight(8%) percentperannum. This Noteshall at be paid (and prepaid, if applicable)only pro rata withcertain additionalnotes of like tenor being issued contemporaneously herewith,subject to each Holder'sconversionrights. Payments of principal nd interestare to be made at the addressof the Holderdesignatedaboveor at suchother a place as the Holder shall have notifiedthe Companyin writingat least five days before such paymentis due. This Noteisissuedpursuanttoa subscription agreementbetweenthe Companyand the Holder("Subscription Agreement"),whichis availablefor inspection the Company'sprincipal at office. Reference hereinto the Subscription Agreementshallin noway impairthe absoluteand unconditional bligation the Companyto paybothprincipal nd interesthereonas providedherein. o of a 1. Eventsof Default. 1.1 Maturity Date; Upon the occurrence of any of the following events(herein called "Events of Default"): (a) The Company shall fail to pay the principal of or interest on this Note on the 5238.5 L (b) (A) The Company shall commence any proceeding or other action relating to it in bankruptcy or seek reorganization, arrangement, readjustment of its debts, receivership, dissolution, liquidation, winding-up, composition or any other relief under any bankruptcy law, or under any other insolvency, reorganization, liquidation, dissolution, arrangement, composition, readjustment of debt or any other similar act or law, of any jurisdiction, domestic or foreign, now or hereafter existing; or (A) the Company shall admit the material allegations of any petition or pleading in connection with any such proceeding; or (B) the Company shall apply for, or consent or acquiesce to, the appointment of a receiver, conservator, trustee or similar officer for it or for all or a substantial part of its property; or (C) the Company shall make a general assignment for the benefit of creditors; (c) (A) The commencement of any proceedings or the taking of any other action against the Company in bankruptcy or seeking reorganization, arrangement, readjustment of its debts, liquidation, dissolution, arrangement, composition, or any other relief under any bankruptcy law or any other similar act or law of any jurisdiction, domestic or foreign, now or hereafter existing and the continuance of any of such events for sixty (60) days undismissed, unbonded or undischarged; or (B) the appointment of a receiver, conservator, trustee or similar officer for the Company for any of its property and the continuance of any of such events for sixty (60) days undismissed, unbondedor undischarged; or (C) the issuance of a warrant of attachment, execution or similar process against any of the property of the Company and the continuance of such event for sixty (60) days undismissed, unbonded and undischarged; (d) The Company shall fail to comply with any of its obligations under this Note; provided, however, that with respect to a failure to comply with any of the provisions of Sections 2.2(a) and (c) of this Note, such failure is not remedied within thirty (30) days after the Company's receipt of written notice of same; (e) The Company shall default with respect to any indebtedness of $250,000 or more for borrowed money (other than under this Note) if either (a) the effect of such default is to accelerate the maturity of such indebtedness (giving effect to any applicable grace periods) or (b) the holder of such indebtedness declares the Company to be in default (giving effect to any applicable grace periods); or (f) Anyjudgment or judgments against the Company or any attachment, levy or execution against any of its properties for any amount in excess of $250,000 in the aggregate shall remain unpaid, or shall not be released, discharged, dismissed, stayed or fully bonded for a period of forty-five (45) days or more after its entry, issue or levy, as the case may be; then, and in any such event, the Holder, at itsoption and without written notice to the Company, may declare the entire principal amount of this Note then outstanding together with accrued unpaid interest thereon immediately due and payable, and the same shall forthwith become immediately due and payable without presentment, demand, protest, or other notice of any kind, all of which are expressly waived. The Events of Default listed herein are solely for the purpose of protecting the interests of the Holder of this Note. If the Note is not paid in full upon acceleration, as required above, interest shall accrue on the outstanding principal of and interest on this Note from the date of the Event of Default up to and including the date of payment at a rate equal to the lesser of fifteen percent (15%) per annum or the maximum interest rate permitted by applicable law. 1.2 Non-Waiver and Other Remedies. No course of dealing or delay on the part of the Holder of this Note in exercising any right hereunder shall operate as a waiver or otherwise prejudice the right of the Holder of this Note. No remedy conferred hereby shall be exclusive of any other remedy referred to herein or now or hereafter available at law, in equity, by statute or otherwise. 