EXHIBIT 10.5
This Note and Warrant Purchase Agreement (the "Purchase Agreement") contains
certain representations and warranties (the "Representations") by ARTISTdirect,
Inc. (the "Company") in favor of the investors named therein (the "Purchasers").
The Purchase Agreement states in Section 13(h) that no person, other than the
parties to the agreement, is entitled to rely on the Representations contained
in the Purchase Agreement. The Purchase Agreement is filed in accordance with
the rules of the Securities and Exchange Commission as a material agreement, and
is intended by the Company solely as a record of the material agreement the
Company has reached with the Purchasers. The filing of the Purchase Agreement is
not intended to waive or modify Section 13(h) thereof, or as a mechanism to
update, supersede or otherwise modify prior disclosures of information and risks
concerning the Company which the Company has made to its stockholders.
Investors and potential investors should also be aware that certain
Representations made to the Purchasers are not intended to be affirmative
representations of facts, situations or circumstances, but are instead designed
and intended to allocate certain risks between the Company, on the one hand, and
the Purchasers, on the other hand. The use of representations and warranties to
allocate risk is a standard device in investment and other commercial contracts.
Accordingly, stockholders should not rely on the Representations as affirmations
or characterizations of information concerning the Company as of the date of the
Purchase Agreement, or as of any other date.
NOTE AND WARRANT PURCHASE AGREEMENT
NOTE AND WARRANT PURCHASE AGREEMENT (the "AGREEMENT"), dated as of July
28, 2005, by and among ARTISTdirect, Inc., a Delaware corporation, with
headquarters located at ▇▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇▇▇▇,
▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇ (the "COMPANY"), the investors listed on the signature pages
hereto (collectively, the "INITIAL PURCHASERS"), and U.S. Bank National
Association, a national banking association as collateral agent for the Initial
Purchasers and all other Holders of the Securities (as defined below) (in such
capacity, the "COLLATERAL AGENT").
WHEREAS:
A. The Company and the Initial Purchasers are executing and delivering
this Agreement in reliance upon the exemption from securities registration
afforded by Section 4(2) of the 1933 Act, and Regulation D.
B. The Initial Purchasers wish to purchase, and the Company wishes to
sell, upon the terms and conditions stated in this Agreement, (i) 11.25% senior
secured notes of the Company, in substantially the form attached hereto as
Exhibit A (as amended or modified from time to time, individually, a "NOTE" and
collectively, the "NOTES"), which aggregate principal amount shall be Fifteen
Million Dollars ($15,000,000) and (ii) warrants, in substantially the form
attached hereto as Exhibit B (as amended or modified from time to time,
individually a "WARRANT" and collectively, the "WARRANTS"), with an exercise
price of $2.00 per share to acquire up to an aggregate of 3,250,000 shares of
the Company's common stock (as exercised, collectively, the "WARRANT SHARES").
C. 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 (as amended or modified
from time to time, the "REGISTRATION RIGHTS AGREEMENT"), pursuant to which the
Company has agreed to provide certain registration rights with respect to the
Warrant Shares under the 1933 Act and the rules and regulations promulgated
thereunder, and applicable state securities laws.
D. The Notes, the Warrants and the Warrant Shares collectively are
referred to herein as the "SECURITIES."
NOW, THEREFORE, the Company and Initial Purchasers hereby agree as
follows:
1. PURCHASE AND SALE OF NOTES AND WARRANTS
(a) Purchase of Notes and Warrants.
(i) Subject to the satisfaction (or waiver) of the conditions
set forth in Sections 10 and 11 below, the Company shall issue and sell to each
Initial Purchaser, and each Initial Purchaser severally, but not jointly, agrees
to purchase from the Company on the Closing Date, (x) a principal amount of
Notes as is set forth opposite such Initial Purchaser's name in column (3) on
the Schedule of Purchasers and (x) Warrants to acquire up to that number of
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Warrant Shares as is set forth opposite such Initial Purchaser's name in column
(4) on the Schedule of Purchasers (the "CLOSING").
(ii) Closing. The date and time of the Closing (the "CLOSING
DATE") shall be 10:00 a.m., New York City time, on the date hereof (or such
later date as is mutually agreed to by the Company and the Initial Purchasers)
after notification of satisfaction (or waiver) of the conditions to the Closing
set forth in Sections 10 and 11 below at the offices of Sheppard, Mullin,
▇▇▇▇▇▇▇ & ▇▇▇▇▇▇▇ LLP, ▇▇▇ ▇▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇
▇▇▇▇▇-▇▇▇▇.
(iii) Purchase Price. The purchase price for the Warrants
shall be $0.25 per share for an aggregate purchase price of Eight Hundred Twelve
Thousand Five Hundred Dollars ($812,500) (the "WARRANT PURCHASE PRICE"), and the
aggregate purchase price for the Notes shall be Fourteen Million One Hundred
Eighty-Seven Thousand Five Hundred Dollars ($14,187,500) (the "NOTE PURCHASE
PRICE," and together with the Warrant Purchase Price, the "PURCHASE PRICE"). The
Purchase Price for the Notes and Warrants to be purchased by each Initial
Purchaser at the Closing shall be the amount set forth opposite such Initial
Purchaser's name in column (5) on the Schedule of Purchasers.
(b) Form of Payment. On the Closing Date, (i) each Initial Purchaser
shall pay the Purchase Price allocated to such Purchaser to the Company for the
Notes and the Warrants to be issued and sold to such Initial Purchaser at the
Closing, by wire transfer of immediately available funds in accordance with the
Company's written wire instructions, and (ii) the Company shall deliver to each
Initial Purchaser (A) one or more Notes (in the initial principal amounts as
such Initial Purchaser shall request) which such Initial Purchaser is then
purchasing and (B) one or more Warrants (in the amounts that Initial Purchaser
shall request) which such Initial Purchaser is purchasing, in each case duly
executed on behalf of the Company and registered in the name of such Initial
Purchaser or its designee.
2. REPAYMENT OF PRINCIPAL; INTEREST ON NOTES
(a) The unpaid principal balance of the Notes, together with any and
all interest accrued and unpaid thereon, automatically and unconditionally shall
be due and payable in cash on that date which is three (3) years and eleven (11)
months after the Closing Date (the "MATURITY DATE").
(b) Interest on the unpaid principal balance of the Notes will
accrue at the rate of 11.25% per annum. Accrued (and theretofore unpaid)
interest shall be payable quarterly in arrears on the fifteenth day of each
March, June, September and December, commencing September 15, 2005 (each, an
"INTEREST PAYMENT DATE"), on the date of any repayment or prepayment of
principal on the Notes (on the amount repaid or prepaid), at maturity (whether
by acceleration or otherwise) and, after such maturity, on demand. Overdue
principal and, to the extent permitted by law, overdue interest in respect of
each Note and any other overdue amount payable hereunder shall, in each case,
bear interest at a rate of 13.25% per annum and shall be payable on demand. All
interest hereunder will be computed on the basis of twelve 30-day months in a
360-day year for actual days elapsed.
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3. PREPAYMENTS OF NOTES
(a) Voluntary Prepayments. The Company shall have the right to
prepay the Notes, in whole or in part, at any time and from time to time before
the Maturity Date without penalty or premium on three Business Days written
notice. Concurrently with each such prepayment, the Company shall pay all
accrued and unpaid interest on the principal amount of the Notes which is
prepaid.
(b) Mandatory Prepayments.
(i) Prepayments from Excess Cash Flow. Not later than ninety
(90) days after the close of each Fiscal Year, the Company shall apply 60% of
its Excess Cash Flow for each Fiscal Year to prepay the principal amount of the
Notes, and together with such prepayment, the Company shall pay all accrued and
unpaid interest to the date of such prepayment on the principal amount of the
Notes being prepaid.
(ii) Prepayments from Asset Sale. Not later than five (5) days
after the receipt by the Company of any Net Cash Proceeds with respect to any
Asset Sale, the Company shall apply such Net Cash Proceeds to prepay the
principal amount of the Notes. Concurrently with each such prepayment, the
Company shall pay all accrued and unpaid interest on the principal amount of the
Notes which is prepaid.
(iii) Prepayments from Change of Control. On the date of the
consummation of any Change of Control, the Company shall prepay the outstanding
principal amount of the Notes, plus accrued and unpaid interest, if any, thereon
to the date of prepayment.
(c) Notice and Procedures.
(i) Partial Prepayment. Upon any partial prepayment of the
Notes pursuant to this Agreement, the aggregate principal amount of each such
prepayment shall be allocated among all of the Notes at the time outstanding in
proportion to the respective unpaid principal amounts thereof not theretofore
called for prepayment. Upon any partial payment of a Note the holder of such
Note may (but shall not be required to), at its option (a) surrender such Note
to the Company in exchange for a new Note in a principal amount equal to the
principal amount remaining unpaid on the surrendered Note; (b) make such Note
available to the Company for notation thereon of the portion of the principal so
paid; or (c) ▇▇▇▇ such Note with a notation thereon of the portion of the
principal so paid; provided, that any error in the notation of the principal
amount of any Note that has been partially prepaid shall not affect the
Company's obligations with respect to the payment of the actual remaining
principal amount of such Note.
(ii) Method and Place of Payment. Except as otherwise
specifically provided herein, all payments under this Agreement or under any
Note shall be made to the Holders entitled thereto not later than 1:00 P.M. (New
York time) on the date when due and shall be made in U.S. Dollars in immediately
available funds at the respective payment offices of the applicable Holders;
funds received by the Holders after that time shall be deemed to have been paid
by the Company on the next succeeding Business Day. Whenever any payment to be
made hereunder or under any Note shall be stated to be due on a day which is not
a Business Day, the
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due date thereof shall be extended to the next succeeding Business Day and, with
respect to payments of principal, interest shall be payable at the applicable
rate during such extension.
4. INITIAL PURCHASER'S REPRESENTATIONS AND WARRANTIES
Each Initial Purchaser represents and warrants:
(a) No Public Sale or Distribution. Such Initial Purchaser is (i)
acquiring the Notes and the Warrants, and (ii) upon exercise of the Warrants
will acquire the Warrant Shares, in 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
Initial Purchaser 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 an effective registration statement
or an exemption from registration under the 1933 Act and any applicable state
securities laws. Such Initial Purchaser is acquiring the Securities hereunder in
the ordinary course of its business. Such Initial Purchaser does not presently
have any agreement or understanding, directly or indirectly, with any Person to
distribute any of the Securities.
(b) Accredited Investor Status. Such Initial Purchaser is an
"accredited investor" as that term is defined in Rule 501(a) of Regulation D.
Such Initial Purchaser has knowledge and experience in financial and business
matters as to be capable of evaluating the merits and risks of purchasing the
Securities. Such Initial Purchaser is not a registered broker dealer or an
affiliate of a broker dealer registered under Section 15(a) of the 1934 Act or a
member of the National Association of Securities Dealers, Inc. or engaged in the
business of being a broker dealer.
(c) Reliance on Exemptions. Such Initial Purchaser understands that
the Securities are being offered and sold to it by the Company 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 Initial Purchaser's compliance with, the
representations, warranties, agreements, acknowledgments and understandings of
such Initial Purchaser set forth herein in order to determine the availability
of such exemptions and the eligibility of such Initial Purchaser to acquire the
Securities.
(d) Information. Such Initial Purchaser 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 that have been requested by such Initial Purchaser. Such Initial
Purchaser 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 Initial Purchaser or its advisors, if any, or
its representatives shall modify, amend or affect such Initial Purchaser's right
to rely on the Company's representations and warranties contained herein. Such
Initial Purchaser understands that its investment in the Securities involves a
high degree of risk. Such Initial Purchaser 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.
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(e) No Governmental Review. Such Initial Purchaser 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.
(f) Transfer or Resale. Such Initial Purchaser 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 Initial Purchaser shall have
delivered to the Company an opinion of qualified counsel reasonably acceptable
to the Company, 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 Initial
Purchaser provides the Company with reasonable assurance that such Securities
can be sold, assigned or transferred pursuant to Rule 144 or Rule 144A
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 through whom the sale is made) may be deemed
to be an underwriter (as that term is defined in the ▇▇▇▇ ▇▇▇) may require
compliance with some other exemption under the 1933 Act or the rules and
regulations of the SEC promulgated 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.
(g) Legends. Such Initial Purchaser understands that the
certificates or other instruments representing the Notes and Warrants and, until
such time as the resale of the Warrant Shares have been registered under the
1933 Act as contemplated by the Registration Rights Agreement, the stock
certificates representing 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
EXERCISABLE][HAVE BEEN][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 SELECTED BY THE HOLDER, IN A
GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER
SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER
SAID ACT. NOTWITHSTANDING THE FOREGOING, THE
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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 cause its
transfer agent to 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, provided such Initial Purchaser provides the Company with reasonable
written assurances to the effect that any resale shall be done in accordance
with the plan of distribution set forth in the prospectus contained in the
effective registration statement, (ii) in connection with a sale, assignment or
other transfer, such holder provides the Company with an opinion of qualified
counsel reasonably acceptable to Company, in a generally acceptable form, to the
effect that such sale, assignment or 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.
(h) Validity; Enforcement. Such Initial Purchaser has the requisite
power and authority to enter into this Agreement and the Registration Rights
Agreement and to purchase the Securities in accordance with the terms hereof.
This Agreement and the Registration Rights Agreement have been duly and validly
authorized, executed and delivered on behalf of such Initial Purchaser and shall
constitute the legal, valid and binding obligations of such Initial Purchaser
enforceable against such Initial Purchaser 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.
(i) Residency. Such Initial Purchaser is a resident of that
jurisdiction specified on the Schedule of Purchasers.
5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth in the Disclosure Schedule, the Company
represents and warrants to the Holders of the Securities that:
(a) Organization and Qualification. The Company and its Subsidiaries
are entities duly incorporated or duly formed and validly existing 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. The Company has no Subsidiaries except as set forth
on Schedule 5(a).
(b) Authorization; Enforcement; Validity. The Company has the
requisite power and authority to enter into and perform its obligations under
each of the Transaction
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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 Notes and the
Warrants, and the reservation for issuance and issuance of Warrant Shares
issuable upon exercise of the Warrants have been duly authorized by the
Company's Board of Directors and (other than the Stockholder Approval, no
further corporate action is required by the Company, its Board of Directors or
its stockholders). This Agreement and the other Transaction Documents 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.
(c) Issuance of Securities. The issuance of the Notes and the
Warrants are duly authorized and are free from all taxes, liens and charges with
respect to the issue thereof. As of the date hereof, the Company has 1,332,411
shares of Common Stock reserved solely for issuance upon exercise of the
Warrants. Immediately following the Closing, the Board will authorize the
Company to undertake the actions reasonably necessary to amend its Certificate
of Incorporation and seek appropriate Stockholder Approval such that a number of
shares of Common Stock shall be duly authorized and reserved for issuance which
equals at least 130% of the sum of the maximum number of shares Common Stock
issuable upon exercise of the Warrants. Upon exercise in accordance with the
Warrants, the Warrant Shares, 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. The offer and issuance by the
Company of the Securities in accordance with this Agreement 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 Notes and the Warrants and the issuance of the Warrant Shares,
when issued) will not (following receipt of the Stockholder Approval) (i) result
in a violation of any certificate of incorporation as amended, as specifically
described in Section 5(c), certificate of formation, any certificate of
designations or other constituent documents of the Company or any of its
Subsidiaries, any capital stock of the Company or any of its Subsidiaries or
bylaws 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 is a party, or (iii) result in a violation of
any law, rule, regulation, order, judgment or decree (including federal and
state securities laws and regulations and the rules and regulations of the OTC
Bulletin Board (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.
