COMMON STOCK PURCHASE WARRANT

 

NEITHER THIS WARRANT NOR ANY SHARES THAT MAY BE ACQUIRED UPON THE EXERCISE OF

THIS WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY MAY NOT

BE SOLD, OFFERED FOR SALE, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE

OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH

ACT EXCEPT PURSUANT TO AN EXEMPTION FROM REGISTRATION AVAILABLE UNDER SUCH ACT

AND, IF REQUESTED, DELIVERY OF AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO

THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.

 

 

              INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORPORATION

 

                          COMMON STOCK PURCHASE WARRANT

 

 

No. 1                                                  Dated:   December 31, 2004

 

 

     Interactive    Motorsports   and    Entertainment    Corporation,    an   Indiana

corporation   (the   "Company,"   which term includes any   corporation   which shall

succeed   to or assume   the   obligations   of the   Company   hereunder),   for value

received,   hereby certifies that Dolphin Direct Equity Partners,   LP, a Delaware

limited   partnership   (the   "Purchaser"),   and   its   registered   successors   and

permitted   assigns   (each   such   successor   and   assignee,    together   with   the

Purchaser,   the   "Holder"),   is entitled   to purchase   from the Company up to an

aggregate    number   of   duly    authorized,    validly   issued,    fully   paid   and

nonassessable shares of Common Stock, par value $0.001 per share, of the Company

("Common   Stock")   equal to the Warrant   Shares   Amount at a purchase   price per

share (the "Warrant Price") equal to $0.10, subject to the terms, conditions and

adjustments set forth below. This Common Stock Purchase Warrant (this "Warrant,"

which   term   includes   all   other   Common   Stock   Purchase   Warrants   issued   in

substitution   therefor) is being issued to the Purchaser in connection   with the

Asset   Purchase   Agreement.   Capitalized   terms   used   in this   Warrant   and not

otherwise defined herein are defined in Section 15 hereof.

 

     1. Exercise of Warrant.

 

      1.1 Time and Manner of Exercise.

 

     (a) This Warrant   shall be   exercisable,   in whole or in part, at any time,

and from time to time,   following the date hereof up until 11:59 p.m.,   New York

time, on the fifth   (5th)anniversary of the date hereof (such time and date, the

"Expiration Date").

 

     (b) Subject to the terms and conditions set forth herein,   this Warrant may

be exercised by the Holder, to the extent then exercisable, in whole or in part,

during normal   business   hours on any Business Day, by surrender of this Warrant

to the   Company   at its   principal   office,   accompanied   by a   subscription   in

substantially   the form   attached to this Warrant as Exhibit A duly   executed by

the Holder and

<PAGE>

 

accompanied by payment,   by check payable to the order of the Company or by wire

transfer   to such   account of the Company as the Company   shall   direct,   in the

amount   obtained   by   multiplying   (i) the   number of   shares   of   Common   Stock

designated in such   subscription (up to the amount of shares to which the Holder

is entitled to receive at such time upon   exercise of this   Warrant) by (ii) the

Warrant   Price,   and the Holder shall   thereupon be entitled to receive the full

number of duly authorized,   validly issued,   fully paid and nonassessable shares

of Common Stock so purchased upon such exercise.

 

     (c) Alternatively, this Warrant may be exercised in the manner set forth in

the preceding paragraph by surrendering this Warrant in exchange for such number

of shares of Common   Stock   equal to the   product of (i) the number of shares of

Common Stock as to which this Warrant is being   exercised,   multiplied by (ii) a

fraction,   the   numerator of which is the Market   Price (as defined   below) of a

share of Common Stock minus the Warrant   Price and the   denominator   of which is

the Market Price for a share of Common Stock (a "Cashless Exercise"). Solely for

the purposes of this Section 1, the "Market   Price" shall be   calculated   either

(A) on the date on which the form of   subscription   attached hereto is deemed to

have been given to the Company (the "Notice   Date") or (B) as the average of the

