EXHIBIT 4.4
[FORM OF CONVERTIBLE SUBORDINATED NOTE]
NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED
OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION
OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED
UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID
ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION
WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED
BY THE SECURITIES. ANY TRANSFEREE OF THIS NOTE SHOULD CAREFULLY REVIEW THE TERMS
OF THIS NOTE, INCLUDING SECTIONS 3(C)(III) AND 19(A) HEREOF. THE PRINCIPAL
AMOUNT REPRESENTED BY THIS NOTE AND, ACCORDINGLY, THE SECURITIES ISSUABLE UPON
CONVERSION HEREOF MAY BE LESS THAN THE AMOUNTS SET FORTH ON THE FACE HEREOF
PURSUANT TO SECTION 3(C)(III) OF THIS NOTE. ALL INDEBTEDNESS EVIDENCED HEREBY
AND REFERENCED HEREIN IS SUBORDINATED TO ALL SENIOR INDEBTEDNESS OWED TO THE
SENIOR CREDITORS IN ACCORDANCE WITH THE TERMS OF THAT CERTAIN SUBORDINATION
AGREEMENT, DATED AS OF JULY 28, 2005, AS AMENDED, RESTATED OR OTHERWISE
MODIFIED, AMONG THE U.S. BANK NATIONAL BANK ASSOCIATION, AS COLLATERAL AGENT FOR
THE SENIOR CREDITORS (AS DEFINED THEREIN), THE HOLDER OF THIS NOTE AND THE OTHER
PARTIES NAMED THEREIN.
ARTISTDIRECT, INC.
CONVERTIBLE SUBORDINATED NOTE
Issuance Date: July 28, 2005 Principal: U.S. $[___________]
FOR VALUE RECEIVED, ARTISTdirect, Inc., a Delaware corporation (the
"COMPANY"), hereby promises to pay to the order of [DKR SOUNDSHORE OASIS HOLDING
FUND LTD.] [CCM Master Qualified Fund Ltd.] [Randy Saaf] [Octavio Herrera]
[Michael Rapp] [Philip Wagenheim] [Karl Brenza] [Jeffrey Meshel] [Broadband
Capital Management LLC] [JLF Investors] [Longview Investors] or its registered
assigns ("HOLDER") the amount set out above as the Principal (as reduced
pursuant to the terms hereof pursuant to redemption, conversion or otherwise,
the "PRINCIPAL") when due, whether upon the Maturity Date (as defined
below), acceleration, redemption or otherwise (in each case in accordance with
the terms hereof) and to pay interest ("INTEREST") on any outstanding Principal
at the rate of 4.00% per annum, subject to periodic adjustment pursuant to
Section 2 (the "INTEREST RATE"), from the date set out above as the Issuance
Date (the "ISSUANCE DATE") until the same becomes due and payable, whether upon
an Interest Date (as defined below), the Maturity Date, acceleration,
conversion, redemption or otherwise (in each case in accordance with the terms
hereof). This Convertible Subordinated Note (including all Convertible
Subordinated Notes issued in exchange, transfer or replacement hereof, this
"NOTE") is one of an issue of Convertible Subordinated Notes (collectively, the
"NOTES" and such other Convertible Subordinated Notes, the "OTHER NOTES") issued
on the Issuance Date pursuant to the Securities Purchase Agreement (as defined
below). Certain capitalized terms are defined in Section 29.
(1) MATURITY. On the Maturity Date, the Holder shall surrender this
Note to the Company and the Company shall pay to the Holder an amount in cash
representing all outstanding Principal, accrued and unpaid Interest and accrued
and unpaid Late Charges, if any. The "ORIGINAL MATURITY DATE" shall be July 28,
2009, as may be extended at the option of the Holder (i) in the event that, and
for so long as, an Event of Default (as defined in Section 4(a)) shall have
occurred and be continuing or any event shall have occurred and be continuing
which with the passage of time and the failure to cure would result in an Event
of Default and (ii) through the date that is ten (10) days after the
consummation of a Change of Control (as defined in Section 5(a)) in the event
that a Change of Control is publicly announced or a Change of Control Notice (as
defined in Section 5(a)) is delivered prior to the Maturity Date (as may be
extended, the "MATURITY DATE").
(2) INTEREST; INTEREST RATE.
(a) Interest on this Note shall commence accruing on the
Issuance Date and shall be computed on the basis of a 365-day year and actual
days elapsed and shall be payable in arrears on September 30, 2006 and,
thereafter, on the last day of each Calendar Quarter and on the Maturity Date
during the period beginning on the Issuance Date and ending on, and including,
the Maturity Date (each, an "INTEREST DATE"). Interest shall be payable on each
Interest Date, to the record holder of this Note on the applicable Interest Date
in shares of Common Stock ("INTEREST SHARES") or, at the sole option of the
Company, in cash ("CASH INTEREST") provided that the Interest which accrued
during any period shall be payable in Cash Interest if, and only if, the Company
delivers written notice (each, an "INTEREST ELECTION NOTICE") of such election
to each holder of the Notes on or prior to the fifth (5th) Trading Day prior to
the Interest Date (each, an "INTEREST NOTICE DUE DATE"); provided, that the
Company may indicate in such notice that the election therein applies for
subsequent Interest Payment Dates until so modified. If the Company does not
deliver an Interest Election Notice, it will be deemed to have certified that
the Equity Conditions have been satisfied as of the Interest Date, and shall be
deemed to have certified that the Equity Conditions have been satisfied with
respect to any subsequent Interest Payment Date. Each Interest Election Notice
shall be irrevocable. The Company shall notify the Holder if at any time the
Equity Conditions are not satisfied. Interest to be paid on an Interest Date in
Interest Shares shall be paid in a number of fully paid and nonassessable shares
(rounded to the nearest whole share in accordance with Section 3(a)) of Common
Stock equal to the quotient of (a) the amount of Interest payable on such
Interest Date and (b) the Interest Conversion Price in effect on the applicable
Interest Date. If any Interest
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Shares are to be paid on an Interest Date, then the Company shall either (X)
provided that the Company's transfer agent (the "TRANSFER AGENT") is
participating in the Depository Trust Company ("DTC") Deposit Withdrawal Agent
Commission Program ("DWAC") and such action is not prohibited by applicable law
or regulation or any applicable policy of DTC, credit such aggregate number of
Interest Shares to which the Holder shall be entitled to the Holder's or its
designee's balance account with DTC through DWAC, or (Y) or issue and deliver on
the applicable Interest Date, to the address set forth in the register
maintained by the Company for such purpose pursuant to the Securities Purchase
Agreement or to such address as specified by the Holder in writing to the
Company, a certificate, registered in the name of the Holder or its designee,
for the number of Interest Shares to which the Holder shall be entitled.
Notwithstanding the foregoing, the Company shall not be entitled to pay Interest
in Interest Shares and shall be required to pay such Interest in cash as Cash
Interest on the applicable Interest Date if, unless consented to in writing by
the Holder, on each Trading Day during the period from the applicable Interest
Notice Due Date through the applicable Interest Date the Equity Conditions have
not been satisfied. Prior to the payment of Interest on an Interest Date,
Interest on this Note shall accrue at the Interest Rate and be payable by way of
inclusion of the Interest in the Conversion Amount in accordance with Section
3(b)(i). From and after the occurrence of an Event of Default, the Interest Rate
shall be increased to 12%. In the event that such Event of Default is
subsequently cured, the adjustment referred to in the preceding sentence shall
cease to be effective as of the date of such cure; provided that the Interest as
calculated at such increased rate during the continuance of such Event of
Default shall continue to apply to the extent relating to the days after the
occurrence of such Event of Default through and including the date of cure of
such Event of Default.
(b) Upon delivery of a Mandatory Conversion Notice pursuant to
Section 9, if this Note remains outstanding as a result of a failure of clause
(vii) of the Equity Conditions to be satisfied, then Interest shall cease to
accrue and be payable on such portion of this Note which remains outstanding due
to the failure of clause (vii) of the Equity Conditions to be so satisfied.
(3) CONVERSION OF NOTES. This Note shall be convertible into shares
of the Company's common stock, par value $0.01 per share (the "COMMON STOCK"),
on the terms and conditions set forth in this Section 3.
(a) Conversion Right. Subject to the provisions of Section
3(d), at any time or times on or after the Issuance Date, the Holder shall be
entitled to convert any portion of the outstanding and unpaid Conversion Amount
(as defined below) into fully paid and nonassessable shares of Common Stock in
accordance with Section 3(c), at the Conversion Rate (as defined below);
provided, however, that prior to the filing by the Company of a Certificate of
Amendment to its Certificate of Incorporation to effect the Share Increase (as
defined in the Securities Purchase Agreement), the Holder shall only be entitled
to convert this Note into a number of shares of Common Stock not to exceed its
pro rata share of [8,003,712] based on the principal amount of this Note
relative to the principal amount of all Notes issued pursuant to the Securities
Purchase Agreement [WILL DROP IN ACTUAL NUMBERS UPON CONFIRMATION OF
ALLOCATIONS]. The Company shall not issue any fraction of a share of Common
Stock upon any conversion. If the issuance would result in the issuance of a
fraction of a share of Common Stock, the Company shall round such fraction of a
share of Common Stock up to the nearest
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whole share. The Company shall pay any and all taxes that may be payable with
respect to the issuance and delivery of Common Stock upon conversion of any
Conversion Amount, but shall exclude (i) any income and/or capital gain taxes
owed by the Holder or (ii) taxes owed solely due to the fact such Holder is a
foreign entity.
(b) Conversion Rate. The number of shares of Common Stock
issuable upon conversion of any Conversion Amount pursuant to Section 3(a) shall
be determined by dividing (x) such Conversion Amount by (y) the Conversion Price
(as defined below) (the "CONVERSION RATE").
(i) "CONVERSION AMOUNT" means the sum of (A) the portion of the Principal
to be converted, redeemed or otherwise with respect to which this
determination is being made, (B) accrued and unpaid Interest with respect
to such Principal and (C) accrued and unpaid Late Charges with respect to
such Principal and Interest.
(ii) "CONVERSION PRICE" means, as of any Conversion Date (as defined
below) or other date of determination, and subject to adjustment as
provided herein, $1.55.
(c) Mechanics of Conversion.
