EXHIBIT 10.1


 


SECURITIES
PURCHASE AGREEMENT


 


SECURITIES PURCHASE AGREEMENT
(the “Agreement”), dated as of March 20,
2006, by and among Think Partnership Inc., (formerly known as CGI Holding
Corporation), a Nevada corporation, with headquarters located at 5 Revere Drive, Suite 510,  Northbrook, Illinois 60062 (the ”Company”), and the investors listed on the Schedule of
Buyers attached hereto (individually, a “Buyer”
and collectively, the “Buyers”).


 


WHEREAS:


 


A.                                   The Company and each
Buyer is executing and delivering this Agreement in reliance upon the exemption
from securities registration afforded by Section 4(2) of the
Securities Act of 1933, as amended (the “1933
Act”), and Rule 506 of Regulation D (“Regulation D”) as promulgated by the
United States Securities and Exchange Commission (the “SEC”) under the 1933 Act.


 


B.                                     The Company has
authorized a new series of convertible preferred stock of the Company
designated as Series A Convertible Preferred Stock, the terms of which are
set forth in the certificate of designation for such series of preferred
stock (the “Certificate of Designations”) in
the form attached hereto as Exhibit A (together with any
convertible preferred shares issued in replacement thereof in accordance with
the terms thereof, the “Preferred Shares”),
which Preferred Shares shall be convertible into the Company’s common stock,
par value $0.001 per share (the “Common Stock”),
in accordance with the terms of the Certificate of Designations.


 


C.                                     Each Buyer wishes
to purchase, and the Company wishes to sell, upon the terms and conditions
stated in this Agreement, (i) that aggregate number of Preferred Shares
set forth opposite such Buyer’s name in column (3) on the Schedule of
Buyers (which aggregate number for all Buyers shall be up to 26,500) (as
converted, collectively, the “Conversion Shares”
and (ii) Warrants in substantially the form attached hereto as Exhibit B
(the “Warrants”), to acquire that number of
shares of Common Stock (as exercised, collectively, the “Warrant
Shares”) set forth opposite such Buyer’s name in column (4) on
the Schedule of Buyers.


 


D.                                    Contemporaneously
with the execution and delivery of this Agreement, the parties hereto are
executing and delivering a Registration Rights Agreement, substantially in the form attached
hereto as Exhibit C (the “Registration
Rights Agreement”), pursuant to which the Company has agreed to
provide certain registration rights with respect to the Registrable Securities
(as defined in the Registration Rights Agreement), under the 1933 Act and the rules and
regulations promulgated thereunder, and applicable state securities laws.


 


E.                                      The Preferred
Shares, the Conversion Shares, the Warrants and the Warrant Shares are
collectively referred to herein as the “Securities”.


 


NOW, THEREFORE, the
Company and each Buyer hereby agree as follows:


 

















 


1.                                       PURCHASE AND SALE OF PREFERRED STOCK AND WARRANTS.


 


(a)                                  Preferred
Shares and Warrants. Subject to the satisfaction (or waiver) of the
conditions set forth in Sections 6 and 7 below, the Company shall issue and
sell to each Buyer, and each Buyer severally, but not jointly, agrees to
purchase from the Company on the Closing Date (as defined below), the number of
Preferred Shares, as is set forth opposite such Buyer’s name in column (3) on
the Schedule of Buyers, along with
Warrants to acquire that number of Warrant Shares as is set forth opposite such
Buyer’s name in column (4) on the Schedule of Buyers.


 


(b)                                 Closing.
The closing (the “Closing”) of the
purchase of the Preferred Shares and the Warrants by the Buyers shall occur at
the offices of Schulte Roth & Zabel LLP, 919 Third Avenue, New York,
New York 10022. The date and time of the Closing (the “Closing Date”)
shall be 10:00 a.m., New York City Time, on the date hereof, subject to
the notification of satisfaction (or waiver) of the conditions to the Closing
set forth in Sections 6 and 7 below (or such later date as is mutually agreed
to by the Company and each Buyer). As used herein “Business Day” means any day
other than a Saturday, Sunday or other day on which commercial banks in The
City of New York are authorized or required by law to remain closed.


 


(c)                                  Purchase
Price. The aggregate purchase price for the Preferred Shares and the
Warrants to be purchased by each Buyer (the “Purchase
Price”) shall be the amount set forth opposite such Buyer’s name in
column (5) on the Schedule of Buyers. Each Buyer shall pay $1,000 for
each Preferred Share and related Warrants to be purchased by such Buyer at the
Closing.


 


(d)                                 Form of
Payment. On the Closing Date, (A) each Buyer shall pay its portion of
the Purchase Price to the Company for the Preferred Shares and the Warrants to
be issued and sold to such Buyer at the Closing, by wire transfer of
immediately available funds in accordance with the Company’s written wire instructions
and (B) the Company shall deliver to each Buyer the Preferred Shares (in
such denominations as is set forth opposite such Buyer’s name in column (3) on
the Schedule of Buyers), along with the Warrants (exercisable for the
number of shares of Common Stock as is set forth opposite such Buyer’s name in
column (4) on the Schedule of Buyers), each duly executed on behalf
of the Company and registered in the name of such Buyer or its designee.


 


2.                                       BUYER’S REPRESENTATIONS AND WARRANTIES.


 


Each Buyer represents and warrants with respect to only itself that:


 


(a)                                  Organization;
Authority. Such Buyer is an entity duly organized, validly existing and in
good standing under the laws of the jurisdiction of its organization with the
requisite power and authority to enter into and to consummate the transactions
contemplated by the Transaction Documents (as defined below) to which it is a
party and otherwise to carry out its obligations hereunder and thereunder.


 


(b)                                 No
Public Sale or Distribution. Such Buyer is (i) acquiring the Preferred
Shares and the Warrants, (ii) upon conversion of the Preferred Shares will
acquire the Conversion Shares, and (iii) upon exercise of the Warrants
will acquire the Warrant Shares, in 


 


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each case, for
its own account and not with a view towards, or for resale in connection with,
the public sale or distribution thereof, except pursuant to sales registered or
exempted under the 1933 Act; provided, however, that by making the representations
herein, such Buyer does not agree to hold any of the Securities for any minimum
or other specific term and reserves the right to dispose of the Securities at
any time in accordance with or pursuant to a registration statement or an
exemption under the 1933 Act. Such Buyer is not a broker-dealer registered, or
required to be registered, with the SEC under the 1934 Act. Such Buyer is
acquiring the Securities hereunder in the ordinary course of its business. Such
Buyer does not presently have any agreement or understanding, directly or
indirectly, with any Person to distribute any of the Securities.


 


(c)                                  Accredited
Investor Status. Such Buyer is an “accredited investor” as that term is
defined in Rule 501(a) of Regulation D.


 


(d)                                 Reliance
on Exemptions. Such Buyer understands that the Securities are being offered
and sold to it in reliance on specific exemptions from the registration
requirements of United States federal and state securities laws and that the
Company is relying in part upon the truth and accuracy of, and such Buyer’s
compliance with, the representations, warranties, agreements, acknowledgments
and understandings of such Buyer set forth herein in order to determine the
availability of such exemptions and the eligibility of such Buyer to acquire
the Securities.


 


(e)                                  Information.
Such Buyer and its advisors, if any, have been furnished with all materials
relating to the business, finances and operations of the Company and materials
relating to the offer and sale of the Securities which have been requested by
such Buyer. Such Buyer and its advisors, if any, have been afforded the
opportunity to ask questions of the Company. Neither such inquiries nor any
other due diligence investigations conducted by such Buyer or its advisors, if
any, or its representatives shall modify, amend or affect such Buyer’s right to
rely on the Company’s representations and warranties contained herein. Such
Buyer understands that its investment in the Securities involves a high degree
of risk. Such Buyer has sought such accounting, legal and tax advice as it has
considered necessary to make an informed investment decision with respect to
its acquisition of the Securities.


 


(f)                                    No
Governmental Review. Such Buyer understands that no United States federal
or state agency or any other government or governmental agency has passed on or
made any recommendation or endorsement of the Securities or the fairness or
suitability of the investment in the Securities nor have such authorities
passed upon or endorsed the merits of the offering of the Securities.


 


(g)                                 Transfer
or Resale. Such Buyer understands that except as provided in the
Registration Rights Agreement: (i) the Securities have not been and are
not being registered under the 1933 Act or any state securities laws, and may not
be offered for sale, sold, assigned or transferred unless (A) subsequently
registered thereunder, (B) such Buyer shall have delivered to the Company
an opinion of counsel, in a generally acceptable form, to the effect that such
Securities to be sold, assigned or transferred may be sold, assigned or
transferred pursuant to an exemption from such registration, or (C) such
Buyer provides the Company with reasonable assurance that such Securities can
be sold, assigned or transferred pursuant to Rule 144 or Rule 144A


 


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promulgated
under the 1933 Act, as amended, (or a successor rule thereto)
(collectively, “Rule 144”); (ii) any
sale of the Securities made in reliance on Rule 144 may be made only
in accordance with the terms of Rule 144 and further, if Rule 144 is
not applicable, any resale of the Securities under circumstances in which the
seller (or the Person (as defined in Section 3(s)) through whom the sale
is made) may be deemed to be an underwriter (as that term is defined in
the 1933 Act) may require compliance with some other exemption under the
1933 Act or the rules and regulations of the SEC thereunder; and (iii) neither
the Company nor any other Person is under any obligation to register the
Securities under the 1933 Act or any state securities laws or to comply with
the terms and conditions of any exemption thereunder. The Securities may be
pledged in connection with a bona fide margin account or other loan or
financing arrangement secured by the Securities and such pledge of Securities
shall not be deemed to be a transfer, sale or assignment of the Securities
hereunder, and no Buyer effecting a pledge of Securities shall be required to
provide the Company with any notice thereof or otherwise make any delivery to
the Company pursuant to this Agreement or any other Transaction Document (as
defined in Section 3(b)), including, without limitation, this Section 2(f).


 


(h)                                 Legends.
Such Buyer understands that the certificates or other instruments representing
the Preferred Shares and the Warrants and, until such time as the resale of the
Conversion Shares and the Warrant Shares have been registered under the 1933
Act as contemplated by the Registration Rights Agreement, the stock
certificates representing the Conversion Shares and the Warrant Shares, except
as set forth below, shall bear any legend as required by the “blue sky” laws of
any state and a restrictive legend in substantially the following form (and
a stop-transfer order may be placed against transfer of such stock
certificates):


 


[NEITHER THE
ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE
SECURITIES INTO WHICH THESE SECURITIES ARE [CONVERTIBLE] [EXERCISABLE] HAVE
BEEN][THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN] REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES
LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR
ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN
OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT
REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR 144A
UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE
PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR
FINANCING ARRANGEMENT SECURED BY THE SECURITIES.


 


The legend set forth above shall be removed and the Company shall issue
a certificate without such legend to the holder of the Securities upon which it
is stamped, if, unless otherwise required by state securities laws, (i) such
Securities are registered for resale under the 1933 Act, (ii) in
connection with a sale, assignment or other transfer, such holder provides the
Company with an opinion of counsel, in a generally acceptable form, to the
effect that such sale, assignment or 


 


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transfer of the Securities may be made without registration under
the applicable requirements of the 1933 Act, or (iii) such holder provides
the Company with reasonable assurance that the Securities can be sold, assigned
or transferred pursuant to Rule 144 or Rule 144A.


 


(i)                                     Validity;
Enforcement. This Agreement and the Registration Rights Agreement have been
duly and validly authorized, executed and delivered on behalf of such Buyer and
shall constitute the legal, valid and binding obligations of such Buyer
enforceable against such Buyer in accordance with their respective terms,
except as such enforceability may be limited by general principles of
equity or to applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation and other similar laws relating to, or affecting generally, the
enforcement of applicable creditors’ rights and remedies.


 


(j)                                     No
Conflicts. The execution, delivery and performance by such Buyer of this
Agreement and the Registration Rights Agreement and the consummation by such
Buyer of the transactions contemplated hereby and thereby will not (i) result
in a violation of the organizational documents of such Buyer or (ii) conflict
with, or constitute a default (or an event which with notice or lapse of time
or both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation of, any agreement,
indenture or instrument to which such Buyer is a party, or (iii) result in
a violation of any law, rule, regulation, order, judgment  or decree (including federal and state
securities laws) applicable to such Buyer, except in the case of clauses (ii) and
(iii) above, for such conflicts, defaults, rights or violations which
would not, individually or in the aggregate, reasonably be expected to have a
material adverse effect on the ability of such Buyer to perform its obligations
hereunder.


 


(k)                                  Residency.
Such Buyer is a resident of that jurisdiction specified below its address on
the Schedule of Buyers.


 


(l)                                     Certain
Trading Activities. No Buyer has directly or indirectly, nor has any Person
acting on behalf of or pursuant to any understanding with such Buyer, engaged
in any transactions in the securities of the Company (including without
limitation, any Short Sales involving the Company’s securities) since the time
that the Buyer was first contacted by the Company or Roth Capital Partners LLC
regarding an investment in the Company. Each Buyer covenants that neither it
nor any Person acting on its behalf or pursuant to any understanding with it
will engage in any transaction in the securities of the Company (including
Short Sales) prior to the time that the transactions contemplated by this
Agreement are publicly disclosed pursuant to Section 4(i). Short Sales
include, without limitation, all “short sales” as defined in Rule 200
promulgated under Regulation SHO under the 1934 Act and all types of direct and
indirect stock pledges, forward sale contracts, options, puts, calls, swaps and
similar arrangements (including on a total return basis), and sales and other
transactions through non-US broker dealers or foreign regulated brokers.


 


(m)                               General
Solicitation. No Buyer is purchasing the Securities as a result of any
advertisement, article, notice or other communication (including a research
report issued by the Agent) regarding the Securities published in any
newspaper, magazine or similar media or broadcast over television or radio or
presented at any seminar.


 


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3.                                       REPRESENTATIONS AND WARRANTIES OF THE COMPANY.


 


The Company represents and warrants to each of the Buyers that:


 


(a)                                  Organization
and Qualification. The Company and its “Subsidiaries”
(which for purposes of this Agreement means any entity in which the Company,
directly or indirectly, owns capital stock or holds an equity or similar
interest) are entities duly organized and validly existing and in good standing
under the laws of the jurisdiction in which they are formed, and have the
requisite power and authorization to own their properties and to carry on their
business as now being conducted. Each of the Company and its Subsidiaries is
duly qualified as a foreign entity to do business and is in good standing in
every jurisdiction in which its ownership of property or the nature of the
business conducted by it makes such qualification necessary, except to the
extent that the failure to be so qualified or be in good standing would not
have a Material Adverse Effect. As used in this Agreement, “Material Adverse Effect” means any material
adverse effect on the business, properties, assets, operations, results of
operations, condition (financial or otherwise) or current prospects of the
Company and its Subsidiaries, both taken as a whole and individually as to any
Subsidiary that is a Significant Subsidiary (as defined in Regulation S-X), or
on the transactions contemplated hereby or in the other Transaction Documents
or by the agreements and instruments to be entered into in connection herewith
or therewith, or on the authority or ability of the Company to perform its
obligations under the Transaction Documents (as defined below). The Company has
no Subsidiaries, except as set forth on Schedule 3(a).


 


(b)                                 Authorization;
Enforcement; Validity. Except as set forth in Schedule 3(b), the
Company has the requisite corporate power and authority to enter into and perform its
obligations under this Agreement, the Certificate of Designations, the
Warrants, the Registration Rights Agreement, the Irrevocable Transfer Agent
Instructions (as defined in Section 5(b)), and each of the other
agreements entered into by the parties hereto in connection with the
transactions contemplated by this Agreement (collectively, the “Transaction Documents”) and to issue the
Securities in accordance with the terms hereof and thereof. The execution and
delivery of the Transaction Documents by the Company and the consummation by
the Company of the transactions contemplated hereby and thereby, including,
without limitation, the issuance of the Preferred Shares, the reservation for
issuance and the issuance of the Conversion Shares issuable upon conversion of
the Preferred Shares, the issuance of the Warrants and the reservation for
issuance and issuance of the Warrant Shares issuable upon exercise of the
Warrants, have been duly authorized by the Company’s Board of Directors and
(other than the filing with the SEC of one or more Registration Statements in
accordance with the requirements of the Registration Rights Agreement and any
other filings as may be required by any state securities agencies) no
further filing, consent, or authorization is required by the Company, its Board
of Directors or its stockholders. This Agreement and the other Transaction
Documents of even date herewith have been duly executed and delivered by the
Company, and constitute the legal, valid and binding obligations of the
Company, enforceable against the Company in accordance with their respective
terms, except as such enforceability may be limited by general principles
of equity or applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation or similar laws relating to, or affecting generally, the
enforcement of applicable creditors’ rights and remedies and except as rights
to indemnification and to contribution may be limited by federal or state
securities law. The Certificate of Designations in the form attached 


 


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hereto as Exhibit A
shall be filed with the Secretary of State of the State of Nevada on or prior
to Closing.