(e) Consents. Except as disclosed on Schedule 5(e), the Company is
not required to obtain any consent, authorization or order of, or make any
filing (other than the filing
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with the SEC of a proxy statement on Schedule 14A and one or more Registration
Statements in accordance with the requirements of the Registration Rights
Agreement) 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 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 listing 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 Initial Purchasers' Purchase of
Securities. The Company acknowledges and agrees that each Initial Purchaser 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 Initial Purchaser is (i) an officer or director of the Company, (ii) an
"affiliate" of the Company (as defined in Rule 144) or (iii) to the Company's
Knowledge, a "beneficial owner" of more than 10% of the shares of Common Stock
(as defined for purposes of Rule 13d-3 of the 1934 Act). The Company further
acknowledges that no Initial Purchaser is acting as a financial advisor or
fiduciary of the Company (or in any similar capacity) with respect to the
Transaction Documents and the transactions contemplated hereby and thereby, and
any advice given by any Initial Purchaser 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 Initial Purchaser's
purchase of the Securities. The Company further represents to each Initial
Purchaser that the decision of the Company and each of the Subsidiaries to enter
into the Transaction Documents, as applicable, has been based solely on the
independent evaluation by the Company, its Subsidiaries and their
representatives.
(g) No General Solicitation; Placement Agent's Fees. Neither the
Company, nor any of its 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 Initial Purchaser or its investment advisor) relating to
or arising out of the transactions contemplated hereby. The Company shall pay,
and hold each Holder of any Securities harmless against, any liability, loss or
expense (including, without limitation, reasonable attorney's fees and
out-of-pocket expenses) arising in connection with any such claim. The Company
acknowledges that it has engaged Libra Securities, LLC as placement agent (the
"AGENT") in connection with this transaction. Other than the Agent, the Company
has not 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
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or any applicable stockholder approval provisions, including, without
limitation, under the rules and regulations of the Principal Market.
(i) Dilutive Effect. The Company understands and acknowledges that
the number of Warrant Shares issuable upon exercise of the Warrants will
increase in certain circumstances. The Company further acknowledges that 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, which may be substantial, 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 Certificate of Incorporation
or the laws of the jurisdiction of its formation or otherwise which is or could
become applicable to any Holder of any Securities as a result of the
transactions contemplated by this Agreement, including, without limitation, the
Company's issuance of the Securities and any ownership of any Holder 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. Except as disclosed on
Schedule 5(k), during the two (2) years prior to the date hereof, the Company
has filed all SEC Documents. The Company has delivered to each Initial Purchaser
or its representatives, true, correct and complete copies of the SEC Documents
not available on the ▇▇▇▇▇ system. 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. 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 the applicable accounting requirements and the
published rules and regulations of the SEC with respect thereto. 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 or subject to year-end
adjustments) 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 interim
statements, to normal year-end audit adjustments). No other information provided
by or on behalf of the Company to the Initial Purchasers which is not included
in the SEC Documents, including, without limitation, information referred to in
Section 4(d) 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, in the light of the circumstance under which they are or were made, not
misleading.
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(l) Absence of Certain Changes. Except as disclosed in the Company's
Form 10-QSB for the period ended March 31, 2005 or otherwise in Schedule 5(l),
since December 31, 2004, there has been no material adverse change and no
material adverse development in the business, properties, operations, condition
(financial or otherwise), results of operations or prospects of the Company or
its Subsidiaries. Since December 31, 2004, the Company has not (i) declared or
paid any dividends, (ii) sold any assets, individually or in the aggregate, in
excess of $100,000 outside of the ordinary course of business, (iii) had capital
expenditures, individually or in the aggregate, in excess of $100,000 or (iv)
waived any material rights with respect to any Indebtedness or other rights in
excess of $100,000 owed to it. The Company has not 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. Neither the Company nor any Subsidiary of
the Company is as of the date hereof, and after giving effect to the
transactions contemplated hereby to occur at the Closing (including the MD
Acquisition) will be, Insolvent.
(m) No Undisclosed Events, Liabilities, Developments or
Circumstances. Except as disclosed on Schedule 5(m), no event, liability,
development or circumstance has occurred or exists, or is reasonably expected to
occur with respect to the Company or 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 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
Certificate of Incorporation or Bylaws or their organizational charter or
certificate 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 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 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
has not received notice of and does not have Knowledge of a 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. Since December 31, 2004, (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.
10
(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 (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) ▇▇▇▇▇▇▇▇-▇▇▇▇▇ Act. Except as described on Schedule 5(p), the
Company's form 10-K for the year ended December 31, 2004 or in the Form 10-QSB
for the quarter ended March 31, 2005, the Company is in compliance with any and
all applicable requirements of the ▇▇▇▇▇▇▇▇-▇▇▇▇▇ Act of 2002 that are effective
as of the date hereof and applicable to the Company, and any and all applicable
rules and regulations promulgated by the SEC thereunder that are effective as of
the date hereof and applicable to the Company, except where such noncompliance
would not have, individually or in the aggregate, a Material Adverse Effect.
(q) Transactions With Affiliates. Except as described in the SEC
Documents filed at least ten (10) days prior to the date hereof and other than
the grant of stock options and transactions with Affiliates disclosed on
Schedule 5(q), none of the officers, directors or employees of the Company 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, 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.
(r) Equity Capitalization. As of the date hereof, the authorized
capital stock of the Company consists of (i) 15,000,000 shares of Common Stock,
of which as of the date hereof, 3,825,019 are issued and 3,502,117 are
outstanding, 1,565,710 shares are reserved for issuance pursuant to the
Company's stock option, purchase plans and pursuant to securities (other than
the Notes and the Warrants) exercisable or exchangeable for, or convertible
into, shares of Common Stock and (ii) 5,000,000 shares of preferred stock, $0.01
par value per share, of which as of the date hereof none of which is issued and
outstanding or reserved for issuance. 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 5(r): (i) none of the Company's share capital 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
11
exercisable or exchangeable for, any share capital 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 share capital 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 share capital 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 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; (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 the Registration Rights Agreement or any other registration rights
granted to certain other investors financing the MD Acquisition or any finder's
fees paid or payable in connection with this Agreement or any other financing
transactions closing in connection with the MD Acquisition); (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 (A) incurred in the ordinary course of the Company's
or its Subsidiaries' respective businesses or (B) incurred in connection with
the MD Acquisition and which, individually or in the aggregate, do not or would
not have a Material Adverse Effect. The Company has furnished to the Initial
Purchasers true, correct and complete copies of the Company's Certificate of
Incorporation, as amended and as in effect on the date hereof (the "CERTIFICATE
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 the SEC
Documents or in Schedule 5(s), neither the Company nor any of its Subsidiaries
(i) has any outstanding Indebtedness, (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 would result in a Material
Adverse Effect, (iii) is in violation of any term of or in default 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 5(s) provides a detailed description of the material
terms of any such outstanding Indebtedness.
(t) Absence of Litigation. 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, the
Common Stock or any of the Company's Subsidiaries or any of the Company's or the
Company's Subsidiaries' officers or directors, except as set forth in Schedule
5(t).
12
(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 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 satisfactory. No executive officer (as defined in Rule
501(f) of the ▇▇▇▇ ▇▇▇) of the Company has notified the Company that such
officer intends to leave the Company or otherwise terminate such officer's
employment with the Company. No executive officer of the Company, to the
Knowledge of the Company, 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. The Company and its Subsidiaries do not own any real
property. The Company and its Subsidiaries have 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 and 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, service marks,
and all applications and registrations therefor, trade names, patents, patent
rights, copyrights, original works of authorship, inventions, licenses,
approvals, governmental authorizations, trade secrets and other intellectual
property rights ("INTELLECTUAL PROPERTY RIGHTS") necessary to conduct their
respective businesses as now conducted. Except as set forth in Schedule 5(x),
none of the Company's Intellectual Property Rights have expired or terminated,
or are expected to expire or terminate, within three years from the date of this
Agreement. The Company does not have any
13
knowledge of any infringement by the Company or its Subsidiaries of Intellectual
Property Rights of others. There is no claim, action or proceeding pending, or
to the knowledge of the Company, being threatened, against the Company or its
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. Except as set forth in Schedule 5(z), 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) 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 to be made or filed by any jurisdiction to
which it is subject, (ii) has paid or accrued 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 or unaccrued 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. No liens have been filed and no claims are being asserted by or against
the Company or any of its Subsidiaries with respect to any taxes (other than
liens for taxes not yet due and payable). Except as disclosed on Schedule 5(aa),
neither the Company nor its Subsidiaries has received notice of assessment or
proposed assessment of any taxes claimed to be owed by it or any other Person on
its behalf. Neither the Company nor its Subsidiaries is a party to any tax
sharing or tax indemnity agreement or any other agreement of a similar nature
that remains in effect. Each of the Company and its Subsidiaries has complied in
all material respects with all applicable legal requirements relating to the
payment and withholding of taxes
14
and, within the time and in the manner prescribed by law, has withheld from
wages, fees and other payments and paid over to the proper governmental or
regulatory authorities all amounts required.
(bb) Internal Accounting Controls. Except as set forth in the SEC
Documents and on Schedule 5(bb), the Company and each of its Subsidiaries
maintain 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 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.
(cc) Ranking of Notes. Except as set forth on Schedule 5(cc), no
Indebtedness of the Company is senior to or ranks pari passu with the Notes in
right of payment, whether with respect of payment of redemptions, interest,
damages or upon liquidation or dissolution or otherwise.
(dd) 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.
(ee) Disclosure. Other than in connection with the acquisition of
MediaDefender, Inc. (the "MD ACQUISITION"), the Company confirms that neither it
nor any other Person acting on its behalf has provided any of the Initial
Purchasers 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 Initial Purchasers and the
other Holders will rely on the foregoing representations in effecting
transactions in securities of the Company. The Company has provided each of the
Initial Purchasers with a true, correct and complete copy of all of the executed
documentation in connection with the MD Acquisition (the "MD DOCUMENTS"). All of
the representations and warranties, including those of MediaDefender, Inc.,
contained in the MD Documents are true and correct as of the date hereof. All
disclosure provided in this Agreement and the Schedules hereto are true and
correct and do 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.
Each press release issued by the Company 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. Except as
set forth in Schedule 5(ee), 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
15
conditions, which, under applicable law, rule or regulation, requires public
disclosure or announcement by the Company but which has not been so publicly
announced or disclosed.
(ff) The provisions of the Security Agreement are effective to
create in favor of the Collateral Agent for the benefit of the Collateral Agent
and the Holders a legal, valid and enforceable security interest in all right,
title and interest of the Company and the Guarantors in the Security Agreement
Collateral, and the Collateral Agent, for the benefit of the Collateral Agent
and the Holders, has a fully perfected first lien on, and security interest in,
all right, title and interest in all of the Security Agreement Collateral
described therein to the extent the Security Agreement Collateral consists of
the type of property in which a security interest may be perfected by filing a
financing statement under the UCC, subject to no other Liens other than
Permitted Liens.
(gg) The provisions of the Trademark Security Agreement, taken
together with the Security Agreement, are effective to create in favor of the
Collateral Agent for the benefit of the Collateral Agent and the Holders a
legal, valid and enforceable security interest in all right, title and interest
of the Company and the Guarantors in the Trademark Collateral, and the
Collateral Agent, for the benefit of the Collateral Agent and the Holders, has a
fully perfected first lien on, and security interest in, all right, title and
interest in all of the Trademark Collateral described therein, subject to no
other Liens other than Permitted Liens. The recordation of the Trademark
Security Agreement in the United States Patent and Trademark Office together
with filings on Form UCC-1 made pursuant to the Trademark Security Agreement
will create a perfected security interest in the Trademark Collateral to the
extent the Trademark Collateral consists of the type of property in which a
security interest may be perfected by such filing and recordation; provided,
that additional action may be required under the UCC with respect to proceeds.
(hh) The provisions of the Patent Security Agreement, taken together
with the Security Agreement, are effective to create in favor of the Collateral
Agent for the benefit of the Collateral Agent and the Holders a legal, valid and
enforceable security interest in all right, title and interest of the Company
and the Guarantors in the Patent Collateral, and the Collateral Agent, for the
benefit of the Collateral Agent and the Holders, has a fully perfected first
lien on, and security interest in, all right, title and interest in all of the
Patent Collateral described therein, subject to no other Liens other than
Permitted Liens. The recordation of the Patent Security Agreement in the United
States Patent and Trademark Office together with filings on Form UCC-1 made
pursuant to the Patent Security Agreement will create a perfected security
interest in the Patent Collateral to the extent the Patent Collateral consists
of the type of property in which a security interest may be perfected by such
filing and recordation; provided, that additional action may be required under
the UCC with respect to proceeds.
(ii) The provisions of the Copyright Security Agreement, taken
together with the Security Agreement, are effective to create in favor of the
Collateral Agent for the benefit of the Collateral Agent and the Holders a
legal, valid and enforceable security interest in all right, title and interest
of the Company and the Guarantors in the Copyright Collateral, and the
Collateral Agent, for the benefit of the Collateral Agent and the Holders, has a
fully perfected first lien on, and security interest in, all right, title and
interest in all of the Copyright Collateral described therein, subject to no
other Liens other than Permitted Liens. The recordation of the
16
Copyright Security Agreement in the United States Copyright Office together with
filings on Form UCC-1 made pursuant to the Copyright Security Agreement will
create a perfected security interest in the Copyright Collateral to the extent
the Copyright Collateral consists of the type of property in which a security
interest may be perfected by such filing and recordation; provided, that
additional action may be required under the UCC with respect to proceeds.
(jj) The security interests created in favor of the Collateral
Agent, for the benefit of the Collateral Agent and the Holders, under the Pledge
Agreement constitute first priority perfected security interests in the Pledged
Collateral described therein, subject to no security interests of any other
Person. Assuming the continued possession by the Collateral Agent of the Pledged
Collateral constituting certificated securities, no filings or recordings are
required in order to perfect (or maintain the perfection or priority of) the
security interests created in the Pledged Collateral under the Pledge Agreement
to the extent such Pledged Collateral constitutes certificated securities.
(kk) Except with respect to Permitted Liens, there is no financing
statement, security agreement, chattel mortgage, real estate mortgage or other
document filed or recorded with any filing records, registry or other public
office, that purports to cover, affect or give notice of any present or possible
future Lien on any assets or property of the Company or any Subsidiary or any
rights relating thereto.
(ll) Schedule 5(ll) hereto sets forth the account numbers and
locations of all bank accounts (including, without limitation, all deposit
accounts, investment accounts, securities accounts and brokerage accounts) of
the Company and its Subsidiaries
6. COVENANTS
(a) Best Efforts. Each party shall use its 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 Holder of the Securities 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 Initial Purchasers 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 Initial Purchasers
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 Investors (as
defined in the Registration Rights Agreement) shall have sold all the Warrant
Shares and none of the Notes or Warrants is outstanding (the "REPORTING
PERIOD"), the Company shall use its best efforts to timely file (or obtain
extensions in respect thereof and file within the applicable period) all reports
required to be filed with the SEC pursuant to the 1934 Act, and the Company
shall not
17
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 otherwise
permit such termination.