(i) Optional Conversion. To convert any Conversion Amount into shares of
Common Stock on any date (a "CONVERSION DATE"), the Holder shall (A)
transmit by facsimile (or otherwise deliver), for receipt on or prior to
11:59 p.m., New York Time, on such date, a copy of an executed notice of
conversion in the form attached hereto as Exhibit I (the "CONVERSION
NOTICE") to the Company and (B) if required by Section 3(c)(iii),
surrender this Note to a common carrier for delivery to the Company as
soon as practicable on or following such date (or an indemnification
undertaking with respect to this Note in the case of its loss, theft or
destruction). Within two (2) Business Days following the date of receipt
of a Conversion Notice, the Company shall transmit by facsimile a
confirmation of receipt of such Conversion Notice to the Holder and the
Transfer Agent. On or before the third (3rd) Business Day following the
date of receipt of a Conversion Notice (the "SHARE DELIVERY DATE"), the
Company shall either (X) credit such aggregate number of shares of Common
Stock to which the Holder shall be entitled to the Holder's or its
designee's balance account with DTC through DWAC or (Y) issue and deliver
to the address as specified in the Conversion Notice, a certificate,
registered in the name of the Holder or its designee, for the number of
shares of Common Stock to which the Holder shall be entitled. If this Note
is physically surrendered for conversion as required by Section 3(c)(iii)
and the outstanding Principal of this Note is greater than the Principal
portion of the Conversion Amount being converted, then the Company shall
as soon as practicable and in no event later than three (3) Business Days
after receipt of this Note and at its own expense, issue and deliver to
the holder a new Note (in accordance with Section 19(d)) representing the
outstanding Principal not converted. The Person or Persons entitled to
receive the shares of Common Stock issuable upon a conversion of this Note
shall be treated for all purposes as the record holder or holders of such
shares of Common Stock on the Conversion Date.
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(ii) Company's Failure to Timely Convert. If the Company shall fail to
issue a certificate to the Holder or credit the Holder's balance account
with DTC for the number of shares of Common Stock to which the Holder is
entitled upon conversion of any Conversion Amount on or prior to the date
which is five (5) Business Days after the Conversion Date (a "CONVERSION
FAILURE"), then (A) the Company shall pay damages to the Holder for each
date of such Conversion Failure in an amount equal to 0.5% of the product
of (I) the sum of the number of shares of Common Stock not issued to the
Holder on or prior to the Share Delivery Date and to which the Holder is
entitled, and (II) the Closing Sale Price of the Common Stock on the Share
Delivery Date and (B) the Holder, upon written notice to the Company, may
void its Conversion Notice with respect to, and retain or have returned,
as the case may be, any portion of this Note that has not been converted
pursuant to such Conversion Notice; provided that the voiding of a
Conversion Notice shall not affect the Company's obligations to make any
payments which have accrued prior to the date of such notice pursuant to
this Section 3(c)(ii) or otherwise. In addition to the foregoing, if
within three (3) Trading Days after the Company's receipt of the facsimile
copy of a Conversion Notice the Company shall fail to issue and deliver a
certificate to the Holder or credit the Holder's balance account with DTC
for the number of shares of Common Stock to which the Holder is entitled
upon the Holder's conversion of any Conversion Amount, and if on or after
such Trading Day the Holder purchases (in an open market transaction or
otherwise) Common Stock to deliver in satisfaction of a sale by the Holder
of Common Stock issuable upon such conversion that the Holder anticipated
receiving from the Company (a "BUY-IN"), then the Company shall, within
three (3) Business Days after the Holder's request and in the Holder's
discretion, either (i) pay cash to the Holder in an amount equal to the
Holder's total purchase price (including brokerage commissions and other
out-of-pocket expenses, if any) for the shares of Common Stock so
purchased (the "BUY-IN PRICE"), at which point the Company's obligation to
deliver such certificate (and to issue such Common Stock) shall terminate,
or (ii) promptly honor its obligation to deliver to the Holder a
certificate or certificates representing such Common Stock and pay cash to
the Holder in an amount equal to the excess (if any) of the Buy-In Price
over the product of (A) such number of shares of Common Stock times (B)
the Closing Bid Price on the Conversion Date.
(iii) Book-Entry. Notwithstanding anything to the contrary set forth
herein, upon conversion of any portion of this Note in accordance with the
terms hereof, the Holder shall not be required to physically surrender
this Note to the Company unless (A) the full Conversion Amount represented
by this Note is being converted or (B) the Holder has provided the Company
with prior written notice (which notice may be included in a Conversion
Notice) requesting physical surrender and reissue of this Note. The Holder
and the Company shall maintain records showing the Principal, Interest and
Late Charges converted and the dates of such conversions or shall use such
other method, reasonably satisfactory to the Holder and the Company, so as
not to require physical surrender of this Note upon conversion.
(iv) Pro Rata Conversion; Disputes. In the event that the Company receives
a Conversion Notice from more than one (1) holder of Notes for the same
Conversion Date and the Company can convert some, but not all, of such
portions of the Notes submitted for conversion, the Company, subject to
Section 3(d), shall convert from each holder of
5
Notes electing to have Notes converted on such date a pro rata amount of
such holder's portion of its Notes submitted for conversion based on the
principal amount of Notes submitted for conversion on such date by such
holder relative to the aggregate principal amount of all Notes issued to
the Holder on the Issuance Date. In the event of a dispute as to the
number of shares of Common Stock issuable to the Holder in connection with
a conversion of this Note, the Company shall issue to the Holder the
number of shares of Common Stock not in dispute and resolve such dispute
in accordance with Section 24.
(d) [Limitations on Conversions. The Company shall not effect
any conversion of this Note, and the Holder of this Note shall not have the
right to convert (or to submit a Conversion Notice with respect to) any portion
of this Note pursuant to Section 3(a), to the extent that after giving effect to
such conversion, the Holder (together with the Holder's affiliates) would
beneficially own in excess of 4.99% [9.99% for CCM and JLF Notes] (the "MAXIMUM
PERCENTAGE") of the number of shares of Common Stock outstanding immediately
after giving effect to such conversion. For purposes of the foregoing sentence,
the number of shares of Common Stock beneficially owned by the Holder and its
affiliates shall include the number of shares of Common Stock issuable upon
conversion of this Note with respect to which the determination of such sentence
is being made, but shall exclude the number of shares of Common Stock which
would be issuable upon (A) conversion of the remaining, unconverted portion of
this Note beneficially owned by the Holder or any of its affiliates and (B)
exercise or conversion of the unexercised or unconverted portion of any other
securities of the Company (including, without limitation, any Other Notes or
warrants) subject to a limitation on conversion or exercise analogous to the
limitation contained herein beneficially owned by the Holder or any of its
affiliates. Except as set forth in the preceding sentence, for purposes of this
Section 3(d), beneficial ownership shall be calculated in accordance with
Section 13(d) of the Securities Exchange Act of 1934, as amended. For purposes
of this Section 3(d), in determining the number of outstanding shares of Common
Stock, the Holder may rely on the number of outstanding shares of Common Stock
as reflected in (x) the Company's most recent Form 10-QSB or Form 10-KSB, (y) a
more recent public announcement by the Company or (z) any other notice by the
Company or the Transfer Agent setting forth the number of shares of Common Stock
outstanding. For any reason at any time, upon the written or oral request of the
Holder, the Company shall within two (2) Business Days confirm orally and in
writing to the Holder the number of shares of Common Stock then outstanding. In
any case, the number of outstanding shares of Common Stock shall be determined
after giving effect to the conversion or exercise of securities of the Company,
including this Note, by the Holder or its affiliates since the date as of which
such number of outstanding shares of Common Stock was reported. [By written
notice to the Company, the Holder may increase or decrease the Maximum
Percentage to any other percentage; provided that any such increase will not be
effective until the 61st day after such notice is delivered to the Company. DO
NOT INCLUDE LAST SENTENCE IN BROADBAND GROUP NOTES]. [FOR OASIS, CCM, JLF AND
BROADBAND GROUP NOTES ONLY]
(4) RIGHTS UPON EVENT OF DEFAULT.
(a) Event of Default. Each of the following events shall
constitute an "EVENT OF DEFAULT":
6
(i) the failure of the applicable Registration Statement required to be
filed pursuant to the Registration Rights Agreement to be declared
effective by the SEC on or prior to the Effectiveness Deadline (as defined
in the Registration Rights Agreement), respectively, or, while the
applicable Registration Statement is required to be maintained effective
pursuant to the terms of the Registration Rights Agreement, the
effectiveness of the applicable Registration Statement lapses for any
reason (including, without limitation, the issuance of a stop order) or is
unavailable to any holder of the Notes for sale of all of such holder's
Registrable Securities (as defined in the Registration Rights Agreement)
in accordance with the terms of the Registration Rights Agreement, and
such lapse or unavailability continues for a period of ten (10)
consecutive Trading Days or for more than an aggregate of thirty (30)
Trading Days in any 365-day period (other than days during an Allowable
Grace Period (as defined in the Registration Rights Agreement) (except to
the extent such failure or lapse is due to the misstatement of any Holder
of the Notes);
(ii) the suspension from trading or failure of the Common Stock to be
listed on the Principal Market or an Eligible Market for a period of five
(5) consecutive Trading Days or for more than an aggregate of seven (7)
Trading Days in any 365-day period;
(iii) the Company's (A) failure to cure a Conversion Failure by delivery
of the required number of shares of Common Stock within ten (10) Business
Days after the applicable Conversion Date or (B) notice, written or oral,
to any holder of the Notes, including by way of public announcement or
through any of its agents, at any time, of its intention not to comply
with a request for conversion of any Notes into shares of Common Stock
that is tendered in accordance with the provisions of the Notes;
(iv) at any time after the filing of the Certificate of Amendment
effecting the Share Increase, following the tenth (10th) consecutive
Business Day that the Holder's Authorized Share Allocation is less than
the number of shares of Common Stock that the Holder would be entitled to
receive upon a conversion of the full Conversion Amount of this Note
(without regard to any limitations on conversion set forth in Section 3(d)
or otherwise);
(v) the Company's failure to pay to the Holder any amount of Principal,
Interest, Late Charges or other amounts when and as due under this Note,
the Securities Purchase Agreement or the Registration Rights Agreement,
except, in the case of a failure to pay Interest and Late Charges when and
as due, in which case only if such failure continues for a period of at
least three (3) Business Days;
(vi) any default under, redemption of or acceleration prior to maturity of
any Indebtedness (as defined below) of the Company or any of its
Subsidiaries (as defined in Section 3(a) of the Securities Purchase
Agreement) with an unpaid principal amount in excess of $1,000,000 at the
time of such default, redemption or acceleration other than with respect
to any Other Notes;
(vii) the Company or any of its Subsidiaries, pursuant to or within the
meaning of Title 11, U.S. Code, or any similar Federal or state law for
the relief of debtors (collectively,
7
"BANKRUPTCY LAW"), (A) commences a voluntary case, (B) consents to the
entry of an order for relief against it in an involuntary case, (C)
consents to the appointment of a receiver, trustee, assignee, liquidator
or similar official (a "CUSTODIAN"), (D) makes a general assignment for
the benefit of its creditors or (E) admits in writing that it is generally
unable to pay its debts as they become due;
(viii) a court of competent jurisdiction enters an order or decree under
any Bankruptcy Law that (A) is for relief against the Company or any of
its Subsidiaries in an involuntary case, (B) appoints a Custodian of the
Company or any of its Subsidiaries or (C) orders the liquidation of the
Company or any of its Subsidiaries;
(ix) a final judgment or judgments for the payment of money aggregating in
excess of $1,000,000 are rendered against the Company or any of its
Subsidiaries and which judgments are not, within sixty (60) days after the
entry thereof, bonded, discharged or stayed pending appeal, or are not
discharged within sixty (60) days after the expiration of such stay;
provided, however, that any judgment which is covered by insurance or an
indemnity from a credit worthy party shall not be included in calculating
the $1,000,000 amount set forth above so long as the Company provides the
Holder a written statement from such insurer or indemnity provider (which
written statement shall be reasonably satisfactory to the Holder) to the
effect that such judgment is covered by insurance or an indemnity and the
Company will receive the proceeds of such insurance or indemnity within
thirty (30) days of the issuance of such judgment;
(x) the Company materially breaches any representation, warranty, covenant
or other term or condition of any Transaction Document (as defined in the
Securities Purchase Agreement) to which the Holder is a party (it being
agreed that a failure to satisfy the conditions set forth in Section
7(a)(xii) of the Securities Purchase Agreement shall be deemed material),
except, in the case of a breach of a covenant or other term or condition
which is curable, only if such breach continues for a period of at least
ten (10) consecutive Business Days;
(xi) failure to obtain Stockholder Approval (as defined in the Securities
Purchase Agreement) by June 30, 2006;
(xii) failure to obtain audited financial statements of MediaDefender,
Inc. and its subsidiaries on or prior to the date that is seventy-five
(75) days after the Closing Date in accordance with Section 4(t) of the
Securities Purchase Agreement;
(xiii) any breach or failure in any respect to comply with Section 15 of
this Note;
(xiv) any Event of Default (as defined in the Other Notes) occurs with
respect to any Other Notes;
(xv) failure to mail the Information Statement (as defined in the
Securities Purchase Agreement) in accordance with the terms of Section
4(r) of the Securities Purchase Agreement;
8
(xvi) failure to obtain the Stockholder Consent by the date that is 15
days after the Closing Date; or
(xvii) failure to file the Certificate of Amendment effecting the Share
Increase in accordance with the terms of Section 4(v) of the Securities
Purchase Agreement.
