NOTE AND WARRANT PURCHASE AGREEMENT

 

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                                                                    EXHIBIT 10.5

 

This Note and Warrant Purchase Agreement (the "Purchase Agreement") contains

certain representations and warranties (the "Representations") by ARTISTdirect,

Inc. (the "Company") in favor of the investors named therein (the "Purchasers").

The Purchase Agreement states in Section 13(h) that no person, other than the

parties to the agreement, is entitled to rely on the Representations contained

in the Purchase Agreement. The Purchase Agreement is filed in accordance with

the rules of the Securities and Exchange Commission as a material agreement, and

is intended by the Company solely as a record of the material agreement the

Company has reached with the Purchasers. The filing of the Purchase Agreement is

not intended to waive or modify Section 13(h) thereof, or as a mechanism to

update, supersede or otherwise modify prior disclosures of information and risks

concerning the Company which the Company has made to its stockholders.

 

Investors and potential investors should also be aware that certain

Representations made to the Purchasers are not intended to be affirmative

representations of facts, situations or circumstances, but are instead designed

and intended to allocate certain risks between the Company, on the one hand, and

the Purchasers, on the other hand. The use of representations and warranties to

allocate risk is a standard device in investment and other commercial contracts.

 

Accordingly, stockholders should not rely on the Representations as affirmations

or characterizations of information concerning the Company as of the date of the

Purchase Agreement, or as of any other date.

 

 

                       NOTE AND WARRANT PURCHASE AGREEMENT

 

      NOTE AND WARRANT PURCHASE AGREEMENT (the "AGREEMENT"), dated as of July

28, 2005, by and among ARTISTdirect, Inc., a Delaware corporation, with

headquarters located at 10900 Wilshire Boulevard, Suite 1400, Los Angeles,

California 90024 (the "COMPANY"), the investors listed on the signature pages

hereto (collectively, the "INITIAL PURCHASERS"), and U.S. Bank National

Association, a national banking association as collateral agent for the Initial

Purchasers and all other Holders of the Securities (as defined below) (in such

capacity, the "COLLATERAL AGENT").

 

      WHEREAS:

 

      A. The Company and the Initial Purchasers are executing and delivering

this Agreement in reliance upon the exemption from securities registration

afforded by Section 4(2) of the 1933 Act, and Regulation D.

 

      B. The Initial Purchasers wish to purchase, and the Company wishes to

sell, upon the terms and conditions stated in this Agreement, (i) 11.25% senior

secured notes of the Company, in substantially the form attached hereto as

Exhibit A (as amended or modified from time to time, individually, a "NOTE" and

collectively, the "NOTES"), which aggregate principal amount shall be Fifteen

Million Dollars ($15,000,000) and (ii) warrants, in substantially the form

attached hereto as Exhibit B (as amended or modified from time to time,

individually a "WARRANT" and collectively, the "WARRANTS"), with an exercise

price of $2.00 per share to acquire up to an aggregate of 3,250,000 shares of

the Company's common stock (as exercised, collectively, the "WARRANT SHARES").

 

      C. Contemporaneously with the execution and delivery of this Agreement,

the parties hereto are executing and delivering a Registration Rights Agreement,

substantially in the form attached hereto as Exhibit C (as amended or modified

from time to time, the "REGISTRATION RIGHTS AGREEMENT"), pursuant to which the

Company has agreed to provide certain registration rights with respect to the

Warrant Shares under the 1933 Act and the rules and regulations promulgated

thereunder, and applicable state securities laws.

 

      D. The Notes, the Warrants and the Warrant Shares collectively are

referred to herein as the "SECURITIES."

 

      NOW, THEREFORE, the Company and Initial Purchasers hereby agree as

follows:

 

      1.     PURCHASE AND SALE OF NOTES AND WARRANTS

 

            (a) Purchase of Notes and Warrants.