 


(c)                                  Issuance
of Securities. The issuance of the Preferred Shares and the Warrants are
duly authorized and upon issuance in accordance with the terms of the
Transaction Documents shall be free from all taxes, liens and charges with
respect to the issue thereof, and the Preferred Shares shall be entitled to the
rights and preferences set forth in the Certificate of Designations. As of the
Closing, the Company shall have reserved from its duly authorized capital stock
not less than the sum of (i) the maximum number of shares of Common Stock
issuable upon conversion of the Preferred Shares (without taking into account
any limitations on the conversion of the Preferred Shares set forth in the
Certificate of Designations) and (ii) the maximum number of shares of
Common Stock issuable upon exercise of the Warrants (assuming for purposes
hereof that the Exercise Price (as defined in the Warrants) is equal to $2.00,
subject to adjustment for stock dividends and stock splits and without taking
into account any limitations on the exercise of the Warrants set forth in the
Warrants). Upon issuance or conversion in accordance with the Certificate of
Designations or exercise in accordance with the Warrants, as the case may be,
the Conversion Shares and the Warrant Shares, respectively, will be validly
issued, fully paid and nonassessable and free from all preemptive or similar
rights, taxes, liens and charges with respect to the issue thereof, with the
holders being entitled to all rights accorded to a holder of Common Stock. Subject
to the representations and warranties of the Buyers in this Agreement, the
offer and issuance by the Company of the Securities is exempt from registration
under the 1933 Act.


 


(d)                                 No
Conflicts. The execution, delivery and performance of the Transaction
Documents by the Company and the consummation by the Company of the
transactions contemplated hereby and thereby (including, without limitation,
the issuance of the Preferred Shares, the Warrants, and reservation for
issuance of the Conversion Shares and the Warrant Shares) will not (i) result
in a violation of the Articles of Incorporation (as defined in Section 3(r))
of the Company or any of its Subsidiaries, any capital stock of the Company or
Bylaws (as defined in Section 3(r)) or the Certificate of Designations of
the Company or any of its Subsidiaries or (ii) conflict with, or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture or
instrument to which the Company or any of its Subsidiaries is a party, except
to the extent such conflict, default or termination right would not reasonably
be expected to have a Material Adverse Effect, or (iii) result in a
violation of any law, rule, regulation, order, judgment or decree (including
federal and state securities laws and regulations and the rules and
regulations of the American Stock Exchange (the “Principal Market”) applicable to the Company or any of its
Subsidiaries or by which any property or asset of the Company or any of its
Subsidiaries is bound or affected except, in the case of clause (ii) or (iii) above,
to the extent such violations that would not reasonably be expected to have a
Material Adverse Effect.


 


(e)                                  Consents.
The Company is not required to obtain any consent, authorization or order of,
or make any filing or registration with, any court, governmental agency or any
regulatory or self-regulatory agency or any other Person in order for it to
execute, deliver or perform any of its obligations under or contemplated
by the Transaction Documents, in each case in accordance with the terms hereof
or thereof. All consents, authorizations, orders, filings 


 


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and
registrations which the Company is required to obtain pursuant to the preceding
sentence have been obtained or effected on or prior to the Closing Date, and
the Company and its Subsidiaries are unaware of any facts or circumstances
which might prevent the Company from obtaining or effecting any of the
registration, application or filings pursuant to the preceding sentence. The
Company is not in violation of the requirements of the Principal Market and has
no knowledge of any facts which would reasonably lead to delisting or
suspension of the Common Stock in the foreseeable future.


 


(f)                                    Acknowledgment
Regarding Buyer’s Purchase of Securities. The Company acknowledges and
agrees that each Buyer is acting solely in the capacity of an arm’s length
purchaser with respect to the Transaction Documents and the transactions
contemplated hereby and thereby and that no Buyer is (i) an officer or
director of the Company, (ii) an “affiliate” of the Company or any of its
Subsidiaries (as defined in Rule 144) or (iii) to its knowledge, a “beneficial
owner” of more than 10% of the shares of Common Stock (as defined for purposes
of Rule 13d-3 of the Securities Exchange Act of 1934, as amended (the “1934 Act”)). The Company further
acknowledges that no Buyer is acting as a financial advisor or fiduciary of the
Company or any of its Subsidiaries (or in any similar capacity) with respect to
the Transaction Documents and the transactions contemplated hereby and thereby,
and any advice given by a Buyer or any of its representatives or agents in
connection with the Transaction Documents and the transactions contemplated
hereby and thereby is merely incidental to such Buyer’s purchase of the
Securities. The Company further represents to each Buyer that the Company’s
decision to enter into the Transaction Documents has been based solely on the
independent evaluation by the Company and its representatives.


 


(g)                                 No
General Solicitation; Placement Agent’s Fees. Neither the Company, nor any
of its Subsidiaries or affiliates, nor any Person acting on its or their
behalf, has engaged in any form of general solicitation or general
advertising (within the meaning of Regulation D) in connection with the offer
or sale of the Securities. The Company shall be responsible for the payment of
any placement agent’s fees, financial advisory fees, or brokers’ commissions
(other than for persons engaged by any Buyer or its investment advisor)
relating to or arising out of the transactions contemplated hereby. The Company
shall pay, and hold each Buyer harmless against, any liability, loss or expense
(including, without limitation, attorney’s fees and out-of-pocket expenses)
arising in connection with any such claim. The Company acknowledges that it has
engaged Roth Capital Partners LLC as placement agent (the “Agent”) in connection with the sale of the
Securities. Other than the Agent, neither the Company nor any of its
Subsidiaries has engaged any placement agent or other agent in connection with
the sale of the Securities.


 


(h)                                 No
Integrated Offering. None of the Company, its Subsidiaries, any of their
affiliates, and any Person acting on their behalf has, directly or indirectly,
made any offers or sales of any security or solicited any offers to buy any
security, under circumstances that would require registration of any of the
Securities under the 1933 Act or cause this offering of the Securities to be
integrated with prior offerings by the Company for purposes of the 1933 Act or
any applicable stockholder approval provisions, including, without limitation,
under the rules and regulations of any exchange or automated quotation system
on which any of the securities of the Company are listed or designated. None of
the Company, its Subsidiaries, their affiliates and any Person acting on their
behalf will take any action or steps referred to in the preceding 


 


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sentence that
would require registration of any of the Securities under the 1933 Act or cause
the offering of the Securities to be integrated with other offerings.


 


(i)                                     Dilutive
Effect. The Company understands and acknowledges that the Warrant Shares
issuable upon exercise of the Warrants, will increase in certain circumstances.
The Company further acknowledges that its obligation to issue Conversion Shares
upon conversion of the Preferred Shares in accordance with this Agreement and
the Certificate of Designations and its obligation to issue the Warrant Shares
upon exercise of the Warrants in accordance with this Agreement and the
Warrants is, in each case, absolute and unconditional regardless of the
dilutive effect that such issuance may have on the ownership interests of
other stockholders of the Company.


 


(j)                                     Application
of Takeover Protections; Rights Agreement. The Company and its board of
directors have taken all necessary action, if any, in order to render
inapplicable any control share acquisition, business combination, poison pill
(including any distribution under a rights agreement) or other similar
anti-takeover provision under the Articles of Incorporation or the laws of the
jurisdiction of its incorporation which is or could become applicable to any
Buyer as a result of the transactions contemplated by this Agreement,
including, without limitation, the Company’s issuance of the Securities and any
Buyer’s ownership of the Securities. The Company has not adopted a stockholder
rights plan or similar arrangement relating to accumulations of beneficial
ownership of Common Stock or a change in control of the Company.


 


(k)                                  SEC
Documents; Financial Statements. During the two (2) years prior to the
date hereof, the Company has filed all reports, schedules, forms, statements
and other documents required to be filed by it with the SEC pursuant to the
reporting requirements of the 1934 Act (all of the foregoing filed prior to the
date hereof and all exhibits included therein and financial statements, notes
and schedules thereto and documents incorporated by reference therein being
hereinafter referred to as the “SEC Documents”).
The Company has delivered to the Buyers or their respective representatives
true, correct and complete copies of each of the SEC Documents not available on
the EDGAR system that have been requested by each Buyer. As of their respective
dates, the SEC Documents complied in all material respects with the
requirements of the 1934 Act and the rules and regulations of the SEC
promulgated thereunder applicable to the SEC Documents, and none of the SEC
Documents, at the time they were filed with the SEC, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. Except
as set forth in Schedule 3(k), as of their respective dates, the
financial statements of the Company included in the SEC Documents complied as
to form in all material respects with applicable accounting requirements
and the published rules and regulations of the SEC with respect thereto as
in effect as of the time of filing. Such financial statements have been
prepared in accordance with generally accepted accounting principles,
consistently applied, during the periods involved (except (i) as may be
otherwise indicated in such financial statements or the notes thereto, or (ii) in
the case of unaudited interim statements, to the extent they may exclude
footnotes or may be condensed or summary statements) and fairly present in
all material respects the financial position of the Company as of the dates
thereof and the results of its operations and cash flows for the periods then
ended (subject, in the case of unaudited statements, to normal year-end audit
adjustments). No other information provided by or on behalf of the Company to
the Buyers which is not 


 


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included in
the SEC Documents, including, without limitation, information referred to in Section 2(e) of
this Agreement, contains any untrue statement of a material fact or omits to
state any material fact necessary in order to make the statements therein not
misleading, in the light of the circumstance under which they are or were made.


 


(l)                                     Absence
of Certain Changes. Except as disclosed in Schedule 3(l), since
the date of the Company’s most recent audited or reviewed financial statements
contained in a Form 10-KSB or Form 10-QSB, there has been no material
adverse change and no material adverse development in the business, assets,
properties, operations, condition (financial or otherwise), results of
operations or prospects of the Company or its Subsidiaries. Except as disclosed
in Schedule 3(l), since the date of the Company’s most recent
audited financial statements contained in a Form 10-KSB or Form 10-QSB,
neither the Company nor any of its Subsidiaries has (i) declared or paid
any dividends, (ii) sold any assets, individually or in the aggregate, in
excess of $500,000 outside of the ordinary course of business or (iii) had
capital expenditures, individually or in the aggregate, in excess of $500,000. Neither
the Company nor any of its Subsidiaries has taken any steps to seek protection
pursuant to any bankruptcy law nor does the Company have any knowledge or
reason to believe that its creditors intend to initiate involuntary bankruptcy
proceedings or any actual knowledge of any fact which would reasonably lead a
creditor to do so. The Company and its Subsidiaries, individually and on a
consolidated basis, are not as of the date hereof, and after giving effect to
the transactions contemplated hereby to occur at the Closing, will not be
Insolvent (as defined below). For purposes of this Section 3(l), “Insolvent” means, with respect to the
Company, on a consolidated basis with its Subsidiaries, (i) the present
fair saleable value of the Company’s and its Subsidiaries’ assets is less than
the amount required to pay the Company’s and its Subsidiaries’ total
Indebtedness (as defined in Section 3(s)), (ii) the Company and its
Subsidiaries are unable to pay their debts and liabilities, subordinated,
contingent or otherwise, as such debts and liabilities become absolute and
matured or (iii) the Company and its Subsidiaries intend to incur or
believe that they will incur debts that would be beyond their ability to pay as
such debts mature. The Company has not engaged in business or in any
transaction, and is not about to engage in business or in any transaction, for
which the Company’s remaining assets constitute unreasonably small capital.


 


(m)                               No
Undisclosed Events, Liabilities, Developments or Circumstances. No event,
liability, development or circumstance has occurred or exists, or is
contemplated to occur with respect to the Company, its Subsidiaries or their
respective business, properties, prospects, operations or financial condition,
that would be required to be disclosed by the Company under applicable
securities laws on a registration statement on Form S-1 filed with the SEC
relating to an issuance and sale by the Company of its Common Stock and which
has not been publicly announced.


 


(n)                                 Conduct
of Business; Regulatory Permits. Neither the Company nor its Subsidiaries
is in violation of any term of or in default under its Articles of
Incorporation, the Certificate of Designations, any other certificate of
designation, preferences or rights of any other outstanding series of
preferred stock of the Company or Bylaws or their organizational charter or Articles
of Incorporation or bylaws, respectively. Neither the Company nor any of its
Subsidiaries is in violation of any judgment, decree or order or any statute,
ordinance, rule or 


 


10





















 


regulation
applicable to the Company or its Subsidiaries, and neither the Company nor any
of its Subsidiaries will conduct its business in violation of any of the
foregoing, except in all cases for possible violations which would not,
individually or in the aggregate, have a Material Adverse Effect. Without
limiting the generality of the foregoing, the Company is not in violation of
any of the rules, regulations or requirements of the Principal Market and has
no knowledge of any facts or circumstances that would reasonably lead to
delisting or suspension of the Common Stock by the Principal Market in the
foreseeable future. Except as set forth in Schedule 3(n), since March 3,
2005, (i) the Common Stock has been designated for quotation on the
Principal Market, (ii) trading in the Common Stock has not been suspended
by the SEC or the Principal Market and (iii) the Company has received no
communication, written or oral, from the SEC or the Principal Market regarding
the suspension or delisting of the Common Stock from the Principal Market. The
Company and its Subsidiaries possess all certificates, authorizations and
permits issued by the appropriate regulatory authorities necessary to conduct
their respective businesses, except where the failure to possess such
certificates, authorizations or permits would not have, individually or in the
aggregate, a Material Adverse Effect, and neither the Company nor any such
Subsidiary has received any notice of proceedings relating to the revocation or
modification of any such certificate, authorization or permit.


 


(o)                                 Foreign
Corrupt Practices. Neither the Company nor any of its Subsidiaries nor any
director, officer, agent, employee or other Person acting on behalf of the
Company or any of its Subsidiaries has, in the course of its actions for, or on
behalf of, the Company or any of its Subsidiaries (i) used any corporate
funds for any unlawful contribution, gift, entertainment or other unlawful
expenses relating to political activity; (ii) made any direct or indirect
unlawful payment to any foreign or domestic government official or employee
from corporate funds; (iii) violated or is in violation of any provision
of the U.S. Foreign Corrupt Practices Act of 1977, as amended; or (iv) made
any unlawful bribe, rebate, payoff, influence payment, kickback or other
unlawful payment to any foreign or domestic government official or employee.


 


(p)                                 Sarbanes-Oxley
Act. The Company is in compliance with any and all applicable requirements
of the Sarbanes-Oxley Act of 2002 that are effective as of the date hereof, and
any and all applicable rules and regulations promulgated by the SEC
thereunder that are effective as of the date hereof.


 


(q)                                 Transactions
With Affiliates. Except as set forth in the SEC Documents filed at least
ten (10) days prior to the date hereof and other than the grant of stock
options disclosed on Schedule 3(q), none of the officers, directors
or employees of the Company or any of its Subsidiaries is presently a party to
any transaction with the Company or any of its Subsidiaries (other than for
ordinary course services as employees, officers or directors), including any
contract, agreement or other arrangement providing for the furnishing of
services to or by, providing for rental of real or personal property to or from,
or otherwise requiring payments to or from any such officer, director or
employee or, to the knowledge of the Company or any of its Subsidiaries, any
corporation, partnership, trust or other entity in which any such officer,
director, or employee has a substantial interest or is an officer, director,
trustee or partner.