(b) Redemption Right. Promptly after the occurrence of an
Event of Default with respect to this Note or any Other Note, the Company shall
deliver written notice thereof via facsimile and overnight courier (an "EVENT OF
DEFAULT NOTICE") to the Holder. At any time after the earlier of the Holder's
receipt of an Event of Default Notice and the Holder becoming aware of an Event
of Default, the Holder may require the Company to redeem all or any portion of
this Note by delivering written notice thereof (the "EVENT OF DEFAULT REDEMPTION
NOTICE") to the Company, which Event of Default Redemption Notice shall indicate
the portion of this Note the Holder is electing to redeem. Each portion of this
Note subject to redemption by the Company pursuant to this Section 4(b) shall be
redeemed by the Company at a price equal to the greater of (i) the product of
(x) the Conversion Amount to be redeemed and (y) the Redemption Premium and (ii)
the product of (A) the Conversion Rate with respect to such Conversion Amount in
effect at such time as the Holder delivers an Event of Default Redemption Notice
and (B) the Closing Sale Price of the Common Stock on the date immediately
preceding such Event of Default (the "EVENT OF DEFAULT REDEMPTION PRICE").
Redemptions required by this Section 4(b) shall be made in accordance with the
provisions of Section 12.
(5) RIGHTS UPON FUNDAMENTAL TRANSACTION AND CHANGE OF CONTROL.
(a) Assumption. The Company shall not enter into or be party
to a Fundamental Transaction unless (i) the Successor Entity assumes in writing
all of the obligations of the Company under this Note and the other Transaction
Documents in accordance with the provisions of this Section 5(a) pursuant to
written agreements in form and substance reasonably satisfactory to the Required
Holders and approved by the Required Holders prior to such Fundamental
Transaction, including agreements to deliver to each holder of Notes in exchange
for such Notes a security of the Successor Entity evidenced by a written
instrument substantially similar in form and substance to the Notes, including,
without limitation, having a principal amount and interest rate equal to the
principal amounts and the interest rates of the Notes held by such holder and
having similar ranking to the Notes, and satisfactory to the Required Holders,
(ii) the Successor Entity (including its Parent Entity) is a publicly traded
corporation whose common stock is quoted on or listed for trading on an Eligible
Market and (iii) under the Subordination Agreement the required parties have
consented to the redemption of the Notes by all Holders so electing pursuant to
Section 5(b) below. Upon the occurrence of any Fundamental Transaction, the
Successor Entity shall succeed to, and be substituted for (so that from and
after the date of such Fundamental Transaction, the provisions of this Note
referring to the "Company" shall refer instead to the Successor Entity), and may
exercise every right and power of the Company and shall assume all of the
obligations of the Company under this Note with the same effect as if such
Successor Entity had been named as the Company herein. Upon consummation of the
Fundamental Transaction, the Successor Entity shall deliver to the Holder
confirmation that there shall be issued upon conversion or redemption of this
Note at any time
9
after the consummation of the Fundamental Transaction, in lieu of the shares of
the Company's Common Stock (or other securities, cash, assets or other property)
issuable upon the conversion or redemption of the Notes prior to such
Fundamental Transaction, such shares of stock, securities, cash, assets or any
other property whatsoever (including warrants or other purchase or subscription
rights) which the Holder would have been entitled to receive upon the happening
of such Fundamental Transaction had this Note been converted immediately prior
to such Fundamental Transaction, as adjusted in accordance with the provisions
of this Note. The provisions of this Section shall apply similarly and equally
to successive Fundamental Transactions and shall be applied without regard to
any limitations on the conversion or redemption of this Note.
(b) Redemption Right. No sooner than fifteen (15) days nor
later than ten (10) days prior to the consummation of a Change of Control, but
not prior to the public announcement of such Change of Control, the Company
shall deliver written notice thereof via facsimile and overnight courier to the
Holder (a "CHANGE OF CONTROL NOTICE"). At any time during the period (the
"CHANGE OF CONTROL PERIOD") beginning after the Holder's receipt of a Change of
Control Notice and ending on the date of the consummation of such Change of
Control (or, in the event a Change of Control Notice is not delivered at least
ten (10) days prior to a Change of Control, at any time on or after the date
which is ten (10) days prior to a Change of Control and ending ten (10) days
after the consummation of such Change of Control), the Holder may require the
Company to redeem all or any portion of this Note by delivering written notice
thereof ("CHANGE OF CONTROL REDEMPTION NOTICE") to the Company, which Change of
Control Redemption Notice shall indicate the Conversion Amount the Holder is
electing to redeem. The portion of this Note subject to redemption pursuant to
this Section 5 shall be redeemed by the Company in cash at a price equal to the
greater of (x) the product of (I) the Conversion Amount being redeemed and (II)
the quotient determined by dividing (A) the Closing Sale Price of the Common
Stock immediately after the public announcement of such proposed Change of
Control by (B) the Conversion Price, and (y) 125% of the Conversion Amount being
redeemed (the "CHANGE OF CONTROL REDEMPTION PRICE"). Redemptions required by
this Section 5 shall be made in accordance with the provisions of Section 12 and
shall have priority to payments to stockholders in connection with a Change of
Control. Notwithstanding anything to the contrary in this Section 5, until the
Change of Control Redemption Price (together with any interest thereon) is paid
in full, the Conversion Amount submitted for redemption under this Section 5(c)
(together with any interest thereon) may be converted, in whole or in part, by
the Holder into Common Stock pursuant to Section 3.
(6) RIGHTS UPON ISSUANCE OF PURCHASE RIGHTS AND OTHER CORPORATE
EVENTS.
(a) Purchase Rights. If at any time the Company grants, issues
or sells any Options, Convertible Securities or rights to purchase stock,
warrants, securities or other property pro rata to the record holders of any
class of Common Stock (the "PURCHASE RIGHTS"), then the Holder will be entitled
to acquire, upon the terms applicable to such Purchase Rights, the aggregate
Purchase Rights which the Holder could have acquired if the Holder had held the
number of shares of Common Stock acquirable upon complete conversion of this
Note (without taking into account any limitations or restrictions on the
convertibility of this Note) immediately before the date on which a record is
taken for the grant, issuance or sale of such Purchase Rights,
10
or, if no such record is taken, the date as of which the record holders of
Common Stock are to be determined for the grant, issue or sale of such Purchase
Rights.
(b) Other Corporate Events. Prior to the consummation of any
recapitalization, reorganization, consolidation, merger, spin-off or other
business combination (other than a Change of Control) pursuant to which holders
of Common Stock are entitled to receive securities or other assets with respect
to or in exchange for Common Stock (a "CORPORATE EVENT"), the Company shall make
appropriate provision to insure that the Holder will thereafter have the right
to receive upon a conversion of this Note, (i) in addition to the shares of
Common Stock receivable upon such conversion, such securities or other assets to
which the Holder would have been entitled with respect to such shares of Common
Stock had such shares of Common Stock been held by the Holder upon the
consummation of such Corporate Event or (ii) in lieu of the shares of Common
Stock otherwise receivable upon such conversion, such securities or other assets
received by the holders of Common Stock in connection with the consummation of
such Corporate Event in such amounts as the Holder would have been entitled to
receive had this Note initially been issued with conversion rights for the form
of such consideration (as opposed to shares of Common Stock) at a conversion
rate for such consideration commensurate with the Conversion Rate. Provision
made pursuant to the preceding sentence shall be in a form and substance
reasonably satisfactory to the holders of Notes representing at least a majority
of the aggregate principal amount of the Notes then outstanding.
(7) RIGHTS UPON ISSUANCE OF OTHER SECURITIES.