(d) Use of Proceeds. The Company will use the proceeds from the sale
of the Securities for the MD Acquisition and costs and expenses related thereto
and for general working capital purposes and not for (i) repayment of any other
outstanding pari passu or junior Indebtedness of the Company or (ii) redemption
or repurchase of any of its equity securities.
(e) Financial Information. The Company agrees to send the following
to each Investor during the Reporting Period (i) unless the following are filed
with the SEC through ▇▇▇▇▇ and are available to the public through the ▇▇▇▇▇
system, within one (1) Business Day after the filing thereof with the SEC, (A) a
copy of its Annual Reports on Form 10-K or 10-KSB, (B) a copy of its quarterly
reports on Form 10-Q, (C) any interim reports or any consolidated balance
sheets, income statements, stockholders' equity statements and/or cash flow
statements for any period other than annual, (D) any Current Reports on Form 8-K
and (E) any registration statements (other than on Form S-8) or amendments filed
pursuant to the 1933 Act, and (ii) 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. To the extent required, 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. The Company shall maintain the Common Stocks'
authorization for quotation on the Principal Market. Neither the 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 the Principal
Market. The Company shall pay all fees and expenses in connection with
satisfying its obligations under this Section 6(f).
(g) Fees. The Company shall reimburse the Initial Purchasers and JMB
Capital Partners for all reasonable out-of-pocket expenses incurred in
connection with the transactions contemplated hereby regardless of whether or
not the transactions contemplated hereby actually occur. To secure the Company's
obligation, the Company has made an initial expense deposit of Fifty Thousand
Dollars ($50,000) upon execution of the term sheet, and such deposit was
delivered to JMB Capital Partners. The Company shall also reimburse the
Collateral Agent and the Holders for all reasonable out-of-pocket expenses
incurred in connection with the custody or preservation of the Collateral and
all reasonable out-of-pocket expenses incurred in connection with the
performance of any of their rights and obligations under the Transaction
Documents and any consents, amendments, waivers or other modifications thereto,
and, including without limitation, all reasonable fees, expenses and
disbursements of counsel to the Collateral Agent and/or the Holders in
connection with the negotiation, preparation, execution and administration of
the Transaction Documents and any consents, amendments, waivers or other
modifications thereto. The Company shall be responsible for the payment of any
placement agent's fees, financial advisory fees, or broker's commissions
relating to or arising out of the transactions contemplated hereby, including,
without limitation, any fees or commissions
18
payable to the Collateral Agent. The Company shall pay, and hold each Holder of
the Securities 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. Except as
otherwise set forth in the Transaction Documents, each party to this Agreement
shall bear its own expenses in connection with the sale of the Securities to the
Initial Purchasers.
(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, including, without limitation, Section 4(f) hereof; provided that an
Investor and its pledgee shall be required to comply with the provisions of
Section 4(f) hereof in order to effect a sale, transfer or assignment of
Securities to such pledgee. 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 5:30 p.m., New York Time, on the fourth Business Day following the date
of this Agreement, the Company shall file a press release and a Current Report
on Form 8-K describing the terms of the transactions contemplated by this
Agreement 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 each of the Notes, the form of
Warrant, the Registration Rights Agreement) and the MD Documents as exhibits to
such filing (including all attachments, the "INITIAL 8-K FILING"). On or before
5:30 p.m., New York Time, on the fourth Business Day following the date of the
signing and closing of the MD Acquisition, the Company shall file a press
release and a Current Report on Form 8-K describing the MD Acquisition in the
form required by the 1934 Act and attaching the MD Documents (including, without
limitation, Agreement and Plan of Merger (the "MERGER AGREEMENT")(and all
schedules to the Merger Agreement) (including all attachments, the "MD 8-K
FILING"). From and after the filing of the Registration Statement with the SEC,
the Company, any of its Subsidiaries or MediaDefender, Inc., or any of their
respective officers, directors, employees or agents, shall not provide to any
Holder of the Securities any material nonpublic information that is not
disclosed in the Registration Statement filing. The Company shall not, and shall
instruct each of its Subsidiaries and its and each of their respective officers,
directors, employees and agents, not to provide any Holder of the Securities
with any material, nonpublic information regarding the Company or any of its
Subsidiaries from and after the filing of the Registration Statement with the
SEC without the express written consent of such Holder. In the event of a breach
of the foregoing covenant by the Company, 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, any Holder of
the Securities 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 Holder
of the Securities shall have any
19
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 nor any Holder of the Securities
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 Holder of the Securities, to make
any press release or other public disclosure with respect to such transactions
(i) in substantial conformity with the Initial 8-K Filing and the MD 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 Holder of the
Securities shall be consulted by the Company in connection with and given an
opportunity to review any such press release or other public disclosure prior to
its release).
(j) Restriction on Redemption and Cash Dividends. Except as
permitted pursuant to Section 7(b), so long as any Notes 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 Required Holders.
(k) Additional Notes; Variable Securities; Dilutive Issuances. So
long as any Holder beneficially owns any Securities, the Company will not issue
any Notes other than to the Holders of the Securities as contemplated hereby and
the Company shall not issue any other securities that would cause a breach or
default under the Notes. For as long as any Notes 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
price which varies or may vary with the market price of the Common Stock,
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 Exercise Price (as defined in the Warrants) with respect to
the Common Stock into which any Warrant is exercisable. For as long as any Notes
or Warrants remain outstanding, the Company shall not, in any manner, enter into
or affect any Dilutive Issuance (as defined in the Warrants) if the effect of
such Dilutive Issuance is to cause the Company to be required to issue upon
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 exercise of the Warrants
without breaching the Company's obligations under the rules or regulations of
the Principal Market.
(l) Corporate Existence. So long as any Holder beneficially owns any
Securities, the Company shall not be party to any Fundamental Transaction unless
the Company is in compliance with the applicable provisions governing
Fundamental Transactions set forth in the Notes and the Warrants.
(m) Reservation of Shares. Immediately following the Closing and
continuing until the Warrants are exercised or the Warrants expire, the Company
shall take all action necessary to have authorized, and reserved for the purpose
of issuance, after the Closing Date, 130% of the shares of Common Stock issuable
upon exercise of 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
20
entity, except where such violations would not result, either individually or in
the aggregate, in a Material Adverse Effect.
(o) Integration. None of the Company, its Subsidiaries, their
affiliates and any Person acting on their behalf will take any action or steps
referred to in Section 5(h) 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.
(p) Registration Statement Eligibility. The Company shall use its
best efforts to maintain its eligibility to use the registration statement that
it files with the SEC so that it is available for the registration of the resale
of the Registrable Securities, as defined in the Registration Rights Agreement.
(q) Holding Period. For the purposes of Rule 144, the Company
acknowledges that the holding period of the Warrant Shares may be tacked onto
the holding period of the Warrants (in the case of Cashless Exercise (as defined
in the Warrants)) and the Company agrees not to take a position contrary to this
Section 6(q).
(r) Stockholder Approval. The Company shall prepare and file with
the SEC, as promptly as practicable after the date hereof but in no event later
than twenty (20) days after the date hereof, an information statement (the
"INFORMATION STATEMENT"), substantially in the form that has been previously
reviewed and reasonably approved by the Initial Purchasers and a counsel of
their choice, informing the stockholders of the Company of the receipt of the
consents of the requisite stockholders approving resolutions increasing the
authorized number of shares of common stock from 15,000,000 shares to 60,000,000
shares (the "STOCKHOLDER APPROVAL"). The Company shall prepare and file with the
SEC a preliminary proxy statement with respect to a special or annual meeting of
the stockholders of the Company (the "STOCKHOLDER MEETING"), which shall be
promptly called and held not later than June 30, 2006 (the "STOCKHOLDER MEETING
DEADLINE") soliciting each such stockholder's affirmative vote for approval of,
to the extent not previously adopted, the amended forms of Certificate of
Incorporation and By-Laws of the Company in substantially the forms attached as
Exhibit Q and Exhibit R hereto, respectively (such affirmative approval being
referred to herein as the "STOCKHOLDER CONSENT"), and the Company shall use its
best efforts to solicit its stockholders' approval of such resolutions and to
cause the Board of Directors of the Company to recommend to the stockholders
that they approve such resolutions. The Company shall be obligated to seek to
obtain the Stockholder Consent by the Stockholder Meeting Deadline. If, despite
the Company's best efforts the Stockholder Consent is not obtained on or prior
to the Stockholder Meeting Deadline, the Company shall cause an additional
Stockholder Meeting to be held each calendar quarter thereafter until such
Stockholder Consent is obtained.
(s) Audit of MD Financial Statements. The Company shall promptly
after the Closing Date have a qualified accounting firm registered with the
Public Company Accounting Oversight Board audit the financial statements of
MediaDefender, Inc. and its subsidiaries, which audit shall be conducted in
accordance with generally accepted accounting principals and completed on or
prior to seventy-five (75) days after the Closing Date.
21
(t) Management Letters. Promptly upon receipt thereof, the Company
shall deliver to the Holders a copy of any "management letter" received from its
certified public accountants and management's response thereto.
(u) Compliance Certificate. Concurrently with the deliver of the
annual and quarterly financial statements pursuant to Section 6(e), a
certificate of the president, the chief financial officer, chief accounting
officer or the treasurer of the Company to the effect that, to the best of such
officer's knowledge after due inquiry, no Default or Event of Default has
occurred and is continuing or, if any Default or Event of Default has occurred
and is continuing, specifying the nature and extent thereof, which certificate
shall (x) set forth in reasonable detail the calculations required to establish
whether the Company and its Subsidiaries were in compliance with the provisions
of Section 7(h), at the end of such fiscal quarter or year, as the case may be;
(y) state whether any change in GAAP or the application thereof has occurred
since the Closing Date and, if any change has occurred, specifying the effect of
such change on the financial statements accompanying such certificate, and (z)
if delivered with the annual financial statements, set forth in reasonable
detail the amount of (and the calculations required to establish the amount of)
Excess Cash Flow for the applicable Fiscal Year.
(v) Execution of Subsidiaries Guaranty and Security Documents by
Future Subsidiaries. If any Person becomes a Subsidiary of the Company or any of
its Subsidiaries after the Closing Date, (A) the Company will promptly notify
the Collateral Agent of that fact and cause (x) such Subsidiary to execute and
deliver to the Collateral Agent a counterpart of the Guaranty, (y) such
Subsidiary to execute and deliver to the Collateral Agent a counterpart of the
Security Agreement, the Pledge Agreement, the Trademark Security Agreement and
the Patent Security Agreement and to take all such further action and execute
all such further documents and instruments as may be required to grant and
perfect in favor of the Collateral Agent, for the benefit of the Collateral
Agent and the Holders, a first-priority security interest in all of the
Collateral owned by such Subsidiary (subject only to Permitted Liens) and (z)
the parent of such Subsidiary to effect the pledge by such parent to the
Collateral Agent on behalf of the Collateral Agent and the Holders of all of the
equity interests in such Subsidiary; (B) the Company shall deliver to the
Collateral Agent (v) certified copies of such Subsidiary's Articles or
Certificate of Incorporation (or equivalent organizational document), together
with a good standing certificate from the Secretary of State of the jurisdiction
of its incorporation (or equivalent document, if any), each to be dated a recent
date prior to their delivery to the Collateral Agent, (w) a copy of such
Subsidiary's Bylaws, certified by its corporate secretary or an assistant
corporate secretary as of a recent date prior to their delivery to the
Collateral Agent, (x) originally executed counterparts of any documents required
to be delivered by such Subsidiary pursuant to the clause (A) above, together
with a certificate executed by the secretary or an assistant secretary of such
Subsidiary as to (i) the incumbency and signatures of the officers of such
Subsidiary executing the Subsidiaries Guaranty and the Security Documents to
which such Subsidiary is a party and (ii) the fact that the attached resolutions
of the Board of Directors of such Subsidiary authorizing the execution, delivery
and performance of the Subsidiaries Guaranty and such Security Documents are in
full force and effect and have not been modified or rescinded, (y) the
certificate or certificates evidencing all of the equity interests in such
Subsidiary required to be delivered pursuant to the clause (A) above, and (z) a
favorable opinion of counsel to the Company and such Subsidiary, in form and
substance reasonably satisfactory to the Collateral Agent, as to (i) the due
organization and good standing of such Subsidiary, (ii) the due
22
authorization, execution and delivery by such Subsidiary of the Subsidiaries
Guaranty and such Security Documents to which such Subsidiary is a party, (iii)
the enforceability of the Subsidiaries Guaranty and such Security Documents
against such Subsidiary, and (iv) such other matters as the Collateral Agent may
reasonably request, all of the foregoing to be reasonably satisfactory in form
and substance to the Collateral Agent.
(w) Notice of Bank Accounts. The Company will, and will cause each
of its Subsidiaries to, give notice to the Administrative Agent in writing of
any such Person creating or opening any additional bank accounts simultaneously
with the opening of such accounts.
(x) Account Control Agreements. The Company will, and will cause
each of the its Subsidiaries to, cause all cash receipts, checks and cash
proceeds of accounts receivable and other Collateral of the Company and its
Subsidiaries to be deposited only into depository accounts with financial
institutions that have entered into account agreements in substantially the form
of Exhibit O hereto or another form reasonably acceptable to the Collateral
Agent (such account control agreements referred to herein as "ACCOUNT CONTROL
AGREEMENTS" and such depository accounts with financial institutions that have
entered into such Account Control Agreements referred to herein as "CONTROLLED
ACCOUNTS"). The Account Control Agreements shall provide that at any time
following the occurrence of an Event of Default, the Collateral Agent shall be
entitled to direct the financial institutions party thereto to cause all funds
of the Company and its Subsidiaries held in the Controlled Accounts at such
financial institutions to be transferred immediately and at any time thereafter
to the Collateral Agent to be applied to the Obligations or held as Collateral,
as the Collateral Agent deems appropriate.
(y) Issuances Pursuant to Approved Stock Plans.
(i) From and after the date hereof until the date that is the
one year anniversary of the Closing Date, the Company shall not issue pursuant
to an Approved Stock Plan (as defined in the Warrant) shares of Common Stock,
Options or Convertible Securities in an amount which exceeds, in the aggregate,
15% of the outstanding shares of Common Stock of the Company on a fully diluted
basis (excluding warrants or options having an exercise price greater than
$2.00).
(ii) From and after the one (1) year anniversary of the
Closing Date, the Company shall not in any 365 day period, at any time while any
of the Notes remain outstanding, issue shares of Common Stock, Options or
Convertible Securities pursuant to an Approved Stock Plan in an amount which
exceeds, in the aggregate, 4% of the outstanding shares of Common Stock of the
company on a fully diluted basis (excluding warrants or options having an
exercise price greater than $2.00, as adjusted for any stock split, stock
dividend, stock combination or other similar transaction) at the beginning of
such 365 day period.
(z) Lock-up Agreements. The Company agrees to use its best efforts
to ensure that the provisions of the Lock-up Agreements delivered pursuant to
the Securities Purchase Agreement are complied with in all respects, and agrees
that the Lock-up Agreements shall not be added to, amended or otherwise modified
in any respect without the prior written consent of the Initial Purchasers.
23
(aa) Voting Agreements. The Company agrees to use its best efforts
to ensure that the provisions of the Voting Agreements delivered pursuant to the
Securities Purchase Agreement are complied with in all respects, and agrees that
the Voting Agreements shall not be added to, amended or otherwise modified in
any respect without the prior written consent of the Initial Purchasers.