5238.5 2 J 1.3 Collection Costs; Attorney's Fees. Inthe event this Note is turned over to an attorney for collection or Holder otherwise seeks advice of an attorney in connection with the exercise of its rights hereunder upon the occurrence of an Event of Default, the Company agrees to pay all reasonable costs of collection, including reasonable attorney's fees and expenses and all out of pocket expenses incurred in connection with such collection efforts, which amounts may, at the Holder's option, be added to the principal hereof. 2. Unconditional bliqation;Covenants. O 2.1 Unconditional Obliqation. No provision of this Note shall alter or impairthe obligation of the Company, which is absolute and unconditional, to pay the principal of and interest on this Note at the place, at the respective times, at the rates, and in the currency herein prescribed. 2.2 Affirmative Covenants.The Company covenants and agrees that, while this Note is outstanding, it shall: (a) Payand dischargeall taxes,assessments and governmental charges or levies imposed upon it or upon its income and profits, or upon any properties belonging to it before the same shall be in default; provided, however, that the Company shall not be required to pay any such tax, assessment, charge or levy that is being contested in good faith by proper proceedings and adequate reserves for the accrual of same are maintained if required by generally accepted accounting principles; (b) Preserve its corporate existence and continue to engage in business of the same general type as conducted as of the date hereof; (c) Comply in all respects with all statutes, laws, ordinances, orders, judgments, decrees, injunctions, rules, regulations, permits, licenses, authorizations and requirements ("Requirement(s)") of all governmental bodies, departments, commissions, boards, companies or associations insuring the premises, courts, authorities, officials, or officers, that are applicable to the Company; except where the failure to comply would not have a material adverse effect on the Company; provided that nothing contained herein shall prevent the Company from contesting the validity or the application of any Requirements. 3. Conversion. 3.1 Conversion.The Holder shall have the right, at the Holder's option, at the closing of the Company's proposed $20 million private offering ("Private Offering") of Series A Convertible Preferred Stock (the "Series A Stock") to convert all of the unpaid principal amount hereof into shares of Series A Stock at a price ("Conversion Price") per share of Series A Stock equal to 85% of the Private Offering price per share of the Series A Stock. If the Private Offering is not consummated, the Holder shall have equivalent conversion rights (withthe same 15%discount) with respect to the Company's Next Offering (as defined below) which is consummated prior to the Maturity Date. "Next Offering" shall mean any sale of the Company's equity securities to more than five persons which raises in the aggregate more than $2 million of gross proceeds. 3.2 Notice of Rights. The Company shall give the Holder ten (10) days' written notice prior to the consummation of the Private Offering or Next Offering. 5238.5 3 3.3 Mechanics and Effectof Conversion; Interest. Inorder to convert the unpaid principal amount hereof into shares of Series A Stock, the Holder shall surrender this Note, with the form of Conversion Notice annexed to this Note completed and executed, to the Company at its principal executive office. The Company shall, as soon as practicable, but not later than five (5) business days after the closing of the Private Offering or Next Offering, issue and deliver to a location in the United States designated by the Holder (i) a Certificatefor the number of shares of Series A Stock (or other securities in case of the Next Offering) to which the Holder shall be entitled as aforesaid; and (ii) a check payable to the order of the Holder in the amount of interest accrued through the closing on the principal amount so converted. Such conversion shall bedeemed to have been made at the closing, and the Holder shall be treated for all purposes as the record holder of such shares of Common Stock as of such closing date. 3.4 Fractional Shares. The Company shall not be required to issue fractions of shares of Common Stock upon conversion. If any fractions of a share would, but for this Section 3.4, be issuable upon any conversion, in lieu of such fractional share the Company shall round up or down to the nearest whole number of shares. 3.5 Reservationof Shares. The Company shall reserve and shall at all times have reserved out of its authorized but unissued shares of Common Stocksufficient shares of Common Stock to permit the conversion of the unpaid principal amount pursuant to this Section 3. All shares of Common Stock that may be issued upon conversion shall be validly issued, fully paid and nonassessable. 4. RESTRICTION ON TRANSFER. THIS NOTE IS TRANSFERABLE ONLY TOGETHER WITH THEWARRANT ISSUEDTO THE HOLDER SIMULTANEOUSLY HEREWITH UNLESSAND UNTIL THE WARRANT BECOMES EXERCISABLE OR IS TERMINATED. 5. Miscellaneous. 5.1 Required Consent. The Company may not modify any of the terms of this Note without the prior written consent of the Holder. 5.2 Lost Documents. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Note or any Note exchanged for it, and (in the case of loss, theft or destruction) of indemnity satisfactory to it, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of such Note, if mutilated, the Company will make and deliver in lieu of such Note a new Note of like tenor and unpaid principal amount and dated as of the original date of the Note. 5.3 Benefit. This Note shall be binding upon and inure to the benefit of the parties hereto and their legal representatives, successors and assigns. 5.4 Notices. All notices, offers, acceptance and any other acts under this Note (except payment) shall be in writing, and shall be sufficiently given if delivered to the addressees in person, by overnight courier service, or, if mailed, postage prepaid, by certified mail (return receipt requested), and shall be effective five days after being placed in the mail if mailed, or upon receipt or refusal of receipt, if delivered personally or by courier, in each case addressed to a party. The addresses for such communications shall be: 5238.5 4 Holder: At the address designated on page 1 of this Note. Umagic Systems, Inc. 800 Third Avenue - Suite 2602 New York, NY 10022 Attention: David A. Post Co-Chairman of the Board and Chief Executive Officer The Company: with a copy to: Graubard Mollen & Miller 600 Third Avenue New York, New York 10016-2097 Attn: David Alan Miller, Esq. or to such other address as any of them, by notice to the others, may designate from time to time. 5.5 Governin.qLaw and Jurisdiction. This Note will be deemed to have been made and delivered in NewYork City and will begoverned as to validity, interpretation, construction, effect and in all other respects by the internal laws of the State of New York. The Company and the Investor each hereby (i) agrees that any legal suit, action or proceeding arising out of or relating to this shall be instituted exclusively in New York State Supreme Court, County of New York, or in the United States District Court for the Southern District of New York, (ii) waives any objection to the venue of any such suit, action or proceeding and the right to assert that such forum is not a convenient forum for such suit, actionor proceeding, and (iii) irrevocably consents to the jurisdiction of the New York State Supreme Court, County of New York, and the United States District Court for the Southern District of New York in any such suit, action or proceeding. The Company further agrees to accept and acknowledge service or any and all process that may be served in any such suit, action or proceeding in New York State Supreme Court, County of New York or in the United States District Court for the Southern District of New York. The Company acknowledges that this is an instrument for the payment of money only and that upon the occurrence of an Event of Default the holder may proceed against the Company under Section 3213 of the New York Civil Practice Law and Rules. 5.6 Section Headings. Section headings herein have been inserted for reference only and shall not be deemed to limit or otherwise affect, in any matter, or be deemed to interpret in whole or in part any of the terms or provisions of this Note. 5.7 of this Note. Survival of Agreements. The agreements contained herein shall survive the delivery 5238.5 5 Z IN WITNESS WHEREOF, this Note has been executed and delivered on the date specified above by the duly authorized representative of the Company. UMAGIC SYSTEMS, INC. By: David A. Post, Co-Chairman of the Board and Chief Executive Officer PAGEON 5238.5 6 NOTICE OF CONVERSION (To Be Completed and Signed Only Upon Conversion of Note) To: Umagic Systems, Inc. 800 Third Avenue - Suite 2602 New York, New York 10022 Attn: David A. Post Co-Chairman of the Board and Chief Executive Officer The undersigned, the holder of the attached Note, hereby surrenders such Note for Stock of conversion of the entire unpaid principal amount thereof into shares of the Umagic Systems, Inc. and requests that a certificate for such shares be issued to the undersigned holder at the address indicated below. The undersigned hereby confirms to Umagic Systems, Inc. the truth and accuracy of the representations and warranties made by the undersigned in the Subscription Agreement and accepted by the Company, as if such representations and warranties were made on the date hereof. Dated: Name of Entity, if any" Signature* Its Title, if applicable Print name (Address) Must conform in all respects to name of holder as specified on the face of the Note. 5238.5 J ASSIGNMENT (To be executed by the Holder to Effect a Transfer of the Attached Note) FOR VALUE RECEIVED, the undersigned does hereby sell, assign and transfer unto of all right, title and interest of the undersigned in the attached Note of Umagic Systems, Inc. , with an address ("Company") and does hereby authorize the Company to transfer such right on the books of the Company. Dated: Name of Entity, if any" Signature* Its Title, if applicable Print name Must conform in all respects to name of holder as specified on the face of the Note. 5238.5 8 J THIS WARRANT AND THE UNDERLYING SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO SUCH SECURITIES UNDER THE ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED. THE COMPANY'S SUBSCRIPTION AGREEMENT WITH THE HOLDER CONTAINS ADDITIONAL PROVISIONS RESTRICTING THE TRANSFER OF THIS WARRANT. A COPY OF SUCH AGREEMENT IS AVAILABLE FOR INSPECTION AT THE COMPANY'S OFFICE. UMAGIC SYSTEMS, INC. No. CSWVoid After ,2004 ,_ This certifies that , or assigns (the "Holder"), is entitled to subscribe for and purchase at the Exercise Price (defined below) from Umagic Systems, Inc., a Delaware corporation, with its principal office at 800 Third Avenue, Suite 2602, New York, New York 10022 (the "Corporation") (.