 


11





















 


(r)                                    Equity
Capitalization. As of the date hereof, the authorized capital stock of the
Company consists of (i) 200,000,000 shares of Common Stock, of which as of
the date hereof, 43,904,261 including 2,500,000 shares held in treasury are
issued and outstanding and 11,769,949 shares are reserved for issuance pursuant
to securities (other than the Preferred Shares and the Warrants) exercisable or
exchangeable for, or convertible into, shares of Common Stock and (ii) 5,000,000
shares of preferred stock, none of which, as of the date hereof, are issued and
outstanding. All of such outstanding shares have been, or upon issuance will
be, validly issued and are fully paid and nonassessable. Except as disclosed in
Schedule 3(r): (i) none of the Company’s capital stock is
subject to preemptive rights or any other similar rights or any liens or
encumbrances suffered or permitted by the Company; (ii) there are no
outstanding options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into, or exercisable or exchangeable for, any capital stock of the
Company or any of its Subsidiaries, or contracts, commitments, understandings
or arrangements by which the Company or any of its Subsidiaries is or may become
bound to issue additional capital stock of the Company or any of its
Subsidiaries or options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into, or exercisable or exchangeable for, any capital stock of the
Company or any of its Subsidiaries; (iii) there are no outstanding debt
securities, notes, credit agreements, credit facilities or other agreements,
documents or instruments evidencing Indebtedness (as defined in Section 3(s))
of the Company or any of its Subsidiaries or by which the Company or any of its
Subsidiaries is or may become bound; (iv) there are no financing
statements securing obligations in any material amounts, either singly or in
the aggregate, filed in connection with the Company or any of its Subsidiaries;
(v) there are no agreements or arrangements under which the Company or any
of its Subsidiaries is obligated to register the sale of any of their
securities under the 1933 Act (except pursuant to the Registration Rights
Agreement); (vi) there are no outstanding securities or instruments of the
Company or any of its Subsidiaries which contain any redemption or similar
provisions, and there are no contracts, commitments, understandings or
arrangements by which the Company or any of its Subsidiaries is or may become
bound to redeem a security of the Company or any of its Subsidiaries; (vii) there
are no securities or instruments containing anti-dilution or similar provisions
that will be triggered by the issuance of the Securities; (viii) the
Company does not have any stock appreciation rights or “phantom stock” plans or
agreements or any similar plan or agreement; and (ix) the Company and its
Subsidiaries have no liabilities or obligations required to be disclosed in the
SEC Documents but not so disclosed in the SEC Documents, other than those
incurred in the ordinary course of the Company’s or its Subsidiaries’
respective businesses and which, individually or in the aggregate, do not or
would not have a Material Adverse Effect. The Company has furnished to the
Buyers true, correct and complete copies of the Company’s Articles of
Incorporation, as amended and as in effect on the date hereof (the “Articles of Incorporation”), and the
Company’s Bylaws, as amended and as in effect on the date hereof (the “Bylaws”), and the terms of all securities
convertible into, or exercisable or exchangeable for, shares of Common Stock
and the material rights of the holders thereof in respect thereto.


 


(s)                                  Indebtedness
and Other Contracts. Except as disclosed in Schedule 3(s), neither the
Company nor any of its Subsidiaries (i) has any outstanding Indebtedness
(as defined below), (ii) is a party to any contract, agreement or
instrument, the violation of which, or default under which, by the other
party(ies) to such contract, agreement or instrument could reasonably be
expected to result in a Material Adverse Effect, (iii) is in violation of
any term of or in default 


 


12





















 


under any
contract, agreement or instrument relating to any Indebtedness, except where
such violations and defaults would not result, individually or in the
aggregate, in a Material Adverse Effect, or (iv) is a party to any
contract, agreement or instrument relating to any Indebtedness, the performance
of which, in the judgment of the Company’s officers, has or is expected to have
a Material Adverse Effect. Schedule 3(s) provides a detailed
description of the material terms of any such outstanding Indebtedness. For
purposes of this Agreement:  (x) “Indebtedness” of any Person means, without
duplication (A) all indebtedness for borrowed money, (B) all
obligations issued, undertaken or assumed as the deferred purchase price of
property or services (including, without limitation, “capital leases” in
accordance with generally accepted accounting principles) (other than trade
payables entered into in the ordinary course of business), (C) all
reimbursement or payment obligations with respect to letters of credit, surety
bonds and other similar instruments, (D) all obligations evidenced by
notes, bonds, debentures or similar instruments, including obligations so
evidenced incurred in connection with the acquisition of property, assets or
businesses, (E) all indebtedness created or arising under any conditional
sale or other title retention agreement, or incurred as financing, in either
case with respect to any property or assets acquired with the proceeds of such
indebtedness (even though the rights and remedies of the seller or bank under
such agreement in the event of default are limited to repossession or sale of
such property), (F) all monetary obligations under any leasing or similar
arrangement which, in connection with generally accepted accounting principles,
consistently applied for the periods covered thereby, is classified as a
capital lease, (G) all indebtedness referred to in clauses (A) through
(F) above secured by (or for which the holder of such Indebtedness has an
existing right, contingent or otherwise, to be secured by) any mortgage, lien,
pledge, charge, security interest or other encumbrance upon or in any property
or assets (including accounts and contract rights) owned by any Person, even
though the Person which owns such assets or property has not assumed or become
liable for the payment of such indebtedness, and (H) all Contingent
Obligations in respect of indebtedness or obligations of others of the kinds
referred to in clauses (A) through (G) above; (y) “Contingent Obligation” means, as to any
Person, any direct or indirect liability, contingent or otherwise, of that
Person with respect to any indebtedness, lease, dividend or other obligation of
another Person if the primary purpose or intent of the Person incurring such
liability, or the primary effect thereof, is to provide assurance to the
obligee of such liability that such liability will be paid or discharged, or
that any agreements relating thereto will be complied with, or that the holders
of such liability will be protected (in whole or in part) against loss with
respect thereto; and (z) “Person”
means an individual, a limited liability company, a partnership, a joint
venture, a corporation, a trust, an unincorporated organization and a
government or any department or agency thereof.


 


(t)                                    Absence
of Litigation. Except as set forth in Schedule 3(t), there is
no action, suit, proceeding, inquiry or investigation before or by the
Principal Market, any court, public board, government agency, self-regulatory
organization or body pending or, to the knowledge of the Company, threatened
against or affecting the Company or any of its Subsidiaries, the Common Stock
or any of the Company’s Subsidiaries or any of the Company’s or its
Subsidiaries’ officers or directors which is outside of the ordinary course of
business or individually or in the aggregate material to the Company.


 


(u)                                 Insurance.
The Company and each of its Subsidiaries are insured by insurers of recognized
financial responsibility against such losses and risks and in such amounts as
management of the Company believes to be prudent and customary in the
businesses in which 


 


13





















 


the Company
and its Subsidiaries are engaged. Neither the Company nor any such Subsidiary
has been refused any insurance coverage sought or applied for and neither the
Company nor any such Subsidiary has any reason to believe that it will not be
able to renew its existing insurance coverage as and when such coverage expires
or to obtain similar coverage from similar insurers as may be necessary to
continue its business at a cost that would not have a Material Adverse Effect.


 


(v)                                 Employee
Relations. (i)  Neither the Company nor any of its Subsidiaries is a
party to any collective bargaining agreement or employs any member of a union. The
Company and its Subsidiaries believe that their relations with their employees
are good. No executive officer of the Company or any of its Subsidiaries (as
defined in Rule 501(f) of the 1933 Act) has notified the Company or
any such Subsidiary that such officer intends to leave the Company or any such
Subsidiary or otherwise terminate such officer’s employment with the Company or
any such Subsidiary. No executive officer of the Company or any of its
Subsidiaries is, or is now expected to be, in violation of any material term of
any employment contract, confidentiality, disclosure or proprietary information
agreement, non-competition agreement, or any other contract or agreement or any
restrictive covenant, and the continued employment of each such executive
officer does not subject the Company or any of its Subsidiaries to any
liability with respect to any of the foregoing matters.


 


(ii)                                  The
Company and its Subsidiaries are in compliance with all federal, state, local
and foreign laws and regulations respecting labor, employment and employment
practices and benefits, terms and conditions of employment and wages and hours,
except where failure to be in compliance would not, either individually or in
the aggregate, reasonably be expected to result in a Material Adverse Effect.


 


(w)                               Title.
Except as set forth on Schedule 3(w), the Company and its
Subsidiaries have good and marketable title in fee simple to all real property
and good and marketable title to all personal property owned by them which is
material to the business of the Company and its Subsidiaries, in each case free
and clear of all liens, encumbrances and defects except such as do not
materially affect the value of such property and do not interfere with the use
made and proposed to be made of such property by the Company and any of its
Subsidiaries. Any real property and facilities held under lease by the Company
or any of its Subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as are not material and do not
interfere with the use made and proposed to be made of such property and
buildings by the Company and its Subsidiaries.


 


(x)                                   Intellectual
Property Rights. The Company and its Subsidiaries own or possess adequate
rights or licenses to use all trademarks, trade names, service marks, service
mark registrations, service names, patents, patent rights, copyrights,
inventions, licenses, approvals, governmental authorizations, trade secrets and
other intellectual property rights (“Intellectual
Property Rights”) necessary to conduct their respective businesses
as now conducted. None of the Company’s or its Subsidiaries’ Intellectual
Property Rights have expired, terminated or been abandoned, or are expected to
expire, terminate or be abandoned, within three years from the date of this
Agreement. The Company does not have any knowledge of any infringement by the
Company or any of its Subsidiaries of Intellectual Property Rights of others. There
is no claim, action or proceeding being made or brought, or to the knowledge of
the 


 


14





















 


Company, being
threatened, against the Company or any of its existing Subsidiaries regarding
its Intellectual Property Rights. The Company is unaware of any facts or
circumstances which might give rise to any of the foregoing infringements or
claims, actions or proceedings. The Company and its Subsidiaries have taken
reasonable security measures to protect the secrecy, confidentiality and value
of all of their Intellectual Property Rights.


 


(y)                                 Environmental
Laws. The Company and its Subsidiaries (i) are in compliance with any
and all Environmental Laws (as hereinafter defined), (ii) have received
all permits, licenses or other approvals required of them under applicable
Environmental Laws to conduct their respective businesses and (iii) are in
compliance with all terms and conditions of any such permit, license or
approval where, in each of the foregoing clauses (i), (ii) and (iii), the
failure to so comply could be reasonably expected to have, individually or in
the aggregate, a Material Adverse Effect. The term “Environmental Laws” means all federal, state, local or foreign
laws relating to pollution or protection of human health or the environment
(including, without limitation, ambient air, surface water, groundwater, land
surface or subsurface strata), including, without limitation, laws relating to
emissions, discharges, releases or threatened releases of chemicals,
pollutants, contaminants, or toxic or hazardous substances or wastes
(collectively, “Hazardous Materials”) into the environment, or otherwise
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Hazardous Materials, as well as all
authorizations, codes, decrees, demands or demand letters, injunctions,
judgments, licenses, notices or notice letters, orders, permits, plans or
regulations issued, entered, promulgated or approved thereunder.


 


(z)                                   Subsidiary
Rights. The Company or one of its Subsidiaries has the unrestricted right
to vote, and (subject to limitations imposed by applicable law) to receive
dividends and distributions on, all capital securities of its Subsidiaries as
owned by the Company or such Subsidiary.


 


(aa)                            Investment
Company. The Company is not, and is not an affiliate of, an “investment
company” within the meaning of the Investment Company Act of 1940, as amended.


 


(bb)                          Tax
Status. The Company and each of its Subsidiaries (i) has made or filed
all foreign, federal and state income and all other tax returns, reports and
declarations required by any jurisdiction to which it is subject, (ii) has
paid all taxes and other governmental assessments and charges that are material
in amount, shown or determined to be due on such returns, reports and
declarations, except those being contested in good faith and (iii) has set
aside on its books provision reasonably adequate for the payment of all taxes
for periods subsequent to the periods to which such returns, reports or
declarations apply. There are no unpaid taxes in any material amount claimed to
be due by the taxing authority of any jurisdiction, and the officers of the
Company know of no basis for any such claim.


 


(cc)                            Internal
Accounting and Disclosure Controls. Except as set forth in Schedule 3(cc),
the Company and each of its Subsidiaries maintains a system of internal
accounting controls sufficient to provide reasonable assurance that (i) transactions
are executed in accordance with management’s general or specific
authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset and liability accountability, (iii) access
to assets or 


 


15





















 


incurrence of
liabilities is permitted only in accordance with management’s general or
specific authorization and (iv) the recorded accountability for assets and
liabilities is compared with the existing assets and liabilities at reasonable
intervals and appropriate action is taken with respect to any difference. The
Company maintains disclosure controls and procedures (as such term is defined
in Rule 13a-14 under the 1934 Act) that are effective in ensuring that
information required to be disclosed by the Company in the reports that it
files or submits under the 1934 Act is recorded, processed, summarized and
reported, within the time periods specified in the rules and forms of the
SEC, including, without limitation, controls and procedures designed in to
ensure that information required to be disclosed by the Company in the reports
that it files or submits under the 1934 Act is accumulated and communicated to
the Company’s management, including its principal executive officer or officers
and its principal financial officer or officers, as appropriate, to allow
timely decisions regarding required disclosure. Except as set forth in Schedule 3(cc),
during the twelve months prior to the date hereof neither the Company nor any
of its Subsidiaries have received any notice or correspondence from any
accountant relating to any potential material weakness in any part of the
system of internal accounting controls of the Company or any of its
Subsidiaries.


 


(dd)                          Off
Balance Sheet Arrangements. There is no transaction, arrangement, or other
relationship between the Company and an unconsolidated or other off balance
sheet entity that is required to be disclosed by the Company in its 1934 Act
filings and is not so disclosed or that otherwise would be reasonably likely to
have a Material Adverse Effect.


 


(ee)                            Investment
Company Status. The Company is not, and upon consummation of the sale of
the Securities will not be, an “investment company,” a company controlled by an
“investment company” or an “affiliated person” of, or “promoter” or “principal
underwriter” for, an “investment company” as such terms are defined in the Investment
Company Act of  1940, as amended.


 


(ff)                                Transfer
Taxes. On the Closing Date, all stock transfer or other taxes (other than
income or similar taxes) which are required to be paid in connection with the
sale and transfer of the Securities to be sold to each Buyer hereunder will be,
or will have been, fully paid or provided for by the Company, and all laws
imposing such taxes will be or will have been complied with.


 


(gg)                          Acknowledgement
Regarding Buyers’ Trading Activity. It is understood and acknowledged by
the Company (i) that following the public disclosure of the transactions
contemplated by the Transaction Documents, in accordance with the terms
thereof, none of the Buyers have been asked by the Company or its Subsidiaries
to agree, nor has any Buyer agreed with the Company or its Subsidiaries, to
desist from purchasing or selling, long and/or short, securities of the
Company, or “derivative” securities based on securities issued by the Company
or to hold the Securities for any specified term; (ii) that any Buyer, and
counter parties in “derivative” transactions to which any such Buyer is a
party, directly or indirectly, presently may have a “short” position in
the Common Stock which were established prior to such Buyer’s knowledge of the
transactions contemplated by the Transaction Documents, and (iii) that
each Buyer shall not be deemed to have any affiliation with or control over any
arm’s length counter party in any “derivative” transaction. The Company further
understands and acknowledges that following the public disclosure of the
transactions contemplated by the Transaction Documents, 


 


16





















 


in accordance
with the terms thereof, one or more Buyers may engage in hedging and/or
trading activities at various times during the period that the Securities are
outstanding, including, without limitation, during the periods that the value
of the Conversion Shares and the Warrant Shares deliverable with respect to
Securities are being determined and (b) such hedging and/or trading
activities, if any, can reduce the value of the existing stockholders’ equity
interest in the Company both at and after the time the hedging and/or trading
activities are being conducted. The Company acknowledges that such aforementioned
hedging and/or trading activities do not constitute a breach of this Agreement,
the Notes, the Warrants or any of the documents executed in connection
herewith.


 


(hh)                          Registration
Eligibility. The Company is eligible to register the Conversion Shares and
the Warrant Shares for resale by the Buyers using Form S-3 promulgated
under the 1933 Act.