 

                  (i) Subject to the satisfaction (or waiver) of the conditions

set forth in Sections 10 and 11 below, the Company shall issue and sell to each

Initial Purchaser, and each Initial Purchaser severally, but not jointly, agrees

to purchase from the Company on the Closing Date, (x) a principal amount of

Notes as is set forth opposite such Initial Purchaser's name in column (3) on

the Schedule of Purchasers and (x) Warrants to acquire up to that number of

 

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Warrant Shares as is set forth opposite such Initial Purchaser's name in column

(4) on the Schedule of Purchasers (the "CLOSING").

 

                  (ii) Closing. The date and time of the Closing (the "CLOSING

DATE") shall be 10:00 a.m., New York City time, on the date hereof (or such

later date as is mutually agreed to by the Company and the Initial Purchasers)

after notification of satisfaction (or waiver) of the conditions to the Closing

set forth in Sections 10 and 11 below at the offices of Sheppard, Mullin,

Richter & Hampton LLP, 333 South Hope Street, Los Angeles, California

90071-1448.

 

                  (iii) Purchase Price. The purchase price for the Warrants

shall be $0.25 per share for an aggregate purchase price of Eight Hundred Twelve

Thousand Five Hundred Dollars ($812,500) (the "WARRANT PURCHASE PRICE"), and the

aggregate purchase price for the Notes shall be Fourteen Million One Hundred

Eighty-Seven Thousand Five Hundred Dollars ($14,187,500) (the "NOTE PURCHASE

PRICE," and together with the Warrant Purchase Price, the "PURCHASE PRICE"). The

Purchase Price for the Notes and Warrants to be purchased by each Initial

Purchaser at the Closing shall be the amount set forth opposite such Initial

Purchaser's name in column (5) on the Schedule of Purchasers.

 

            (b) Form of Payment. On the Closing Date, (i) each Initial Purchaser

shall pay the Purchase Price allocated to such Purchaser to the Company for the

Notes and the Warrants to be issued and sold to such Initial Purchaser at the

Closing, by wire transfer of immediately available funds in accordance with the

Company's written wire instructions, and (ii) the Company shall deliver to each

Initial Purchaser (A) one or more Notes (in the initial principal amounts as

such Initial Purchaser shall request) which such Initial Purchaser is then

purchasing and (B) one or more Warrants (in the amounts that Initial Purchaser

shall request) which such Initial Purchaser is purchasing, in each case duly

executed on behalf of the Company and registered in the name of such Initial

Purchaser or its designee.

 

      2.     REPAYMENT OF PRINCIPAL; INTEREST ON NOTES

 

            (a) The unpaid principal balance of the Notes, together with any and

all interest accrued and unpaid thereon, automatically and unconditionally shall

be due and payable in cash on that date which is three (3) years and eleven (11)

months after the Closing Date (the "MATURITY DATE").

 

            (b) Interest on the unpaid principal balance of the Notes will

accrue at the rate of 11.25% per annum. Accrued (and theretofore unpaid)

interest shall be payable quarterly in arrears on the fifteenth day of each

March, June, September and December, commencing September 15, 2005 (each, an

"INTEREST PAYMENT DATE"), on the date of any repayment or prepayment of

principal on the Notes (on the amount repaid or prepaid), at maturity (whether

by acceleration or otherwise) and, after such maturity, on demand. Overdue

principal and, to the extent permitted by law, overdue interest in respect of

each Note and any other overdue amount payable hereunder shall, in each case,

bear interest at a rate of 13.25% per annum and shall be payable on demand. All

interest hereunder will be computed on the basis of twelve 30-day months in a

360-day year for actual days elapsed.

 

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      3.     PREPAYMENTS OF NOTES

 

            (a) Voluntary Prepayments. The Company shall have the right to

prepay the Notes, in whole or in part, at any time and from time to time before

the Maturity Date without penalty or premium on three Business Days written

notice. Concurrently with each such prepayment, the Company shall pay all

accrued and unpaid interest on the principal amount of the Notes which is

prepaid.