Market Price for each of the five trading days immediately   preceding the Notice

Date,   whichever   of (A) or (B)   results in a greater   Market   Price;   provided,

however,   that a Cashless   Exercise   may only be   employed   by the Holder if the

Common   Stock shall then be publicly   quoted in the manner   contemplated   in the

next   sentence.   As used herein,   the phrase "Market Price" at any date shall be

deemed to be the last   reported   sale price,   or, in case no such   reported sale

takes place on such day,   the average of the last   reported   sale prices for the

last three trading days, in either case as officially   reported by the principal

securities   exchange on which the Common Stock is listed or admitted to trading,

or, if the Common   Stock is not listed or   admitted   to trading on any   national

securities   exchange,   the average   closing   sale price as furnished by the NASD

through   The Nasdaq   Stock   Market,   Inc.   ("Nasdaq")   or by the OTC   Electronic

Bulletin   Board or similar   organization   if Nasdaq is no longer   reporting such

information or if the Common Stock is not publicly quoted, as determined in good

faith by resolution of the Board of Directors of the Company,   based on the best

information available to it.

 

     1.2 When Exercise Effective.   Each exercise of this Warrant shall be deemed

to have been effected immediately prior to the close of business on the Business

Day on which this Warrant shall have been surrendered to the Company as provided

in Section 1.1   hereof.   At such time,   the Person or Persons,   in whose name or

names any   certificate   or   certificates   for   shares of Common   Stock   shall be

issuable upon such   exercise as provided in Section 1.3 hereof,   shall be deemed

to have become the Holder or Holders of record thereof.

 

     1.3 Delivery of Stock Certificates,   Etc. As soon as practicable after each

exercise   of this   Warrant,   in whole or in part,   and in any event   within five

Business Days thereafter,   the Company, at its expense (including the payment by

it of any applicable   issue taxes),   will cause to be issued in the name of, and

delivered   to, the Holder or as such Holder (upon   payment by such Holder of any

applicable transfer taxes) may direct,

 

     (a) a   certificate   or   certificates   for the   number   of duly   authorized,

validly   issued,   fully paid and   nonassessable   shares of Common Stock to which

such Holder shall be entitled upon

<PAGE>

 

such exercise plus, in lieu of any   fractional   share to which such Holder would

otherwise be   entitled,   cash in an amount   determined   in   accordance   with the

provisions of Section 4 hereof, and

 

     (b) in case such   exercise   is in part only,   a new   Warrant of like tenor,

calling in the   aggregate on the face thereof for the number of shares of Common

Stock equal to the number of such shares which such Holder would be entitled to

receive at such time upon exercise of this Warrant,   after giving effect to such

recent exercise.

 

     2. Adjustments.

 

     2.1 Change in Warrant Shares Amount and Warrant   Price.   The Warrant Shares

Amount and the Warrant Price shall be subject to adjustment from time to time as

follows:

 

     (a) The "Warrant Shares Amount" shall initially equal 5,161,500.

 

     (b) In case at any time or from time to time the   Company   shall (i) take a

record of the holders of its Common Stock for the purpose of   entitling   them to

receive a dividend payable in, or other   distribution of, its Common Stock, (ii)

subdivide its   outstanding   shares of any class or series of Common Stock into a

larger number of any class or series of shares of Common Stock, or (iii) combine

its   outstanding   shares of any class or series of Common   Stock   into a smaller

number of shares of any class or series of Common   Stock,   or (iv)   increase   or

decrease the number of shares of its capital stock in a reclassification   of the

Common Stock (including any such   reclassification   in connection with a merger,

consolidation   or   other   business   combination   in   which   the   Company   is the

surviving   corporation),   then in each instance (A) the Warrant Shares Amount in

effect   immediately   prior to the record date for such dividend or the effective

date of such subdivision or combination   shall be adjusted so that the Holder of

this   Warrant   shall   thereafter   be   entitled to receive the kind and number of

shares of Common Stock that the Holder would have owned or have been entitled to

receive   after the   happening   of any of the events   described   above,   had this