(bb) Further Assurances. The Company will, and will cause each of
their Subsidiaries, at the expense of the Company, to make, execute, endorse,
acknowledge, record, file and/or deliver to the Collateral Agent from time to
time such vouchers, invoices, schedules, confirmatory assignments, conveyances,
financing statements, transfer endorsements, powers of attorney, certificates,
reports and other assurances, instruments or documents and take such further
steps may be necessary or desirable to establish, perfect, preserve and protect
the Liens relating to the Collateral covered by any of the Security Documents as
the Collateral Agent may reasonably require.
7. NEGATIVE COVENANTS. The Company hereby covenants and agrees that until
the satisfaction in full of the Notes and the exercise of the Warrants, it will
fully and timely perform all covenants in this Article 7:
(a) Indebtedness. The Company will not, and will not permit any of
its Subsidiaries to, contract, create, incur, assume or suffer to exist any
Indebtedness, except
(i) Indebtedness incurred pursuant to this Agreement and the
other Transaction Documents;
(ii) Indebtedness incurred pursuant to the Convertible
Subordinated Notes; and
(iii) additional Indebtedness incurred by the Company and its
Subsidiaries in an aggregate principal amount not to exceed $3,000,000 at any
one time outstanding.
(b) Restricted Payments. (i) The Company will not, and will not
cause or permit any Subsidiary to, directly or indirectly, (a) declare or pay
any dividend or make any distribution (other than dividends or distributions
payable in Qualified Capital Stock of the Company) on or in respect of shares of
the Company's Qualified Capital Stock to holders of such Capital Stock, (b)
redeem or repurchase any Qualified Capital Stock of the Company or any warrants,
rights or options to purchase or acquire shares of any class of such Capital
Stock, or (c) make any Investment (other than Permitted Investments) (each of
the foregoing actions set forth in clauses (a), (b) and (c) being referred to as
a "RESTRICTED PAYMENT"), if at the time of such Restricted Payment or
immediately after giving effect thereto, (i) a Default shall have occurred and
be continuing or (ii) the Company is not in compliance with Section 7(h) or
(iii) the aggregate amount of Restricted Payments (including such proposed
Restricted Payment but excluding Restricted Payments pursuant to clause (2) of
the next paragraph) made subsequent to the Closing Date (the amount expended for
such purposes, if other than in cash, being the fair market value of such
property as determined reasonably and in good faith by the Board of Directors of
the Company) shall exceed the sum (the "BASKET") of (without duplication): (v)
24
50% of the cumulative Consolidated Net Income (or if cumulative Consolidated Net
Income for any fiscal quarter shall be a loss, minus 100% of such loss) of the
Company earned subsequent to the end of the first fiscal quarter ended after the
Closing Date and on or prior to the date the Restricted Payment occurs (the
"REFERENCE DATE") (treating such period as a single accounting period); plus (w)
100% of the aggregate net proceeds received by the Company from any Person
(other than a Subsidiary of the Company) from the issuance and sale subsequent
to the Closing Date and on or prior to the Reference Date of Qualified Capital
Stock of the Company; plus (x) without duplication of any amounts included in
clause (iii)(w) above, 100% of the aggregate net proceeds of any equity
contribution received by the Company from a holder of the Company's Capital
Stock; plus (y) without duplication of any amounts included in the calculation
of Consolidated Net Income, the sum of (1) the aggregate amount returned in cash
on or with respect to investments treated as Restricted Payments whether through
interest payments, principal payments, dividends or other distributions or
payments, and (2) the net proceeds received by the Company or any Subsidiary
from the disposition of all or any portion of such Investments (other than to a
Subsidiary of the Company);
(ii) Notwithstanding the foregoing, so long as there shall exist no
Default or Event of Default, the provisions set forth in the immediately
preceding paragraph do not prohibit: (1) the payment of any dividend within 60
days after the date of declaration of such dividend if the dividend would have
been permitted on the date of declaration; (2) the acquisition of any shares of
Capital Stock of the Company, either (i) solely in exchange for shares of
Qualified Capital Stock of the Company or (ii) through the application of net
proceeds of a substantially concurrent sale for cash (other than to a Subsidiary
of the Company) of shares of Qualified Capital Stock of the Company; provided,
however, that no transaction pursuant to this clause (2) shall increase the
Basket; (3) the repurchase by the Company or any of the Company's Subsidiaries
of outstanding shares of Common Stock of the Company (or options to purchase
such Common Stock) held by directors, employees or former directors or employees
of Company or any of its Subsidiaries pursuant to any Management Agreements,
provided that the aggregate amount of such payments, dividends or other advances
made by the Company or any of the Subsidiaries does not exceed $250,000 in any
fiscal year; and (4) additional Restricted Payments aggregating up to $250,000.
(c) Limitation on Sale of Assets. The Company will not, and will not
permit any of its Subsidiaries to, consummate an Asset Sale unless (i) the
Company or the applicable Subsidiary, as the case may be, receives consideration
at the time of such Asset Sale at least equal to the fair market value of the
assets sold or otherwise disposed of (as determined in good faith with respect
to Asset Sales in excess of $250,000 by the Company's Board of Directors); and
(ii) the Company shall apply, or cause such Subsidiary to apply, the Net Cash
Proceeds in accordance with Section 3(b)(ii).
(d) Limitation on Dividend and Other Payment Restrictions Affecting
Subsidiaries. The Company will not, and will not cause or permit any of its
Subsidiaries to, directly or indirectly, create or otherwise cause or permit to
exist or become effective any encumbrance or restriction on the ability of any
Subsidiary to (a) pay dividends or make any other distributions on or in respect
of its Capital Stock; (b) make loans or advances or to pay any Indebtedness or
other obligation owed by the Company or any other Subsidiary; or (c) transfer
any of its property or assets to the Company or any other Subsidiary, except for
such
25
encumbrances or restrictions existing under or by reason of: (1) applicable law;
and (2) this Agreement.
(e) Liens. The Company shall not, and shall not permit any
Subsidiary to, directly or indirectly, create, incur, assume or suffer to exist
any Lien (other than Permitted Liens) that secures any (i) trade payables or
(ii) any Indebtedness of the Company which is expressly by its terms
subordinated in right of payment to any other Indebtedness of the Company,
unless in the case of clause (ii) the Notes are secured by a Lien on such asset
or property that is (x) pari passu with such other Indebtedness if such other
Indebtedness is pari passu with the Notes or (y) if such other indebtedness is
subordinated to the Notes, senior in priority to the Lien securing such other
Indebtedness, in each case, until such time as such obligations are no longer
secured by a Lien.
(f) Senior Subordinated Debt. The Company will not, and will not
permit its Subsidiaries to, incur or suffer to exist Indebtedness that is senior
in right of payment to the Notes, and expressly subordinate in right of payment
to any other Indebtedness of the Company or the Subsidiaries.
(g) Merger, Consolidation and Sale of Assets. (i) The Company will
not, in a single transaction or series of related transactions, consolidate or
merge with or into any Person, or sell, assign, transfer, lease, convey or
otherwise dispose of (or cause or permit any Subsidiary to sell, assign,
transfer, lease, convey or otherwise dispose of) all or substantially all of the
Company's assets (determined on a consolidated basis for the Company and the
Company's Subsidiaries) whether as an entirety or substantially as an entirety
to any Person unless: (i) either (1) the Company shall be the surviving or
continuing corporation or (2) the Person (if other than the Company) formed by
such consolidation or into which the Company is merged or the Person which
acquires by sale, assignment, transfer, lease, conveyance or other disposition
the properties and assets of the Company and of the Company's Subsidiaries
substantially as an entirety (the "SURVIVING ENTITY") (x) shall be an entity
organized and validly existing under the laws of the United States or any State
thereof or the District of Columbia and (y) shall expressly assume (in form and
substance reasonably satisfactory to the Required Holders), the due and punctual
payment of the principal of, and premium, if any, and interest on all of the
Notes and the performance of every covenant of the Notes and this Agreement on
the part of the Company to be performed or observed; (ii) immediately before and
immediately after giving effect to such transaction and the assumption
contemplated by clause (i)(2)(y) above (including, without limitation, giving
effect to any Indebtedness incurred or anticipated to be incurred and any Lien
granted or anticipated to be granted in connection with or in respect of the
transaction), no Default shall have occurred and be continuing; and (iii) the
Company or the Surviving Entity shall have delivered to the Holders an officers'
certificate and an opinion of counsel, each stating that such consolidation,
merger, sale, assignment, transfer, lease, conveyance or other disposition
complies with the applicable provisions of this Agreement and that all
conditions precedent in this Agreement relating to such transaction have been
satisfied.
(h) Financial Covenants.
26
(i) Minimum Working Capital . The Company will not permit its
Consolidated Working Capital, calculated as of the last day of any fiscal
quarter ending after the Closing Date, to be less than $750,000.
(ii) Maximum Capital Expenditures. The Company will not permit
its Consolidated Capital Expenditures during any fiscal quarter to exceed
$500,000 plus, for each fiscal quarter ending after September 30, 2005, the
Capex Carryover Amount, if any, for the prior fiscal quarter; provided that the
Consolidated Capital Expenditures during any four consecutive fiscal quarters
shall not exceed $2,000,000.
(iii) Minimum Leverage Ratio. The Company will not permit its
Consolidated Leverage Ratio, calculated as of the end of any fiscal quarter
ending after the Closing Date, to exceed (x) 3.00 for fiscal quarters ending on
or before December 31, 2005, (y) 2.75 for fiscal quarters ending on or after
March 31, 2006, and on or before December 31, 2006, or (z) 2.50 for fiscal
quarters ending on or after March 31, 2007.
(iv) Minimum EBITDA. The Company will not permit its
Consolidated EBITDA for any fiscal quarter (calculated for the Test Period
ending on the last day of such fiscal quarter; provided that for the Test Period
ending on September 30, 2005, Consolidated EBITDA shall be (x) Consolidated
EBITDA for the three-fiscal-quarter period ending on September 30, 2005 times
(y) 4/3) to be less than (x) $5,000,000 for fiscal quarters ending on or before
December 31, 2005, (y) $4,500,000 for fiscal quarters ending on or after March
31, 2006, and on or before December 31, 2006, or (z) $4,000,000 for fiscal
quarters ending on or after March 31, 2007.
(v) Minimum Fixed Charge Coverage Ratio. The Company will not
permit its Consolidated Fixed Charge Coverage Ratio for any fiscal quarter to be
less than (x) 1.20 for fiscal quarters ending on or before December 31, 2005, or
(y) 1.25 for fiscal quarters ending on or after March 31, 2006.
8. EVENTS OF DEFAULT
Upon the occurrence of any of the following specified events (each
an "Event of Default"):
(a) Failure to Make Payments When Due. Failure to pay interest on
the Notes or any other amount payable under this Agreement or the Transaction
Documents when the same becomes due and payable and the default continues for a
period of five Business Days; and failure to pay the principal on the Notes,
when such principal becomes due and payable, at maturity, upon redemption or
otherwise.
(b) Breach of Negative Covenants. Default in the observance or
performance of any other covenant or agreement contained in Section 7 of this
Agreement.
(c) Breach of Covenants. Default in the observance or performance of
any other covenant or agreement contained in this Agreement or the Transaction
Documents which default continues for a period of (i) 30 Business Days after the
Company receives written notice specifying the default (and demanding that such
default be remedied) from the Holders holding
27
at least 25% of the outstanding principal amount of the Notes (the "Initial Cure
Period"), (ii) or if such default cannot be reasonably cured within the Initial
Cure Period and provided that the Company commences such cure within the Initial
Cure Period and thereafter diligently pursues such cure, such longer period, not
to exceed an additional 30 calendar days after the Initial Cure Period, as may
be necessary to cure such default.
(d) Default Under Other Agreements. Default under any mortgage,
indenture or other instrument or agreement under which there may be issued, or
by which there may be secured or evidenced, Indebtedness of the Company or any
of its Subsidiaries, which default (i) is caused by a failure to pay such
Indebtedness at its express final maturity within the applicable express grace
period (and such failure continues for a period of 20 days or more) or (ii)
results in the acceleration of such Indebtedness prior to its express final
maturity (which acceleration is not rescinded, annulled or otherwise cured
within 20 days of receipt by the Company of its Subsidiaries of such notice of
acceleration).
(e) Judgments. One or more judgments in an aggregate amount in
excess of $1,000,000 shall have been rendered against the Company or any of its
Subsidiaries and such judgments remain undischarged, unpaid or unstayed for a
period of 60 days after such judgment or judgments become final and
non-appealable.
(f) Bankruptcy. (i) The Company or any of its Subsidiaries pursuant
to or under or within the meaning of any Bankruptcy Code:
(1) commences a voluntary case or proceeding;
(2) consents to the entry of an order for relief against
it in an involuntary case or proceeding;
(3) consents to the appointment of a Custodian of it or
for all or substantially all of its property; or
(4) makes a general assignment for the benefit of its
creditors; or
(ii) A court of competent jurisdiction enters an order or
decree under any Bankruptcy Code that:
(1) is for relief against the Company or any of its
Subsidiaries in an involuntary case or proceeding;
(2) appoints a Custodian of the Company or any of its
Subsidiaries for all or substantially all of their properties taken as a
whole; or
(3) orders the liquidation of the Company or any of its
Subsidiaries; and in each case the order or decree remains unstayed and in
effect for 60 days.
(g) Event of Default Under Convertible Subordinated Notes. Any Event
of
28
Default, as defined in any of the Convertible Subordinated Notes, Securities
Purchase Agreement or any other Securities Purchase Document.
(h) Remedies. If an Event of Default (other than an Event of Default
specified in Section 8(f) above with respect to the Company) shall occur and be
continuing, the Holders holding at least 25% of the outstanding principal amount
of the Notes, may declare the principal of and accrued interest on all the Notes
to be due and payable by notice in writing to the Company and the other Holders
specifying the respective Event of Default and that it is a "notice of
acceleration" (the "ACCELERATION NOTICE"), and the same shall become immediately
due and payable. If an Event of Default specified in Section 8(f) above with
respect to the Company occurs and is continuing, then all unpaid principal of,
and premium, if any, and accrued and unpaid interest on all of the outstanding
Notes shall ipso facto become and be immediately due and payable without any
declaration or other act on the part of the any Holder.
At any time after a declaration of acceleration with respect to the Notes
as described in the preceding paragraph, the Holders may rescind and cancel such
declaration and its consequences (i) if the rescission would not conflict with
any judgment or decree, (ii) if all existing Events of Default have been cured
or waived except nonpayment of principal or interest that has become due solely
because of the acceleration, (iii) to the extent the payment of such interest is
lawful, interest on overdue installments of interest and overdue principal,
which has become due otherwise than by such declaration of acceleration, has
been paid, (iv) if the Company has paid to each Holder its reasonable
compensation and reimbursed each Holder for its expenses, disbursements and
advances and (v) in the event of the cure or waiver of an Event of Default of
the type described in Section 8(f), the Holders shall have received an officers'
certificate and an opinion of counsel that such Event of Default has been cured
or waived. No such rescission shall affect any subsequent Event of Default or
impair any right consequent thereto.
The Holders may waive any existing Default or Event of Default under this
Agreement, and its consequences, except a default in the payment of the
principal of or interest on any Notes.
Under this Agreement, the Company is required to provide an officers'
certificate to the Holders promptly upon any such officer obtaining knowledge of
any Default or Event of Default (provided that such officers shall provide such
certification at least annually whether or not they know of any Default or Event
of Default) that has occurred and, if applicable, describe such Default or Event
of Default and the status thereof.