 

            (b) Mandatory Prepayments.

 

                  (i) Prepayments from Excess Cash Flow. Not later than ninety

(90) days after the close of each Fiscal Year, the Company shall apply 60% of

its Excess Cash Flow for each Fiscal Year to prepay the principal amount of the

Notes, and together with such prepayment, the Company shall pay all accrued and

unpaid interest to the date of such prepayment on the principal amount of the

Notes being prepaid.

 

                  (ii) Prepayments from Asset Sale. Not later than five (5) days

after the receipt by the Company of any Net Cash Proceeds with respect to any

Asset Sale, the Company shall apply such Net Cash Proceeds to prepay the

principal amount of the Notes. Concurrently with each such prepayment, the

Company shall pay all accrued and unpaid interest on the principal amount of the

Notes which is prepaid.

 

                  (iii) Prepayments from Change of Control. On the date of the

consummation of any Change of Control, the Company shall prepay the outstanding

principal amount of the Notes, plus accrued and unpaid interest, if any, thereon

to the date of prepayment.

 

            (c) Notice and Procedures.

 

                  (i) Partial Prepayment. Upon any partial prepayment of the

Notes pursuant to this Agreement, the aggregate principal amount of each such

prepayment shall be allocated among all of the Notes at the time outstanding in

proportion to the respective unpaid principal amounts thereof not theretofore

called for prepayment. Upon any partial payment of a Note the holder of such

Note may (but shall not be required to), at its option (a) surrender such Note

to the Company in exchange for a new Note in a principal amount equal to the

principal amount remaining unpaid on the surrendered Note; (b) make such Note

available to the Company for notation thereon of the portion of the principal so

paid; or (c) mark such Note with a notation thereon of the portion of the

principal so paid; provided, that any error in the notation of the principal

amount of any Note that has been partially prepaid shall not affect the

Company's obligations with respect to the payment of the actual remaining

principal amount of such Note.

 

                  (ii) Method and Place of Payment. Except as otherwise

specifically provided herein, all payments under this Agreement or under any

Note shall be made to the Holders entitled thereto not later than 1:00 P.M. (New

York time) on the date when due and shall be made in U.S. Dollars in immediately

available funds at the respective payment offices of the applicable Holders;

funds received by the Holders after that time shall be deemed to have been paid

by the Company on the next succeeding Business Day. Whenever any payment to be

made hereunder or under any Note shall be stated to be due on a day which is not

a Business Day, the

 

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due date thereof shall be extended to the next succeeding Business Day and, with

respect to payments of principal, interest shall be payable at the applicable

rate during such extension.

 

      4.     INITIAL PURCHASER'S REPRESENTATIONS AND WARRANTIES

 

            Each Initial Purchaser represents and warrants:

 

            (a) No Public Sale or Distribution. Such Initial Purchaser is (i)

acquiring the Notes and the Warrants, and (ii) upon exercise of the Warrants

will acquire the Warrant Shares, in each case, for its own account and not with

a view towards, or for resale in connection with, the public sale or

distribution thereof, except pursuant to sales registered or exempted under the

1933 Act; provided, however, that by making the representations herein, such

Initial Purchaser does not agree to hold any of the Securities for any minimum

or other specific term and reserves the right to dispose of the Securities at

any time in accordance with or pursuant to an effective registration statement

or an exemption from registration under the 1933 Act and any applicable state

securities laws. Such Initial Purchaser is acquiring the Securities hereunder in

the ordinary course of its business. Such Initial Purchaser does not presently

have any agreement or understanding, directly or indirectly, with any Person to

distribute any of the Securities.

 

            (b) Accredited Investor Status. Such Initial Purchaser is an

"accredited investor" as that term is defined in Rule 501(a) of Regulation D.