 


(ii)                                  Manipulation
of Price. The Company has not, and to its knowledge no one acting on its
behalf has, (i) taken, directly or indirectly, any action designed to cause
or to result in the stabilization or manipulation of the price of any security
of the Company to facilitate the sale or resale of any of the Securities, (ii) sold,
bid for, purchased, or paid any compensation for soliciting purchases of, any
of the Securities, or (iii) paid or agreed to pay to any person any
compensation for soliciting another to purchase any other securities of the
Company.


 


(jj)                                  U.S.
Real Property Holding Corporation. The Company is not, nor has ever been, a
U.S. real property holding corporation within the meaning of Section 897
of the Internal Revenue Code of 1986, as amended, and the Company shall so
certify upon Buyer’s request.


 


(kk)                            Disclosure.
The Company confirms that neither it nor any other Person acting on its behalf
has provided any of the Buyers or their agents or counsel with any information
that constitutes or could reasonably be expected to constitute material,
nonpublic information. The Company understands and confirms that each of the
Buyers will rely on the foregoing representations in effecting transactions in
securities of the Company. All disclosure provided to the Buyers regarding the
Company and its Subsidiaries, their business and the transactions contemplated
hereby, including the Schedules to this Agreement, furnished by or on behalf of
the Company is true and correct and does not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements made therein, in the light of the circumstances under which they
were made, not misleading. Except as set forth on Schedule 3(kk), each
press release issued by the Company or its Subsidiaries during the twelve (12)
months preceding the date of this Agreement did not at the time of release
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they are made, not
misleading. No event or circumstance has occurred or information exists with
respect to the Company or any of its Subsidiaries or its or their business,
properties, prospects, operations or financial conditions, which, under
applicable law, rule or regulation, requires public disclosure at or
before the date hereof or announcement by the Company but which has not been so
publicly announced or disclosed.


 


17





















 


4.                                       COVENANTS.


 


(a)                                  Best
Efforts. Each party shall use its reasonable best efforts timely to satisfy
each of the conditions to be satisfied by it as provided in Sections 6 and 7 of
this Agreement.


 


(b)                                 Form D
and Blue Sky. The Company agrees to file a Form D with respect to the
Securities as required under Regulation D and to provide a copy thereof to each
Buyer promptly after such filing. The Company shall, on or before the Closing
Date, take such action as the Company shall reasonably determine is necessary
in order to obtain an exemption for or to qualify the Securities for sale to
the Buyers at the Closing pursuant to this Agreement under applicable
securities or “Blue Sky” laws of the states of the United States (or to obtain
an exemption from such qualification), and shall provide evidence of any such
action so taken to the Buyers on or prior to the Closing Date. The Company
shall make all filings and reports relating to the offer and sale of the
Securities required under applicable securities or “Blue Sky” laws of the
states of the United States following the Closing Date.


 


(c)                                  Reporting
Status. Until the date on which the Buyers shall have sold all the
Conversion Shares and Warrant Shares, and
none of the Preferred Shares or Warrants
is outstanding (the “Reporting Period”),
the Company shall timely file all reports required to be filed with the SEC pursuant
to the 1934 Act, and the Company shall not terminate its status as an issuer
required to file reports under the 1934 Act even if the 1934 Act or the rules and
regulations thereunder would no longer require or otherwise permit such termination.


 


(d)                                 Use
of Proceeds. The Company will use the proceeds from the sale of the
Securities solely as set forth on Schedule 4(d).


 


(e)                                  Financial
Information. The Company agrees to send the following to each Investor (as
defined in the Registration Rights Agreement) during the Reporting Period (i) unless
the following are filed with the SEC through EDGAR and are available to the
public through the EDGAR system, within one (1) Business Day after the
filing thereof with the SEC, a copy of its Annual Reports and Quarterly Reports
on Form 10-K, 10-KSB, 10-Q or 10-QSB, any interim reports or any
consolidated balance sheets, income statements, stockholders’ equity statements
and/or cash flow statements for any period other than annual, any Current
Reports on Form 8-K and any registration statements (other than on Form S-8)
or amendments filed pursuant to the 1933 Act, (ii) on the same day as the
release thereof, facsimile copies of all press releases issued by the Company
or any of its Subsidiaries, and (iii) copies of any notices and other
information made available or given to the stockholders of the Company
generally, contemporaneously with the making available or giving thereof to the
stockholders.


 


(f)                                    Listing.
The Company shall promptly secure the listing of all of the Registrable
Securities (as defined in the Registration Rights Agreement) upon each national
securities exchange and automated quotation system, if any, upon which the
Common Stock is then listed (subject to official notice of issuance) and shall
maintain such listing of all Registrable Securities from time to time issuable
under the terms of the Transaction Documents on such exchange or automated
quotation system or an Eligible Market. The Company shall maintain the Common
Stocks’ authorization for quotation on the Principal Market. Neither the 


 


18





















 


Company nor
any of its Subsidiaries shall take any action which would be reasonably
expected to result in the delisting or suspension of the Common Stock on an
Eligible Market. The Company shall pay all fees and expenses in connection with
satisfying its obligations under this Section 4(f).


 


(g)                                 Fees.
The Company shall reimburse Magnetar Financial LLC or its designee(s) (in
addition to any other expense amounts paid to any Buyer prior to the date of
this Agreement) for all reasonable costs and expenses, not to exceed $65,000, incurred
in connection with the transactions contemplated by the Transaction Documents
and due diligence in connection therewith), which amount shall be
non-accountable and withheld by Magnetar Capital Master Fund, Ltd. from its
Purchase Price at the Closing or paid by the Company upon termination of this
Agreement. The Company shall reimburse William Blair Small Cap Fund or its
designee(s) (in addition to any other expense amounts paid to any Buyer prior
to the date of this Agreement) for all reasonable costs and expenses, not to
exceed $20,000, incurred in connection with the transactions contemplated by
the Transaction Documents and due diligence in connection therewith), which
amount shall be non-accountable. The Company shall be responsible for the
payment of any placement agent’s fees, financial advisory fees, or broker’s
commissions (other than for Persons engaged by any Buyer) relating to or
arising out of the transactions contemplated hereby, including, without
limitation, any fees payable to the Agent. The Company shall pay, and hold each
Buyer harmless against, any liability, loss or expense (including, without
limitation, reasonable attorney’s fees and out-of-pocket expenses) arising in
connection with any claim relating to any such payment.


 


(h)                                 Pledge
of Securities. The Company acknowledges and agrees that the Securities may be
pledged by an Investor (as defined in the Registration Rights Agreement) in
connection with a bona fide margin agreement or other loan or financing
arrangement that is secured by the Securities. The pledge of Securities shall
not be deemed to be a transfer, sale or assignment of the Securities hereunder,
and no Investor effecting a pledge of Securities shall be required to provide
the Company with any notice thereof or otherwise make any delivery to the
Company pursuant to this Agreement or any other Transaction Document. The
Company hereby agrees to execute and deliver such documentation as a pledgee of
the Securities may reasonably request in connection with a pledge of the
Securities to such pledgee by an Investor.


 


(i)                                     Disclosure
of Transactions and Other Material Information. On or before 8:30 a.m.,
New York Time, on the second
Business Day following the date of this Agreement, the Company shall file a
Current Report on Form 8-K describing the terms of the transactions
contemplated by the Transaction Documents in the form required by the 1934
Act and attaching the material Transaction Documents (including, without
limitation, this Agreement (and all schedules to this Agreement), the form of
Certificate of Designations, the form of Warrant and the Registration
Rights Agreement) (including all attachments, the “8-K Filing”). From and after the filing of the 8-K Filing with
the SEC, the Company shall have disclosed any material nonpublic information
delivered to the Buyers by the Company or any of its Subsidiaries, or any of
their respective officers, directors, employees or agents. The Company shall
not, and shall cause each of its Subsidiaries and its and each of their
respective officers, directors, employees and agents, not to, provide any Buyer
with any material, nonpublic information regarding the Company or any of its
Subsidiaries from and after the filing of the 8-K Filing with the SEC without
the express written consent of such Buyer. In the event of a breach of the
foregoing 


 


19





















 


covenant by
the Company, or any of its Subsidiaries, or any of its or their respective
officers, directors, employees and agents, in addition to any other remedy
provided herein or in the Transaction Documents, a Buyer shall have the right
to make a public disclosure, in the form of a press release, public
advertisement or otherwise, of such material, nonpublic information without the
prior approval by the Company, its Subsidiaries, or any of its or their
respective officers, directors, employees or agents. No Buyer shall have any
liability to the Company, its Subsidiaries, or any of its or their respective
officers, directors, employees, stockholders or agents, for any such disclosure.
Subject to the foregoing, neither the Company, its Subsidiaries nor any Buyer
shall issue any press releases or any other public statements with respect to
the transactions contemplated hereby; provided, however, that the
Company shall be entitled, without the prior approval of any Buyer, to make any
press release or other public disclosure with respect to such transactions (i) in
substantial conformity with the 8-K Filing and contemporaneously therewith and (ii) as
is required by applicable law and regulations (provided that in the case of
clause (i) each Buyer shall be consulted by the Company in connection with
any such press release or other public disclosure prior to its release). Without
the prior written consent of any applicable Buyer, neither the Company nor any
of its Subsidiaries shall disclose the name of any Buyer in any filing,
announcement, release or otherwise.


 


(j)                                     Restriction
on Redemption and Cash Dividends; Additional Registration Statements. So
long as any Preferred Shares are outstanding, the Company shall not, directly
or indirectly, redeem, or declare or pay any cash dividend or distribution on,
the Common Stock without the prior express written consent of the holders of
Preferred Shares representing not less than a majority of the aggregate number
of the then outstanding Preferred Shares. Except as set forth on Schedule 4(j),
until the Effective Date (as defined in the Registration Rights Agreement), the
Company shall not file a registration statement under the 1933 Act relating to
securities that are not the Securities.


 


(k)                                  Additional
Preferred Shares; Variable Securities; Dilutive Issuances. So long as any
Buyer beneficially owns any Securities, the Company will not, without the prior
written consent of Buyers holding a majority of the Preferred Shares, issue any
Preferred Shares (other than to the Buyers as contemplated hereby) and the
Company shall not issue any other securities that would cause a breach or
default under the Certificate of Designations or the Warrants. For so long as
any Preferred Shares or Warrants remain outstanding, the Company shall not, in
any manner, issue or sell any rights, warrants or options to subscribe for or
purchase Common Stock or directly or indirectly convertible into or
exchangeable or exercisable for Common Stock at a conversion, exchange or
exercise price which varies or may vary after issuance with the market
price of the Common Stock at the time of issuance, including by way of one or
more reset(s) to any fixed price unless the conversion, exchange or exercise
price of any such security cannot be less than the then applicable Conversion
Price (as defined in the Certificate of Designations) with respect to the
Common Stock into which any Preferred Shares are convertible or the then
applicable Exercise Price (as defined in the Warrants) with respect to the
Common Stock into which any Warrant is exercisable. For so long as any Preferred
Shares or Warrants remain outstanding, the Company shall not, in any manner,
enter into or affect any Dilutive Issuance (as defined in the Certificate of
Designations) if the effect of such Dilutive Issuance is to cause the Company
to be required to issue upon conversion of any Preferred Shares or exercise of
any Warrant any shares of Common Stock in excess of that number of shares of
Common Stock which the Company may issue upon conversion of the Preferred
Shares 


 


20





















 


and exercise
of the Warrants without breaching the Company’s obligations under the rules or
regulations of the Principal Market. The Company shall not, in any manner,
enter into or affect any Dilutive Issuance if the effect of such Dilutive
Issuance would cause the Conversion Price (as defined in the Certificate of
Designations) or the Exercise Price (as defined in the Warrant), as applicable,
to be reduced below $2.00 (as adjusted for stock splits or stock dividends).


 


(l)                                     Corporate
Existence. So long as any Buyer beneficially owns any Preferred Shares or
Warrants, the Company shall not be party to any Fundamental Transaction (as
defined in the Certificate of Designations) unless the Company is in compliance
with the applicable provisions governing Fundamental Transactions set forth in
the Certificate of Designations and the Warrants.


 


(m)                               Reservation
of Shares. The Company shall take all action necessary to at all times have
authorized, and reserved for the purpose of issuance, no less than (i) the
maximum number of shares of Common Stock issuable upon conversion of the
Preferred Shares (assuming for purposes hereof, that the Preferred Shares are
convertible at the Conversion Price and without taking into account any
limitations on the conversion of the Preferred Shares set forth in the
Certificate of Designations) and (ii) the maximum number of shares of
Common Stock issuable upon exercise of the Warrants (assuming for purposes
hereof that the Exercise Price (as defined in the Warrants) is equal to $2.00,
subject to adjustment for stock splits and stock dividends and without taking
into account any limitations on the exercise of the Warrants set forth in the
Warrants).


 


(n)                                 Conduct
of Business. The business of the Company and its Subsidiaries shall not be
conducted in violation of any law, ordinance or regulation of any governmental
entity, except where such violations would not result, either individually or
in the aggregate, in a Material Adverse Effect.


 


(o)                                 Additional
Issuances of Securities.


 


(i)                                     For
purposes of this Section 4(o), the following definitions shall apply.


 


(1)                                “Convertible Securities” means any stock or securities (other
than Options) convertible into or exercisable or exchangeable for shares of Common
Stock.


 


(2)                                “Options” means any rights, warrants or
options to subscribe for or purchase shares of Common Stock or Convertible
Securities.


 


(3)                                “Common Stock Equivalents” means, collectively, Options and
Convertible Securities.


 


(ii)                                  From
the date hereof until the date that is thirty (30) Trading Days (as defined in
the Certificate of Designations) after the Effective Date (as defined in the
Registration Rights Agreement) (the “Trigger
Date”), the Company will not, directly or indirectly, offer, sell,
grant any option to purchase, or otherwise dispose of (or announce any offer,
sale, grant or any option to purchase or other disposition of) any of its or
its Subsidiaries’ 


 


21





















 


(other than Real Estate Online, Inc. and Cherish, Inc. and
its Subsidiaries) equity or equity equivalent securities, including without
limitation any debt, preferred stock or other instrument or security that is,
at any time during its life and under any circumstances, convertible into or
exchangeable or exercisable for shares of Common Stock or Common Stock
Equivalents (any such offer, sale, grant, disposition or announcement being
referred to as a “Subsequent Placement”);
provided, that the term Subsequent Placement shall not include the
issuance of any Excluded Securities (as defined in the Certificate of
Designations).


 


(iii)                               From
the Trigger Date until the two year anniversary of the Closing Date, the
Company will not, directly or indirectly, effect any Subsequent Placement
unless the Company shall have first complied with this Section 4(o)(iii).


 


(1)                                               The
Company shall deliver to each Buyer a written notice (the ”Offer Notice”) of any proposed or intended
issuance or sale or exchange (the ”Offer”)
of the securities being offered (the “Offered
Securities”) in a Subsequent Placement, which Offer Notice shall (w)
identify and describe the Offered Securities, (x) describe the price and
other terms upon which they are to be issued, sold or exchanged, and the number
or amount of the Offered Securities to be issued, sold or exchanged,
(y) identify the persons or entities (if known) to which or with which the
Offered Securities are to be offered, issued, sold or exchanged and (z) offer
to issue and sell to or exchange with such Buyers at least 50% of the Offered
Securities allocated among such Buyers (a) based on such Buyer’s pro rata
portion of the aggregate number of Preferred Shares purchased hereunder (the “Basic Amount”), and (b) with respect
to each Buyer that elects to purchase its Basic Amount, any additional portion
of the Offered Securities attributable to the Basic Amounts of other Buyers as
such Buyer shall indicate it will purchase or acquire should the other Buyers
subscribe for less than their Basic Amounts (the “Undersubscription Amount”), which process shall be repeated
until the Buyers shall have an opportunity to subscribe for any remaining
Undersubscription Amount.