9. 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 Notes and the Warrants
in which the Company shall record the name and address of the Person in whose
name the Notes and the Warrants have been issued (including the name and address
of each transferee), the principal amount of Notes held by such Person, the
number of 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 Holder or its legal representatives.
29
(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 Holder or its
respective nominee(s), for the Warrant Shares in such amounts as specified from
time to time by each Holder to the Company upon exercise of the Warrants in the
form of Exhibit D 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 9(b), and
stop transfer instructions to give effect to Section 4(f) hereof, will be given
by the Company to its transfer agent with respect to the Securities, and that
the Securities shall 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 and applicable law. If any Holder effects a
sale, assignment or transfer of the Securities in accordance with Section 4(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 Holder to effect such sale, transfer or assignment. In the event that such
sale, assignment or transfer involves Warrant Shares sold, assigned or
transferred pursuant to an effective registration statement or pursuant to Rule
144, the transfer agent shall issue such Securities to the Holder, 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 Holder. Accordingly, the Company acknowledges that the
remedy at law for a breach of its obligations under this Section 9(b) will be
inadequate and agrees, in the event of a breach or threatened breach by the
Company of the provisions of this Section 9(b), that Holder 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.
10. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL
(a) Closing Date. The obligation of the Company hereunder to issue
and sell the Notes and the related Warrants to the Initial Purchasers at the
Closing is subject to the satisfaction, at or before the Closing Date, of each
of the following conditions, by each of the Initial Purchasers 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 Initial Purchaser
with prior written notice thereof:
(i) Such Initial Purchaser shall have executed each of the
Transaction Documents to which it is a party and delivered the same to the
Company.
(ii) Such Initial Purchaser shall have delivered to the
Company the Purchase Price by wire transfer of immediately available funds
pursuant to the wire instructions provided by the Company.
(iii) The representations and warranties of such Initial
Purchaser 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
Initial Purchaser shall have performed, satisfied and complied in all material
30
respects with the covenants, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by such Initial Purchaser
at or prior to the Closing Date.
(iv) Such Initial Purchaser shall have delivered to the
Company a completed "accredited investor" questionnaire.
11. CONDITIONS TO EACH INITIAL PURCHASERS' OBLIGATION TO PURCHASE
(a) Closing Date. The obligation of each Initial Purchaser hereunder
to purchase the Notes 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 such Initial Purchaser's sole
benefit and may be waived by such Initial Purchaser at any time in its sole
discretion by providing the Company with prior written notice thereof:
(i) The Company and, to the extent it is a party thereto, each
of it Subsidiaries, shall have executed and delivered to such Initial Purchaser
(A) each of the Transaction Documents, (B) the Notes (in such principal amounts
as such Initial Purchaser shall request) being purchased by such Initial
Purchaser at the Closing pursuant to this Agreement and (C) the Warrants (in
such amounts as such Initial Purchaser shall request) being purchased by such
Initial Purchaser at the Closing pursuant to this Agreement.
(ii) Such Initial Purchaser shall have received evidence from
the Company that funds in the amount of at least Thirty Million Dollars
($30,000,000) shall have been invested in the Company by the purchasers thereof
in the Convertible Subordinated Notes.
(iii) Such Initial Purchaser and the Collateral Agent shall
have received the opinions of ▇▇▇▇▇▇▇▇▇▇ & ▇▇▇▇▇ LLP and Sheppard, Mullin,
▇▇▇▇▇▇▇ & Hampton LLP, the Company's outside special counsel for this
transaction, dated as of the Closing Date, in form and substance satisfactory to
the Initial Purchasers.
(iv) The Company shall have delivered to the Initial
Purchasers a copy of the Irrevocable Transfer Agent Instructions, in the form of
Exhibit D attached hereto, which instructions shall have been delivered to and
acknowledged in writing by the Company's transfer agent.
(v) The Company shall have delivered to such Initial Purchaser
a certificate evidencing the formation and good standing of the Company and each
of its Subsidiaries in such entity's jurisdiction of formation issued by the
Secretary of State (or comparable office) of such jurisdiction, as of a date
within 10 days of the Closing Date.
(vi) The Company shall have delivered to such Initial
Purchaser a certificate evidencing the qualification of the Company and each of
its Subsidiaries as a foreign corporation and good standing issued by the
Secretary of State (or comparable office) of the State of California and the
Secretary of State (or comparable office) of each other jurisdiction in which
the failure to be so qualified could reasonably be expected to have a Material
Adverse Effect; and (B) a certificate evidencing the qualification of each
Subsidiary of the Company as a foreign entity and good standing issued by the
Secretary of State (or comparable office) of each
31
jurisdiction in which the failure to be so qualified could reasonably be
expected to have a Material Adverse Effect, in each case, as of a date within 30
days of the Closing Date along with a bring-down confirmation of such
qualification and good standing as of the Closing Date.
(vii) The Company shall have delivered to such Initial
Purchaser (A) a certified copy of the Certificate of Incorporation as certified
by the Secretary of State of the State of Delaware within ten (10) days of the
Closing Date, and (B) a certified copy of the certificate of incorporation or
formation or each Subsidiary of the Company as certified by the Secretary of
State of the jurisdiction of formation of such Subsidiary within ten (10) days
of the Closing Date.
(viii) The Company shall have delivered to such Initial
Purchaser (A) a certificate, executed by the Secretary of the Company and dated
as of the Closing Date, as to (x) the resolutions consistent with Section 5(b)
as adopted by the Company's Board of Directors in a form reasonably acceptable
to such Initial Purchaser, (y) the Certificate of Incorporation and (z) the
Bylaws, each as in effect at the Closing, and (B) a certificate, executed by the
Secretary of each Subsidiary of the Company and dated as of the Closing Date, as
to (x) the resolutions consistent with Section 5(b) as adopted by such
Subsidiary's Board of Directors in a form reasonably acceptable to such Initial
Purchaser, (y) the certificate of incorporation or other formation documents of
such Subsidiary and (z) the bylaws of such Subsidiary, each as in effect at the
Closing, in each case in the form attached hereto as Exhibit F.
(ix) The representations and warranties of the Company and its
Subsidiaries in the Transaction Documents 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 and its Subsidiaries at or
prior to the Closing Date. Such Initial Purchaser shall have received a
certificate, executed by the Secretary 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 Initial Purchaser in the form attached hereto as Exhibit G.
(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 listing maintenance
requirements of the Principal Market.
(xi) The Company and each Subsidiary shall have obtained all
governmental, regulatory or third party consents and approvals, if any,
necessary for the sale of the Securities.
(xii) Such Initial Purchaser shall have completed its due
diligence review of MediaDefender, Inc. to its sole satisfaction.
32
(xiii) Such Initial Purchaser shall have received executed
copies of the MD Documents and any amendments, waivers, consents, schedules,
exhibits, certificates and legal opinions related thereto, which shall be in
form and substance satisfactory to the Initial Purchaser. The tax and legal
structure of the MD Acquisition shall be satisfactory to such Initial Purchaser.
The MD Documents shall remain in full force and effect.
(xiv) The MD Acquisition shall comply in all material respects
with all applicable securities and tax laws and regulations. MediaDefender,
Inc., the Company and each of their Subsidiaries shall have obtained all
governmental, regulatory or third party consents and approvals, if any,
necessary for the MD Acquisition.
(xv) The Company shall have obtained the consent of its
directors and the directors and a majority of the stockholders of MediaDefender,
Inc. to the MD Acquisition.
(xvi) The Company shall have delivered to the Initial
Purchasers the lock-up agreements in the form of Exhibit I hereto (the "LOCK-UP
AGREEMENTS"), executed by the Persons listed on Schedule 11(a)(xvi) hereto.
(xvii) The Company and each of its Subsidiaries shall have
executed and delivered a Pledge Agreement in the form of Exhibit J (the "PLEDGE
AGREEMENT") and shall have delivered to the Collateral Agent, as secured party
thereunder, all of the Pledged Collateral, if any, referred to therein and then
owned by the Company or such Subsidiary, (A) endorsed in blank in the case of
notes or other evidences of indebtedness constituting Pledged Collateral and (B)
together with executed and undated stock powers in the case of Capital Stock
constituting Pledged Collateral.
(xviii) The Company and each of its Subsidiaries shall have
executed and delivered a Security Agreement in the form of Exhibit K (the
"SECURITY AGREEMENT") covering all of the present and future Security Agreement
Collateral of the Company and each such Subsidiary, together with: (A) proper
Financing Statements (Form UCC-1 or the equivalent) fully completed and
authorized for filing under the UCC in the appropriate filing offices of each
jurisdiction as may be necessary or, in the reasonable opinion of the Collateral
Agent, desirable to perfect the security interests purported to be created by
the Security Agreement; (B) certified copies of search results, or equivalent
reports, listing all effective financing statements that name the Company,
MediaDefender or any of their respective Subsidiaries as debtor and that are
filed in the jurisdictions referred to in clause (A) above, together with copies
of such other financing statements that name the Company, MediaDefender or any
of their respective Subsidiaries as debtor (none of which shall cover the
Collateral except to the extent evidencing Permitted Liens or in respect of
which the Collateral Agent shall have received UCC termination statements or
such other termination statements as shall be required by local law fully
executed for filing); (C) evidence of the completion of all other recordings and
filings of, or with respect to, the Security Documents as may be necessary or,
in the reasonable opinion of the Collateral Agent, desirable to perfect the
security interests intended to be created by the Security Agreement; and (D)
evidence that all other actions necessary or, in the reasonable opinion of the
Collateral Agent, desirable to perfect and protect the security interests
purported to be created by the Security Documents have been taken.
33
(xix) The Company and each of its Subsidiaries shall have
executed and delivered (a) the Trademark Collateral Security and Pledge
Agreement in the form of Exhibit L (the "TRADEMARK SECURITY AGREEMENT"), (b) the
Patent Security Agreement in the form of Exhibit M (the "PATENT SECURITY
AGREEMENT") and (c) the Copyright Security Agreement in the form of Exhibit N
(the "COPYRIGHT SECURITY AGREEMENT") covering all of the present and future
Trademark Collateral, Patent Collateral and Copyright Collateral respectively of
the Company and each such Subsidiary, together with: (A) proper Financing
Statements (Form UCC-1 or the equivalent), in each case fully completed and
authorized for filing under the UCC or other appropriate filing offices
(including, without limitation, the United States Patent and Trademark Office)
as may be necessary or, in the reasonable opinion of the Collateral Agent,
desirable to perfect the security interests purported to be created by the
Trademark Security Agreement and the Patent Security Agreement; and (B) evidence
of the completion of, or satisfactory arrangements for, all other recordings and
filings of, or with respect to, the Trademark Security Agreement and the Patent
Security Agreement as may be necessary or, in the reasonable opinion of the
Collateral Agent, desirable to perfect the security interests intended to be
created by the Trademark Security Agreement and the Patent Security Agreement.
(xx) The Company shall have executed and delivered to the
Initial Purchasers the Account Control Agreement in the form of Exhibit O hereto
(the "ACCOUNT CONTROL AGREEMENT").
(xxi) Each of the Company's Subsidiaries shall have executed
and delivered to the Initial Purchasers the Subsidiary Guaranty in the form of
Exhibit H hereto (the "SUBSIDIARY GUARANTY").
(xxii) The Company shall have delivered to, or caused to be
delivered to, the Initial Purchasers certified copies of the following documents
(if any): (A) all material agreements entered into by the Company or any of its
Subsidiaries governing the terms and relative rights of its capital stock and
any agreements entered into by shareholders relating to any such entity with
respect to its capital stock, together with a list of all shareholders who have
entered into such agreements with the Company (collectively, the "SHAREHOLDERS'
AGREEMENTS"), in form and substance reasonably satisfactory to the Initial
Purchasers; (B) all material management or consulting agreements entered into by
the Company or any of its Subsidiaries with members of, or with respect to, the
management of the Company or any of its Subsidiaries (collectively, the
"MANAGEMENT AGREEMENTS"), in form and substance reasonably satisfactory to the
Initial Purchasers; (C) certified copies of all material employment or
individual service agreements entered into by the Company or any of its
Subsidiaries (collectively, the "EMPLOYMENT AGREEMENTS"), in form and substance
reasonably satisfactory to the Initial Purchasers; (D) any non-compete agreement
entered into by the Company or any of its Subsidiaries which restricts or limits
the ability of the Company or any of its Subsidiaries to engage in any line of
business in any geographic area (collectively, the "NON-COMPETE AGREEMENTS"), in
form and substance reasonably satisfactory to the Initial Purchasers; (E) all
tax sharing, tax allocation and other similar agreements entered into by the
Company or any of its Subsidiaries (collectively, the "TAX SHARING AGREEMENTS"),
in form and substance reasonably satisfactory to the Initial Purchasers; and (F)
all agreements evidencing or relating to Indebtedness of the Company or any of
its Subsidiaries which is to remain outstanding after giving effect to the
issuance of the Notes on the Closing Date (collectively, the "EXISTING
34
INDEBTEDNESS AGREEMENTS"), in form and substance reasonably satisfactory to the
Initial Purchasers.
(xxiii) Each holder of the Convertible Subordinated Notes
shall have executed and delivered to the Initial Purchasers the Subordination
Agreement in the form of Exhibit P hereto (the "SUBORDINATION AGREEMENT").
(xxiv) The Company shall have delivered to the Initial
Purchasers the voting agreements in the form of Exhibit S hereof (the "VOTING
AGREEMENTS"), executed by the Persons listed on Schedule 11(a)(xxiv) hereto.
(xxv) The Company shall have delivered to the Initial
Purchasers such other documents relating to the transactions contemplated by
this Agreement as any Initial Purchaser or its counsel may reasonably request.
12. TERMINATION. In the event that the Closing shall not have occurred
with respect to an Initial Purchaser on or before five (5) Business Days from
the date hereof due to the Company's or such Initial Purchaser's failure to
satisfy the conditions set forth in Sections 10 and 11 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 12, the Company shall remain obligated to
reimburse the non-breaching Initial Purchasers for the expenses described in
Section 6(g) above.
13. 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 by
registered or certified mail, return receipt requested 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
35
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 supersedes all
other prior oral or written agreements between the Initial Purchasers, the
Company, their affiliates and Persons acting on their behalf with respect to the
matters discussed herein, and this Agreement and the instruments referenced
herein contain the entire understanding of the parties with respect to the
matters covered herein and therein and, except as specifically set forth herein
or therein, neither the Company nor any Initial Purchaser makes any
representation, warranty, covenant or undertaking with respect to such matters.
No provision of this Agreement may be amended other than by an instrument in
writing signed by the Company and the Required Holders, and any amendment to
this Agreement made in conformity with the provisions of this Section 13(e)
shall be binding on all Initial Purchasers and any Holders of Securities, as
applicable; provided, however, that no such amendment shall (i) extend the
maturity of the Note, reduce the interest rate or extend the time of payment of
interest thereon, or reduce the principal amount thereof or premium, if any,
thereon, change the conversion price or reduce any amount payable on redemption
or repurchase thereof or affect any amounts due to any Holder under any of the
Transaction Documents without the consent of such Holder or (ii) reduce the
aforesaid percentage of the Notes, the holders of which are required to consent
to any such amendment, without the consent of the holders of all Notes then
outstanding. 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 applicable Securities 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 Notes, or holders of the Warrants, as the case may be. The
Company has not, directly or indirectly, made any agreements with any Initial
Purchaser relating to the terms or conditions of the transactions contemplated
by the Transaction Documents except as set forth in the Transaction Documents.