Such Initial Purchaser has knowledge and experience in financial and business

matters as to be capable of evaluating the merits and risks of purchasing the

Securities. Such Initial Purchaser is not a registered broker dealer or an

affiliate of a broker dealer registered under Section 15(a) of the 1934 Act or a

member of the National Association of Securities Dealers, Inc. or engaged in the

business of being a broker dealer.

 

            (c) Reliance on Exemptions. Such Initial Purchaser understands that

the Securities are being offered and sold to it by the Company in reliance on

specific exemptions from the registration requirements of United States federal

and state securities laws and that the Company is relying in part upon the truth

and accuracy of, and such Initial Purchaser's compliance with, the

representations, warranties, agreements, acknowledgments and understandings of

such Initial Purchaser set forth herein in order to determine the availability

of such exemptions and the eligibility of such Initial Purchaser to acquire the

Securities.

 

            (d) Information. Such Initial Purchaser and its advisors, if any,

have been furnished with all materials relating to the business, finances and

operations of the Company and materials relating to the offer and sale of the

Securities that have been requested by such Initial Purchaser. Such Initial

Purchaser and its advisors, if any, have been afforded the opportunity to ask

questions of the Company. Neither such inquiries nor any other due diligence

investigations conducted by such Initial Purchaser or its advisors, if any, or

its representatives shall modify, amend or affect such Initial Purchaser's right

to rely on the Company's representations and warranties contained herein. Such

Initial Purchaser understands that its investment in the Securities involves a

high degree of risk. Such Initial Purchaser has sought such accounting, legal

and tax advice as it has considered necessary to make an informed investment

decision with respect to its acquisition of the Securities.

 

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            (e) No Governmental Review. Such Initial Purchaser understands that

no United States federal or state agency or any other government or governmental

agency has passed on or made any recommendation or endorsement of the Securities

or the fairness or suitability of the investment in the Securities nor have such

authorities passed upon or endorsed the merits of the offering of the

Securities.

 

            (f) Transfer or Resale. Such Initial Purchaser understands that

except as provided in the Registration Rights Agreement: (i) the Securities have

not been and are not being registered under the 1933 Act or any state securities

laws, and may not be offered for sale, sold, assigned or transferred unless (A)

subsequently registered thereunder, (B) such Initial Purchaser shall have

delivered to the Company an opinion of qualified counsel reasonably acceptable

to the Company, in a generally acceptable form, to the effect that such

Securities to be sold, assigned or transferred may be sold, assigned or

transferred pursuant to an exemption from such registration, or (C) such Initial

Purchaser provides the Company with reasonable assurance that such Securities

can be sold, assigned or transferred pursuant to Rule 144 or Rule 144A

promulgated under the 1933 Act, as amended, (or a successor rule thereto)

(collectively, "RULE 144"); (ii) any sale of the Securities made in reliance on

Rule 144 may be made only in accordance with the terms of Rule 144 and further,

if Rule 144 is not applicable, any resale of the Securities under circumstances

in which the seller (or the Person through whom the sale is made) may be deemed

to be an underwriter (as that term is defined in the 1933 Act) may require

compliance with some other exemption under the 1933 Act or the rules and

regulations of the SEC promulgated thereunder; and (iii) neither the Company nor

any other Person is under any obligation to register the Securities under the

1933 Act or any state securities laws or to comply with the terms and conditions

of any exemption thereunder.

 

            (g) Legends. Such Initial Purchaser understands that the

certificates or other instruments representing the Notes and Warrants and, until

such time as the resale of the Warrant Shares have been registered under the

1933 Act as contemplated by the Registration Rights Agreement, the stock

certificates representing the Warrant Shares, except as set forth below, shall

bear any legend as required by the "blue sky" laws of any state and a

restrictive legend in substantially the following form (and a stop-transfer

order may be placed against transfer of such stock certificates):

 

            [NEITHER] THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY

            THIS CERTIFICATE [NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE

            EXERCISABLE][HAVE BEEN][HAVE NOT BEEN] REGISTERED UNDER THE

            SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES

            LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED

            OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION

            STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS

            AMENDED, OR (B) AN OPINION OF COUNSEL SELECTED BY THE HOLDER, IN A

            GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER

            SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER

            SAID ACT. NOTWITHSTANDING THE FOREGOING, THE

 

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            SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN

            ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE

            SECURITIES.