 


(2)                                               To
accept an Offer, in whole or in part, such Buyer must deliver a written notice
to the Company prior to the end of the tenth (10th) Business Day
after such Buyer’s receipt of the Offer Notice (the “Offer Period”),
setting forth the portion of such Buyer’s Basic Amount that such Buyer elects
to purchase and, if such Buyer shall elect to purchase all of its Basic Amount,
the Undersubscription Amount, if any, that such Buyer elects to purchase (in
either case, the “Notice of Acceptance”).
If the Basic Amounts subscribed for by all Buyers are less than the total of
all of the Basic Amounts, then each Buyer who has set forth an
Undersubscription Amount in its Notice of Acceptance shall be entitled to
purchase, in addition to the Basic Amounts subscribed for, the
Undersubscription Amount it has subscribed for; provided, however,
that if the Undersubscription Amounts subscribed for exceed the difference
between the total of all the Basic Amounts and the Basic Amounts subscribed for
(the “Available Undersubscription Amount”),
each Buyer who has subscribed for any Undersubscription Amount shall be
entitled to purchase only that portion of the Available Undersubscription
Amount as the Basic Amount of such Buyer bears to the total Basic Amounts of
all Buyers that have subscribed for Undersubscription Amounts, subject to
rounding by the Company to the extent its deems reasonably necessary. Notwithstanding
the foregoing, if the Company desires to modify or amend the terms and
conditions of the Offer prior to the expiration of the Offer Period, the
Company may deliver to the Buyers a new Offer Notice and 


 


22





















 


the Offer
Period shall expire on the seventh (7th) Business Day after such
Buyer’s receipt of such new Offer Notice.


 


(3)                                               The
Company shall have ten (10) Business Days from the expiration of the Offer
Period above (i) to offer, issue, sell or exchange all or any part of
such Offered Securities as to which a Notice of Acceptance has not been given
by the Buyers (the “Refused Securities”)
pursuant to a definitive agreement(s) (the “Subsequent
Placement Agreement”), but only to the offerees described in the
Offer Notice (if so described therein) and only upon terms and conditions
(including, without limitation, unit prices and interest rates) that are not
more favorable to the acquiring person or persons or less favorable to the Company
than those set forth in the Offer Notice and (ii) to publicly announce (a) the
execution of such Subsequent Placement Agreement, and (b) either (x) the
consummation of the transactions contemplated by such Subsequent Placement
Agreement or (y) the termination of such Subsequent Placement Agreement, which
shall be filed with the SEC on a Current Report on Form 8-K with such
Subsequent Placement Agreement and any documents contemplated therein filed as
exhibits thereto.


 


(4)                                               In
the event the Company shall propose to sell less than all the Refused
Securities (any such sale to be in the manner and on the terms specified in Section 4(o)(iii)(3) above),
then each Buyer may, at its sole option and in its sole discretion, reduce the
number or amount of the Offered Securities specified in its Notice of
Acceptance to an amount that shall be not less than the number or amount of the
Offered Securities that such Buyer elected to purchase pursuant to Section 4(o)(iii)(2) above
multiplied by a fraction, (i) the numerator of which shall be the number
or amount of Offered Securities the Company actually proposes to issue, sell or
exchange (including Offered Securities to be issued or sold to Buyers pursuant
to Section 4(o)(iii)(3) above prior to such reduction) and (ii) the
denominator of which shall be the original amount of the Offered Securities. In
the event that any Buyer so elects to reduce the number or amount of Offered
Securities specified in its Notice of Acceptance, the Company may not
issue, sell or exchange more than the reduced number or amount of the Offered
Securities unless and until such securities have again been offered to the
Buyers in accordance with Section 4(o)(iii)(1) above.


 


(5)                                               Upon
the closing of the issuance, sale or exchange of all or less than all of the
Refused Securities, the Buyers shall acquire from the Company, and the Company
shall issue to the Buyers, the number or amount of Offered Securities specified
in the Notices of Acceptance, as reduced pursuant to Section 4(o)(iii)(3) above
if the Buyers have so elected, upon the terms and conditions specified in the
Offer. The purchase by the Buyers of any Offered Securities is subject in all
cases to the preparation, execution and delivery by the Company and the Buyers
of a purchase agreement relating to such Offered Securities reasonably
satisfactory in form and substance to the Buyers and their respective
counsel.


 


(6)                                               Any
Offered Securities not acquired by the Buyers or other persons in accordance
with Section 4(o)(iii)(3) above may not be issued, sold or
exchanged until they are again offered to the Buyers under the procedures
specified in this Agreement.


 


(7)                                               The
Company and the Buyers agree that if any Buyer elects to participate in the
Offer, neither the securities purchase agreement (the “Subsequent 


 


23





















 


Placement
Agreement”) with respect to such Offer nor any other
transaction documents related thereto (collectively, the “Subsequent
Placement Documents”) shall include any term or provisions whereby
any Buyer shall be required to agree to any restrictions in trading as to any
securities of the Company owned by such Buyer prior to such Subsequent
Placement.


 


(8)                                               Notwithstanding anything to the contrary in
this Section 4(o) and unless otherwise agreed to by the Buyers, the
Company shall either confirm in writing to the Buyers that the transaction with
respect to the Subsequent Placement has been abandoned or shall publicly
disclose its intention to issue the Offered Securities, in either case in such
a manner such that the Buyers will not be in possession of material non-public
information, by the tenth (10th) Business Day following delivery of
the Offer Notice. If by the tenth (10th) Business Day following
delivery of the Offer Notice no public disclosure regarding a transaction with
respect to the Offered Securities has been made, and no notice regarding the
abandonment of such transaction has been received by the Buyers, such
transaction shall be deemed to have been abandoned and the Buyers shall not be
deemed to be in possession of any material, non-public information with respect
to the Company. Should the Company decide to pursue such transaction with
respect to the Offered Securities, the Company shall provide each Buyer with
another Offer Notice and each Buyer will again have the right of participation
set forth in this Section 4(o)(iii). The Company shall not be permitted to
deliver more than one such Offer Notice to the Buyers in any 60 day period.


 


(9)                                               The
restrictions contained in subsections (ii) and (iii) of this Section 4(o)
shall not apply in connection with the issuance of any Excluded Securities (as
defined in the Certificate of Designations).


 


5.                                       REGISTER; TRANSFER AGENT INSTRUCTIONS.


 


(a)                                  Register.
The Company shall maintain at its principal executive offices (or such other
office or agency of the Company as it may designate by notice to each
holder of Securities), a register for the Preferred Shares and the Warrants in
which the Company shall record the name and address of the Person in whose name
the Preferred Shares and the
Warrants have been issued (including the name and address of each transferee),
the number of Preferred Shares held by such Person, the number of Conversion
Shares issuable upon conversion of the Preferred Shares and Warrant Shares
issuable upon exercise of the Warrants held by such Person. The Company shall
keep the register open and available at all times during business hours for
inspection of any Buyer or its legal representatives.


 


(b)                                 Transfer
Agent Instructions. The Company shall issue irrevocable instructions to its
transfer agent, and any subsequent transfer agent, to issue certificates or
credit shares to the applicable balance accounts at The Depository Trust
Company (“DTC”), registered in the name of each
Buyer or its respective nominee(s), for the Conversion Shares and the Warrant
Shares in such amounts as specified from time
to time by each Buyer to the Company upon conversion of the Preferred Shares or
exercise of the Warrants in the form of Exhibit E attached
hereto (the “Irrevocable Transfer Agent
Instructions”). The Company warrants that no instruction other than
the Irrevocable Transfer Agent Instructions referred to in this Section 5(b),
and stop transfer instructions to give effect to Section 2(f) hereof,
will be given by the Company to its transfer agent with respect to the
Securities, and that the Securities shall 


 


24





















 


otherwise be
freely transferable on the books and records of the Company, as applicable, and
to the extent provided in this Agreement and the other Transaction Documents. If
a Buyer effects a sale, assignment or transfer of the Securities in accordance
with Section 2(f), the Company shall permit the transfer and shall
promptly instruct its transfer agent to issue one or more certificates or
credit shares to the applicable balance accounts at DTC in such name and in
such denominations as specified by such Buyer to effect such sale, transfer or
assignment. In the event that such sale, assignment or transfer involves
Conversion Shares and Warrant Shares sold, assigned or transferred pursuant to
an effective registration statement or in compliance with Rule 144, the
transfer agent shall issue such Securities to the Buyer, assignee or transferee,
as the case may be, without any restrictive legend. The Company
acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to a Buyer. Accordingly, the Company acknowledges that the
remedy at law for a breach of its obligations under this Section 5(b) will
be inadequate and agrees, in the event of a breach or threatened breach by the
Company of the provisions of this Section 5(b), that a Buyer shall be
entitled, in addition to all other available remedies, to an order and/or
injunction restraining any breach and requiring immediate issuance and
transfer, without the necessity of showing economic loss and without any bond
or other security being required.


 


6.                                       CONDITIONS TO THE COMPANY’S OBLIGATION TO SELL.


 


(a)                                  The
obligation of the Company hereunder to issue and sell the Preferred Shares and the related Warrants to each Buyer at the Closing is
subject to the satisfaction, at or before the Closing Date, of each of the
following conditions, provided that these conditions are for the Company’s sole
benefit and may be waived by the Company at any time in its sole
discretion by providing each Buyer with prior written notice thereof:


 


(i)                                     Such
Buyer shall have executed each of the Transaction Documents to which it is a
party and delivered the same to the Company.


 


(ii)                                  Such
Buyer and each other Buyer shall have delivered to the Company the Purchase
Price (less, in the case of Magnetar Capital Master Fund, Ltd. the amount
withheld pursuant to Section 4(g)) for the Preferred Shares and the
related Warrants being purchased by such Buyer at
the Closing by wire transfer of immediately available funds pursuant to the
wire instructions provided by the Company.


 


(iii)                               The
representations and warranties of such Buyer shall be true and correct in all
material respects as of the date when made and as of the Closing Date as though
made at that time (except for representations and warranties that speak as of a
specific date), and such Buyer shall have performed, satisfied and complied in
all material respects with the covenants, agreements and conditions required by
this Agreement to be performed, satisfied or complied with by such Buyer at or
prior to the Closing Date.


 


(iv)                              The
Company shall have obtained approval of the Principal Market to list the
Conversion Shares and the Warrant Shares.


 


25










 













 


7.             CONDITIONS TO EACH BUYER’S OBLIGATION TO PURCHASE.


 


(a)           The obligation of each Buyer
hereunder to purchase the Preferred Shares and the
related Warrants at the Closing is subject to the satisfaction, at or before
the Closing Date, of each of the following conditions, provided that these
conditions are for each Buyer’s sole benefit and may be waived by such Buyer at
any time in its sole discretion by providing the Company with prior written
notice thereof:


 


(i)            The Company shall have duly executed
and delivered to such Buyer (A) each of the Transaction Documents and (B)
the Preferred Shares (in such numbers as is set forth across from such Buyer’s
name in column (3) of the Schedule of Buyers and
the related Warrants (in such numbers as is set forth across from such Buyer’s
name in column (4) of the Schedule of Buyers) being purchased by such Buyer at
the Closing pursuant to this Agreement.


 


(ii)           Such Buyer shall have received
the opinion of Shefsky & Froelich Ltd., Rosenfeld, Roberson, Johns &
Durant Group the Company’s outside counsel, dated as of the Closing Date, in
substantially the form of Exhibit F attached hereto.


 


(iii)          The Company shall have
delivered to such Buyer a copy of the Irrevocable Transfer Agent Instructions,
in the form of Exhibit E attached hereto, which instructions shall have
been delivered to and acknowledged in writing by the Company’s transfer agent.


 


(iv)          The Company shall have
delivered to such Buyer a certificate evidencing the formation and good
standing of the Company and each of its Subsidiaries in each such entity’s
jurisdiction of formation issued by the Secretary of State (or equivalent) of
such jurisdiction of formation as of a date within thirty (30) days of the
Closing Date.


 


(v)           The Company shall have
delivered to such Buyer a certificate evidencing the Company’s qualification as
a foreign corporation and good standing issued by the Secretary of State (or
comparable office) of each jurisdiction in which the Company conducts business
and is required to so qualify, as of a date within thirty (30) days of the
Closing Date, provided, that the Buyers and the Company shall receive
verbal affirmation from the Secretary of State of the states of Nevada and
Illinois that the Company is in good standing on the Closing Date.


 


(vi)          The Company shall have
delivered to such Buyer a certified copy of the Articles of Incorporation as
certified by the Secretary of State of the State of Nevada within twenty (20) days
of the Closing Date.


 


(vii)         The Company shall have delivered
to such Buyer a certificate, executed by the Secretary of the Company and dated
as of the Closing Date, as to (i) the resolutions consistent with Section 3(b)
as adopted by the Company’s board of directors in a form reasonably acceptable
to such Buyer, (ii) the Articles of Incorporation and (iii) the Bylaws, each as
in effect at the Closing, in the form attached hereto as Exhibit G.


 


26

















 


(viii)        The representations and
warranties of the Company shall be true and correct as of the date when made
and as of the Closing Date as though made at that time (except for
representations and warranties that speak as of a specific date) and the
Company shall have performed, satisfied and complied in all respects with the
covenants, agreements and conditions required by the Transaction Documents to
be performed, satisfied or complied with by the Company at or prior to the
Closing Date. Such Buyer shall have received a certificate, executed by the
Chief Executive Officer of the Company, dated as of the Closing Date, to the
foregoing effect and as to such other matters as may be reasonably requested by
such Buyer in the form attached hereto as

Exhibit H.


 


(ix)           The Company shall have
delivered to such Buyer a letter from the Company’s transfer agent certifying
the number of shares of Common Stock outstanding as of a date within five days
of the Closing Date.


 


(x)            The Common Stock (I) shall be
designated for quotation or listed on the Principal Market and (II) shall not
have been suspended, as of the Closing Date, by the SEC or the Principal Market
from trading on the Principal Market nor shall suspension by the SEC or the
Principal Market have been threatened, as of the Closing Date, either (A) in
writing by the SEC or the Principal Market or (B) by falling below the minimum
maintenance requirements of the Principal Market.


 


(xi)           The Company shall have
obtained all governmental, regulatory or third party consents and approvals, if
any, necessary for the sale of the Securities, including without limitation,
those required by the Principal Market.


 


(xii)          The Certificate of Designations
in the form attached hereto as Exhibit A shall have been filed with the
Secretary of State of the State of Nevada and shall be in full force and
effect, enforceable against the Company in accordance with its terms and shall
not have been amended.


 


(xiii)         The aggregate Purchase Price
paid to the Company for the Securities by the Buyers at the Closing shall not
be less than $25 million.


 


(xiv)        The Company shall have delivered
to such Buyer such other documents relating to the transactions contemplated by
this Agreement as such Buyer or its counsel may reasonably request.


 


8.             TERMINATION.


 


In the event
that the Closing shall not have occurred with respect to a Buyer on or before
five (5) Business Days from the date hereof due to the Company’s or such Buyer’s
failure to satisfy the conditions set forth in Sections 6 and 7 above (and the
nonbreaching party’s failure to waive such unsatisfied condition(s)), the
nonbreaching party shall have the option to terminate this Agreement with
respect to such breaching party at the close of business on such date without
liability of any party to any other party; provided, however, if this Agreement
is terminated pursuant to this Section 8, the Company shall remain obligated to
reimburse the non-breaching Buyers for the expenses described in Section 4(g)
above.


 


27

















 


9.             MISCELLANEOUS.


 


(a)           Governing Law; Jurisdiction; Jury
Trial. All questions concerning the construction, validity, enforcement and
interpretation of this Agreement shall be governed by the internal laws of the
State of New York, without giving effect to any choice of law or conflict of
law provision or rule (whether of the State of New York or any other
jurisdictions) that would cause the application of the laws of any
jurisdictions other than the State of New York. Each party hereby irrevocably
submits to the exclusive jurisdiction of the state and federal courts sitting
in The City of New York, Borough of Manhattan, for the adjudication of any
dispute hereunder or in connection herewith or with any transaction
contemplated hereby or discussed herein, and hereby irrevocably waives, and
agrees not to assert in any suit, action or proceeding, any claim that it is
not personally subject to the jurisdiction of any such court, that such suit,
action or proceeding is brought in an inconvenient forum or that the venue of
such suit, action or proceeding is improper. Each party hereby irrevocably
waives personal service of process and consents to process being served in any
such suit, action or proceeding by mailing a copy thereof to such party at the
address for such notices to it under this Agreement and agrees that such
service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES
NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR
IN CONNECTION WITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION
CONTEMPLATED HEREBY.