Warrant been exercised   immediately   prior to the happening of such event or any

record date with respect   thereto and (B) the Warrant Price shall be adjusted so

that the aggregate   amount payable by the Holder to the Company upon exercise of

this Warrant in full   immediately   prior to such event shall equal the aggregate

amount   payable by the Holder to the Company   upon   exercise of this   Warrant in

full   immediately   after such event. An adjustment made pursuant to this Section

2.1(b) shall   become   effective   immediately   after the   effective   date of such

event.

 

     (c) Except as provided   herein,   if the Company shall   consolidate or merge

with another corporation, and the Company is the surviving corporation, then the

Holder of this   Warrant   shall have the right to receive   upon   exercise of this

Warrant,   the   number of shares of   Common   Stock and other   property   that such

Holder   would   have   been   entitled   to   receive   upon   or as a   result   of such

consolidation   or   merger   had   this   Warrant   been   exercisable   and   exercised

immediately prior to such event.

 

     (d) The adjustments   required by the preceding   subsections of this Section

2.1 shall be made   whenever   and as often as any   specified   event   requiring an

<PAGE>

 

adjustment shall occur.   For the purpose of any adjustment,   any specified event

shall be deemed to have   occurred   at the close of   business   on the date of its

occurrence.

 

     (e) In computing   adjustments under this Section 2, fractional interests in

Common   Stock   shall be taken into   account to the nearest   one-thousandth   of a

share.

 

     (f) If the Company   shall take a record of the holders of its Common   Stock

for the   purpose of   entitling   them to receive a dividend   or   distribution   or

subscription    or   purchase    rights   and   shall,    thereafter   and   before   the

distribution to stockholders thereof, legally abandon its plan to pay or deliver

such dividend, distribution, subscription or purchase rights, then thereafter no

adjustment shall be required by reason of the taking of such record and any such

adjustment previously made in respect thereof shall be rescinded and annulled.

 

     2.2 Notice of   Adjustment.   Whenever the Warrant Shares Amount is adjusted,

as   provided   in Section   2.1,   the Company   shall   promptly   mail to the Holder

written notice of such adjustment or adjustments and shall deliver to the Holder

a certificate of the chief executive   officer or chief financial   officer of the

Company   setting   forth the number of shares of Common Stock   issuable,   and the

Warrant Price payable,   upon the exercise of this Warrant after such adjustment,

setting   forth a brief   statement of the facts   requiring   such   adjustment   and

setting forth the computation by which such   adjustment was made;   provided that

in the case of any   increase in the Warrant   Shares   Amount   pursuant to Section

2.1(a), such written notice of such adjustment and related officer's certificate

shall be delivered to the Holder within five (5) Business Days following the end

of the month with respect to which such adjustment occurred.

 

     2.3 Notice of Certain   Corporate   Action. In case the Company shall propose

(a) to pay any dividend payable in securities of any class to the holders of the

Common   Stock or to make any other   distribution   to the   holders   of the Common

Stock,   or (b) to offer the holders of the Common Stock rights to subscribe   for

or to purchase any securities   convertible into shares of Common Stock or shares

of stock of any class or any other   securities,   rights   or   options,   or (c) to

effect any capital   reorganization,   consolidation or merger, then, in each such

case,   the Company   shall give the Holders of this   Warrant a written   notice of

such   proposed   action,   which shall specify the date on which a record is to be

taken for the purposes of such   dividend,   distribution   or rights,   or the date

such   issuance   is to take   place and the date of   participation   therein by the

holders   of   Common   Stock,   if any,   is to be fixed,   and   shall be   reasonably

necessary   to   indicate   the effect of such   action on the Common   Stock and the

number and kind of any other shares of stock and other   property,   if any, after

giving   effect to any   adjustment   which   will be   required   as a result of such

action.   Such   notice   shall be so given in the case of any   action   covered   by

clause   (a) or (b)   above at least ten (10) days   prior to the   record   date for

determining   holders of the Common Stock for purposes of such action and, in the

case of any other such action,   at least twenty (20)   Business Days prior to the

date of the taking of such proposed action or the date of participation   therein

by the holders of Common Stock, whichever shall be the earlier.