(a) Adjustment of Conversion Price upon Issuance of Common
Stock. If at any time after the Subscription Date, the Company issues or sells,
or in accordance with this Section 7(a) is deemed to have issued or sold, any
shares of Common Stock (including the issuance or sale of shares of Common Stock
owned or held by or for the account of the Company, but excluding shares of
Common Stock deemed to have been issued or sold by the Company in connection
with any Excluded Security) for a consideration per share (the "NEW SECURITIES
ISSUANCE PRICE") less than a price (the "APPLICABLE PRICE") equal to $2.25 (but
greater than the Conversion Price in effect immediately prior to such issue or
sale) (the foregoing a "DILUTIVE ISSUANCE"), then immediately after such
Dilutive Issuance, the Conversion Price then in effect shall be reduced to an
amount (rounded to the nearest cent) equal to the product of (A) the Conversion
Price in effect immediately prior to such Dilutive Issuance and (B) the quotient
determined by dividing (1) the sum of (I) the product derived by multiplying the
Conversion Price in effect immediately prior to such Dilutive Issuance and the
number of shares of Common Stock Deemed Outstanding immediately prior to such
Dilutive Issuance plus (II) the consideration, if any, received by the Company
upon such Dilutive Issuance, by (2) the product derived by multiplying (I) the
Conversion Price in effect immediately prior to such Dilutive Issuance by (II)
the number of shares of Common Stock Deemed Outstanding immediately after such
Dilutive Issuance. If and whenever prior to the first anniversary of the
Effective Date (as defined in the Registration Rights Agreement) the Company
issues or sells, or in accordance with this Section 7(a) is deemed to have
issued or sold, any shares of Common Stock (including the issuance or sale of
shares of Common Stock owned or held by or for the account of the Company, but
excluding shares of Common stock deemed to have been issued or sold by the
Company in connection with any Excluded Security) for a New Securities Issuance
Price that is
11
less than the Conversion Price in effect immediately prior to such issue or
sale, then immediately after such issue or sale, the Conversion Price then in
effect shall be reduced to such New Securities Issuance Price. For purposes of
determining the adjusted Conversion Price under this Section 7(a), the following
shall be applicable:
(i) Issuance of Options. If the Company in any manner grants or sells any
Options and the lowest price per share for which one share of Common Stock
is issuable upon the exercise of any such Option or upon conversion or
exchange or exercise of any Convertible Securities issuable upon exercise
of such Option is less than the Applicable Price or the Conversion Price
in effect immediately prior to such grant or sale, then such share of
Common Stock shall be deemed to be outstanding and to have been issued and
sold by the Company at the time of the granting or sale of such Option for
such price per share. For purposes of this Section 7(a)(i), the "lowest
price per share for which one share of Common Stock is issuable upon the
exercise of any such Option or upon conversion or exchange or exercise of
any Convertible Securities issuable upon exercise of such Option" shall be
equal to the sum of the lowest amounts of consideration (if any) received
or receivable by the Company with respect to any one share of Common Stock
upon granting or sale of the Option, upon exercise of the Option and upon
conversion or exchange or exercise of any Convertible Security issuable
upon exercise of such Option. No further adjustment of the Conversion
Price shall be made upon the actual issuance of such Common Stock or of
such Convertible Securities upon the exercise of such Options or upon the
actual issuance of such Common Stock upon conversion or exchange or
exercise of such Convertible Securities.
(ii) Issuance of Convertible Securities. If the Company in any manner
issues or sells any Convertible Securities and the lowest price per share
for which one share of Common Stock is issuable upon such conversion or
exchange or exercise thereof is less than the Applicable Price or the
Conversion Price in effect immediately prior to such grant or sale, then
such share of Common Stock shall be deemed to be outstanding and to have
been issued and sold by the Company at the time of the issuance of sale of
such Convertible Securities for such price per share. For the purposes of
this Section 7(a)(ii), the "price per share for which one share of Common
Stock is issuable upon such conversion or exchange or exercise" shall be
equal to the sum of the lowest amounts of consideration (if any) received
or receivable by the Company with respect to any one share of Common Stock
upon the issuance or sale of the Convertible Security and upon the
conversion or exchange or exercise of such Convertible Security. No
further adjustment of the Conversion Price shall be made upon the actual
issuance of such Common Stock upon conversion or exchange or exercise of
such Convertible Securities, and if any such issue or sale of such
Convertible Securities is made upon exercise of any Options for which
adjustment of the Conversion Price had been or are to be made pursuant to
other provisions of this Section 7(a), no further adjustment of the
Conversion Price shall be made by reason of such issue or sale.
(iii) Change in Option Price or Rate of Conversion. If the purchase price
provided for in any Options, the additional consideration, if any, payable
upon the issue, conversion, exchange or exercise of any Convertible
Securities, or the rate at which any Convertible Securities are
convertible into or exchangeable or exercisable for Common Stock changes
12
at any time, the Conversion Price in effect at the time of such change
shall be adjusted to the Conversion Price which would have been in effect
at such time had such Options or Convertible Securities provided for such
changed purchase price, additional consideration or changed conversion
rate, as the case may be, at the time initially granted, issued or sold.
For purposes of this Section 7(a)(iii), if the terms of any Option or
Convertible Security that was outstanding as of the Issuance Date are
changed in the manner described in the immediately preceding sentence,
then such Option or Convertible Security and the Common Stock deemed
issuable upon exercise, conversion or exchange thereof shall be deemed to
have been issued as of the date of such change. No adjustment shall be
made if such adjustment would result in an increase of the Conversion
Price then in effect.
(iv) Calculation of Consideration Received. In case any Option is issued
in connection with the issue or sale of other securities of the Company,
together comprising one integrated transaction in which no specific
consideration is allocated to such Options by the parties thereto, the
Options will be deemed to have been issued for a consideration of $.01. If
any Common Stock, Options or Convertible Securities are issued or sold or
deemed to have been issued or sold for cash, the consideration received
therefor will be deemed to be the net amount received by the Company
therefor. If any Common Stock, Options or Convertible Securities are
issued or sold for a consideration other than cash, the amount of the
consideration other than cash received by the Company will be the fair
value of such consideration, except where such consideration consists of
securities, in which case the amount of consideration received by the
Company will be the Closing Sale Price of such security on the date of
receipt. If any shares of Common Stock or Convertible Securities are
issued to the owners of the non-surviving entity in connection with any
merger in which the Company is the surviving entity, the amount of
consideration therefor will be deemed to be the fair value of such portion
of the net assets and business of the non-surviving entity as is
attributable to such shares of Common Stock or Convertible Securities, as
the case may be. The fair value of any consideration other than cash or
securities will be determined jointly by the Company and the holders of
Notes representing at least a majority of the principal amounts of the
Notes then outstanding. If such parties are unable to reach agreement
within ten (10) days after the occurrence of an event requiring valuation
(the "VALUATION EVENT"), the fair value of such consideration will be
determined within five (5) Business Days after the tenth (10th) day
following the Valuation Event by an independent, reputable appraiser
jointly selected by the Company and the holders of Notes representing at
least a majority of the principal amounts of the Notes then outstanding.
The determination of such appraiser shall be final and binding upon all
parties absent manifest error and the fees and expenses of such appraiser
shall be borne by the Company.
(v) Record Date. If the Company takes a record of the holders of shares of
Common Stock for the purpose of entitling them (A) to receive a dividend
or other distribution payable in shares of Common Stock or in Convertible
Securities or (B) to subscribe for or purchase shares of Common Stock or
Convertible Securities, then such record date will be deemed to be the
date of the issue or sale of the shares of Common Stock deemed to have
been issued or sold upon the declaration of such dividend or the making of
such
13
other distribution or the date of the granting of such right of
subscription or purchase, as the case may be.
(b) Adjustment of Conversion Price upon Subdivision or
Combination of Common Stock. If the Company at any time on or after the
Subscription Date subdivides (by any stock split, stock dividend,
recapitalization or otherwise) one or more classes of its outstanding shares of
Common Stock into a greater number of shares, the Conversion Price in effect
immediately prior to such subdivision will be proportionately reduced. If the
Company at any time combines (by combination, reverse stock split or otherwise)
one or more classes of its outstanding shares of Common Stock into a smaller
number of shares, the Conversion Price in effect immediately prior to such
combination will be proportionately increased.
(c) Other Events. If any event occurs of the type contemplated
by the provisions of this Section 7 but not expressly provided for by such
provisions (including, without limitation, the granting of stock appreciation
rights, phantom stock rights or other rights with equity features), then the
Company's Board of Directors will make an appropriate adjustment in the
Conversion Price and so as to protect the rights of the Holder; provided that no
such adjustment pursuant to this Section 7(c) will increase the Conversion Price
as otherwise determined pursuant to this Section 7.
(8) CERTAIN NEGATIVE COVENANTS. The Company hereby covenants and
agrees that until the satisfaction in full of the Notes or their conversion in
full, it will fully and timely perform all covenants in this Article 8:
(a) 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 $400,000, 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) of the Note and
Warrant Purchase Agreement entered into by the Company and the holders of
Permitted Senior Indebtedness, dated July 28, 2005 (the "NOTE AND WARRANT
PURCHASE AGREEMENT").
(b) 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 encumbrances or restrictions existing under or by
reason of: (1) applicable law; and (2) the Notes.
(c) Incurrence of Permitted Senior Indebtedness. So long as
this Note is outstanding, the Company shall not, and the Company shall not
permit any of its Subsidiaries
14
to, directly or indirectly, incur or guarantee, assume or suffer to exist any
Indebtedness other than Subordinated Indebtedness and Permitted Senior
Indebtedness.
(d) Existence of Liens. So long as this Note is outstanding,
the Company shall not, and the Company shall not permit any of its Subsidiaries
to, directly or indirectly, allow or suffer to exist any mortgage, lien, pledge,
charge, security interest or other encumbrance upon or in any property or assets
(including accounts and contract rights) owned by the Company or any of its
Subsidiaries (collectively, "LIENS") other than Permitted Liens.
(e) Restricted Payments. The Company shall not, and the
Company shall not permit any of its Subsidiaries to, directly or indirectly,
redeem, defease, repurchase, repay or make any payments in respect of, by the
payment of cash or cash equivalents (in whole or in part, whether by way of open
market purchases, tender offers, private transactions or otherwise), all or any
portion of any Indebtedness, other than Permitted Senior Indebtedness or the
Notes and Other Notes, whether by way of payment in respect of principal of (or
premium, if any) or interest on, such Indebtedness if at the time such payment
is due or is otherwise made or, after giving effect to such payment, an event
constituting, or that with the passage of time and without being cured would
constitute, an Event of Default has occurred and is continuing.
(f) Financial Covenants.