__) [15% of the principal amount of the Notes divided by $3.10] shares of the common stock of the Corporation (the "Common Stock"). This Warrant is one of a series of warrants ("Warrant(s)") being issued in connection with an interim financing ("Offering") by the Corporation of up to $3 million principal amount of Convertible PromissoryNotes ("Notes"). The Notes are convertible at the option of the Holder into the Corporation's proposed private offering ("Private Offering") of $20 million of Series A Convertible Preferred Stock (or the "Next Offering" (as defined in the Notes) if the Private Offering is not consummated). 1. Definitions. meanings: As used herein, the following terms shall have the following respective 1.1 "Exercise Period" shall mean the period commencing on the earlier of the (i) "Maturity Date" of the Notes (as such term is defined in the Notes), or (ii) the closing of the Private Offering or of the Next Offering if the Private Offering is not consummated, and ending on , 2004 [five years from the date the first Warrant is issued], subject to Corporation's redemption rights as described in Section 6 hereof and early termination rights described in Section 8 hereof; provided however, if the Holder does not elect to convert his Note on the closing of the Private Offering or Next Offering, as the case may be, this Warrant shall be terminated prior to becoming exercisable and shall thereafter be of no further force and effect. 1.2 7 below. "Exercise Price" shall mean $2.64 per share, subject to adjustment pursuant to Section 1.3 "Exercise Shares" shall mean the shares of the Corporation's Common Stock issuable upon exercise of this Warrant. 5237.5 2. Exercise of Warrant. 2.1 The rights represented by this Warrant may be exercised in whole or in part at any time during the Exercise Period, by delivery of the following to the Corporation at its address set forth above (or at such other address as it may designate by notice in writing to the Holder): (a) (b) (c) .An executed Notice of Exercise in the form attached hereto; Payment of the Exercise Price in cash, by check or by wire-transfer; and This Warrant. 2.2 Upon the exercise of the rights represented by this Warrant, a certificate or certificates for the Exercise Shares so purchased, registered in the name of the Holder or persons affiliated with the Holder, if the Holder so designates, shall be issued and delivered to the Holder within a reasonable time after the rights represented by this Warrant shall have been so exercised. 2.3 The person in whose name any certificate or certificates for Exercise Shares are to be issued upon exercise of this Warrant shall be deemed to have become the holder of record of such shares on the date on which this Warrant was surrendered and payment of the Exercise Price was made, irrespective of the date of delivery of such certificate or certificates, except that, if the date of such surrender and payment is a date when the stock transfer books of the Corporation are closed, such person shall be deemed to have become the holder of such shares at the close of business on the next succeeding date on which the stock transfer books are open. 2.4 No fractional shares shall be issued upon the exercise of this Warrant as a consequence of any adjustment or otherwise. All Exercise Shares (including fractions) issuable upon exercise of this Warrant may be aggregated for purposes of determining whether the exercise would result in the issuance of any fractional share. If, after aggregation, the exercise would result in the issuance of a fractional share, the Corporation shall, in lieu of issuance of any fractional share, pay the Holder otherwise entitled to such fraction a sum in cash equal to the product resulting from multiplying the then current fair market value of an Exercise Share by such fraction. 3. Covenant as to Exercise Shares. The Corporation covenants and agrees that all Exercise Shares that may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be validly issued and outstanding, fully paid and nonassessable, and free from all taxes, liens and charges with respect to the issuance thereof. The Corporation further covenants and agrees that the Corporation will at all times during the Exercise Period, have authorized and reserved a sufficient number of shares of Common Stock to provide for the exercise of the rights represented by this Warrant. If at any time during the Exercise Period the number of authorized but unissued shares of Common Stock shall not be sufficient to permit exercise of this Warrant, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock, as the case may be, to such number of shares as shall be sufficient for such purposes. 5237.5 2 4. Restrictions on Transfer. 4.1 THIS WARRANT IS TRANSFERABLE ONLY TOGETHER WITH THE NOTE ISSUED TO THE HOLDER SIMULTANEOUSLY HEREWITH UNLESS AND UNTIL THIS WARRANT BECOMES EXERCISABLE. 