 

     2.4 Statement on Warrant   Certificates.   Irrespective   of any adjustment in

the number or kind of shares issuable upon the exercise of this Warrant, Warrant

certificates   theretofore or thereafter   issued may continue to express the same

number and kind of shares as are stated in the   Warrant   certificates   initially

issued.

<PAGE>

 

     2.5   Notice   to   Holders   of    Dissolution,    Liquidation   or   Winding   Up.

Notwithstanding any other provision herein, in the event that, at any time after

the date hereof and prior to the expiration of this Warrant and the   termination

of the   rights   of   the   Holder,   there   shall   be a   voluntary   or   involuntary

dissolution,   liquidation   or winding up of the Company,   then the Company shall

mail to the Holder at the earliest practicable time (and, in any event, not less

than ten (10) days before any date set for definitive   action) written notice of

the date on which such dissolution,   liquidation or winding up shall take place,

as the case may be.   Such   notice   shall also   specify   the date as of which the

holders of the shares of record of Common Stock   issuable   upon exercise of this

Warrant   shall be entitled to exchange   their   shares for   securities,   money or

other property deliverable upon such dissolution,   liquidation or winding up, as

the case may be, on which   date the Holder   shall be   entitled   to receive   upon

surrender of this Warrant, the cash or other property that the Holder would have

been   entitled   to receive   had this   Warrant   been   exercisable   and   exercised

immediately prior to such dissolution, liquidation or winding up and any and all

rights of the Holder to exercise   this Warrant shall   terminate.   In case of any

such   voluntary or   involuntary   dissolution,   liquidation   or winding up of the

Company,   the Company   shall,   after receipt of the   surrendered   Warrant,   make

payment in appropriate amount to such Person or Persons as it may be directed in

writing by the Holder surrendering the Warrant.

 

     3. No Dilution or   Impairment.   The Company   will not, by   amendment of its

certificate    of    incorporation    or    through    any    consolidation,    merger,

reorganization,   transfer of assets, dissolution, issue or sale of securities or

any other voluntary action, avoid or seek to avoid the observance or performance

of any of the terms of this Warrant,   but will at all times in good faith assist

in the   carrying   out of all such terms and in the taking of all such actions as

may be reasonably necessary or appropriate in order to protect the rights of the

holder of this Warrant against   dilution or other   impairment.   Without limiting

the generality of the   foregoing,   the Company (a) will not permit the par value

of any share of stock receivable upon the exercise of this Warrant to exceed the

amount payable therefor upon such exercise, and (b) will take all such action as

may   be   necessary   or   appropriate   (including,    without   limitation,    making

appropriate   transfers   from the   Company's   additional   paid-in   capital to its

stated   capital) in order that the   Company may validly and legally   issue fully

paid and nonassessable shares of Common Stock upon the exercise of this Warrant.

 

     4.   Fractional   Interests.   The   Company   shall   not be   required   to issue

fractional   shares of Common   Stock upon the   exercise of this   Warrant.   If any

fraction of shares of Common   Stock would be issuable   upon the exercise of this

Warrant (or specified portion thereof),   the Company shall pay an amount in cash

equal to the fair market   value (as   determined   in good faith by the   Company's

Board of   Directors)   of one (1)   share of   Common   Stock   on the   Business   Day

immediately    preceding   the   date   this   Warrant   is   presented   for   exercise,

multiplied by such fraction.