 


(b)           Counterparts. This Agreement
may be executed in two or more identical counterparts, all of which shall be
considered one and the same agreement and shall become effective when
counterparts have been signed by each party and delivered to the other party;
provided that a facsimile signature shall be considered due execution and shall
be binding upon the signatory thereto with the same force and effect as if the
signature were an original, not a facsimile signature.


 


(c)           Headings. The headings of this
Agreement are for convenience of reference and shall not form part of, or
affect the interpretation of, this Agreement.


 


(d)           Severability. If any provision
of this Agreement shall be invalid or unenforceable in any jurisdiction, such
invalidity or unenforceability shall not affect the validity or enforceability
of the remainder of this Agreement in that jurisdiction or the validity or
enforceability of any provision of this Agreement in any other jurisdiction.


 


(e)           Entire Agreement; Amendments. This
Agreement and the other Transaction Documents supersede all other prior oral or
written agreements between the Buyers, the Company, their affiliates and
Persons acting on their behalf with respect to the matters discussed herein,
and this Agreement, the other Transaction Documents and the instruments
referenced herein and therein contain the entire understanding of the parties
with respect to the matters covered herein and therein and, except as
specifically set forth herein or therein, neither the Company nor any Buyer
makes any representation, warranty, covenant or undertaking with respect to such
matters. No provision of this Agreement may be amended other than by an 


 


28





















 


instrument in writing signed by the Company
and the holders of at least a majority of the Preferred Shares issued and
issuable hereunder, and any amendment to this Agreement made in conformity with
the provisions of this Section 9(e) shall be binding on all Buyers and holders
of Securities, as applicable. No provision hereof may be waived other than by
an instrument in writing signed by the party against whom enforcement is sought.
No such amendment shall be effective to the extent that it applies to less than
all of the holders of the Preferred Shares then outstanding. No consideration
shall be offered or paid to any Person to amend or consent to a waiver or
modification of any provision of any of the Transaction Documents unless the
same consideration also is offered to all of the parties to the Transaction
Documents, holders of Preferred Shares or holders of the Warrants, as the case
may be. The Company has not, directly or indirectly, made any agreements with
any Buyers relating to the terms or conditions of the transactions contemplated
by the Transaction Documents except as set forth in the Transaction Documents. Without
limiting the foregoing, the Company confirms that, except as set forth in this
Agreement, no Buyer has made any commitment or promise or has any other
obligation to provide any financing to the Company or otherwise.


 


(f)            Notices. Any notices,
consents, waivers or other communications required or permitted to be given
under the terms of this Agreement must be in writing and will be deemed to have
been delivered:  (i) upon receipt, when
delivered personally; (ii) upon receipt, when sent by facsimile (provided confirmation
of transmission is mechanically or electronically generated and kept on file by
the sending party); or (iii) one Business Day after deposit with an overnight
courier service, in each case properly addressed to the party to receive the
same. The addresses and facsimile numbers for such communications shall be:


 


If to the
Company:


 


	
  Think
  Partnership Inc.

  
	
  5 Revere Drive, Suite 510

  
	
  Northbrook, Illinois 60062

  
	
  Telephone:

  	
  (847) 562-0177

  
	
  Facsimile:

  	
  (847)
  562-0178

  
	
  Attention:

  	
  Gerard M.
  Jacobs

  



 


 


With a copy
(for informational purposes only) to:


 


	
  Shefsky
  & Froelich Ltd.

  
	
  111 East
  Wacker Drive, Suite 2800

  
	
  Chicago,
  Illinois 60601

  
	
  Telephone:

  	
  (312) 527-4000

  
	
  Facsimile:

  	
  (312) 527-5921

  
	
  Attention:

  	
  Michael J.
  Choate

  



 


If to the
Transfer Agent:


 


	
  Colonial
  Stock Transfer

  
	
  66 Exchange
  Place, Suite 100

  
	
  Salt Lake
  City, VT 84111

  
	
  Telephone:

  	
  (801) 355-5740

  
	
  Facsimile:

  	
  (801) 355-6505

  
	
  Attention:

  	
  Donna
  Webster

  



 


29

















 


If to a Buyer,
to its address and facsimile number set forth on the Schedule of Buyers, with
copies to such Buyer’s representatives as set forth on the Schedule of Buyers,


 


with a copy
(for informational purposes only) to:


 


	
  Schulte Roth
  & Zabel LLP 

  
	
  919 Third
  Avenue

  
	
  New York,
  New York  10022

  
	
  Telephone:

  	
  (212) 756-2000

  
	
  Facsimile:

  	
  (212)
  593-5955

  
	
  Attention:

  	
  Eleazer N.
  Klein, Esq.

  



 


or to such
other address and/or facsimile number and/or to the attention of such other
Person as the recipient party has specified by written notice given to each
other party five (5) days prior to the effectiveness of such change provided,
that Schulte Roth & Zabel LLP shall only receive notices sent to clients of
its firm. Written confirmation of receipt (A) given by the recipient of such
notice, consent, waiver or other communication, (B) mechanically or
electronically generated by the sender’s facsimile machine containing the time,
date, recipient facsimile number and an image of the first page of such
transmission or (C) provided by an overnight courier service shall be
rebuttable evidence of personal service, receipt by facsimile or receipt from
an overnight courier service in accordance with clause (i), (ii) or (iii)
above, respectively.


 


(g)           Successors and Assigns. This
Agreement shall be binding upon and inure to the benefit of the parties and
their respective successors and assigns, including any purchasers of the Preferred
Shares or the Warrants. The Company shall not assign this Agreement or any
rights or obligations hereunder without the prior written consent of the
holders of at least a majority of the aggregate number of Registrable
Securities issued and issuable hereunder, including by way of a Fundamental
Transaction (unless the Company is in compliance with the applicable provisions
governing Fundamental Transactions set forth in the Certificate of Designations
and the Warrants). A Buyer may assign some or all of its rights hereunder in
connection with transfer of any of its Preferred Shares or Warrants without the
consent of the Company, in which event such assignee shall be deemed to be a
Buyer hereunder with respect to such assigned rights.


 


(h)           No Third Party Beneficiaries. This
Agreement is intended for the benefit of the parties hereto and their
respective permitted successors and assigns, and is not for the benefit of, nor
may any provision hereof be enforced by, any other Person.


 


(i)            Survival. Unless this
Agreement is terminated under Section 8, the representations and warranties of
the Company and the Buyers contained in Sections 2 and 3 and the agreements and
covenants set forth in Sections 4, 5 and 9 shall survive the Closing. Each
Buyer shall be responsible only for its own representations, warranties,
agreements and covenants hereunder.


 


30





















 


(j)            Further Assurances. Each
party shall do and perform, or cause to be done and performed, all such further
acts and things, and shall execute and deliver all such other agreements,
certificates, instruments and documents, as any other party may reasonably
request in order to carry out the intent and accomplish the purposes of this
Agreement and the consummation of the transactions contemplated hereby.


 


(k)           Indemnification. In
consideration of each Buyer’s execution and delivery of the Transaction
Documents and acquiring the Securities thereunder and in addition to all of the
Company’s other obligations under the Transaction Documents, the Company shall
defend, protect, indemnify and hold harmless each Buyer and each affiliate of a
Buyer that holds Preferred Shares or Warrants and all of their stockholders,
partners, members, officers, directors, employees and direct or indirect
investors and any of the foregoing Persons’ agents or other representatives
(including, without limitation, those retained in connection with the transactions
contemplated by this Agreement) (collectively, the “Indemnitees”) from and against any and all actions, causes of
action, suits, claims, losses, costs, penalties, fees, liabilities and damages,
and expenses in connection therewith (irrespective of whether any such
Indemnitee is a party to the action for which indemnification hereunder is
sought), and including reasonable attorneys’ fees and disbursements (the “Indemnified Liabilities”), incurred by any
Indemnitee as a result of, or arising out of, or relating to (a) any
misrepresentation or breach of any representation or warranty made by the
Company in the Transaction Documents, (b) any breach of any covenant, agreement
or obligation of the Company contained in the Transaction Documents or (c) any
cause of action, suit or claim brought or made against such Indemnitee by a
third party (including for these purposes a derivative action brought on behalf
of the Company) and arising out of or resulting from (i) the execution,
delivery, performance or enforcement of the Transaction Documents or any other
certificate, instrument or document contemplated hereby or thereby, (ii) any
transaction financed or to be financed in whole or in part, directly or
indirectly, with the proceeds of the issuance of the Securities, (iii) any
disclosure made by such Buyer pursuant to Section 4(i), or (iv) the status of
such Buyer or holder of the Securities as an investor in the Company pursuant
to the transactions contemplated by the Transaction Documents; provided,
that no Buyer shall be entitled to indemnification to the extent any of the
foregoing is caused by its gross negligence or willful misconduct. To the
extent that the foregoing undertaking by the Company may be unenforceable for
any reason, the Company shall make the maximum contribution to the payment and
satisfaction of each of the Indemnified Liabilities which is permissible under
applicable law. Except as otherwise set forth herein, the mechanics and
procedures with respect to the rights and obligations under this Section 9(k)
shall be the same as those set forth in Section 6 of the Registration Rights
Agreement.


 


(l)            No Strict Construction. The
language used in this Agreement will be deemed to be the language chosen by the
parties to express their mutual intent, and no rules of strict construction
will be applied against any party.


 


(m)          Remedies. Each Buyer and each affiliate
of a Buyer that holds Preferred Shares or Warrants shall have all rights and
remedies set forth in the Transaction Documents and all rights and remedies
which such holders have been granted at any time under any other agreement or
contract and all of the rights which such holders have under any law. Any
Person having any rights under any provision of this Agreement shall be
entitled to enforce such rights specifically (without posting a bond or other
security), to recover damages by reason of any 


 


31





















 


breach of any provision of this Agreement and
to exercise all other rights granted by law. Furthermore, the Company
recognizes that in the event that it fails to perform, observe, or discharge
any or all of its obligations under the Transaction Documents, any remedy at
law may prove to be inadequate relief to the Buyers. The Company therefore
agrees that the Buyers shall be entitled to seek temporary and permanent
injunctive relief in any such case without the necessity of proving actual
damages and without posting a bond or other security.


 


(n)           Rescission and Withdrawal Right.
Notwithstanding anything to the contrary contained in (and without limiting any
similar provisions of) the Transaction Documents, whenever any Buyer exercises
a right, election, demand or option under a Transaction Document and the
Company does not timely perform its related obligations within the periods
therein provided, then such Buyer may rescind or withdraw, in its sole
discretion from time to time upon written notice to the Company, any relevant
notice, demand or election in whole or in part without prejudice to its future
actions and rights


 


(o)           Payment Set Aside. To the
extent that the Company makes a payment or payments to the Buyers hereunder or
pursuant to any of the other Transaction Documents or the Buyers enforce or
exercise their rights hereunder or thereunder, and such payment or payments or
the proceeds of such enforcement or exercise or any part thereof are
subsequently invalidated, declared to be fraudulent or preferential, set aside,
recovered from, disgorged by or are required to be refunded, repaid or
otherwise restored to the Company, a trustee, receiver or any other Person
under any law (including, without limitation, any bankruptcy law, foreign,
state or federal law, common law or equitable cause of action), then to the
extent of any such restoration the obligation or part thereof originally
intended to be satisfied shall be revived and continued in full force and
effect as if such payment had not been made or such enforcement or setoff had
not occurred.


 


(p)           Independent Nature of Buyers’
Obligations and Rights. The obligations of each Buyer under any Transaction
Document are several and not joint with the obligations of any other Buyer, and
no Buyer shall be responsible in any way for the performance of the obligations
of any other Buyer under any Transaction Document. Nothing contained herein or
in any other Transaction Document, and no action taken by any Buyer pursuant
hereto or thereto, shall be deemed to constitute the Buyers as a partnership,
an association, a joint venture or any other kind of entity, or create a
presumption that the Buyers are in any way acting in concert or as a group with
respect to such obligations or the transactions contemplated by the Transaction
Documents and the Company acknowledges that the Buyers are not
acting in concert or as a group with respect to such obligations or the
transactions contemplated by the Transaction Documents. Each Buyer confirms
that it has independently participated in the negotiation of the transaction
contemplated hereby with the advice of its own counsel and advisors. Each Buyer
shall be entitled to independently protect and enforce its rights, including,
without limitation, the rights arising out of this Agreement or out of any
other Transaction Documents, and it shall not be necessary for any other Buyer
to be joined as an additional party in any proceeding for such purpose.


 


[Signature Page Follows]


 


32

















 


 


IN WITNESS WHEREOF,
each Buyer and the Company have caused their respective signature page to this
Securities Purchase Agreement to be duly executed as of the date first written
above.


 


 




	
  COMPANY:

  
	
   

  
	
  THINK PARTNERSHIP INC.

  
	
   

  
	
   

  
	
  By:

  	
   

  	
   

  
	
   

  	
  Name: Gerard M. Jacobs

  
	
   

  	
  Title: Chief Executive Officer

  






 

















 


IN WITNESS WHEREOF,
each Buyer and the Company have caused their respective signature page to this
Securities Purchase Agreement to be duly executed as of the date first written
above.


 


 




	
  BUYERS:

  
	
   

  
	
  MAGNETAR CAPITAL MASTER FUND, LTD.

  
	
   

  
	
   

  
	
  By:

  	
  Magnetar Financial LLC 

  
	
  Its:

  	
  Investment Manager 

  
	
   

  
	
   

  	
   

  
	
  By:

  	
  Paul Smith 

  
	
  Its:

  	
  General Counsel

  
			






 

















 


IN WITNESS WHEREOF,
each Buyer and the Company have caused their respective signature page to this
Securities Purchase Agreement to be duly executed as of the date first written
above.


 


 




	
  BUYERS:

  
	
   

  
	
  [OTHER BUYERS]

  
	
   

  
	
   

  
	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  






 

















 


SCHEDULE OF BUYERS


 


	
  (1)

  	
   

  	
  (2)

  	
   

  	
  (3)

  	
   

  	
  (4)

  	
   

  	
  (5)

  	
   

  	
  (6)

  
	
  Buyer

  	
   

  	
  Address and Facsimile 

  Number

  	
   

  	
  Aggregate 

  Number of 

  Preferred 

  Shares

  	
   

  	
  Aggregate 

  Number of 

  Warrant Shares

  	
   

  	
  Purchase Price

  	
   

  	
  Legal Representative’s

  Address and Facsimile Number

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Magnetar
  Capital Master Fund, Ltd..

  	
   

  	
  1603 Orrington
  Avenue

  Evanston, IL 60201

  Attn: Richard Levy and

  Matthew Ray

  Facsimile: (847) 905-5603

  Telephone: (847) 905-4707

  	
   

  	
  5,000

  	
   

  	
  1,000,000

  	
   

  	
  $

  	
  5,000,000

  	
   

  	
  Schulte Roth
  & Zabel LLP

  919 Third Avenue

  New York, New York 10022

  Attention: Eleazer Klein, Esq.

  Facsimile: (212) 593-5955

  Telephone: (212) 756-2000

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Heller
  Capital Investments, LLC

  	
   

  	
  700 E. Palisade
  Avenue

  Englewood Cliffs, NJ 07632

  Facsimile: (201)569-5014

  	
   

  	
  1,000

  	
   

  	
  200,000

  	
   

  	
  $

  	
  1,000,000

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Heller
  Family Foundation

  	
   

  	
  74 Fairview Rd.

  Tenafly, NJ 07670

  Facsimile: 201-569-5014

  	
   

  	
  500

  	
   

  	
  100,000

  	
   

  	
  $

  	
  500,000

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Mac
  & Co



  	
   

  	
  Mac & Co

  CIBC Mellon

  PO Box 3196

  Pittsburg, PA 15230-3196

  	
   

  	
  322

  	
   

  	
  64,400

  	
   

  	
  $

  	
  322,000

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Calhoun
  & Co

  FFC City of Dearborn Policemen and Firemen
  Revised Retirement Systems

  	
   

  	
  Calhoun & Co

  Comerica Bank

  PO Box 75000-M/C 3404

  Detroit, MI 48231

  Attn: Sarah Grant, Trust Department

  Facsimile: 313.222.7041

  Telephone: 313.222.4150

  	
   

  	
  84

  	
   

  	
  16,800

  	
   

  	
  $

  	
  84,000

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Calhoun
  & Co

  FFC City of Dearborn General Employees

  Retirement Systems

  	
   

  	
  Calhoun & Co.