 

The legend set forth above shall be removed and the Company shall cause its

transfer agent to issue a certificate without such legend to the holder of the

Securities upon which it is stamped, if, unless otherwise required by state

securities laws, (i) such Securities are registered for resale under the 1933

Act, provided such Initial Purchaser provides the Company with reasonable

written assurances to the effect that any resale shall be done in accordance

with the plan of distribution set forth in the prospectus contained in the

effective registration statement, (ii) in connection with a sale, assignment or

other transfer, such holder provides the Company with an opinion of qualified

counsel reasonably acceptable to Company, in a generally acceptable form, to the

effect that such sale, assignment or transfer of the Securities may be made

without registration under the applicable requirements of the 1933 Act, or (iii)

such holder provides the Company with reasonable assurance that the Securities

can be sold, assigned or transferred pursuant to Rule 144 or Rule 144A.

 

            (h) Validity; Enforcement. Such Initial Purchaser has the requisite

power and authority to enter into this Agreement and the Registration Rights

Agreement and to purchase the Securities in accordance with the terms hereof.

This Agreement and the Registration Rights Agreement have been duly and validly

authorized, executed and delivered on behalf of such Initial Purchaser and shall

constitute the legal, valid and binding obligations of such Initial Purchaser

enforceable against such Initial Purchaser in accordance with their respective

terms, except as such enforceability may be limited by general principles of

equity or to applicable bankruptcy, insolvency, reorganization, moratorium,

liquidation and other similar laws relating to, or affecting generally, the

enforcement of applicable creditors' rights and remedies.

 

            (i) Residency. Such Initial Purchaser is a resident of that

jurisdiction specified on the Schedule of Purchasers.

 

      5.     REPRESENTATIONS AND WARRANTIES OF THE COMPANY

 

            Except as set forth in the Disclosure Schedule, the Company

represents and warrants to the Holders of the Securities that:

 

             (a) Organization and Qualification. The Company and its Subsidiaries

are entities duly incorporated or duly formed and validly existing in good

standing under the laws of the jurisdiction in which they are formed, and have

the requisite power and authorization to own their properties and to carry on

their business as now being conducted. Each of the Company and its Subsidiaries

is duly qualified as a foreign entity to do business and is in good standing in

every jurisdiction in which its ownership of property or the nature of the

business conducted by it makes such qualification necessary, except to the

extent that the failure to be so qualified or be in good standing would not have

a Material Adverse Effect. The Company has no Subsidiaries except as set forth

on Schedule 5(a).

 

            (b) Authorization; Enforcement; Validity. The Company has the

requisite power and authority to enter into and perform its obligations under

each of the Transaction

 

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Documents and to issue the Securities in accordance with the terms hereof and

thereof. The execution and delivery of the Transaction Documents by the Company

and the consummation by the Company of the transactions contemplated hereby and

thereby, including, without limitation, the issuance of the Notes and the

Warrants, and the reservation for issuance and issuance of Warrant Shares

issuable upon exercise of the Warrants have been duly authorized by the

Company's Board of Directors and (other than the Stockholder Approval, no

further corporate action is required by the Company, its Board of Directors or

its stockholders). This Agreement and the other Transaction Documents have been

duly executed and delivered by the Company, and constitute the legal, valid and

binding obligations of the Company, enforceable against the Company in

accordance with their respective terms, except as such enforceability may be

limited by general principles of equity or applicable bankruptcy, insolvency,

reorganization, moratorium, liquidation or similar laws relating to, or

affecting generally, the enforcement of applicable creditors' rights and

remedies.