(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
36
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:
ARTISTdirect, Inc.
▇▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇,
▇▇▇▇▇ ▇▇▇▇
▇▇▇ ▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
Attention: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇
Copy to (for informational purposes):
▇▇▇▇▇▇▇▇▇▇ & ▇▇▇▇▇ LLP
▇▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇
▇▇▇ ▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
Attention: ▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇, Esq.
Copy to (for informational purposes):
Sheppard, Mullin, ▇▇▇▇▇▇▇ & Hampton LLP
▇▇▇ ▇▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇
▇▇▇ ▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
Attention: ▇▇▇▇▇ ▇. ▇▇▇▇▇, Esq.
If to the Company's transfer agent:
American Stock Transfer & Trust Company
▇▇ ▇▇▇▇▇▇ ▇▇▇▇ - ▇▇▇▇▇ ▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
Attention: ▇▇▇▇▇ ▇. ▇▇▇▇▇
If to an Initial Purchaser, to its address and
facsimile number set forth on the Schedule of
Purchasers,
37
If to the Collateral Agent:
U.S. Bank National Association
▇▇▇ ▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇
▇▇▇ ▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
Attention: Corporate Trust Services
(ARTISTdirect, Inc. 2005 Note and Warrant
Purchase Agreement)
with a copy (for informational purposes only) to:
▇▇▇▇▇▇ & ▇▇▇▇▇▇▇, LLP
▇▇▇ ▇. ▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇
▇▇▇ ▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
Attention: ▇▇▇▇▇▇ ▇▇▇▇▇▇, 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.
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 (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;
provided however that the foregoing clause (B) shall only be valid if such
communication contained in the facsimile is delivered by an overnight courier
service within 24 hours of the transmission of facsimile. Copies to legal
counsel shall not constitute notice under this Agreement.
(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 Notes or the Warrants. The Company shall not
assign this Agreement or any rights or obligations hereunder without the prior
written consent of the Required Holders. A Holder may assign some or all of its
rights hereunder without the consent of the Company, in which event such
assignee shall be deemed to be a Holder 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 12,
the representations and warranties of the Company and the Initial Purchasers
contained in Sections 4 and 5 and the agreements and covenants set forth in
Sections 2, 3, 6, 7, 8, 9 and 13 shall survive the Closing. Each Initial
Purchaser shall be responsible only for its own representations, warranties,
agreements and covenants hereunder.
38
(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 Initial Purchaser'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 Holder and each other holder of the Securities 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 any Transaction Documents, (b) any breach of any covenant, agreement
or obligation of the Company contained in any 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 any Transaction Documents, (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 Holder pursuant to Section 6(i), or (iv) the status of
such Holder or holder of the Securities as an investor in the Company pursuant
to the transactions contemplated by the Transaction Documents. 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 13(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 Initial Purchaser and each holder of the
Securities 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 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
39
obligations under the Transaction Documents, any remedy at law may prove to be
inadequate relief to the Holders. The Company therefore agrees that the Holders
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) Payment Set Aside. To the extent that the Company makes a
payment or payments to Holder hereunder or pursuant to any of the other
Transaction Documents or the Holders 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.
(o) Independent Nature of Initial Purchasers' Obligations and
Rights. The obligations of each Initial Purchaser under any Transaction Document
are several and not joint with the obligations of any other Initial Purchaser,
and no Initial Purchaser shall be responsible in any way for the performance of
the obligations of any other Initial Purchaser under any Transaction Document.
Nothing contained herein or in any other Transaction Document, and no action
taken by any Initial Purchaser pursuant hereto or thereto, shall be deemed to
constitute the Initial Purchasers as a partnership, an association, a joint
venture or any other kind of entity, or create a presumption that the Initial
Purchasers are in any way acting in concert or as a group with respect to such
obligations or the transactions contemplated by the Transaction Documents. Each
Initial Purchaser confirms that it has independently participated in the
negotiation of the transaction contemplated hereby with the advice of its own
counsel and advisors. Each Initial Purchaser 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 Initial Purchaser to be joined as an
additional party in any proceeding for such purpose.
(p) Business Day. In the event that any due date falls on a day that
is not a Business Day, then the applicable due date shall be the next Business
Day thereafter.
14. THE COLLATERAL AGENT
(a) Appointment. The Holders of the Securities hereby irrevocably
designate U.S. Bank National Association, a national banking association, as
Collateral Agent to act as specified herein and in the other Transaction
Documents. Each Initial Purchaser hereby irrevocably authorizes, and each Holder
by the acceptance of such Note shall be deemed irrevocably to authorize, the
Collateral Agent to take such action on their behalf under the provisions of
this Agreement, the other Transaction Documents and any other instruments and
agreements referred to herein or therein and to exercise such powers and to
perform such duties hereunder and thereunder as are specifically delegated to or
required of the Collateral Agent by the terms hereof and thereof and such other
powers as are reasonably incidental thereto. The
40
Collateral Agent may perform any of its duties hereunder by or through its
officers, directors, agents, employees or affiliates.
(b) Nature of Duties. The Collateral Agent shall have no duties or
responsibilities except those expressly set forth in this Agreement and in the
other Transaction Documents. Neither the Collateral Agent nor any of its
respective officers, directors, agents, employees or affiliates shall be liable
for any action taken or omitted by them hereunder or under any other Transaction
Document or in connection herewith or therewith, unless caused by its or their
gross negligence or willful misconduct. The duties of the Collateral Agent shall
be mechanical and administrative in nature; the Collateral Agent shall not have
by reason of this Agreement or any other Transaction Document a fiduciary
relationship in respect of any Initial Purchaser or Holder; and nothing in this
Agreement or any other Transaction Document, expressed or implied, is intended
to or shall be so construed as to impose upon the Collateral Agent any
obligations in respect of this Agreement or any other Transaction Document
except as expressly set forth herein or therein.
(c) Lack of Reliance on the Collateral Agent. Independently and
without reliance upon the Collateral Agent, each Initial Purchaser and each
Holder, to the extent it deemed or deems appropriate, has made and shall
continue to make (i) its own independent investigation of the financial
condition and affairs of Company and its Subsidiaries in connection with the
making and the continuance of the loans and the taking or not taking of any
action in connection herewith and (ii) its own appraisal of the creditworthiness
of Company and its Subsidiaries and, except as expressly provided in this
Agreement, the Collateral Agent shall not have any duty or responsibility,
either initially or on a continuing basis, to provide any Initial Purchaser or
Holder with any credit or other information with respect thereto, whether coming
into its possession before the making of the loans or at any time or times
thereafter. The Collateral Agent shall not be responsible to any Initial
Purchaser or Holder for any recitals, statements, information, representations
or warranties herein or in any document, certificate or other writing delivered
in connection herewith or for the execution, effectiveness, genuineness,
validity, enforceability, perfection, collectability, priority or sufficiency of
this Agreement or any other Transaction Document or the financial condition of
the Company or any of its Subsidiaries or be required to make any inquiry
concerning either the performance or observance of any of the terms, provisions
or conditions of this Agreement or any other Transaction Document, or the
financial condition of the Company or any of its Subsidiaries or the existence
or possible existence of any Default or Event of Default.
(d) Certain Rights of the Collateral Agent.(e) If the Collateral
Agent shall request instructions from the Holders, as applicable, with respect
to any act or action (including failure to act) in connection with this
Agreement or any other Transaction Document, the Collateral Agent shall be
entitled to refrain from such act or taking such action unless and until the
Collateral Agent shall have received instructions from the Holders; and the
Collateral Agent shall not incur liability to any Holder by reason of so
refraining. Without limiting the foregoing, no Holder shall have any right of
action whatsoever against the Collateral Agent as a result of the Collateral
Agent acting or refraining from acting hereunder or under any other Transaction
Document in accordance with the instructions of the Holders, as applicable.
41
(f) Reliance. The Collateral Agent shall be entitled to rely, and
shall be fully protected in relying, upon any note, writing, resolution, notice,
statement, certificate, e-mail, facsimile message, order or other document or
telephone message signed, sent or made by any Person that the Collateral Agent
believed to be the proper Person, and, with respect to all legal matters
pertaining to this Agreement and any other Transaction Document and its duties
hereunder and thereunder, upon advice of counsel selected by the Collateral
Agent.
(g) Indemnification. To the extent the Collateral Agent is not
reimbursed and indemnified by the Company or any of its Subsidiaries, the
Holders will reimburse and indemnify the Collateral Agent in proportion to the
principal amount of their Notes for and against any and all liabilities,
obligations, losses, damages, penalties, claims, actions, judgments, costs,
expenses or disbursements of whatsoever kind or nature which may be imposed on,
asserted against or incurred by the Collateral Agent in performing its
respective duties, if any, hereunder or under any other Transaction Document or
in any way relating to or arising out of this Agreement or any other Transaction
Document; provided, that no Holder shall be liable to any Person indemnified
hereunder for any portion of such liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements resulting
from such indemnified Person's gross negligence or willful misconduct (as
finally determined by a court of competent jurisdiction).
(h) The Collateral Agent in Its Individual Capacity. With respect to
its obligation to purchase Notes or Warrants under this Agreement, the
Collateral Agent shall have the rights and powers specified herein for an
Initial Purchaser and may exercise the same rights and powers as though it were
not performing the duties specified herein; and the terms Initial Purchasers and
Holders or any similar terms shall, unless the context clearly otherwise
indicates, include the Collateral Agent in its individual capacity. The
Collateral Agent and its affiliates may accept deposits from, lend money to, and
generally engage in any kind of banking, investment banking, trust or other
business with, or provide debt financing, equity capital or other services
(including financial advisory services) to the Company or any Subsidiary of the
Company (or any Person engaged in a similar business with the Company or any
Subsidiary of the Company) as if they were not performing the duties specified
herein, and may accept fees and other consideration from the Company or any
Subsidiary of the Company for services in connection with this Agreement and
otherwise without having to account for the same to the Holders.
(i) Holders. The Collateral Agent may deem and treat the payee of
any Note as the owner thereof for all purposes hereof unless and until a written
notice of the assignment, transfer or endorsement thereof, as the case may be,
shall have been filed with the Collateral Agent. Any request, authority or
consent of any Person who, at the time of making such request or giving such
authority or consent, is the holder of any Note shall be conclusive and binding
on any subsequent holder, transferee, assignee or endorsee, as the case may be,
of such Note or of any Note or Notes issued in exchange therefor.
(j) Resignation by the Collateral Agent.
(1) The Collateral Agent may resign from the performance of
all its respective functions and duties hereunder and/or under the other
Transaction
42
Documents at any time by giving 15 Business Days' prior written notice to
the Holders and, to the extent permitted by applicable law, the Company.
Such resignation shall take effect upon the appointment of a successor
Collateral Agent pursuant to clauses (2) and (3) below or as otherwise
provided below.
(2) Upon any such notice of resignation by the Collateral
Agent, the Holders shall appoint a successor Collateral Agent hereunder or
thereunder who shall be a commercial bank or trust company and if no Event
of Default has occurred and is continuing, such successor Collateral Agent
shall be acceptable to the Company, which acceptance shall not be
unreasonably withheld or delayed.
(3) If a successor Collateral Agent shall not have been so
appointed within such 15 Business Day period, the Collateral Agent may
apply to a court of competent jurisdiction to appoint a successor
collateral agent who shall serve as Collateral Agent hereunder or
thereunder until such time, if any, as the Holders appoint a successor
Collateral Agent as provided above.
(4) If no successor Collateral Agent has been appointed
pursuant to clause (2) or (3) above by the 15th Business Day after the
date such notice of resignation was given by the Collateral Agent, the
Collateral Agent's resignation shall become effective and the Holders
shall thereafter perform all the duties of the Collateral Agent hereunder
and/or under any other Transaction Document until such time, if any, as
the Holders appoint a successor Collateral Agent as provided above
15. DEFINITIONS
As used in this Agreement, the following terms shall have the
following meanings (such meanings to be equally applicable to both the singular
and plural forms of the terms defined):
"1933 ACT" means the Securities Act of 1933, as amended
"1934 ACT" means the Securities Exchange Act of 1934, as amended
"ACCELERATION NOTICE" has the meaning provided in Section 8(g).
"ACCOUNT CONTROL AGREEMENT" has the meaning provided in Section 11(a)(xx).
"AFFILIATE" shall mean, with respect to any specified Person, any other
Person who directly or indirectly through one or more intermediaries controls,
or is controlled by, or is under common control with, such specified Person. The
term "control" means the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of a Person,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative of the
foregoing.
"AGENT" has the meaning provided in Section 5(g).
"ASSET SALE" means any direct or indirect sale, issuance, conveyance,
transfer, assignment or other transfer for value by the Company or any of its
Subsidiaries to any Person other than the Company or its Subsidiaries of any
property or assets of the Company or any Subsidiary other than in the ordinary
course of business.
43
"BASKET" has the meaning provided in Section 7(b)(i).
"BUSINESS DAY" means a day of the year on which banks are not required or
authorized by law to close in New York City or Los Angeles, California.
"BYLAWS" has the meaning provided in Section 5(r).
"CASH EQUIVALENTS" means, with respect to any Person, (a) securities
issued or directly and fully guaranteed or insured by the United States or any
agency or instrumentality thereof (provided that the full faith and credit of
the United States is pledged in support thereof) having maturities of not more
than six months from the date of acquisition, (b) Dollar denominated time
deposits and certificates of deposit of any commercial bank having, or which is
the principal banking subsidiary of a bank holding company having, a long-term
unsecured debt rating of at least "A" or the equivalent thereof from S&P or "A2"
or the equivalent thereof from ▇▇▇▇▇'▇ with maturities of not more than six
months from the date of acquisition by such Person, (c) repurchase obligations
with a term of not more than seven days for underlying securities of the types
described in clause (a) above entered into with any bank meeting the
qualifications specified in clause (b) above, (d) commercial paper issued by any
Person incorporated in the United States rated at least A-1 or the equivalent
thereof by S&P or at least P-1 or the equivalent thereof by ▇▇▇▇▇'▇ and in each
case maturing not more than six months after the date of acquisition by such
Person, (e) marketable direct obligations issued by the District of Columbia or
any State of the United States or any political subdivision of any such State or
any public instrumentality thereof maturing within six months from the date of
acquisition and, at the time of acquisition, having one of the two highest
ratings obtainable from either S&P or ▇▇▇▇▇'▇ and (f) investments in money
market funds substantially all of whose assets are comprised of securities of
the types described in clauses (a) through (e) above.
"CAPEX CARRYOVER AMOUNT" means, for any fiscal quarter, (i) the amount of
Consolidated Capital Expenditures permitted during such fiscal quarter pursuant
to Section 7(h)(ii) (after giving effect to the Capex Carryover Amount, if any,
for the previous fiscal quarter) minus (ii) the Consolidated Capital
Expenditures during such fiscal quarter.
"CAPITAL STOCK" means (a) with respect to any Person that is a
corporation, any and all shares, interests, participations or other equivalents
(however designated and whether or not voting) of corporate stock, including
each class of Common Stock and Preferred Stock of such Person and (b) with
respect to any Person that is not a corporation, any and all partnership or
other equity interests of such Person, and in each case any options, warrants or
other rights to purchase or acquire such stocks, shares and interests.
"CAPITALIZED LEASE OBLIGATIONS" means all rental obligations of the
Company and its Subsidiaries which, under GAAP, are or will be required to be
capitalized on the books of the Company and its Subsidiaries, in each case taken
at the amount thereof accounted for as indebtedness in accordance with such
principles.