4.2 and until: In addition, neither this Warrant nor the Exercise Shares may be transferred unless (a) There is then in effect a registration statement under the Act covering such proposed disposition ("Registration Statement") and such disposition is made in accordance with said registration statement; or (b) The Holder shall have notified the Corporation of the proposed disposition and shall have furnished the Corporation with a detailed statement of the circumstances surrounding the proposed disposition, and if reasonably requested by the Corporation, the Holder shall have furnished the Corporation with an opinion of counsel, reasonably satisfactory to the Corporation, for the Holder to the effect that such disposition will not require registration of such Warrant or Exercise Shares under the Act or any applicable state securities laws. 4.3 Subject to applicable laws and the restrictions on transfer set forth herein, this Warrant and all rights hereunder are transferable, by the Holder in person or by duly authorized attorney, upon delivery of this Warrant and the form of assignment attached hereto to any transferee designated by Holder; provided, however, that as a condition to such transfer, the transferee must sign an investment letter in form and substance satisfactory to the Corporation. 4.4 The Holder understands and agrees that, unless registered for sale under the Act, as amended, all certificates evidencing the Exercise Shares to issued to the Holder may bear the following legend: THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER THE ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED. 5. Registration Rights. The shares of Common Stock underlying the Warrants shall be afforded the same registration rights as the securities into which the Notes are converted. 6. Redemption. 6.1 On not less than thirty (30) days' notice given at any time during which a Registration Statement covering the resale of the Exercise Shares is current and effective, the Warrants may be redeemed, at the option of the Corporation, at a price of $.01 per Warrant, provided the "Market 5237.5 3 Price" (as defined below) of the Common Stock receivable upon exercise of the Warrant shall have been at least 140% of the Exercise Price. Market Price for the purpose of this Section 6 shall mean the last reported sale price of the Common Stock (as reported by,the National Association of Securities Dealers, Inc. Automatic Quotation System, the OTC Bulletin Board or the national securities exchange on which the Common Stock is traded) for at least twenty (20) out of the thirty (30) consecutive trading days ending five (5) calendar days prior to the date of which notice of redemption is given. 6.2 If the conditions set forth in Section 6.1 are met, and the Corporation desires to exercise its fight to redeem the Warrants, it shall mail a notice of redemption to each of the Holders of the Warrants to be redeemed, first class, postage prepaid. The Company shall mail such notice not later than the thirtieth day before the date fixed for redemption. Any notice mailed in the manner provided herein shall be conclusively presumed to have been duly given whether or not the Holder receives such notice. 6.3 The notice of redemption shall specify (i) the date fixed for redemption, (ii) the place where the Warrants shall be delivered, and (iii) that the right to exercise the Warrant shall terminate at 5:00 P.M. (New York time) on the business day immediately preceding the date fixed for redemption. The date fixed for the redemption of the Warrants shall be the Redemption Date. No failure to mail such notice nor any defect therein or in the mailing thereof shall affect the validity of the proceedings for such redemption except as to a Holder (a) to whom notice was not mailed or (b) whose notice was defective and then only to the extent that the Holder is prejudiced thereby. An affidavit of the Secretary or an Assistant Secretary of the Corporation that notice of redemption has been mailed shall, in the absence of fraud, be prima facie evidence of the facts stated therein. 6.4 Any right to exercise a Warrant shall terminate at 5:00 P.M. (New York time) on the business day immediately preceding the Redemption Date. On and after the Redemption Date, Holders of the Warrants shall have no further rights. 6.5 From and after the Redemption Date, the Corporation shall, at the place specified in the notice of redemption, upon presentation and surrender to the Corporation by or on behalf of the Holder thereof of one or more Warrants to be redeemed, deliver or cause to be delivered to or upon the written order of such Holder a sum in cash equal to the redemption price of each such Warrant. From and after the Redemption Date and upon the deposit or setting aside by the Corporation of a sum sufficient to redeem all the Warrants called for redemption, such Warrants shall expire and become void and all rights hereunder and Under the Warrant shall cease. 