 

            (c) Issuance of Securities. The issuance of the Notes and the

Warrants are duly authorized and are free from all taxes, liens and charges with

respect to the issue thereof. As of the date hereof, the Company has 1,332,411

shares of Common Stock reserved solely for issuance upon exercise of the

Warrants. Immediately following the Closing, the Board will authorize the

Company to undertake the actions reasonably necessary to amend its Certificate

of Incorporation and seek appropriate Stockholder Approval such that a number of

shares of Common Stock shall be duly authorized and reserved for issuance which

equals at least 130% of the sum of the maximum number of shares Common Stock

issuable upon exercise of the Warrants. Upon exercise in accordance with the

Warrants, the Warrant Shares, will be validly issued, fully paid and

nonassessable and free from all preemptive or similar rights, taxes, liens and

charges with respect to the issue thereof, with the holders being entitled to

all rights accorded to a holder of Common Stock. The offer and issuance by the

Company of the Securities in accordance with this Agreement is exempt from

registration under the 1933 Act.

 

            (d) No Conflicts. The execution, delivery and performance of the

Transaction Documents by the Company and the consummation by the Company of the

transactions contemplated hereby and thereby (including, without limitation, the

issuance of the Notes and the Warrants and the issuance of the Warrant Shares,

when issued) will not (following receipt of the Stockholder Approval) (i) result

in a violation of any certificate of incorporation as amended, as specifically

described in Section 5(c), certificate of formation, any certificate of

designations or other constituent documents of the Company or any of its

Subsidiaries, any capital stock of the Company or any of its Subsidiaries or

bylaws of the Company or any of its Subsidiaries or (ii) conflict with, or

constitute a default (or an event which with notice or lapse of time or both

would become a default) under, or give to others any rights of termination,

amendment, acceleration or cancellation of, any agreement, indenture or

instrument to which the Company is a party, or (iii) result in a violation of

any law, rule, regulation, order, judgment or decree (including federal and

state securities laws and regulations and the rules and regulations of the OTC

Bulletin Board (the "PRINCIPAL MARKET")) applicable to the Company or any of its

Subsidiaries or by which any property or asset of the Company or any of its

Subsidiaries is bound or affected.

 

            (e) Consents. Except as disclosed on Schedule 5(e), the Company is

not required to obtain any consent, authorization or order of, or make any

filing (other than the filing

 

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with the SEC of a proxy statement on Schedule 14A and one or more Registration

Statements in accordance with the requirements of the Registration Rights

Agreement) or registration with, any court, governmental agency or any

regulatory or self-regulatory agency or any other Person in order for it to

execute, deliver or perform any of its obligations under or contemplated by the

Transaction Documents, in each case in accordance with the terms hereof or

thereof. All consents, authorizations, orders, filings and registrations which

the Company is required to obtain pursuant to the preceding sentence have been

obtained or effected on or prior to the Closing Date, and the Company and its

Subsidiaries are unaware of any facts or circumstances which might prevent the

Company from obtaining or effecting any of the registration, application or

filings pursuant to the preceding sentence. The Company is not in violation of

the listing requirements of the Principal Market and has no Knowledge of any

facts which would reasonably lead to delisting or suspension of the Common Stock

in the foreseeable future.

 

             (f) Acknowledgment Regarding Initial Purchasers' Purchase of

Securities. The Company acknowledges and agrees that each Initial Purchaser is

acting solely in the capacity of an arm's length purchaser with respect to the

Transaction Documents and the transactions contemplated hereby and thereby and

that no Initial Purchaser is (i) an officer or director of the Company, (ii) an

"affiliate" of the Company (as defined in Rule 144) or (iii) to the Company's

Knowledge, a "beneficial owner" of more than 10% of the shares of Common Stock

(as defined for purposes of Rule 13d-3 of the 1934 Act). The Company further

acknowledges that no Initial Purchaser is acting as a financial advisor or

fiduciary of the Company (or in any similar capacity) with respect to the

Transaction Documents and the transactions contemplated hereby and thereby, and

any advice given by any Initial Purchaser or any of its representatives or

agents in connection with the Transaction Documents and the transactions

contemplated hereby and thereby is merely incidental to such Initial Purchaser's

purchase of the Securities. The Company further represents to each Initial

Purchaser that the decision of the Company and each of the Subsidiaries to enter

into the Transaction Documents, as applicable, has been based solely on the

independent evaluation by the Company, its Subsidiaries and their

representatives.