(i) Minimum Working Capital. The Company will not permit
its Consolidated Working Capital (as defined in the Note and Warrant Purchase
Agreement), 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 (as defined in the Note and Warrant
Purchase Agreement)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 (as defined in the Note and Warrant
Purchase Agreement), 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
15
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.
(g) Limitations on Issuances of Preferred Stock. The Company
will not, and will not permit any of its Subsidiaries to, issue any shares of
preferred stock or any class of shares of capital stock of the Company providing
for rights and preferences that are more favorable than those of the Common
Stock.
(9) COMPANY'S RIGHT OF MANDATORY CONVERSION.
(a) Mandatory Conversion. If at any time following the
Effective Date (i) a Mandatory Conversion Triggering Event occurs and (ii) on
each day during the period commencing on the Mandatory Conversion Notice Date
and ending on the Mandatory Conversion Date (each, as defined below), the Equity
Conditions are satisfied or waived in writing by the Holder, the Company shall
have the right to require the Holder to convert all or a portion equal to not
less than 25% of the Conversion Amount of this Note designated in the Mandatory
Conversion Notice (the "MANDATORY CONVERSION AMOUNT") (provided, however, that
if the Mandatory Conversion Triggering Event occurs pursuant to clause (A) of
the definition thereof, the Mandatory Conversion Amount shall not exceed 50% of
the Conversion Amount of this Note then outstanding) into fully paid, validly
issued and nonassessable shares of Common Stock in accordance with Section 3(c)
hereof at the Conversion Rate as of the Mandatory Conversion Date (as defined
below) (a "MANDATORY CONVERSION"). The Company may exercise its right to require
conversion under this Section 9(a), which right shall not be exercisable more
than two (2) times in any twelve (12) month period, by delivering within not
more than three Trading Days following the end of such Mandatory Conversion
Measuring Period a written notice thereof by facsimile and overnight courier to
all, but not less than all, of the holders of Notes and the Transfer Agent (the
"MANDATORY CONVERSION NOTICE" and the date all of the holders received such
notice is referred to as the "MANDATORY CONVERSION NOTICE DATE"). The Mandatory
Conversion Notice shall be irrevocable.
(b) Pro Rata Conversion Requirement. If the Company elects to
cause a conversion of all or any portion of the Conversion Amount of this Note
pursuant to Section 9(a), then it must simultaneously take the same action with
respect to the Other Notes. The Mandatory Conversion Notice shall state (i) the
Trading Day selected for the Mandatory Conversion in accordance with Section
9(a), which Trading Day shall be at least twenty (20) Business Days but not more
than sixty (60) Business Days following the Mandatory Conversion Notice Date. If
the Company has elected a Mandatory Conversion, the mechanics of conversion set
forth in Section 3(c)(iv) shall apply, to the extent applicable, as if the
Company and the Transfer Agent had received from the Holder on the Mandatory
Conversion Date a Conversion Notice with respect to the Conversion Amount being
converted pursuant to the Mandatory Conversion.
16
(10) NONCIRCUMVENTION. The Company hereby covenants and agrees that
the Company will not, by amendment of its Certificate of Incorporation or
through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities, or any other voluntary action, avoid
or seek to avoid the observance or performance of any of the terms of this Note,
and will at all times in good faith carry out all of the provisions of this Note
and take all action as may be required to protect the rights of the Holder of
this Note.
(11) RESERVATION OF AUTHORIZED SHARES.
(a) Reservation. The Company shall initially reserve out of
its authorized and unissued Common Stock at least 8,003,712 shares of Common
Stock for conversion of the Notes. Upon filing of the Certificate of Amendment
to the Company's Certificate of Incorporation effecting the Share Increase in
accordance with Section 4(v) of the Securities Purchase Agreement, the Company,
so long as any of the Notes are outstanding, shall take all action necessary to
reserve and keep available out of its authorized and unissued Common Stock,
solely for the purpose of effecting the conversion of the Notes, 130% of the
number of shares of Common Stock as shall from time to time be necessary to
effect the conversion of all of the Notes then outstanding; provided that at no
time shall the number of shares of Common Stock so reserved be less than the
number of shares required to be reserved by the previous sentence (without
regard to any limitations on conversions) (the "REQUIRED RESERVE AMOUNT"). The
initial number of shares of Common Stock reserved for conversions of the Notes
and each increase in the number of shares so reserved shall be allocated pro
rata among the holders of the Notes based on the principal amount of the Notes
held by each holder at the time of Issuance Date or increase in the number of
reserved shares, as the case may be (the "AUTHORIZED SHARE ALLOCATION"). In the
event that a holder shall sell or otherwise transfer any of such holder's Notes,
each transferee shall be allocated a pro rata portion of such holder's
Authorized Share Allocation. Any shares of Common Stock reserved and allocated
to any Person which ceases to hold any Notes shall be allocated to the remaining
holders of Notes, pro rata based on the principal amount of the Notes then held
by such holders.
(b) Insufficient Authorized Shares. If at any time while any
of the Notes remain outstanding, and after the filing of the Certificate of
Amendment effecting the Share Increase, the Company does not have a sufficient
number of authorized and unreserved shares of Common Stock to satisfy its
obligation to reserve for issuance upon conversion of the Notes at least a
number of shares of Common Stock equal to the Required Reserve Amount (an
"AUTHORIZED SHARE FAILURE"), then the Company shall immediately take all action
necessary to increase the Company's authorized shares of Common Stock to an
amount sufficient to allow the Company to reserve the Required Reserve Amount
for the Notes then outstanding. Without limiting the generality of the foregoing
sentence, as soon as practicable after the date of the occurrence of an
Authorized Share Failure, but in no event later than sixty (60) days after the
occurrence of such Authorized Share Failure, the Company shall hold a meeting of
its stockholders for the approval of an increase in the number of authorized
shares of Common Stock. In connection with such meeting, the Company shall
provide each stockholder with a proxy statement and shall use its best efforts
to solicit its stockholders' approval of such increase in authorized shares of
Common Stock and to cause its board of directors to recommend to the
stockholders that they approve such proposal.
17
(12) REDEMPTIONS.
(a) Mechanics. The Company shall deliver the applicable Event
of Default Redemption Price to the Holder within five (5) Business Days after
the Company's receipt of the Holder's Event of Default Redemption Notice. If the
Holder has submitted a Change of Control Redemption Notice in accordance with
Section 5(b), the Company shall deliver the applicable Change of Control
Redemption Price to the Holder concurrently with the consummation of such Change
of Control if such notice is received prior to the consummation of such Change
of Control and within fifteen (15) Business Days after the Company's receipt of
such notice otherwise. In the event of a redemption of less than all of the
Conversion Amount of this Note, the Company shall promptly cause to be issued
and delivered to the Holder a new Note (in accordance with Section 19(d))
representing the outstanding Principal which has not been redeemed. In the event
that the Company does not pay the applicable Redemption Price to the Holder
within the time period required, at any time thereafter and until the Company
pays such unpaid Redemption Price in full, the Holder shall have the option, in
lieu of redemption, to require the Company to promptly return to the Holder all
or any portion of this Note representing the Conversion Amount that was
submitted for redemption and for which the applicable Redemption Price (together
with any Late Charges thereon) has not been paid. Upon the Company's receipt of
such notice, (x) the Redemption Notice shall be null and void with respect to
such Conversion Amount, (y) the Company shall immediately return this Note, or
issue a new Note (in accordance with Section 19(d)) to the Holder representing
such Conversion Amount and (z) the Conversion Price of this Note or such new
Notes shall be adjusted to the lesser of (A) the Conversion Price as in effect
on the date on which the Redemption Notice is voided and (B) the lowest Closing
Bid Price of the Common Stock during the period beginning on and including the
date on which the Redemption Notice is delivered to the Company and ending on
and including the date on which the Redemption Notice is voided. The Holder's
delivery of a notice voiding a Redemption Notice and exercise of its rights
following such notice shall not affect the Company's obligations to make any
payments of Late Charges which have accrued prior to the date of such notice
with respect to the Conversion Amount subject to such notice.
(b) Redemption by Other Holders. Upon the Company's receipt of
notice from any of the holders of the Other Notes for redemption or repayment as
a result of an event or occurrence substantially similar to the events or
occurrences described in Section 4(b) or Section 5(b) (each, an "OTHER
REDEMPTION NOTICE"), the Company shall immediately forward to the Holder by
facsimile a copy of such notice. If the Company receives a Redemption Notice and
one or more Other Redemption Notices, during the seven (7) Business Day period
beginning on and including the date which is three (3) Business Days prior to
the Company's receipt of the Holder's Redemption Notice and ending on and
including the date which is three (3) Business Days after the Company's receipt
of the Holder's Redemption Notice and the Company is unable to redeem all
principal, interest and other amounts designated in such Redemption Notice and
such Other Redemption Notices received during such seven (7) Business Day
period, then the Company shall redeem a pro rata amount from each holder of the
Notes (including the Holder) based on the principal amount of the Notes
submitted for redemption pursuant to such Redemption Notice and such Other
Redemption Notices received by the Company during such seven (7) Business Day
period.
18
(13) SUBORDINATION TO PERMITTED SENIOR INDEBTEDNESS.
(a) The indebtedness represented by this Note and the payment
of the principal amount and interest and Late Charges thereon, any redemption
amount, liquidated damages, fees, expenses or any other amounts in respect of
this Note are hereby expressly made subordinate and junior and subject in right
of payment (to the extent set forth in the Subordination Agreement) to the prior
payment in full of all Permitted Senior Indebtedness of the Company now
outstanding or hereinafter incurred.
(b) Certain Rights.
Nothing contained in this Section 13 or elsewhere in this Note is
intended to or shall impair, as among the Company, its creditors including the
holders of Senior Indebtedness and the Holder, the right, which is absolute and
unconditional, of the Holder to convert this Note in accordance herewith.
(c) Rights of Holders Unimpaired. The provisions of this
Section 13 are and are intended solely for the purposes of defining the relative
rights of the Holder and the holders of Senior Indebtedness and nothing in this
Section 13 shall impair, as between the Company and the Holder, the obligation
of the Company, which is unconditional and absolute, to pay to the Holder the
principal thereof (and premium, if any) and interest thereon, in accordance with
the terms of this Note.
(14) VOTING RIGHTS. The Holder shall have no voting rights as the
holder of this Note, except as required by law, including but not limited to the
Delaware General Corporation Law, and as expressly provided in this Note.
(15) RANK.
(a) Rank. All payments due under this Note (a) shall rank pari
passu with all Other Notes, (b) shall be subordinate in right of payment to the
prior payment of all existing and future Permitted Senior Indebtedness and (c)
shall be senior to all other Indebtedness of the Company and its Subsidiaries
other than Permitted Senior Indebtedness.