7. Adjustment of Exercise Price. In the event of changes in the outstanding Common Stock of the Corporation, as a whole, by reason of stock dividends, split-ups, reclassifications, combinations or exchanges of shares, or the like, the number and class of Exercise Shares in the aggregate and the Exercise Price shall be correspondingly adjusted to give the Holder of the Warrant, on exercise for the same aggregate Exercise Price, the total number, class, and kind of shares as the Holder would have owned had the Warrant been exercised prior to the event and had the Holder continued to hold such shares until after the event requiring adjustment; provided, however, that such adjustment shall not be made with respect to, and this Warrant shall terminate if not exercised prior to, the events set forth in Section 8 below. The form of this Warrant need not be changed because of any adjustment 5237.5 4 in the number of Exercise Shares subject to this Warrant. 8. Early Termination In Merger. In the event of any consolidation or merger of the Corporation or subsidiary of the Corporation with or into another corporation, as a'result of which the holders of the Corporation's outstanding voting securities prior to the consolidation or merger own less than 50% of the voting securities of the Corporation or surviving corporation after the consolidation or merger, at any time during the Exercise Period (a "Merger"), the Corporation shall provide to the Holder fifteen (15) days advance written notice of the record date for such Merger. At the election of the Company, which shall be set forth in such notice, this Warrant shall terminate at the closing of the Merger if not exercised prior thereto. Any exercise by the Holder prior to the closing of the Merger may be conditioned upon such closing occurring. 9. No Stockholder Rights. This Warrant in and of itself shall not entitle the Holder to any voting rights or other rights as a stockholder of the Corporation. 10. Lost, Stolen, Mutilated or Destroyed Warrant. If this Warrant is lost, stolen, mutilated or destroyed, the Corporation may, on such terms as to indemnity or otherwise as it may reasonably impose (which shall, in the case of a mutilated Warrant, include the surrender thereof), issue a new Warrant of like denomination and tenor as the Warrant to replace the Warrant which was, lost, stolen, mutilated or destroyed. Any such new Warrant shall constitute an original contractual obligation of the Corporation, whether or not the already lost, stolen, mutilated or destroyed Warrant shall be at any time enforceable by anyone. 11. Notice, Etc. All notices, offers, acceptance and any other acts under this Warrant shall be in writing, and shall be sufficiently given if delivered to the addresses in person, by overnight courier se_ice, or if mailed, postage prepaid, by certified mail (return receipt requested), and shall be effective five days after being placed in the mail if mailed, or upon receipt or refusal of receipt, if delivered personally or by courier, in each case addressed to a party. The addresses for such communications shall be: Holder: At the address as shown on the Corporation's books and records Umagic Systems, Inc. 800 Third Avenue -- Suite 2602 New York, New York 10022 Attention: David A. Post, Co-Chairman of the Board and Chief Executive Officer Graubard Mollen & Miller 600 Third Avenue New York, New York 10016 Attention: David Alan Miller Corporation: with a copy to: 5237.5 5 or to such other address as any of them, by notice to the others, may designate from time to time. 12. Acceptance. Receipt of this Warrant by the Holder shall constitute acceptance of and agreement of all of the terms and conditions contained herein. 13. Goveming Law and Jurisdiction. This Warrant will be deemed to have been made and delivered in New York City and will be governed as to validity, interpretation, construction, effect and in all other respects by the internal laws of the State of New York. The Corporation and the Holder each hereby (i) agrees that any legal suit, action or proceeding arising out of or relating to this Warrant shall be instituted exclusively in New York State Supreme Court, County of New York, or in the United States District Court for the Southem District of New York, (ii) waives any objection to the venue of any such suit, action or proceeding and the fight to assert that such forum is not a convenient forum for such suit, action or proceeding, and (iii) irrevocably consents to the jurisdiction of the New York State Supreme Court, County of New York, and the United States District Court for the Southern District of New York in any such suit, action or proceeding. The Corporation further agrees to accept and acknowledge service or any and all process that may be served in any such suit, action or proceeding in New York State Supreme Court, County of New York or in the United States District Court for the Southem District of New York. IN WITNESS WHEREOF, duly authorized officer as of the Corporation has caused this Warrant to be executed by its ., __ UMAGIC SYSTEMS, INC. By: Name: David A. Post Title: Co-Chairman of the Board and Chief Executive Officer 5237.5 6 i NOTICE OF EXERCISE TO: Umagic Systems, Inc. (1) The undersigned hereby elects to purchase shares of the Common Stock of Umagic Systems, Inc. (the "Corporation") pursuant to the terms of the attached Warrant, and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any. (2) Please issue a certificate or certificates representing said shares of Common Stock in the name of the undersigned or in such other name as is specified below: (Name) (Address) (3) The undersigned represents that (i) the aforesaid shares of Common Stock are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distTibution thereof and that the undersigned has no present intention of distributing or reselling such shares; (ii) the undersigned is aware of the Corporation's business affairs and financial condition and has acquired sufficient information about the Corporation to reach an informed and knowledgeable decision regarding its investment in the Corporation; (iii) the undersigned is experienced in making investments of the type and has such knowledge and background in financial and business matters that the undersigned is capable of evaluating.the merits and risks of this investment and protecting the undersigned's own interests; (iv) the undersigned understands that the shares of Common Stock are issuable upon exercise of this Warrant have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), by reason of a specific exemption from the registration provisions of the Securities Act, which exemption depends upon, among other things, the bona fide nature of the investment intent as expressed herein, and, because such securities have not been registered under the Securities Act, they must be held indefinitely unless subsequently registered under the Securities Act or an exemption from such registration is available; (v) the undersigned is aware that the aforesaid shares of Common Stock may not be sold pursuant to Rule 144 adopted under the Securities Act unless certain conditions are met and until the undersigned has held the shares for the number of years prescribed by Rule 144, that among the conditions for use of the Rule is the availability of current information to the public about the Corporation and the Corporation has not made such information available and has no present plans to do so; and (vi) the undersigned agrees not to make any disposition of all or any part of the aforesaid shares of Common Stock unless and until there is then in effect a registration statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with said registration statement, or the undersigned has provided the Corporation with an opinion of counsel satisfactory to the Corporation, stating that such registration is not required. (Date) (Signature) (Print name) 5237.5 7 ASSIGNMENT FORM (To assign the foregoing Warrant, execute this form and supply required information. Do not use this form to purchase shares.) For Value Received, the foregoing Warrant and all rights evidenced thereby are hereby assigned to: Name: (Please Print) Address: (Please Print) Dated: Holder's Signature: Holder's Address: NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatever. Officers of corporations and those acting in a fiduciary orother representative capacity should file proper evidence of authority to assign the foregoing Warrant. 5237.5 8 _.o Preliminary Term Sheet for Proposed Private Offering or, if The following proposed terms are subject to execution of definitive documentation for the Private Offering. There is no assurance that the Private Offering will be consummated consummated, that it will be consummated on these terms. Issuer: Umagic Systems, Inc., a Delaware corporation (the "Company"). J.P. Morgan Securities Inc. Series A Convertible Preferred Stock (the "Series A Stock"). $20 million. $3.10 per share (the "Original Purchase Price"). Placement Agent: Type of security: Amount: Purchase price per share: Classes of stock: The Company will create a new series of preferred stock, the Series A Stock, which will be senior to the existing Common Stock. Liquidation preference: In the event of any liquidation, dissolution or winding up of the Company, or a sale or transfer of all or substantially all of the assets of the Company, or a consolidation or merger of the Company in which the Company is not the survivor, holders of the Series A Stock will be entitled to the Original Purchase Price per Share plus any declared but unpaid dividends, before any payment is made to the holders of Common Stock or any other junior securities. Dividends: Holders of the Series A Stock will be entitled to equivalent dividends and distributions as those paid on shares of Common Stock or any other class of capital stock. Such equivalent dividends will be determined based upon the dividend payable on the number of shares of Common Stock into which such shares of Series A Stock could have been converted on the record date for the declaration of such dividends. The Series A Stock will be convertible in whole or in part into Common Stock, at any time at the option of the holder, at the Conversion: 5896.2 Original Purchase Price per Share, including any adjustment provided herein. The Series A Stock shall convert automatically at the closing of the Company's initial public offering. The Series A Stock shall also automatically convert to Common Stock upon the consent of at least 50 percent of the outstanding shares of the Series A Stock. The conversion price for the Series A Stock will be adjusted proportionally for stock splits, stock dividends, stock combinations and the like. The conversion price will also be subject to a weighted average adjustment for issuances of common stock or common stock equivalents below the Original