 

            (g) No General Solicitation; Placement Agent's Fees. Neither the

Company, nor any of its affiliates, nor any Person acting on its or their

behalf, has engaged in any form of general solicitation or general advertising

(within the meaning of Regulation D) in connection with the offer or sale of the

Securities. The Company shall be responsible for the payment of any placement

agent's fees, financial advisory fees, or brokers' commissions (other than for

persons engaged by any Initial Purchaser or its investment advisor) relating to

or arising out of the transactions contemplated hereby. The Company shall pay,

and hold each Holder of any Securities harmless against, any liability, loss or

expense (including, without limitation, reasonable attorney's fees and

out-of-pocket expenses) arising in connection with any such claim. The Company

acknowledges that it has engaged Libra Securities, LLC as placement agent (the

"AGENT") in connection with this transaction. Other than the Agent, the Company

has not engaged any placement agent or other agent in connection with the sale

of the Securities.

 

            (h) No Integrated Offering. None of the Company, its Subsidiaries,

any of their affiliates, and any Person acting on their behalf has, directly or

indirectly, made any offers or sales of any security or solicited any offers to

buy any security, under circumstances that would require registration of any of

the Securities under the 1933 Act or cause this offering of the Securities to be

integrated with prior offerings by the Company for purposes of the 1933 Act

 

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or any applicable stockholder approval provisions, including, without

limitation, under the rules and regulations of the Principal Market.

 

            (i) Dilutive Effect. The Company understands and acknowledges that

the number of Warrant Shares issuable upon exercise of the Warrants will

increase in certain circumstances. The Company further acknowledges that its

obligation to issue the Warrant Shares upon exercise of the Warrants in

accordance with this Agreement and the Warrants is, in each case, absolute and

unconditional regardless of the dilutive effect, which may be substantial, that

such issuance may have on the ownership interests of other stockholders of the

Company.

 

            (j) Application of Takeover Protections; Rights Agreement. The

Company and its board of directors have taken all necessary action, if any, in

order to render inapplicable any control share acquisition, business

combination, poison pill (including any distribution under a rights agreement)

or other similar anti-takeover provision under the Certificate of Incorporation

or the laws of the jurisdiction of its formation or otherwise which is or could

become applicable to any Holder of any Securities as a result of the

transactions contemplated by this Agreement, including, without limitation, the

Company's issuance of the Securities and any ownership of any Holder of the

Securities. The Company has not adopted a stockholder rights plan or similar

arrangement relating to accumulations of beneficial ownership of Common Stock or

a change in control of the Company.

 