 

     5.   Reservation   of Stock,   Etc. The Company shall at all times reserve and

keep available,   solely for issuance and delivery upon exercise of this Warrant,

the   number   of   shares of Common   Stock   from time to time   issuable   upon full

exercise of this Warrant.   All shares of Common Stock   issuable upon exercise of

this Warrant shall be duly authorized and, when issued upon such exercise, shall

be validly issued, fully paid and nonassessable with no liability on the part of

the holder thereof.

<PAGE>

 

     6. Registration and Transfer of Warrants, Etc.

 

     6.1 Restrictions on Transfer of Warrants and Common Stock. This Warrant and

the Common Stock issuable upon exercise   hereof may not be sold,   transferred or

otherwise   disposed of unless   registered   under the Securities Act of 1933 (the

"Securities   Act"),   and any   applicable   state   securities   laws or pursuant to

available   exemptions   from such   registration,   provided   that the   seller,   if

requested by Company,   delivers to the Company an opinion of counsel   reasonably

satisfactory   to the Company   confirming   the   availability   of such   exemption.

Unless   the shares of Common   Stock   issuable   upon   exercise   hereof   have been

registered   under the   Securities   Act,   upon   exercise of this   Warrant and the

issuance of any of the shares of Common   Stock,   all   certificates   representing

such   securities   shall bear on the face   thereof   substantially   the   following

legend:

 

                           "THESE SHARES HAVE NOT BEEN REGISTERED UNDER THE

                            SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED

                           FOR SALE, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE

                           ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH

                           RESPECT TO THE SECURITIES UNDER SUCH ACT EXCEPT

                           PURSUANT TO AN EXEMPTION FROM REGISTRATION AVAILABLE

                           UNDER SUCH ACT AND, IF REQUESTED, DELIVERY OF AN

                           OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE

                           COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED."

 

     6.2 Warrant Register;   Ownership of Warrants. The Company shall keep at its

principal   office   a   register   in   which   the   Company   shall   provide   for the

registration of this Warrant and the   registration of transfers of this Warrant.

The Company   may treat the Person in whose name this   Warrant is   registered   on

such register as the owner thereof for all other purposes, and the Company shall

not be affected by any notice to the   contrary,   except   that,   if and when this

Warrant is accompanied by an instrument of assignment in substantially   the form

attached   hereto as Exhibit B, the Company may (but shall not be   obligated   to)

treat the bearer   thereof as the owner of this   Warrant for all   purposes.   This

Warrant,   if properly   assigned,   may be exercised by a new Holder without a new

Warrant first having been issued.

 

     6.3 Transfer and Exchange of Warrants.   Upon   surrender of this Warrant for

registration of transfer or for exchange to the Company at its principal office,

the Company at its expense shall execute and deliver in exchange   therefor a new

Warrant or Warrants   of like   tenor,   in the name of the Holder or as the Holder

(upon   payment   by the Holder of any   applicable   transfer   taxes)   may   direct,

calling in the   aggregate on the face or faces   thereof for the number of shares

of Common   Stock   called for on the face or faces of the   Warrant or Warrants so

surrendered.

 

     6.4    Replacement   of   Warrants.    Upon   receipt   of   evidence    reasonably

satisfactory   to the Company of the loss,   theft,   destruction   or mutilation of

this   Warrant,   and upon   delivery   to the   Company   of an   indemnity   agreement

reasonably   acceptable to the Company,   the Company at its expense shall execute

and deliver, in lieu thereof, a new Warrant of like tenor.

<PAGE>

 

     7. Remedies.   The Company stipulates that the remedies at law of the Holder

of this   Warrant,   in the event of any   default   or   threatened   default   by the

Company   in the   performance   of or   compliance   with   any of the   terms of this

Warrant,   are not and will not be   adequate   and   that,   to the   fullest   extent

permitted by law,   such terms may be   specifically   enforced by a decree for the

specific   performance   of any   agreement   contained   herein or by an   injunction

against a violation of any of the terms hereof or otherwise.

 

     8.