Purchase Price; provided; however, that the following issuances shall not trigger any adjustment: (i.) (ii.) upon conversion of shares of Series A Stock; to employees, consultants or directors pursuant to stock option, stock grant, stock purchase or similar plans or arrangements approved by the Board of Directors, including without limitation upon the exercise of options currently outstanding; (iii.) to equipment lessors, banks, financial institutions or similar entities in a transaction approved by the Board of Directors, the principal purpose of which is other than the raising of capital through the sale of equity securities of the Company; (iv.) as a dividend or other distribution in connection with which an automatic adjustment in the conversion price is made; (v.) (vi.) in the Company's initial public offering ("IPO") in a merger or acquisition that is approved by the Board of Directors; pursuant to any transaction approved by the Board of Directors primarily for the purpose of (A) a joint venture, technology licensing or research and development activity, (B) distribution or manufacture of the Company's products or services, or (C) any other (vii.) 5896.2 2 transaction involving a corporate partner that is primarily for a purpose other than raising capital through the sale of equity securities; or (viii.) if the holders of a majority of the then outstanding shares of the Series A Stock that may be subject to an adjustment upon such issuance agree in writing that such issuance shall not trigger an adjustment. Board representation: Voting rights: Holders of the Series A Stock, voting as a separate class, shall be entitled to elect one director to the Board of Directors. (a) Holders of the Series A Stock will be entitled to vote on all matters on an as-converted basis with the Common Stock of the Company. (b) Holders representing at least a majority of the outstanding Series A Stock, voting as a single class, will be required to approve: (i.) any amendment to the Articles of Incorporation or bylaws that adversely affects the rights of the Series A Stock (including, without limitation, the liquidation preference provisions) the authorization of any new series or class of stock of the Company senior to the Series A Stock. (iii.) dividends or distributions on, or repurchases of, junior securities (subject to customary exceptions) (ii.) Registration rights: Demand: At any time on or after the first anniversary of the effective date of an initial public offering of the Company's Common Stock, Investors holding at least a majority of the Series A Stock originally outstanding (or the Common Stock into which it has been converted) may make up to two demands (or, if Form S-3 or any similar short-form registration statement is available, an unlimited number of demands) of the Company to register Common 5896.2 3 J Stock. The Company shall not be obligated to effect any demand registration: (i.) unless such registration would have a net aggregate offering price exceeding $5 million at the time of negotiation; within 90 days following the filing of, and within 180 days following the effective date of, any registration statement of the Company; (iii.) within 12 months of a previous demand registration. In addition, if the President of the Company executes a certificate giving notice of the Company's intention to file a registration statement or stating that the demanded filing would be seriously detrimental to the Company or its stockholders, the Company may delay such request one or more times (but no more than twice in any 12 month period) for a period not to exceed 180 days. (ii.) Piggyback: Unlimited piggyback rights after the IPO, subject to pro rata cutback at the underwriter's discretion. Tag-along: Holders of the Series A Stock will be entitled to tag along on anysale by David Post of more than __ shares of Common Stock. In any such transaction, holders of the Series A Stock will be permitted to sell, at the same price and on the same terms as Mr. Post, the same proportion of their holdings (on an as-converted basis) as the proportion of Mr. Post's holdings being sold by him. Pre-emptive rights: Holders of the Series A Stock will have pre-emptive rights with respect to any offering of securities by the Company for cash, with anticipated gross proceeds in excess of $ (other than pursuant to employee stock plans or in a registered public offering), except if the holders of a majority of the then outstanding Series A Stock agree in writing that such preemptive rights not apply. 5896.2 4 Lock-u p The holder shall agree not to sell or otherwise transfer any securities of the Company for a period of 180 days following the effective date of the registration statement filed in connection with the IPO without the consent of the managing underwriter of the IPO. So long as a holder owns at least __ shares of the Series A Stock or underlying Common Stock, the Company will deliver to such holder: (a) within 105 days after the end of each fiscal year, audited annual financial statements certified by independent auditors; (b) within 45 days after the end of each quarter, unaudited quarterly and year-to-date financial statements; and (c) information generally distributed to the Company's stockholders. Information rights: 5896.2 5