"CERTIFICATE OF INCORPORATION" has the meaning provided in Section 5(r).
"CHANGE OF CONTROL" shall mean the occurrence of any one or more of the
following events: (a) any sale, lease, exchange or transfer (in a single
transaction or a series of related transactions) of all or substantially all of
the assets of the Company and its Subsidiaries to any Person or "group" (within
the meaning of the 1934 Act and the
44
rules of the SEC thereunder in effect on the date hereof), (b) any Person or
"group" (within the meaning of the 1934 Act and the rules of the SEC thereunder
in effect on the date hereof) shall own 20% or more of the voting stock of the
Company at any time, (c) after giving effect to the MD Acquisition, the Company
shall cease to own all of the voting and economic interests of the
MediaDefender, Inc. or (d) the occupation of a majority of the seats (other than
vacant seats) on the board of directors of the Company by persons who were
neither (i) nominated by the board of directors of such entity holding office on
the Closing Date or (ii) appointed by the directors or the directors holding
office on the Closing Date so nominated.
"CLOSING" has the meaning provided in Section 1(a)(i).
"CLOSING DATE" has the meaning provided in Section 1(a)(ii).
"COMMON STOCK" means, with respect to any Person, any and all shares,
interests or other participations in, and other equivalents (however designated
and whether voting or non-voting) of such Person's common stock, whether
outstanding on the Closing Date or issued after the Closing Date, and includes,
without limitation, all series and classes of such common stock.
"COMPLIANCE COSTS" means, for any period, all costs and expenses incurred
by the Company directly as a result of complying with its obligations under
Sections 6(f), 6(i), 6(p), 6(r) and 6(s) of this Agreement and under the
Registration Rights Agreement, including but not limited to (a) the costs of all
legal and accounting services related to preparing a Form 8-K describing the MD
Acquisition and a Form 8-K/A containing 2003 and 2004 audited financial
statements of MediaDefender, Inc., June 30, 2005 interim financial statements
and pro forma financial statement disclosures, (b) the costs of preparing and
filing a registration statement with the SEC registering the Warrant Shares,
(iii) the costs of a consultant to determine purchase price allocations and the
accounting value of the Warrants, (iv) a public relations firm to manage
publicity for the MD Acquisition and the financing related thereto, and (v) the
costs of applying to Nasdaq for a listing on the SmallCap or National Market
System.
"CONSOLIDATED CAPITAL EXPENDITURES" means, for any period, the sum of,
without duplication, (a) all cash expenditures made, directly or indirectly, by
the Company and its Subsidiaries during such period for equipment, fixed assets,
real property or improvements, or for replacements or substitutions therefore or
additions thereto, that have been or should be, in accordance with GAAP,
reflected as additions to property, plant or equipment on a balance sheet of the
Company and its Subsidiaries plus (b) the aggregate principal amount of all
indebtedness (including Capitalized Leases Obligations) assumed or incurred in
connection with any such expenditures. For purposes of this definition, the
purchase price of equipment that is purchased simultaneously with the trade in
of existing equipment or with insurance or condemnation proceeds shall be
included in Capital Expenditures only to the extent of the gross amount of such
purchase price less the credit granted by the seller of such equipment for the
equipment being traded in at such time or the amount of such insurance or
condemnation proceeds, as the case may be.
"CONSOLIDATED EBITDA" means, for the Company and its Subsidiaries for any
period, an amount equal to (a) the sum (without duplication) of (i) Consolidated
Net Income for such period plus (ii) to the extent deducted in determining
Consolidated Net Income for such period, (A) Consolidated Interest Expense; (B)
income tax expense; (C) depreciation and amortization; (D) net losses on Asset
Sales for such period; (E) other non-cash charges for such period (excluding any
such non-cash charge to the extent that it represents an accrual of or reserve
for cash expenditures in any future period) (F) transaction costs and expenses
related directly to the
45
MD Acquisition; provided that the total costs and expenses added back pursuant
to this clause (F) for all periods shall not exceed $250,000; (G) litigation
costs and expenses and settlement costs incurred on or prior to the Closing
Date; provided that the total costs and expenses added back pursuant to this
clause (G) for all periods shall not exceed $70,000; and (H) Compliance Costs;
provided that the Compliance Costs added back pursuant to this clause (H) for
all periods shall not exceed $500,000 minus (b) to the extent included in
determining Consolidated Net Income for such period, (i) net gains on Assets
Sales for such period, (ii) other non-cash items increasing Consolidated Net
Income for such period (excluding any non-cash gains for such period resulting
from the reversal of an accrual or reduction or elimination of a reserve
established in a prior period to the extent the related non-cash charge was
excluded in accordance with clause (a)(ii)(E) immediately above), in each case
determined for such period on a consolidated basis in accordance with GAAP.
"CONSOLIDATED FIXED CHARGE COVERAGE RATIO" means, for any period, the
ratio of (a) Consolidated EBITDA for such period to (b) Consolidated Fixed
Charges for such period.
"CONSOLIDATED FIXED CHARGES" means, for any period, the sum (without
duplication) of (a) Consolidated Interest Expense paid in cash during such
period, (b) scheduled principal payments made on Consolidated Indebtedness
during such period, (c) income tax expense of the Company and its Subsidiaries
for such period, (d) lease or rent expense of the Company and its Subsidiaries
for such period and (e) Consolidated Maintenance Capital Expenditures for such
period, in each case determined on a consolidated basis in accordance with GAAP.
"CONSOLIDATED INDEBTEDNESS" means, at any time, the aggregate amount of
all Indebtedness of the Company and its Subsidiaries, determined on a
consolidated basis in accordance with GAAP at such time.
"CONSOLIDATED INTEREST EXPENSE" means, for the Company and its
Subsidiaries for any period determined on a consolidated basis in accordance
with GAAP, the total interest expense of the Company and its Subsidiaries for
such period, including without limitation the interest component of any payments
in respect of Capitalized Lease Obligations capitalized or expensed during such
period (whether or not actually paid during such period).
"CONSOLIDATED LEVERAGE RATIO" means, at any time, the ratio of (i) (a)
Consolidated Indebtedness at such time minus (b) the aggregate amount of
Indebtedness evidenced by the Convertible Subordinated Notes and subject to the
Subordination Agreement at such time to (ii) Consolidated EBITDA for the Test
Period then most recently ended; provided, however, that for the Test Period
ending on September 30, 2005, Consolidated EBITDA shall be (x) Consolidated
EBITDA for the three-fiscal-quarter period ending on September 30, 2005 times
(y) 4/3.
"CONSOLIDATED MAINTENANCE CAPITAL EXPENDITURES" means, for any period, the
portion of Consolidated Capital Expenditures for such period used to repair and
maintain computer servers and other assets existing on the first day of such
period, including but not limited to expenditures for the purchase of memory,
powerstrips, routers, firewalls, hard disk drives, power supplies, computer fans
and other miscellaneous computer parts and software.
"CONSOLIDATED NET INCOME" means, for any period, the net income (or loss)
of the Company and its Subsidiaries, but excluding therefrom (to the extent
otherwise included therein) (i) any extraordinary gains or losses, (ii) any
gains attributable to write-ups of assets, (iii) the net income (or loss) of any
Subsidiary of the Company if and to the extent such Subsidiary is unable
46
or otherwise prohibited by any contractual restrictions, charter documents, or
law applicable to such Subsidiary to make or pay any dividend or distribution to
the holders of its equity interests, except to the extent such net income is
actually made or paid as a dividend or distribution to the Company or any
Subsidiary not subject to such restrictions and (iv) any income (or loss) of any
Person (other than MediaDefender, Inc.) accrued prior to the date (a) such
Person becomes a Subsidiary, (b) is merged into or consolidated with the Company
or any of its Subsidiaries or (c) such Person's assets are acquired by the
Company or any of its Subsidiaries, in each case determined for such period on a
consolidated basis in accordance with GAAP.
"CONSOLIDATED WORKING CAPITAL" means, at any time, (i) the consolidated
current assets (excluding cash and assets related to discontinued operations) of
the Company and its Subsidiaries at such time minus (ii) the consolidated
current liabilities (excluding the current portion of long term Indebtedness and
liabilities related to discontinued operations) of the Company and its
Subsidiaries at such time, each as determined in accordance with GAAP.
"CONTINGENT OBLIGATION" means, with respect 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.
"CONTROLLED ACCOUNTS" has the meaning provided in Section 6(x).
"CONVERTIBLE SECURITIES" means any stock or securities (other than
Options) convertible into or exercisable or exchangeable for shares of Common
Stock.
"CONVERTIBLE SUBORDINATED NOTES" means all Indebtedness of the Company and
its Subsidiaries incurred pursuant to the Securities Purchase Agreement and the
other Securities Purchase Documents.
"CONVERSION SHARES" shall have the meaning given in the Securities
Purchase Agreement.
"COPYRIGHT COLLATERAL" means all of the "Collateral" as defined in the
Copyright Security Agreement
"COPYRIGHT SECURITY AGREEMENT" has the meaning provided in Section
11(a)(xix)
"DEFAULT" means any event, act or condition which with notice or lapse of
time, or both, would constitute an Event of Default.
"DISQUALIFIED CAPITAL STOCK" means, with respect to any Person, any
Capital Stock of such Person or its Subsidiaries that, by its terms, by the
terms of any agreement related thereto or by the terms of any security into
which it is convertible, puttable or exchangeable, is, or upon the happening of
any event or the passage of time would be, required to be redeemed or
repurchased by such Person or its Subsidiaries, including at the option of the
holder thereof, in whole or in part, or has, or upon the happening of an event
or passage of time would have, a redemption or similar payment due on or prior
to the date six (6) months after the Maturity Date, or any other Capital Stock
of such Person or its subsidiaries designated as Disqualified Capital Stock by
such Person at the time of issuance; provided, however, that if such Capital
Stock is either
47
(i) redeemable or repurchasable solely at the option of such Person or (ii)
issued to employees of the Company or the Subsidiaries or to any plan for the
benefit of such employees, such Capital Stock shall not constitute Disqualified
Capital Stock unless so designated.
"EMPLOYMENT AGREEMENTS" has the meaning provided in Section 11(a)(xxii).
"ENVIRONMENTAL LAWS" has the meaning provided in Section 5(y).
"EVENT OF DEFAULT" has the meaning provided in Section 8.
"EXCESS CASH FLOW" means, for any period, (A) the Consolidated EBITDA for
such period minus (B) the sum (without duplication) of (i) Consolidated Interest
Expense paid in cash during such period, (ii) income tax expense paid by in cash
by the Company and its Subsidiaries during such period, (iii) voluntary
principal payments on the Notes made during such period, and (iv) Consolidated
Capital Expenditures permitted pursuant to Section 7(h) which are paid in cash
during such period (other than Consolidated Capital Expenditures financed (but
only to the extent financed) with equity proceeds, insurance or condemnation
proceeds or Indebtedness proceeds), in each case calculated on a consolidated
basis for the Company and its Subsidiaries in accordance with GAAP.
"EXISTING INDEBTEDNESS AGREEMENTS" has the meaning provided in Section
11(a)(xxii).
"FISCAL YEAR" means a fiscal year of the Company and its Subsidiaries
ending on December 31 in any calendar year.
"FUNDAMENTAL TRANSACTION" means that the Company shall, directly or
indirectly, in one or more related transactions, (a) consolidate or merge with
or into (whether or not the Company is the surviving corporation) another
Person, or (b) sell, assign, transfer, convey or otherwise dispose of all or
substantially all of the properties or assets of the Company and its
Subsidiaries to another Person, or (c) be subject to an offer from another
Person or group of related Persons (as defined in Sections 13(d) and 14(d) of
the ▇▇▇▇ ▇▇▇) to make a purchase, tender or exchange offer that is accepted by
the holders of more than the 50% of the outstanding shares of Common Stock (not
including any shares of Common Stock held by the Person or Persons making or
party to, or associated or affiliated with the Persons making or party to, such
purchase, tender or exchange offer), or (d) consummate a stock purchase
agreement or other business combination (including, without limitation, a
reorganization, recapitalization, spin-off or scheme of arrangement) with
another Person or group of related Persons (as defined in Sections 13(d) and
14(d) of the 1934 Act) whereby such other Person or group acquires more than the
50% of the outstanding shares of Common Stock (not including any shares of
Common Stock held by the other Person or other Persons making or party to, or
associated or affiliated with the other Persons making or party to, such stock
purchase agreement or other business combination), or (e) reorganize,
recapitalize or reclassify its Common Stock..
"GAAP" means generally accepted accounting principles as in effect from
time to time in the United States, consistently applied. References to GAAP for
calculation of financial covenants and Excess Cash Flow herein shall be to GAAP
as in effect on the Closing Date.
"GUARANTOR" means (i) each of the Subsidiary of the Company existing on
the Closing Date, and (ii) each future Subsidiary of the Company.
"GUARANTY" means the Guaranty, in the form of Exhibit H executed by each
Guarantor.
"HAZARDOUS MATERIALS" has the meaning provided in Section 5(y).
48
"HOLDERS" means the Initial Purchasers and each of their respective
successors and assigns.
"INDEBTEDNESS" means, with respect to any Person, without duplication (i)
all indebtedness for borrowed money, (ii) all obligations issued, undertaken or
assumed as the deferred purchase price of property or services including,
without limitation, Capitalized Lease Obligations (other than trade payables
entered into in the ordinary course of business), (iii) all reimbursement or
payment obligations with respect to letters of credit, surety bonds and other
similar instruments, (iv) 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, (v) 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), (vi) all
Capitalized Lease Obligations, (vii) all indebtedness referred to in clauses (i)
through (vi) 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 such
Person, even though the Person which owns such assets or property has not
assumed or become liable for the payment of such indebtedness, and (vii) all
Contingent Obligations in respect of indebtedness or obligations of others of
the kinds referred to in clauses (i) through (vi) above.
"INDEMNITEES" has the meaning provided in Section 13(k).
"INDEMNIFIED LIABILITIES" has the meaning provided in Section 13(k).
"INITIAL 8-K FILING" has the meaning provided in Section 6(i).
"INSOLVENT" means, with respect to any Persion (i) the present fair
saleable value of the assets of such Person is less than the amount required to
pay the total Indebtedness of such Person, (ii) such Person is unable to pay its
debts and liabilities, subordinated, contingent or otherwise, as such debts and
liabilities become absolute and matured, (iii) such Person intends to incur or
believes that it will incur debts that would be beyond its ability to pay as
such debts mature or (iv) such Person has unreasonably small capital with which
to conduct the business in which it is engaged as such business is now conducted
and is proposed to be conducted.
"INTELLECTUAL PROPERTY RIGHTS" has the meaning provided in Section 5(x).
"INTEREST PAYMENT DATE" has the meaning provided in Section 2(b).