(16) PARTICIPATION. The Holder, as the holder of this Note, shall be
entitled to such dividends paid and distributions made to the holders of Common
Stock to the same extent as if the Holder had converted this Note into Common
Stock (without regard to any limitations on conversion herein or elsewhere) and
had held such shares of Common Stock on the record date for such dividends and
distributions. Payments (if any) under the preceding sentence shall be made
concurrently with the dividend or distribution to the holders of Common Stock.
(17) VOTE TO ISSUE, OR CHANGE THE TERMS OF, NOTES. The affirmative
vote at a meeting duly called for such purpose or the written consent without a
meeting, of the holders of Notes representing not less than a majority of the
aggregate principal amount of the then outstanding Notes, shall be required for
any change or amendment to this Note or the Other Notes.
19
(18) TRANSFER. This Note may be offered, sold, assigned or
transferred by the Holder without the consent of the Company, subject only to
the provisions of Section 2(f) of the Securities Purchase Agreement.
(19) REISSUANCE OF THIS NOTE.
(a) Transfer. If this Note is to be transferred, the Holder
shall surrender this Note to the Company, whereupon the Company will forthwith,
provided the transferee shall have agreed in writing to be bound by the
provisions of the Subordination Agreement, issue and deliver upon the order of
the Holder a new Note (in accordance with Section 19(d)), registered as the
Holder may request, representing the outstanding Principal being transferred by
the Holder and, if less then the entire outstanding Principal is being
transferred, a new Note (in accordance with Section 19(d)) to the Holder
representing the outstanding Principal not being transferred. The Holder and any
assignee, by acceptance of this Note, acknowledge and agree that, by reason of
the provisions of Section 3(c)(iii) and this Section 19(a), following conversion
or redemption of any portion of this Note, the outstanding Principal represented
by this Note may be less than the Principal stated on the face of this Note.
(b) Lost, Stolen or Mutilated Note. Upon receipt by the
Company of evidence reasonably satisfactory to the Company of the loss, theft,
destruction or mutilation of this Note, and, in the case of loss, theft or
destruction, of any indemnification undertaking by the Holder to the Company in
customary form and, in the case of mutilation, upon surrender and cancellation
of this Note, the Company shall execute and deliver to the Holder a new Note (in
accordance with Section 19(d)) representing the outstanding Principal.
(c) Note Exchangeable for Different Denominations. This Note
is exchangeable, upon the surrender hereof by the Holder at the principal office
of the Company, for a new Note or Notes (in accordance with Section 19(d) and in
principal amounts of at least $10,000) representing in the aggregate the
outstanding Principal of this Note, and each such new Note will represent such
portion of such outstanding Principal as is designated by the Holder at the time
of such surrender.
(d) Issuance of New Notes. Whenever the Company is required to
issue a new Note pursuant to the terms of this Note, such new Note (i) shall be
of like tenor with this Note, (ii) shall represent, as indicated on the face of
such new Note, the Principal remaining outstanding (or in the case of a new Note
being issued pursuant to Section 19(a) or Section 19(c), the Principal
designated by the Holder which, when added to the principal represented by the
other new Notes issued in connection with such issuance, does not exceed the
Principal remaining outstanding under this Note immediately prior to such
issuance of new Notes), (iii) shall have an issuance date, as indicated on the
face of such new Note, which is the same as the Issuance Date of this Note, (iv)
shall have the same rights and conditions as this Note, and (v) shall represent
accrued Interest and Late Charges on the Principal and Interest of this Note,
from the Issuance Date.
(20) REMEDIES, CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND
INJUNCTIVE RELIEF. The remedies provided in this Note shall be cumulative and in
addition to all other remedies available under this Note, the Securities
20
Purchase Agreement and the Registration Rights Agreement, at law or in equity
(including a decree of specific performance and/or other injunctive relief), and
nothing herein shall limit the Holder's right to pursue actual and consequential
damages for any failure by the Company to comply with the terms of this Note.
Amounts set forth or provided for herein with respect to payments, conversion
and the like (and the computation thereof) shall be the amounts to be received
by the Holder and shall not, except as expressly provided herein, be subject to
any other obligation of the Company (or the performance thereof). The Company
acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to the Holder and that the remedy at law for any such breach
may be inadequate. The Company therefore agrees that, in the event of any such
breach or threatened breach, the Holder shall be entitled, in addition to all
other available remedies, to an injunction restraining any breach, without the
necessity of showing economic loss and without any bond or other security being
required.
(21) PAYMENT OF COLLECTION, ENFORCEMENT AND OTHER COSTS. If (a) this
Note is placed in the hands of an attorney for collection or enforcement or is
collected or enforced through any legal proceeding or the Holder otherwise takes
action to collect amounts due under this Note or to enforce the provisions of
this Note or (b) there occurs any bankruptcy, reorganization, receivership of
the Company or other proceedings affecting Company creditors' rights and
involving a claim under this Note, then the Company shall pay the reasonable
costs incurred by the Holder for such collection, enforcement or action or in
connection with such bankruptcy, reorganization, receivership or other
proceeding, including, but not limited to, attorneys' fees and disbursements.
(22) CONSTRUCTION; HEADINGS. This Note shall be deemed to be jointly
drafted by the Company and all the Purchasers and shall not be construed against
any person as the drafter hereof. The headings of this Note are for convenience
of reference and shall not form part of, or affect the interpretation of, this
Note.
(23) FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the
part of the Holder in the exercise of any power, right or privilege hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise of
any such power, right or privilege preclude other or further exercise thereof or
of any other right, power or privilege.
(24) DISPUTE RESOLUTION. In the case of a dispute as to the
determination of the Redemption Price or the arithmetic calculation of the
Conversion Rate or the Redemption Price, the Company shall submit the disputed
determinations or arithmetic calculations via facsimile within one Business Day
of receipt of the Conversion Notice or Redemption Notice or other event giving
rise to such dispute, as the case may be, to the Holder. If the Holder and the
Company are unable to agree upon such determination or calculation within one
(1) Business Day of such disputed determination or arithmetic calculation being
submitted to the Holder, then the Company shall, within one (1) Business Day
submit via facsimile (a) the disputed determination of the Closing Bid Price or
the Closing Sale Price to an independent, reputable investment bank selected by
the Company and approved by the Holder or (b) the disputed arithmetic
calculation of the Conversion Rate or the Redemption Price to the Company's
independent, outside accountant. The Company, at the Company's expense, shall
cause the investment bank or the accountant, as the case may be, to perform the
determinations or calculations and notify the Company and the Holder of the
results no later than five (5) Business
21
Days from the time it receives the disputed determinations or calculations. Such
investment bank's or accountant's determination or calculation, as the case may
be, shall be binding upon all parties absent demonstrable error.
(25) NOTICES; PAYMENTS.
(a) Notices. Whenever notice is required to be given under
this Note, unless otherwise provided herein, such notice shall be given in
accordance with Section 9(f) of the Securities Purchase Agreement. The Company
shall provide the Holder with prompt written notice of all actions taken
pursuant to this Note, including in reasonable detail a description of such
action and the reason therefore. Without limiting the generality of the
foregoing, the Company will give written notice to the Holder (i) immediately
upon any adjustment of the Conversion Price, setting forth in reasonable detail,
and certifying, the calculation of such adjustment and (ii) at least twenty days
prior to the date on which the Company closes its books or takes a record (A)
with respect to any dividend or distribution upon the Common Stock, (B) with
respect to any pro rata subscription offer to holders of Common Stock or (C) for
determining rights to vote with respect to any Change of Control, dissolution or
liquidation, provided in each case that such information shall be made known to
the public prior to or in conjunction with such notice being provided to the
Holder. Notwithstanding the foregoing, Section 4(i) of the Securities Purchase
Agreement shall apply to all notices given pursuant to this Note.
(b) Payments. Whenever any payment of cash is to be made by
the Company to any Person pursuant to this Note, such payment shall be made in
lawful money of the United States of America by a check drawn on the account of
the Company and sent via overnight courier service to such Person at such
address as previously provided to the Company in writing (which address, in the
case of each of the Purchasers, shall initially be as set forth on the Schedule
of Buyers attached to the Securities Purchase Agreement); provided that the
Holder may elect to receive a payment of cash via wire transfer of immediately
available funds by providing the Company with prior written notice setting out
such request and the Holder's wire transfer instructions. Whenever any amount
expressed to be due by the terms of this Note is due on any day which is not a
Business Day, the same shall instead be due on the next succeeding day which is
a Business Day and, in the case of any Interest Date which is not the date on
which this Note is paid in full, the extension of the due date thereof shall not
be taken into account for purposes of determining the amount of Interest due on
such date. Any amount of Principal or other amounts due under the Transaction
Documents (as defined in the Securities Purchase Agreement) which is not paid
when due shall result in a late charge being incurred and payable by the Company
in an amount equal to interest on such amount at the rate of 14% per annum from
the date such amount was due until the same is paid in full ("LATE CHARGE").
(26) CANCELLATION. After all Principal, accrued Interest and other
amounts at any time owed on this Note has been paid in full, this Note shall
automatically be deemed canceled, shall be surrendered to the Company for
cancellation and shall not be reissued.
(27) WAIVER OF NOTICE. To the extent permitted by law, the Company
hereby waives demand, notice, protest and all other demands and notices in
connection with the delivery, acceptance, performance, default or enforcement of
this Note and the Securities Purchase Agreement.
22
(28) GOVERNING LAW. This Note shall be construed and enforced in
accordance with, and all questions concerning the construction, validity,
interpretation and performance of this Note shall be governed by, the internal
laws of the State of New York, without giving effect to any choice of law or
conflict of law provision or rule (whether of the State of New York or any other
jurisdictions) that would cause the application of the laws of any jurisdictions
other than the State of New York. Each party hereby irrevocably submits to the
exclusive jurisdiction of the state and federal courts sitting in The City of
New York, Borough of Manhattan, for the adjudication of any dispute hereunder or
in connection herewith or with any transaction contemplated hereby or discussed
herein, and hereby irrevocably waives, and agrees not to assert in any suit,
action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is brought
in an inconvenient forum or that the venue of such suit, action or proceeding is
improper. Each party hereby irrevocably waives personal service of process and
consents to process being served in any such suit, action or proceeding by
mailing a copy thereof to such party at the address for such notices to it under
this Agreement and agrees that such service shall constitute good and sufficient
service of process and notice thereof. Nothing contained herein shall be deemed
to limit in any way any right to serve process in any manner permitted by law.
EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO
REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN
CONNECTION WITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED
HEREBY.
(29) CERTAIN DEFINITIONS. For purposes of this Note, the following
terms shall have the following meanings:
(a) "APPROVED STOCK PLAN" means any employee benefit, option
or incentive plan which has been approved by the Board of Directors of the
Company, pursuant to which the Company's securities may be issued to any
employee, consultant, officer or director for services provided to the Company.
(b) "BLOOMBERG" means Bloomberg Financial Markets.
(c) "BUSINESS DAY" means any day other than Saturday, Sunday
or other day on which commercial banks in The City of New York are authorized or
required by law to remain closed.
(d) "CALENDAR QUARTER" means each of: the period beginning on
and including January 1 and ending on and including March 31; the period
beginning on and including April 1 and ending on and including June 30; the
period beginning on and including July 1 and ending on and including September
30; and the period beginning on and including October 1 and ending on and
including December 31.
(e) "CHANGE OF CONTROL" means any Fundamental Transaction
other than (A) a Fundamental Transaction in which holders of the Company's
voting power immediately prior to the Fundamental Transaction continue after the
Fundamental Transaction to
23
hold publicly traded securities and, directly or indirectly, the voting power of
the surviving entity or entities necessary to elect a majority of the members of
the board of directors (or their equivalent if other than a corporation) of such
entity or entities, or (B) pursuant to a migratory merger effected solely for
the purpose of changing the jurisdiction of incorporation of the Company.
(f) "CLOSING BID PRICE" and "CLOSING SALE PRICE" means, for
any security as of any date, the last closing bid price and last closing trade
price, respectively, for such security on the Principal Market, as reported by
Bloomberg, or, if the Principal Market begins to operate on an extended hours
basis and does not designate the closing bid price or the closing trade price,
as the case may be, then the last bid price or last trade price, respectively,
of such security prior to 4:00:00 p.m., New York Time, as reported by Bloomberg,
or, if the Principal Market is not the principal securities exchange or trading
market for such security, the last closing bid price or last trade price,
respectively, of such security on the principal securities exchange or trading
market where such security is listed or traded as reported by Bloomberg, or if
the foregoing do not apply, the last closing bid price or last trade price,
respectively, of such security in the over-the-counter market on the electronic
bulletin board for such security as reported by Bloomberg, or, if no closing bid
price or last trade price, respectively, is reported for such security by
Bloomberg, the average of the bid prices, or the ask prices, respectively, of
any market makers for such security as reported in the "pink sheets" by Pink
Sheets LLC (formerly the National Quotation Bureau, Inc.). If the Closing Bid
Price or the Closing Sale Price cannot be calculated for a security on a
particular date on any of the foregoing bases, the Closing Bid Price or the
Closing Sale Price, as the case may be, of such security on such date shall be
the fair market value as mutually determined by the Company and the Holder. If
the Company and the Holder are unable to agree upon the fair market value of
such security, then such dispute shall be resolved pursuant to Section 24. All
such determinations to be appropriately adjusted for any stock dividend, stock
split, stock combination or other similar transaction during the applicable
calculation period.
(g) "COLLATERAL AGENT" shall have the meaning set forth in the
Subordination Agreement.
(h) "COMMON STOCK DEEMED OUTSTANDING" shall mean, at any given
time, the number of shares of Common Stock actually outstanding at such time,
plus (i) the number of shares of Common Stock deemed to be outstanding pursuant
to Sections 7(a)(i) and 7(a)(ii) hereof regardless of whether the Options or
Convertible Securities are actually exercisable at such time and (ii) plus the
number of shares of Common Stock underlying Options or Convertible Securities
issued pursuant to the Approved Stock Plans that are actually exercisable or
convertible at such time at an exercise price or conversion price that is less
than or equal to the per share fair market value of such underlying shares of
Common Stock, but excluding any shares of Common Stock owned or held by or for
the account of the Company or issuable upon conversion of the Notes or the Other
Notes.
(i) "COMPLIANCE COSTS" shall have the meaning set forth in the
Note and Warrant Purchase Agreement.
24
(j) "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; (F) 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) any unusual or non-recurring expenses such as transaction expenses
relating to the MD Acquisition, litigation expenses and settlement costs, and
stock-based compensation expenses, and (G) Compliance Costs (which shall not
exceed $500,000 in the aggregate) 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;
provided, however, that for purposes of this definition for the Test Period
ending September 30, 2005, any net income (or loss), interest expense, income
tax expense, depreciation and amortization for such Test Period shall be the
annualized amount of such item for the period commencing January 1, 2005, and
ending September 30, 2005.
(k) "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 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.
(l) "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.
(m) "CONTINGENT OBLIGATION" means, as to any Person, any
direct or indirect liability, contingent or otherwise, of that Person with
respect to any indebtedness, lease, dividend or other obligation of another
Person if the primary purpose or intent of the Person incurring such liability,
or the primary effect thereof, is to provide assurance to the obligee of such
liability that such liability will be paid or discharged, or that any agreements
relating thereto
25
will be complied with, or that the holders of such liability will be protected
(in whole or in part) against loss with respect thereto.
(n) "CONVERTIBLE SECURITIES" means any stock or securities
(other than Options) directly or indirectly convertible into or exercisable or
exchangeable for Common Stock.
(o) "ELIGIBLE MARKET" means the Principal Market, The New York
Stock Exchange, the American Stock Exchange, the Nasdaq National Market System
or The Nasdaq SmallCap Market.
(p) "EQUITY CONDITIONS" means that each of the following
conditions is satisfied: (i) during the period beginning on the date that is
three months prior to the applicable date of determination and ending on and
including the applicable date of determination (the "EQUITY CONDITIONS MEASURING
PERIOD"), the Company shall have delivered shares of Common Stock upon any
conversion of Conversion Amounts on a timely basis as set forth in Section
3(c)(i); (ii) on each day during the Equity Conditions Measuring Period, the
Common Stock shall be listed on the Principal Market or an Eligible Market and
delisting or suspension by such market or exchange shall not have been
threatened either (A) in writing by such market or exchange or (B) by falling
below the minimum listing maintenance requirements of such market or exchange;
(iii) during each day of the Equity Conditions Measuring Period, there shall not
have occurred (x) the public announcement of a pending, proposed or intended
Change of Control which has not been abandoned, terminated or consummated, (y)
an Event of Default or (z) an event that with the passage of time or giving of
notice, and assuming it were not cured, would constitute an Event of Default;
(iv) on each day of the Equity Conditions Measuring Period either (x) the
Registration Statement or Registration Statements required pursuant to the
Registration Rights Agreement shall be effective and available for the sale for
all of the Registrable Securities in accordance with the terms of the
Registration Rights Agreement or (y) all shares of Common Stock issuable upon
conversion of the Notes shall be eligible for sale without restriction and
without the need for registration under any applicable federal or state
securities laws; (v) on each day of the Equity Conditions Measuring Period and
ending thirty Trading Days thereafter either (x) the Registration Statements
required pursuant to the Registration Rights Agreement shall be expected to be
effective and available for the sale of at least all of the Registrable
Securities in accordance with the terms of the Registration Rights Agreement or
(y) all shares of Common Stock issuable upon conversion of the Notes shall be
eligible for sale without restriction and without the need for registration
under any applicable federal or state securities laws; (vi) the Company
otherwise shall have been in material compliance with and shall not have
breached (unless subsequently cured by the Company prior to the first Trading
Day of the Notice Measuring Period), in any material respect, any material
provision, covenant, representation or warranty of the Transaction Documents;
and (vii) the Company shall not be in violation of Section 3(d).
(q) "EQUITY FINANCING" means equity financing (including the
issuance of securities convertible into equity securities, or long term debt
securities issued as a unit with equity securities, of the Company) subsequent
to the date hereof at a price per share of not less than $2.50 and as a result
of which the Company shall have realized aggregate gross proceeds of $20,000,000
or more from bona fide third party investors (not including any
26
proceeds received from the Holder upon or in connection with the issuance or
conversion of this Note or any Other Note).
(r) "EXCLUDED SECURITIES" means any shares of Common Stock
issued or issuable: (i) in connection with any Approved Stock Plan; (ii) upon
conversion, redemption or exchange of the Notes and the Other Notes or issuances
of Interest Shares; (iii) pursuant to a bona fide firm commitment underwritten
public offering with a nationally recognized underwriter which generates gross
proceeds to the Company in excess of $25,000,000 (other than an "at-the-market
offering" as defined in Rule 415(a)(4) under the 1933 Act and "equity lines")
and (iv) upon conversion of any convertible security outstanding on the
Subscription Date so long as the terms of such securities are not thereafter
amended, modified or changed; (v) to employees, directors or consultants in the
ordinary course of business in consideration for services provided to the
Company (to the extent the value of the securities are based on fair market
value as based on the Closing Sales Price on the date of issuance) in an amount
not to exceed an aggregate of 200,000 shares in any twelve (12) month period;
and (vi) upon issuance or conversion of any security issued by the Company that
is contemplated on the capitalization table provided to the Holder attached
hereto as Annex A.
(s) "FUNDAMENTAL TRANSACTION" means that the Company shall,
directly or indirectly, in one or more related transactions, (i) consolidate or
merge with or into (whether or not the Company is the surviving corporation)
another Person, or (ii) sell, assign, transfer, convey or otherwise dispose of
all or substantially all of the properties or assets of the Company to another
Person, or (iii) be subject to an offer from another Person or group of related
Persons (as defined in Sections 13(d) and 14(d) of the Exchange Act) 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 (iv) 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 Exchange 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 (v) reorganize, recapitalize or reclassify its Common
Stock.
(t) "INDEBTEDNESS" of any Person means, without duplication
(A) all indebtedness for borrowed money, (B) all obligations issued, undertaken
or assumed as the deferred purchase price of property or services (other than
trade payables entered into in the ordinary course of business), (C) all
reimbursement or payment obligations with respect to letters of credit, surety
bonds and other similar instruments, (D) all obligations evidenced by notes,
bonds, debentures or similar instruments, including obligations so evidenced
incurred in connection with the acquisition of property, assets or businesses,
(E) all indebtedness created or arising under any conditional sale or other
title retention agreement, or incurred as financing, in either case with respect
to any property or assets acquired with the proceeds of such indebtedness (even
though the rights and remedies of the seller or bank under such agreement in the
event of default are limited to repossession or sale of such property), (F) all
monetary obligations under
27
any leasing or similar arrangement which, in connection with generally accepted
accounting principles, consistently applied for the periods covered thereby, is
classified as a capital lease, (G) off-balance sheet liabilities retained in
connection with asset securitization programs, synthetic leases, sale and
leaseback transactions or other similar obligations arising with respect to any
other transaction which is the functional equivalent of or takes the place of
borrowing but which does not constitute a liability on the consolidated balance
sheet of such Person and its subsidiaries, and (H) all indebtedness referred to
in clauses (A) through (G) above secured by (or for which the holder of such
Indebtedness has an existing right, contingent or otherwise, to be secured by)
any mortgage, lien, pledge, charge, security interest or other encumbrance upon
or in any property or assets (including accounts and contract rights) owned by
any Person, even though the Person which owns such assets or property has not
assumed or become liable for the payment of such indebtedness, and (I) all
Contingent Obligations in respect of indebtedness or obligations of others of
the kinds referred to in clauses (A) through (H) above.