  Comercia Bank

  PO Box 75000-M/C 3404

  Detroit, MI 48231

  Attn: Sarah Grant

  Facsimile: 313-222-7041

  Telephone: 313-222-4150

  	
   

  	
  53

  	
   

  	
  10,600

  	
   

  	
  $

  	
  53,000

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  William
  Blair Small Cap Growth Fund

  	
   

  	
  William Blair
  & Company, LLC

  222 W Adams St

  Chicago, IL 60606

  Attn: Terry Sullivan

  Facsimile: 312.236.1497

  Telephone: 312.364.8319

  	
   

  	
  7,120

  	
   

  	
  1,424,000

  	
   

  	
  $

  	
  7,120,000

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
															



 

















 


	
  Booth
  & Co

  FFC Hartmarx Retirement Income Trust

  	
   

  	
  Booth & Co

  Northern Trust

  50 S LaSalle Street

  Chicago, IL 60675

  	
   

  	
  108

  	
   

  	
  21,600

  	
   

  	
  $

  	
  108,000

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Booth
  & Co

  FFC Rush University Medical Center

  Endowment Account

  	
   

  	
  Booth & Co

  Northern Trust

  50 S LaSalle St, 7th floor

  Chicago, IL 60675

  Attn: David Applegate

  Facsimile: 312.557.2673

  Telephone: 312.557.3019

  	
   

  	
  142

  	
   

  	
  28,400

  	
   

  	
  $

  	
  142,000

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Booth
  & Co

  FFC Rush University Medical Center

  Pension and Retirement

  	
   

  	
  Booth & Co

  Northern Trust

  50 S LaSalle St, 7th floor

  Chicago, IL 60675

  Attn: David Applegate

  Facsimile: 312.557.2673

  Telephone: 312.557.3019

  	
   

  	
  171

  	
   

  	
  34,200

  	
   

  	
  $

  	
  171,000

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Bear
  Stearns Sec. Corp. Cust. 

  J. Steven Emerson Inv. Act.

  	
   

  	
  Bear Stearns Sec.
  Corp. Cust. J. Steven Emerson Inv. Act.

  1522 Ensley Avenue

  Los Angeles, CA 90024

  Phone: 310-553-4151

  Fax: 310-553-4187

  Att:: Steven Emerson

  Custodian:

  Bear Stearns Sec. Corp.

  1990 Avenue of the Stars #2530

  Los Angeles, CA 90067

  Phone: 310-201-3976

  Fax: 310-407-1721

  Att: Rita Swann

  	
   

  	
  600

  	
   

  	
  120,000

  	
   

  	
  $

  	
  600,000

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Bear
  Stearns Sec. Corp. FBO 

  J. Steven Emerson Roth IRA

  	
   

  	
  Bear Stearns Sec.
  Corp. FBO J. Steven Emerson Roth IRA

  1522 Ensley Avenue

  Los Angeles, CA 90024

  Phone: 310-553-4151

  Fax: 310-553-4187

  Att:: Steven Emerson

  Custodian:

  Bear Stearns Sec. Corp.

  1990 Avenue of the Stars #2530

  Los Angeles, CA 90067

  Phone: 310-201-3976

  Fax: 310-407-1721

  Att: Rita Swann

  	
   

  	
  2,000

  	
   

  	
  400,000

  	
   

  	
  $

  	
  2,000,000

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Bear
  Stearns Sec. Corp. FBO 

  J. Steven Emerson IRA Rollover II

  	
   

  	
  Bear Stearns Sec.
  Corp. FBO J. Steven Emerson IRA Rollover II

  1522 Ensley Avenue

  Los Angeles, CA 90024

  Phone: 310-553-4151

  Fax: 310-553-4187

  Att:: Steven Emerson

  Custodian:

  Bear Stearns Sec. Corp.

  1990 Avenue of the Stars #2530

  Los Angeles, CA 90067

  Phone: 310-201-3976

  Fax: 310-407-1721

  Att: Rita Swann

  	
   

  	
  3,400

  	
   

  	
  680,000

  	
   

  	
  $

  	
  3,400,000

  	
   

  	
   

  
													



 

















 


	
  Umbtru
  & Co.

  FBO Oberweis Emerging Growth Fund

  	
   

  	
  3333 Warrenville
  Road

  Suite 500

  Lisle, Illinois 60532

  Facsimile: (630) 245-0470

  	
   

  	
  2,700

  	
   

  	
  540,000

  	
   

  	
  $

  	
  2,700,000

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Umbtru
  & Co.

  FBO Oberweis Micro-Cap Fund

  	
   

  	
  3333 Warrenville
  Road

  Suite 500

  Lisle, Illinois 60532

  Facsimile: (630) 245-0470

  	
   

  	
  1,300

  	
   

  	
  260,000

  	
   

  	
  $

  	
  1,300,000

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Fort
  Mason Master Fund, LP



  	
   

  	
  Fort Mason Master
  Fund, LP

  456 Montgomery Street, 22nd Fl.

  San Francisco, CA 94104

  Telephone 415-249-3380

  Fax 415-249-3389

  Attn: KC Lynch and Marshall Jensen

  	
   

  	
  1,878

  	
   

  	
  375,600

  	
   

  	
  $

  	
  1,878,000

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Fort
  Mason Partners, LP



  	
   

  	
  Fort Mason
  Partners, LP

  456 Montgomery Street, 22nd Fl.

  San Francisco, CA 94104

  Telephone 415-249-3380

  Fax 415-249-3389

  Attn: KC Lynch and Marshall Jensen

  	
   

  	
  122

  	
   

  	
  24,400

  	
   

  	
  $

  	
  122,000

  	
   

  	
   

  



 

















 


EXHIBITS


 


	
  Exhibit A

  	
   

  	
  Form of Certificate of Designations

  
	
  Exhibit B

  	
   

  	
  Form of Warrants

  
	
  Exhibit C

  	
   

  	
  Form of Registration Rights Agreement

  
	
  Exhibit D

  	
   

  	
  [Intentionally Omitted]

  
	
  Exhibit E

  	
   

  	
  Form of Irrevocable Transfer Agent
  Instructions

  
	
  Exhibit F

  	
   

  	
  Form of Outside Company Counsel Opinion

  
	
  Exhibit G

  	
   

  	
  Form of Secretary’s Certificate

  
	
  Exhibit H

  	
   

  	
  Form of Officer’s Certificate

  



 


 


	
  Schedule 3(a)

  	
   

  	
  Subsidiaries

  
	
  Schedule 3(b)

  	
   

  	
  Authorization; Enforcement; Validity

  
	
  Schedule 3(k)

  	
   

  	
  SEC Documents; Financial Statements

  
	
  Schedule 3(l)

  	
   

  	
  Absence of Certain Changes

  
	
  Schedule 3(n)

  	
   

  	
  Conduct of Business

  
	
  Schedule 3(q)

  	
   

  	
  Transactions with Affiliates

  
	
  Schedule 3(r)

  	
   

  	
  Capitalization

  
	
  Schedule 3(s)

  	
   

  	
  Indebtedness and Other Contracts

  
	
  Schedule 3(t)

  	
   

  	
  Litigation

  
	
  Schedule 3(w)

  	
   

  	
  Title

  
	
  Schedule 3(cc)

  	
   

  	
  Internal Accounting and Disclosure Controls

  
	
  Schedule 3(kk)

  	
   

  	
  Disclosure

  
	
  Schedule 4(d)

  	
   

  	
  Use of Proceeds

  
	
  Schedule 4(j)

  	
   

  	
  Restriction on Redemption and Cash
  Dividends; Additional Registration Statements

  



 

















 


SCHEDULE 3(a)


Subsidiaries


 


	
  MarketSmart Interactive, Inc. f/k/a
  WebSourced, Inc.

  
	
  Cherish, Inc.

  
	
  CheckUp Marketing, Inc.

  
	
  MarketSmart Advertising, Inc.

  
	
  RightStuff, Inc.

  
	
  Ozona Online Network, Inc.

  
	
  Personals Plus, Inc.

  
	
  KowaBunga Marketing, Inc.

  
	
  PrimaryAds, Inc.

  
	
  Real Estate School Online, Inc.

  
	
  Vintacom Florida, Inc.

  
	
  Vintacom Media Group, ULC

  
	
  Vintacom Internet Services, Inc.

  
	
  Vintacom Software Services, Inc.

  
	
  Relationship Exchange Holdings Ltd.

  
	
  Relationship Exchange Limited

  
	
  Intipro Dating Inc.

  
	
  Morex Marketing Group, LLC

  
	
  Smart Interactive Limited

  



 

















 


SCHEDULE 3(b)


Authorization;
Enforcement; Validity


 


The Company needs to obtain AMEX approval for
the listing of the Conversion Shares and Warrant Shares and the Certificate of
Designations will not be filed until AMEX approval has been obtained.


 

















 


SCHEDULE 3(k)


SEC
Documents; Financial Statements


 


The financial statements contained in the
Company’s original filings of its Form 10-KSB for the year ended December 31,
2004, and its Forms 10-QSB for the quarters ended March 31, 2005 and 2004,
June 30, 2005 and 2004 and September 30, 2004 were restated on December 30,
2005 for the reasons described below (collectively, the “Restatements”).


 


On October 27, 2005, the Company
concluded that it would need to amend and restate our previously issued
unaudited consolidated financial statements and other financial information for
the above mentioned periods. The restatements resulted from a change to the
manner in which the Company then believed it must recognize revenue generated
by its search engine enhancement (SEE) business segment.  The Company originally recognized revenues
from the SEE business segment in the period that they are deemed to be earned
and collectible under the accrual method of accounting using the proportional
performance model. In the proportional performance model, revenue is recognized
using the pattern in which value is provided to the customer over the term of
the contract. Subsequently based on comments the Company received from the
Staff of the Securities and Exchange Commission, the Company determined that
the manner in which it applied the proportional performance revenue recognition
model: (1) did not adequately rely on objective evidence of the value of
services performed, and (2) did not provide sufficient evidence to prove
the collectibility of the accelerated revenue stream. As a result, the Company
restated portions of the above-referenced financial statements by recognizing
revenue for each deliverable under its SEE business segment on a straight-line
basis over the term of the contract. The Company believes it is appropriate to
use straight-line if there is not adequate objective evidence of the value of
services performed. Additionally, using straight-line allows the Company to
more closely match cash receipts with revenue recognition. As a result,
collection of amounts recognized as revenue is reasonably assured.


 


The restatements for the Form 10-QSB for
the quarter ended June 30, 2005 also results from a change to the manner
in which the Company presents revenues from its PrimaryAds, Inc.
subsidiary. The Company originally recognized revenues from PrimaryAds on a
gross basis by recording as revenue the gross amount received from advertisers
and recording as cost of sales the amount paid to the publishers placing the
advertisements. The Company believed the gross presentation was appropriate
because, in accordance with EITF 99-19, the Company believed the following were
the predominant factors:  (1) PrimaryAds
had credit risk to the extent that it is responsible for payments to
affiliates, despite standard contractual language stating that if PrimaryAds
does not get paid for an advertisement, it is not obligated to pay the
affiliate. In practice, PrimaryAds chooses to pay affiliates in the event of
non-payment by advertisers in order to maintain its marketplace relationships,
and (2) PrimaryAds sets pricing with respect to the amount paid to the
affiliate. Subsequently, based on additional analyses performed by the Company
in response to comments raised by the Staff of the Securities and Exchange
Commission, the Company subsequently believed that the predominant factors
underlying EITF 99-19 support the net treatment. Specifically, the factors the
Company previously believed to be predominant are now believed to have a lesser
significance in the gross versus net analysis, with PrimaryAds not being the
primary obligor in the arrangement rising to predominant status. The


 

















 


Company restated its quarterly report on Form 10-QSB for the
quarter ended June 30, 2005 by presenting revenue from PrimaryAds on a
net, rather than gross, basis.


 


Additionally, in the third quarter of 2005,
the Company changed the useful life of the Customer Relations intangible asset
for our PrimaryAds, Inc. subsidiary from ten years to five years. The
Company retroactively applied this change to all periods that it owned this
intangible asset, including the quarter ended June 30, 2005.


 

















 


SCHEDULE 3(l)


Absence of
Certain Changes


 


On Friday, March 17, the Company
announced that its letter of intent to acquire Crystal Reference Systems
Limited had been terminated, after the Company and Crystal Reference failed to
agree upon mutually acceptable definitive agreements.


 

















 


SCHEDULE 3(n)


Conduct of
Business; Regulatory Permits


 


The Company’s press release dated October 28,
2005, pursuant to which it announced that investors should no longer rely on
the Company’s financial statements, did not contain sufficient information
regarding the Company’s estimate of the potential effect on earnings the restated
financial statements would have. As a result, AMEX imposed a trading halt in
the Company’s shares of common stock. On November 2, 2005 the Company
issued a revised press release and trading resumed.


 

















 


SCHEDULE 3(q)


Transactions
With Affiliates


 


The Company issued a note to Scott P.
Mitchell, its President in connection with the Company’s acquisition of
WebCapades, Inc. (of which Scott was a shareholder). The outstanding
balance of the note is $267,000 and calls for six remaining payments of $44,500.
The note does not bear any stated interest.


 


The Company issued a note to Katherine
Dennison, an employee of Cherish, Inc. in connection with the Company’s
acquisition of WebCapades, Inc. (of which Katherine was a shareholder). The
outstanding balance of the note is $3,000 and calls for six remaining payments
of $500. The note does not bear any stated interest.


 


In connection with the Company’s acquisition
of Ozona Online, Inc., the Company assumed two promissory notes Ozona
issued in favor of Scott P. Mitchell, the Company’s President. The first note
has a remaining balance $50,085, bears interest at 5.5% interest, and has 31
payments of $1,756.12 remaining.    The
second note has a remaining balance of $52,471, bears interest at 8.0%
interest, and has 34 payments of $1,756.12, 34 remaining.


 

















 


SCHEDULE 3(r)


Equity
Capitalization


 


(i)                                     No
disclosure necessary.


(ii)                                  See
attached excel spreadsheet for list of options/warrants and shares that may be
required to be issued in the future with respect to earnouts from acquisitions.


(iii)                               The
Company entered into loan agreement with Wachovia Bank, N.A. and the Company
executed two promissory notes in the amounts of $15 million and $2.5 million,
respectively in connection with the loan agreement. Additionally, see the notes
to Scott Mitchell and Katherine Dennison described in Schedule 3(q).


(iv)                              In
connection with the Wachovia loan agreement (described in (iii) above),
Wachovia filed financing statements perfecting a lien on all of the assets of
the Company. In addition, each “Guarantor Subsidiary” guaranteed the
obligations of the Company under the loan agreement. The guarantees are secured
by a lien on all of the assets of each Subsidiary which was perfected by a
filing of appropriate financing statements. As used herein, the term “Guarantor
Subsidiary” means the following Subsidiaries: 
MarketSmart Interactive, Inc., Cherish, Inc., CheckUp
Marketing, Inc., RightStuff, Inc., MarketSmart Advertising, Inc.,
Ozona Online Network, Inc., Personals Plus, Inc., KowaBunga! Marketing, Inc.,
PrimaryAds, Inc., Real Estate School Online, Inc. and Vintacom
Florida, Inc.


(v)                                 See
attached excel spreadsheet for the Company’s current obligations to register
shares of its common stock issued in previous acquisitions and shares that may be
issued as part of earnouts related to such acquisitions. In addition, the
Company will be obligated to register 3,170,732 shares of common stock issued
at the closing of the Litmus acquisition and up to $10.5 million of shares of
common stock that may be issued as a result of earnouts related to the
Litmus acquisition.


(vi)                              No
disclosure necessary.


(vii)                           No
disclosure necessary.