"INVESTMENTS" means, with respect to any Person, any direct or indirect
loan or other extension of credit (including, without limitation, a guarantee)
or capital contribution to (by means of any transfer of cash or other property
to others or any payment for property or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness issued
by, any other Person. "Investment" shall exclude (i) extensions of trade credit
by the Company and its Subsidiaries on commercially reasonable terms in
accordance with normal trade practices of the Company or such Subsidiary, as the
case may be; and (ii) loans and advances to employees and officers of the
Company and its Subsidiaries in the ordinary course of business for bona fide
business purposes (it being understood that the purchase of Capital Stock shall
not be deemed to
49
occur in the ordinary course of business for purposes of this clause). For the
purposes of Section 7(b), the amount of any Investment shall be the original
cost of such Investment plus the cost of all additional Investments by the
Company or any of its Subsidiaries, without any adjustments for increases or
decreases in value, or write-ups, write-downs or write-offs with respect to such
Investment, reduced by the payment of dividends or distributions in connection
with such Investment or any other amounts received in respect of such
Investment; provided that no such payment of dividends or distributions or
receipt of any such other amounts shall reduce the amount of any Investment to
the extent that payment of dividends or distributions or receipt of any such
amounts would be included in the Basket. If the Company or any Subsidiary sells
or otherwise disposes of any Common Stock of any direct or indirect Subsidiary
such that, after giving effect to any such sale or disposition, the Company no
longer owns, directly or indirectly, greater than 50% of the outstanding Common
Stock of such Subsidiary, the Company shall be deemed to have made an Investment
on the date of any such sale or disposition equal to the fair market value of
the Common Stock of such Subsidiary not sold or disposed of.
"IRREVOCABLE TRANSFER AGENT INSTRUCTIONS" has the meaning provided in
Section 9(b).
"KNOWLEDGE" means the actual knowledge of (i) the Company's Chief
Executive Officer and Chief Financial Officer, and (ii) the President and Chief
Executive Officer and Vice President of Business Development of MediaDefender,
Inc.
"LIEN" with respect to any property, whether personal or real, tangible or
intangible, shall mean any mortgage, pledge, hypothecation, assignment, deposit
arrangement, encumbrance, lien (statutory or other), preference, priority or
other security agreement of any kind or nature whatsoever (including, without
limitation, any conditional sale or other title retention agreement, any
financing or similar statement or notice filed under the UCC or any other
similar recording or notice statute, and any lease having substantially the same
effect as any of the foregoing).
"LOCK-UP AGREEMENTS" has the meaning provided in Section 11(a)(xvi).
"MANAGEMENT AGREEMENTS" has the meaning provided in Section 11(a)(xv).
"MATERIAL ADVERSE EFFECT" means any material adverse effect on the
business, properties, assets, operations, results of operations, condition
(financial or otherwise) or prospects of the Company and its Subsidiaries, taken
as a whole, or on the transactions contemplated hereby and 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.
"MATURITY DATE" has the meaning provided in Section 2(a).
"MD 8-K FILING" has the meaning provided in Section 6(i).
"MD ACQUISITION" has the meaning provided in Section 5(ee).
"MD DOCUMENTS" has the meaning provided in Section 5(ee).
"MERGER AGREEMENT" has the meaning provided in Section 6(i).
"MOODY'S" means ▇▇▇▇▇'▇ Investors Service, Inc.
"NET CASH PROCEEDS" means, with respect to any Asset Sale, the cash or
cash equivalents received by the Company or any of its Subsidiaries in
connection with such Asset Sale
50
(including, without limitation any amount received, when received from any
non-cash proceeds) net of (a) actual and reasonable out of pocket expenses and
fees relating to such Asset Sale (other than expenses paid to the Company or any
Subsidiary or Affiliate of the Company), and (b) taxes paid or payable after
taking into account any reduction in consolidated tax liability due to available
tax credits or deductions and any tax sharing arrangements.
"NON-COMPETE AGREEMENTS" has the meaning provided in Section 11(a)(xv).
"NOTES" has the meaning provided in Clause B of the Whereas clauses.
"OPTIONS" means any rights, warrants or options to subscribe for or
purchase shares of Common Stock or Convertible Securities.
"PATENT COLLATERAL" means all of the "Collateral" as defined in the Patent
Security Agreement.
"PATENT SECURITY AGREEMENT" has the meaning provided in Section
11(a)(xix).
"PERMITTED INVESTMENTS" means (i) Investments by the Company or any of its
Subsidiaries in any Person that is or will become immediately after such
Investment a Wholly Owned Subsidiary of the Company or that will merge or
consolidate into the Company or a Wholly Owned Subsidiary of the Company; (ii)
Investments by any Subsidiary of the Company in the Company or any of its
Subsidiaries; (iii) Investments in cash and Cash Equivalents; (iv) Investments
in securities of trade creditors or customers received pursuant to any plan of
reorganization or similar arrangement upon the bankruptcy or insolvency of such
trade creditors or customers or in good faith settlement or delinquent
obligations and disputes with trade creditors or customers; and (v) Investments
identified in Schedule 15.
"PERMITTED LIENS" means (i) Liens for taxes, assessments and governmental
charges or claims not yet due or which are being contested in good faith by
appropriate proceedings promptly instituted and diligently conducted and if a
reserve or other appropriate provision, if any, as shall be required in
conformity with GAAP shall have been made therefor; (ii) statutory Liens of
landlords and carriers, warehousemen, mechanics, suppliers, materialmen,
repairmen or other like Liens arising in the ordinary course of business or
deposits made to obtain the release of such Liens, and in each case with respect
to amounts not yet delinquent for a period of more than 60 days or being
contested in good faith by an appropriate process of law, and for which a
reserve or other appropriate provision, if any, as shall be required by GAAP
shall have been made; (iii) Liens incurred or pledges or deposits made in the
ordinary course of business to secure obligations under workers' compensation,
unemployment insurance and other types of social security or similar
legislation; (iv) Liens incurred or deposits made to secure the performance of
tenders, bids, leases, statutory obligations, surety and appeal bonds,
governmental contracts, performance and return of money bonds and other
obligations of a like nature incurred in the ordinary course of business
(exclusive of obligations for the payment of borrowed money); (v) easements,
rights-of-way, zoning or other restrictions, minor defects or irregularities in
title and other similar charges or encumbrances not interfering in any material
respect with the business of the Company or any of its Subsidiaries incurred in
the ordinary course of business; (vi) Liens upon specific items of inventory or
other goods and proceeds of any Person securing such Person's obligations in
respect of bankers' acceptances issued or created for the account of such Person
to facilitate the purchase, shipment or storage of such inventory or other goods
in the ordinary course of business; (vii) Liens securing reimbursement
51
obligations with respect to letters of credit which encumber documents and other
property relating to such letters of credit and the products and proceeds
thereof; (viii) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of nondelinquent customs duties in connection
with the importation of goods; (ix) judgment and attachment Liens not giving
rise to a Default or Event of Default; (x) leases or subleases granted to others
not interfering in any material respect with the business of the Company or any
Subsidiary of the Company; (xi) Liens encumbering deposits made in the ordinary
course of business to secure nondelinquent obligations arising from statutory,
regulatory, contractual or warranty requirements of the Company or its
Subsidiaries for which a reserve or other appropriate provision, if any, as
shall be required by GAAP shall have been made; (xii) any interest or title of a
lessor in the property subject to any lease, whether characterized as
capitalized or operating other than any such interest or title resulting from or
arising out of a default by the Company or any Subsidiary of the Company of its
obligations under such lease; and (xiii) Liens arising from filing UCC financing
statements for precautionary purposes in connection with true leases of personal
property that are otherwise permitted under this Agreement and under which the
Company or any Subsidiary of the Company is lessee.
"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.
"PLEDGE AGREEMENT" has the meaning provided in Section 11(a)(xvii).
"PLEDGED COLLATERAL" means all of the "Pledged Collateral" as defined in
the Pledge Agreement.
"PREFERRED STOCK" means, with respect to any Person, any Capital Stock of
such Person that has preferential rights to any other Capital Stock of such
Person with respect to dividends or redemptions or upon liquidation.
"PRINCIPAL MARKET" has the meaning provided in Section 5(d).
"PURCHASE PRICE" has the meaning provided in Section 1(a)(iii).
"QUALIFIED CAPITAL STOCK" means any Capital Stock that is not Disqualified
Capital Stock.
"REFERENCE DATE" has the meaning provided in Section 7(b)(i).
"REGISTRATION RIGHTS AGREEMENT" has the meaning provided in Clause C of
the Whereas clauses.
"REGULATION D" means Rule 506 of Regulation D as promulgated by the SEC
under the 1933 Act.
"REPORTING PERIOD" has the meaning provided in Section 6(c).
"REQUIRED HOLDERS" means, as of any date of determination, the holders of
at least 51% of the unpaid principal amount of the Notes then outstanding.
"RESTRICTED PAYMENT" has the meaning provided in Section 7(b)(i).
"RULE 144" has the meaning provided in Section 4(f).
"S&P" means Standard & Poor's Ratings Services.
52
"SEC" means United States Securities and Exchange Commission.
"SEC DOCUMENTS" means all reports, schedules, forms, statements and other
documents required to be filed by the Company with the SEC pursuant to the
reporting requirements of the 1934 Act (including all exhibits included therein
and financial statements, notes and schedules thereto and documents incorporated
by reference therein).
"SECURITIES" has the meaning provided in Clause D of the Whereas clauses.
"SECURITIES PURCHASE AGREEMENT" means that certain Securities Purchase
Agreement dated as of the date hereof among the Company, Holdings and the
Initial Purchasers (as identified and defined therein) of $30,000,000 of 4.0%
Subordinated Convertible Notes due July 28, 2009, as in effect on the Closing
Date.
"SECURITIES PURCHASE DOCUMENTS" means the Securities Purchase Agreement
and all other agreements, documents and instruments governing or evidencing the
Convertible Subordinated Debt or the related warrants executed and delivered in
connection with the Securities Purchase Agreement, as in effect on the Closing
Date.
"SECURITY AGREEMENT" has the meaning provided in Section 11(a)(xviii).
"SECURITY AGREEMENT COLLATERAL" means all of the "Collateral" as defined
in the Security Agreement.
"SECURITY DOCUMENTS" means the Security Agreement, and each of the
collateral documents, instruments and agreements delivered pursuant to Section
11, and each other agreement that creates or purports to create a Lien in favor
of the Collateral Agent for the benefit of the Holders.
"SHAREHOLDERS' AGREEMENTS" has the meaning provided in Section
11(a)(xxii).
"STOCKHOLDER APPROVAL" has the meaning provided in Section 6(r).
"STOCKHOLDER MEETING" has the meaning provided in Section 6(r).
"STOCKHOLDER MEETING DEADLINE" has the meaning provided in Section 6(r).
"SUBORDINATION AGREEMENT" has the meaning provided in Section
11(a)(xxiii).
"SUBSIDIARY" means, with respect to any Person, any corporation,
partnership, joint venture, limited liability company, trust or estate of which
(or in which) more than 50% of (a) the issued and outstanding capital stock
having ordinary voting power to elect a majority of the Board of Directors of
such corporation (irrespective of whether at the time capital stock of any other
class or classes of such corporation shall or might have voting power upon the
occurrence of any contingency), (b) the interest in the capital or profits of
such partnership, joint venture or limited liability company or (c) the
beneficial interest in such trust or estate is at the time directly or
indirectly owned or controlled by such Person, by such Person and one or more of
its other Subsidiaries or by one or more of such Person's other Subsidiaries.
"SURVIVING ENTITY" has the meaning provided in Section 7(g).
"TAX SHARING AGREEMENTS" has the meaning provided in Section 11(a)(xxii).
"TEST PERIOD" shall mean each period of four consecutive fiscal quarters
of the Company and its Subsidiaries then last ended (in each case taken as one
accounting period).
53
"TRADEMARK COLLATERAL" means all of the "Collateral" as defined in the
Trademark Security Agreement.
"TRADEMARK SECURITY AGREEMENT" has the meaning provided in Section
11(a)(xix).
"TRANSACTION DOCUMENTS" means this Agreement, the Notes, the Guaranty, the
Security Agreement, the Pledge Agreement, the Registration Rights Agreement, the
Irrevocable Transfer Agent Instructions, the Warrants, and each of the other
agreements entered into by the parties hereto in connection with the
transactions contemplated by this Agreement.
"UCC" shall mean the Uniform Commercial Code of the applicable
jurisdiction.
"VOTING AGREEMENT" has the meaning provided in Section 11(a)(xxiv).
"WARRANTS" has the meaning provided in Clause B of the Whereas clauses.
"WARRANT SHARES" has the meaning provided in Clause B of the Whereas
clauses.
"WHOLLY-OWNED SUBSIDIARY" means, with respect to any Person, (i) any
corporation 100% of whose capital stock (other than director's qualifying
shares) is at the time owned by such Person and/or one or more Wholly-Owned
Subsidiaries of such Person and (ii) any partnership, limited liability company,
association, joint venture or other entity in which such Person and/or one or
more Wholly-Owned Subsidiaries of such Person has a 100% equity interest at such
time.
[SIGNATURE PAGE FOLLOWS]
54
IN WITNESS WHEREOF, the Initial Purchasers, Collateral Agent and the
Company have caused their respective signature page to this Note and Warrant
Purchase Agreement to be duly executed as of the date first written above.
COMPANY:
ARTISTDIRECT, INC.
By: /s/ ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇
---------------------------
Name: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇
Title: Chief Financial Officer
IN WITNESS WHEREOF, the Initial Purchasers, Collateral Agent and the
Company have caused their respective signature page to this Note and Warrant
Purchase Agreement to be duly executed as of the date first written above.
INITIAL PURCHASERS:
JMB CAPITAL PARTNERS, L.P.
By: /s/ ▇▇▇▇▇ ▇▇▇▇▇▇
-------------------------
Name: ▇▇▇▇▇ ▇▇▇▇▇▇
Title: Analyst
JMG CAPITAL PARTNERS, L.P.
By: /s/ [Illegible]
-------------------------
Name:
Title:
JMG TRITON OFFSHORE FUND, LTD
By: /s/ [Illegible]
-------------------------
Name:
Title:
CCM MASTER QUALIFIED FUND, LTD
By: /s/ ▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇
-------------------------
Name: ▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇
Title: Director
IN WITNESS WHEREOF, the Initial Purchasers, Collateral Agent and the
Company have caused their respective signature page to this Note and Warrant
Purchase Agreement to be duly executed as of the date first written above.
COLLATERAL AGENT:
U.S. BANK NATIONAL ASSOCIATION
By: /s/ ▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇
-------------------------
Name: ▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇
Title: Vice President
SCHEDULE OF PURCHASERS
Aggregate Number of Warrant
Address, and Facsimile Principal Amount Shares/Purchase
Buyer Number of Notes Price of Warrants Purchase Price
-------------------- -------------------------------- ---------------- ------------------- --------------
JMB Capital 1999 Avenue of the Stars, $9,458,333 2,166,667/$541,667 $10,000,000
Partners, L.P. ▇▇▇▇▇ ▇▇▇▇
▇▇▇ ▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
Attn: ▇▇▇▇▇ ▇▇▇▇▇▇
JMG Capital c/o JMG Capital Management, LLC $1,418,750 325,000/$ 81,250 $ 1,500,000
Partners, LP ▇▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇., ▇▇▇▇▇ ▇▇▇▇
▇▇▇ ▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
Attn: ▇▇▇▇▇▇ ▇▇▇▇▇▇
JMG Triton Offshore c/o JMG Capital Management, LLC $1,418,750 325,000/$ 81,250 $ 1,500,000
Fund, Ltd. ▇▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇., ▇▇▇▇▇ ▇▇▇▇
▇▇▇ ▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
Attn: ▇▇▇▇▇▇ ▇▇▇▇▇▇
CCM Master c/o Coghill Capital $1,891,667 433,333/$108,333 $ 2,000,000
Qualified Fund, Ltd. ▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇.,
▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
Attn: ▇▇▇▇ ▇▇▇▇