(u) "INTEREST CONVERSION PRICE" means, with respect to any
Interest Date, the lesser of (i) the Conversion Price, and (ii) that price equal
to the Closing Sale Price of the Common Stock on the Trading Day immediately
preceding the Interest Date. All such determinations to be appropriately
adjusted for any stock split, stock dividend, stock combination or other similar
transaction during such period.
(v) "ISSUANCE DATE" means July 28, 2005.
(w) "MANDATORY CONVERSION TRIGGERING EVENT" means (A) the
Closing Sale Price of the Common Stock equals or exceeds $2.32 (subject to
appropriate adjustments for stock splits, stock dividends, stock combinations
and other similar transactions after the Issuance Date) for each of any fifteen
(15) consecutive Trading Days (the "MANDATORY CONVERSION MEASURING PERIOD")
(with a minimum trading volume of 200,000 shares of Common Stock on each such
Trading Day); or (B) the Closing Sale Price of the Common Stock equals or
exceeds $3.10 (subject to appropriate adjustment for stock splits, stock
dividends, stock combinations and other similar transactions after the Issuance
Date) on each Trading Day during the Mandatory Conversion Period (with a minimum
trading volume of 200,000 shares of Common Stock on each such Trading Day); or
(C) completion of an Equity Financing.
(x) "OPTIONS" means any rights, warrants or options to
subscribe for or purchase Common Stock or Convertible Securities.
(y) "PERMITTED LIENS" means (i) Liens incurred to secure
Permitted Senior Indebtedness, (ii) Liens on fixed or capital assets acquired,
constructed or improved by the Company or any Subsidiary, to the extent of
Indebtedness incurred within thirty days for such acquisition, construction or
improvement and incurred within thirty days of such acquisition, construction or
improvement, (iii) purchase money Liens, or (iv) carriers', warehousemen's,
mechanics', materialmen's, repairmen's and other similar Liens imposed by law,
so long as payment on such Liens is not more than 30 days past due.
(z) "PERMITTED SENIOR INDEBTEDNESS" means the principal of
(and premium, if any), interest on, and all fees and other amounts (including,
without limitation, any reasonable costs, enforcement expenses (including
reasonable legal fees and disbursements),
28
collateral protection expenses and other reimbursement or indemnity obligations
relating thereto) payable under the agreements or instruments evidencing, any
unaffiliated, third-party Indebtedness of the Company and its Subsidiaries,
whether now existing or hereafter arising (together with any renewals,
refundings, refinancings or other extensions thereof), which affirmatively
states that it is senior in right of payment to the Senior Indebtedness (as
defined in the Subordination Agreement) evidenced by this Note and the Other
Notes, provided that the aggregate amount of such Permitted Senior Indebtedness
(taking into account the maximum amounts which may be advanced under the loan
documents evidencing such Senior Indebtedness) does not as of the date on which
such Permitted Senior Indebtedness is incurred exceed $18,000,000 (the "SENIOR
INDEBTEDNESS CAP") in the aggregate.
(aa) "PERSON" means an individual, a limited liability
company, a partnership, a joint venture, a corporation, a trust, an
unincorporated organization, any other entity and a government or any department
or agency thereof.
(bb) "PRINCIPAL MARKET" means the OTC Bulletin Board.
(cc) "REDEMPTION PREMIUM" means (i) in the case of the Events
of Default described in Section 4(a)(i) through (vi) and (ix) through (xvii),
110%, or (ii) in the case of the Events of Default described in Section
4(a)(vii) - (viii), 100%.
(dd) "REGISTRATION RIGHTS AGREEMENT" means that certain
registration rights agreement between the Company and the initial holders of the
Notes relating to the registration of the resale of the shares of Common Stock
issuable upon conversion of the Notes.
(ee) "SEC" means the United States Securities and Exchange
Commission.
(ff) "SECURITIES PURCHASE AGREEMENT" means that certain
securities purchase agreement, dated July 28, 2005, between the Company and the
initial holders of the Notes pursuant to which the Company issued the Notes.
(gg) "SUBORDINATED INDEBTEDNESS" means Indebtedness of the
Company subordinated to the Notes on terms satisfactory to the Required Holders.
(hh) "SUBORDINATION AGREEMENT" means that certain
subordination agreement, dated July 28, 2005, among the Company, the Collateral
Agent and the initial holders of the Notes.
(ii) "SUBSCRIPTION DATE" means the date of the Securities
Purchase Agreement.
(jj) "TEST PERIOD" shall have the meaning set forth in the
Note and Warrant Purchase Agreement.
(kk) "TRADING DAY" means any day on which the Common Stock is
traded on the Principal Market, or, if the Principal Market is not the principal
trading market for the Common Stock, then on the principal securities exchange
or securities market on which the
29
Common Stock is then traded; provided that "Trading Day" shall not include any
day on which the Common Stock is scheduled to trade on such exchange or market
for less than 4.5 hours or any day that the Common Stock is suspended from
trading during the final hour of trading on such exchange or market (or if such
exchange or market does not designate in advance the closing time of trading on
such exchange or market, then during the hour ending at 4:00:00 p.m., New York
Time).
[SIGNATURE PAGE FOLLOWS]
30
IN WITNESS WHEREOF, the Company has caused this Note to be duly
executed as of the Issuance Date set out above.
ARTISTDIRECT INC.
By: ________________________
Name:
Title:
31
EXHIBIT I
ARTISTDIRECT INC.
Reference is made to the Convertible Subordinated Note (the "NOTE")
issued to the undersigned by ARTISTdirect, Inc. (the "COMPANY"). In accordance
with and pursuant to the Note, the undersigned hereby elects to convert the
Conversion Amount (as defined in the Note) of the Note indicated below into
shares of Common Stock, par value $0.01 per share (the "COMMON STOCK"), of the
Company as of the date specified below.
Date of Conversion:_______________________________________________
Aggregate Conversion Amount to be converted:______________________
[The undersigned hereby certifies to the Company that the
Company's conversion of the amount set forth above in accordance with Section
3(a) of the Note will not directly result in the undersigned (together with the
undersigned's affiliates) beneficially owning in excess of 4.99% [9.99% for CCM
and JLF Investors] of the number of shares of Common Stock outstanding
immediately after giving effect to such conversion, calculated in accordance
with Section 3(d) of the Note.] [FOR OASIS, CCM, JLF AND BROADBAND GROUP NOTES
ONLY]
Please confirm the following information:
Conversion Price:__________________________________________________
Number of shares of Common Stock to be issued:_____________________
Please issue the Common Stock into which the Note is being converted
in the following name and to the following address:
Issue to:___________________________________________________________
____________________________________________________________________
____________________________________________________________________
Facsimile Number:___________________________________________________
Authorization:__________________________________________________
By:__________________________________________________________
Title:_____________________________
Dated:______________________________________________________________
Account Number:_____________________________________________________
(if electronic book entry transfer)
Transaction Code Number:____________________________________________
(if electronic book entry transfer)
ACKNOWLEDGMENT
The Company hereby acknowledges this Conversion Notice and hereby
directs American Stock Transfer & Trust Company to issue the above indicated
number of shares of Common Stock in accordance with the Transfer Agent
Instructions dated July 28, 2005 from the Company and acknowledged and agreed to
by American Stock Transfer & Trust Company.
ARTISTDIRECT, INC.
By:___________________________
Name:
Title:
ANNEX A
CAPITALIZATION TABLE
EXERCISE PRICE INVESTMENT AMT PREWARRANTS FD FULLY DILUTED
COMMON SHAREHOLDERS 3,502,117 9.5%
----------
OPTIONS
Current Directors/Management 302,370 0.2%
92,000 0.2%
259,659 0.7%
120,000 0.3%
Employees (Non Directors/Management) 205,150 0.6%
Subject to Cancellation 320,000
1,299,179
Employees/Artists/Directors 586,531
1,885,710
Way out of money option (508,901)
Investor out of money options (320,000)
TOTAL OPTIONS 1,056,809 2.9%
----------
TOTAL EXISTING OPTIONS & SHARES 4,558,926 17.5%
M&A Fee $ 1,564,000 1,109,032 3.00%
Financing Capital Fee $ 1,530,000 987,097 2.7%
----------
NEW SHARES 2,096,129 8.1%
NEW SHARES /DEBT
CCM $ 13,000,000 8,387,097
JFL $ 1,500,000 967,742
Redwood $ 3,000,000 1,935,484
DKR Oasis $ 8,000,000 5,161,290
MediaDefender Mgt $ 4,500,000 2,903,226
-------------- ----------
$ 30,000,000 19,354,839 74.4% 52.30%
PREWARRANT FULLY DILUTED 26,009,894
DEBT WARRANTS $ 2.00 $ 15,000,000 3,487,500
FINANCING FEE WARRANTS $ 1.55 1,516,935 4.10%
NEW EQUITY WARRANTS $ 1.55 1,596,774 4.32%
M&A FEE WARRANTS 114,985 0.31%
----------
PRE-MGT OPTIONS 32,726,088
NEW MGT OPTIONS
Saaf $ 1.55 200,000 0.5%
Herrera $ 1.55 200,000 0.5%
Mgt & Others $ 1.55 3,878,098
----------
4,278,098 13.07% 12%
14.4%
FDILUTED SHARES 37,004,186
==========
Price per share $ 1.55
TIME VESTING PERFORMANCE EXISTING TOTAL
CEO 1,045,000 1,708,098 259,659 3,012,757
CFO 275,000 275,000 120,000 670,000
Outside Directors* 170,000 170,000
Directors 75,000 75,000
Others 330,000 330,000
---------
TOTAL 1,895,000 1,983,098 379,659
Total Pool 3,878,098
chk 3,878,098
* EP = 85% of 60 day closing price beg. 30 days prior to closing.