(viii)                        The
Company’s 2005 Long Term Incentive Plan authorizes the board to grant “Other
Stock Based Awards” in addition to options to purchase common stock and shares
of restricted common stock. “Other Stock Based Awards” includes awards that are
valued in whole or in part by reference to, or are otherwise based on,
shares of the Company’s common stock or the fair market value thereof.


(ix)                                No
disclosure necessary.


 

















 


SCHEDULE 3(s)


Indebtedness
and Other Contracts


 


(i)                                     A.                                   The
Company entered into loan agreement with Wachovia Bank, N.A. and the Company
executed two promissory notes in the amounts of $15 million and $2.5 million, respectively
in connection with the loan agreement.


B.                                     The Company issued
a note to Scott P. Mitchell, its President in connection with the Company’s
acquisition of WebCapades, Inc. (of which Scott was a shareholder). The
outstanding balance of the note is $267,000 and calls for six remaining
payments of $44,500. The note does not bear any stated interest.


C.                                     The Company issued
a note to Katherine Dennison, an employee of Cherish, Inc. in connection
with the Company’s acquisition of WebCapades, Inc. (of which Katherine was
a shareholder). The outstanding balance of the note is $3,000 and calls for six
remaining payments of $500. The note does not bear any stated interest.


D.                                    In connection with
the Company’s acquisition of Ozona Online, Inc., the Company assumed two
promissory notes Ozona issued in favor of Scott P. Mitchell, the Company’s
President. The first note has a remaining balance $50,085, bears interest at
5.5% interest, and has 31 payments of $1,756.12 remaining.    The second note has a remaining balance of
$52,471, bears interest at 8.0% interest, and has 34 payments of $1,756.12, 34
remaining.


 


(ii)                                  No
disclosure necessary


 


(iii)                               No
disclosure necessary.


 


(iv)                              No
disclosure necessary.


 


Description of Wachovia Indebtedness


 


On January 19, 2006, the Company entered into a loan agreement
with Wachovia Bank, National Association (the “Loan Agreement”). Pursuant to
the loan agreement, on January 20, 2006, the Company borrowed $15 million
from Wachovia, evidenced by a revolving credit promissory note (the “Revolving
Credit Note”), and $2.5 million, evidenced by a term promissory note (the “Term
Note” and together with the Revolving Credit Note, the “Notes”). The Company
used $7.5 million of the proceeds to repay amounts due Wachovia under the
Company’s previous line of credit (which was cancelled as a result of entering
into the Loan Agreement) with substantially all of the remaining proceeds used
to fund the cash portion of the purchase price for the acquisition of Morex
Marketing Group, LLC.


 


Repayment Terms; Interest Rate


 


The Company’s obligations under the Loan
Agreement and the Notes are secured by a first priority lien, in favor of
Wachovia, on all of the assets of the Company, including the stock of each of
the Company’s operating subsidiaries. Further, each of the Company’s operating
subsidiaries has guaranteed the performance of the Company’s obligations under
the Loan Agreement and the Notes (each, a “Guarantor”) and the guaranty is
secured by a first priority lien on each Guarantor’s assets. The aggregate
principal advances available to the Company


 

















 


under the Revolving Credit Note may not exceed 1.75 times the
Company’s trailing twelve months EBITDA, as calculated quarterly on a
consolidated pro forma basis, where the term pro forma is meant to include all EBITDA generated by an
entity acquired by the Company during the trailing twelve month period, as
opposed to just that portion of EBITDA generated by the entity after the
acquisition. Interest on the unpaid principal balance of the Revolving Credit
Note accrues at the LIBOR Market Index Rate plus 2.10% as such rate may change
from day to day. Amounts due under the Revolving Credit Note are payable in
consecutive monthly payments of accrued interest only until maturity at which
time all principal and any accrued but unpaid interest is due and payable. The
Revolving Credit Note matures on January 19, 2009. Interest on the unpaid
principal balance of the Term Note accrues at the LIBOR Market Index Rate plus
2.15% as such rate may change from day to day. Amounts due under the Term
Note are payable in 12 consecutive monthly payments of equal principal in the
amount of $208,333.33 plus accrued interest with the final payment due on January 19,
2007, the Term Note’s maturity. In the event that the Company is in default of
any of the covenants below, in addition to the remedies set forth below, the
interest rate on each of the Notes shall automatically increase 3%.


 


Covenants


 


So long as there remain any amounts
outstanding under the Loan Agreement and either of the Notes, the Company: (A) is
required to maintain a “Total Debt to EBITDA Ratio” of not less than 2.00 to
1.00, calculated quarterly on a rolling four quarters basis, where “Total Debt
to EBITDA Ratio” means the sum of all the indebtedness of the Company  and its subsidiaries for borrowed money
divided by the Company’s EBITDA calculated on a consolidated pro forma basis; (B) is required to maintain a net
worth of not less than an amount equal to $36.9 million plus 50% of the Company’s
net income for each fiscal quarter (the “Minimum Net Worth Amount”), provided
that the Minimum Net Worth Amount for any fiscal quarter must exceed the
Minimum Net Worth amount for the immediately preceding fiscal quarter by at
least $1.00; (C) is required to maintain, a consolidated “Fixed Charge
Coverage Ratio” of not less than 2.50 to 1.00, calculated quarterly on a
rolling four quarters basis, where “Fixed Charge Coverage Ratio” means, the sum
of the pro forma net income from operations,
depreciation and amortization minus all dividends, withdrawals and non-cash
income divided by the sum of all current maturities of long-term debt, capital
lease obligations and capital expenditures which were not financed; (D) may not,
during any fiscal year, expend on gross fixed assets (excluding the pro forma impact of “Permitted Acquisitions” (as hereinafter
defined) during any fiscal year, but including capital leases and leasehold
improvements for the Permitted Acquisitions) an amount exceeding $2 million; (E) may not
incur any additional indebtedness which causes the aggregate amount of the
Company’s debt, excluding obligations to Wachovia to exceed $5 million; and (F) may not,
during any fiscal year, declare or pay dividends in an amount in excess of 50%
of its net income.


 


Further, so long as there remain any amounts
outstanding under the Loan Agreement and either of the Notes, neither the
Company nor any Guarantor is permitted to: (A) change its fiscal year; (B) suffer a change in its board of
directors, such that the members of the board of directors as of the date of
this Agreement fail to constitute a majority of the members of the board; provided
that any individual becoming a member of the applicable board of directors who
is nominated by the applicable board of directors will be treated as if he or
she were a member of the board as of the date of this Agreement; (C) create,
assume, or permit to exist any


 

















 


encumbrance on any of its assets, other than (i) security
interests required by the Loan Agreement, (ii) liens for taxes contested
in good faith, (iii) liens accruing by law for employee benefits, or (iv) acquired
indebtedness to the extent permitted as set forth in (E) in the previous
paragraph; (D) guarantee or otherwise become responsible for obligations
of any other person or entity; (E) acquire any capital
stock, interests in any partnership or joint venture except for investments by
the Company or any Guarantor in the form of acquisitions of all or
substantially all of the business or a line of business (whether by the
acquisition of capital stock, assets or any combination thereof) of any other
person in an electronic commerce line of business which has positive EBITDA for
the most recent twelve (12) month period then ended, both prior to the
acquisition and after giving effect thereto (a “Permitted Acquisition”); (F) retire any long-term debt entered into prior to
the date of the Loan Agreement at a date in advance of its legal obligation to
do so.


 


Default


 


The Company is permitted a five day grace
period to cure any payment default and a thirty day grace period to cure any
non-payment default, provided the Company will be permitted to cure a default
once during any twelve month period. If there occurs a default that is not
cured during the applicable grace period, Wachovia may accelerate the
maturity of all amounts due under the Loan Agreement and the Notes and
foreclose upon its security interest in the Company’s assets and the assets of
the Guarantors.


 

















 


SCHEDULE 3(t)


Absence of
Litigation


 


MarketSmart Interactive


 


On May 27, 2005, the Company and its
MarketSmart Interactive, Inc. subsidiary filed a lawsuit against Jason
Dowdell, a former employee of MarketSmart Interactive, and his wife, Shannon
Dowdell in the Circuit Court of the Eighteenth Judicial Circuit of the State of
Florida, in and for Brevard County, which is captioned MarketSmart Interactive, Inc.
and CGI Holding Corporation v. Jason Dowdell and Shannon Dowdell. In the
lawsuit, the Company alleged that Mr. Dowdell failed to perform his
employment duties and other obligations under an Asset Purchase Agreement
pursuant to which MarketSmart Interactive purchased certain business assets
from the Dowdells. The Company also alleged that Mr. Dowdell breached a
Confidentiality, Inventions and Non-Competition Agreement between him and
MarketSmart Interactive. In the lawsuit, the Company asserted claims for
replevin of certain computer equipment and files Jason Dowdell failed to return
to MarketSmart Interactive following the termination of his employment. The Company
also sought a declaratory judgment regarding its right to cancel shares of
common stock issued to Mr. Dowdell as well as shares of common stock and
warrants to purchase shares of common stock Mr. Dowdell alleged he is
entitled to under the Asset Purchase Agreement. The Company also sought
injunctive relief and damages with respect to the Dowdells’ breach of the Asset
Purchase Agreement and Mr. Dowdell’s breach of the Confidentiality,
Inventions and Non-Competition Agreement. This lawsuit was settled on the
following terms:


 


•                                          MarketSmart
Interactive agreed to allow Mr. Dowdell to keep the shares of stock that
were promised to him in the Asset Purchase Agreement.


 


•                                          Mr. Dowdell
agreed to the entry of a Permanent Injunction limiting his competitive activities
until July 5, 2006.


 


•                                          The
parties agreed to a mutual release of all claims.


 


Primary Ads


 


On May 16, 2005, the Company’s
PrimaryAds subsidiary filed a lawsuit against Direct Response Technologies, Inc.
in the Court of Common Pleas of Allegheny County, Pennsylvania, captioned as
PrimaryAds Inc. v. Direct Response Technologies, Inc., GD 05-11414. Direct
Response Technologies, Inc. (“DRT”) provided software services to
PrimaryAds and threatened to terminate those services in breach of PrimaryAds’
agreement with DRT. Additionally, DRT possessed and controlled certain business
information regarding PrimaryAds’ business. PrimaryAds sought injunctive relief
to maintain the status quo (i.e., continued access to the services), as well as
the return of its business information and data. This lawsuit was settled at
the end of June, 2005 upon the following settlement terms in the form of a
consent decree:


 


•                                          DRT
agreed to provide PrimaryAds with a duplicate of its business information and
data.


 

















 


•                                          DRT
agreed to continue to provide services to PrimaryAds for nine months after DRT
provided PrimaryAds with a duplicate of its business information and data.


 


•                                          Both
parties agreed to release the other from all liability relating to the lawsuit.


 


•                                          PrimaryAds
agreed to dismiss the lawsuit within one month after it received its business
information and data from DRT.


 


After DRT failed to properly return
PrimaryAds’ business information and data, PrimaryAds filed a motion asking the
Court to require DRT to comply with the terms of the consent decree. In
response to the motion, the parties agreed to an amended consent decree which
included a non-disparagement clause, a release from all liability relating to
the lawsuit, an agreement that PrimaryAds would provide a presentation to DRT
relating to its use of DRT’s Affiliate IDs, Codes, and Tracking Codes, an
agreement that DRT would continue to provide services to PrimaryAds until October of
2006, and an agreement that PrimaryAds would dismiss the lawsuit. The
presentation successfully took place on March 8, 2006 and thus the
litigation has concluded.


 

















 


SCHEDULE 3(w)


Title


 


In connection with the Wachovia loan
agreement, Wachovia filed financing statements perfecting a lien on all of the
assets of the Company. In addition, each Guarantor Subsidiary guaranteed the
obligations of the Company under the loan agreement. The guarantees are secured
by a lien on all of the assets of each Subsidiary which was perfected by a
filing of appropriate financing statements. Additionally, the Company has
pledged all of the stock of the Wachovia Subsidiaries to Wachovia in connection
with the Company’s obligations under the loan agreement.


 

















 


SCHEDULE 3(cc)


Internal
Accounting and Disclosure Controls


 


In each of the Restatements, the Company made
the following disclosure (the attached disclosure is from the Company’s
Restatement for the quarter ended June 30, 2005, but the other disclosures
read substantially similar):


 


As required by Rule 13a-15(b) under
the Exchange Act, we conducted an evaluation, under the supervision and with
the participation of our management, including our chief executive officer and
the chief financial officer, of the effectiveness and the design and operation
of our disclosure controls and procedures as of June 30, 2005, the end of
the period covered by this report. This evaluation was subsequently modified
due to the identification of items described below. Based on and as of the date
of the foregoing evaluation as modified, we determined that our internal
controls over revenue recognition for certain of our contracts at our search
engine enhancement segment and presentation of revenue at our affiliate
marketing segment were deficient, and constituted a material weakness, and
therefore our disclosure controls and procedures were not effective as of June 30,
2005.


 


The deficiencies in our internal controls
resulted in improper recognition of revenue at our WebSourced subsidiary and
improper presentation of revenue at our PrimaryAds subsidiary. The first
deficiency at WebSourced was the lack of adequate objective criteria of the
value of services provided to customers to support use of the proportional
performance model using the pattern in which value is provided to the customer
over the term of the contract to recognize revenue generated by WebSourced. The
second deficiency at WebSourced related to the lack of sufficient evidence to
support the collectibility of amounts recognized under certain contracts on an
accelerated basis. At PrimaryAds, the deficiency resulted from a misapplication
of the principles governing whether the revenues of PrimaryAds should be
presented on a gross or net basis.


 


During the fourth quarter of 2005, we began a
process to improve upon our internal controls in an effort to remediate these
deficiencies, in part by establishing additional policies and procedures
related to revenue recognition. Management is implementing compensating
controls and procedures, principally manual checks and additional levels of
review as it relates to revenue recognition. In addition, our WebSourced
subsidiary now performs a credit check at the time it enters into a contract
with a client to determine the appropriate payment terms for the client, which
provides an objective basis for our belief that the collectibility of amounts
recognized as revenue associated with the client is reasonably assured. Additionally,
management has directed our internal audit staff, which reports directly to our
audit committee and is not involved in the preparation of our financial
statements, to focus on evaluating and documenting our disclosure controls and
procedures over financial reporting including revenue recognition. Further, on
a going forward basis, our audit committee will review a list of all


 

















 


critical accounting policies and estimates
with supporting schedules for each pending acquisition prior to closing. Management
has approved and intends to hire additional internal audit staff. To date, we
have incurred expenses of approximately $25,000 to remediate these deficiencies
in our internal controls. These expenses include the costs of the credit checks
and a pro rata portion of the time incurred by our internal audit staff to
improve our disclosure controls and procedures over financial reporting. In
2006, we expect these expenses to be approximately $35,000. We anticipate that
the material weakness in our disclosure controls and procedures caused by the
deficiencies set forth above will be fully remediated during the first quarter
of 2006 and prior to the filing of our annual report for the year ended December 31,
2005.


 


There was no change in our internal control
over financial reporting that occurred during the fiscal quarter ended June 30,
2005 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.


 

















 


SCHEDULE 3(kk)


Disclosure


 


The Company’s press release dated October 28,
2005, pursuant to which it announced that investors should no longer rely on
the Company’s financial statements, did not contain sufficient information
regarding the Company’s estimate of the potential effect on earnings the
restated financial statements would have. As a result, AMEX imposed a trading
halt in the Company’s shares of common stock. On November 2, 2005 the
Company issued a revised press release and trading resumed.


 

















 


SCHEDULE 4(d)


Use of
Proceeds


 


The Company will use the proceeds from the
sale of the Securities to fund the cash portion of the purchase price of Litmus
Media, Inc. and for general working capital purposes.


 

















 


SCHEDULE 4(j)


Restriction
on Redemption and Cash Dividends; Additional Registration Statements


 


The Company shall be allowed to file
additional such pre-effective and post-effective amendments as it deems
reasonably necessary to that certain Registration Statement on Form SB-2
which was originally filed with the Commission on December 30, 2004.


 


The Company shall be allowed to file a
registration statement on Form S-8 in connection with its 2005 Long Term
Incentive Plan so long as such registration statement shall not include for
registration thereon more than 1 million shares of the Company’s common stock.