             (k) SEC Documents; Financial Statements. Except as disclosed on

Schedule 5(k), during the two (2) years prior to the date hereof, the Company

has filed all SEC Documents. The Company has delivered to each Initial Purchaser

or its representatives, true, correct and complete copies of the SEC Documents

not available on the EDGAR system. As of their respective dates, the SEC

Documents complied in all material respects with the requirements of the 1934

Act and the rules and regulations of the SEC promulgated thereunder applicable

to the SEC Documents, and none of the SEC Documents, at the time they were filed

with the SEC, contained any untrue statement of a material fact or omitted to

state a material fact required to be stated therein or necessary in order to

make the statements therein, in the light of the circumstances under which they

were made, not misleading. As of their respective dates, the financial

statements of the Company included in the SEC Documents complied as to form in

all material respects with the applicable accounting requirements and the

published rules and regulations of the SEC with respect thereto. Such financial

statements have been prepared in accordance with generally accepted accounting

principles, consistently applied, during the periods involved (except (i) as may

be otherwise indicated in such financial statements or the notes thereto, or

(ii) in the case of unaudited interim statements, to the extent they may exclude

footnotes or may be condensed or summary statements or subject to year-end

adjustments) and fairly present in all material respects the financial position

of the Company as of the dates thereof and the results of its operations and

cash flows for the periods then ended (subject, in the case of unaudited interim

statements, to normal year-end audit adjustments). No other information provided

by or on behalf of the Company to the Initial Purchasers which is not included

in the SEC Documents, including, without limitation, information referred to in

Section 4(d) of this Agreement, contains any untrue statement of a material fact

or omits to state any material fact necessary in order to make the statements

therein, in the light of the circumstance under which they are or were made, not

misleading.

 

                                        9

<PAGE>

 

            (l) Absence of Certain Changes. Except as disclosed in the Company's

Form 10-QSB for the period ended March 31, 2005 or otherwise in Schedule 5(l),

since December 31, 2004, there has been no material adverse change and no

material adverse development in the business, properties, operations, condition

(financial or otherwise), results of operations or prospects of the Company or

its Subsidiaries. Since December 31, 2004, the Company has not (i) declared or

paid any dividends, (ii) sold any assets, individually or in the aggregate, in

excess of $100,000 outside of the ordinary course of business, (iii) had capital

expenditures, individually or in the aggregate, in excess of $100,000 or (iv)

waived any material rights with respect to any Indebtedness or other rights in

excess of $100,000 owed to it. The Company has not taken any steps to seek

protection pursuant to any bankruptcy law nor does the Company have any

Knowledge or reason to believe that its creditors intend to initiate involuntary

bankruptcy proceedings or any actual knowledge of any fact which would

reasonably lead a creditor to do so. Neither the Company nor any Subsidiary of

the Company is as of the date hereof, and after giving effect to the

transactions contemplated hereby to occur at the Closing (including the MD

Acquisition) will be, Insolvent.

 

            (m) No Undisclosed Events, Liabilities, Developments or

Circumstances. Except as disclosed on Schedule 5(m), no event, liability,

development or circumstance has occurred or exists, or is reasonably expected to

occur with respect to the Company or its Subsidiaries or their respective

business, properties, prospects, operations or financial condition, that would

be required to be disclosed by the Company under applicable securities laws with

the SEC relating to an issuance and sale by the Company of its Common Stock and

which has not been publicly announced.

 

            (n) Conduct of Business; Regulatory Permits. Neither the Company nor

its Subsidiaries is in violation of any term of or in default under its

Certificate of Incorporation or Bylaws or their organizational charter or

certificate of incorporation or bylaws, respectively. Neither the Company nor

any of its Subsidiaries is in violation of any judgment, decree or order or any

statute, ordinance, rule or regulation applicable to the Company or its

Subsidiaries, and neither the Company nor any of its Subsidiaries will conduct

its business in violation of any of the foregoing, except for possible

violations which would not, individually or in the aggregate, have a Material

Adverse Effect. Without limiting the generality of the foregoing, the Company

has not received notice of and does not have Knowledge of a violation of any of

the rules, regulations or requirements of the Principal Market and has no

Knowledge of any facts or circumstances that would reasonably lead to delisting

or suspension of the Common Stock by the Principal Market in the foreseeable

future. Since December 31, 2004, (i) the Common Stock has been designated for

quotation on the Principal Market, (ii) trading in the Common Stock has not been

suspended by the SEC or the Principal Market and (iii) the Company has received

no communication, written or oral, from the SEC or the Principal Market

regarding the suspension or delisting of the Common Stock from the Principal

Market. The Company and its Subsidiaries possess all certificates,

authorizations and permits issued by the appropriate regulatory authorities

necessary to conduct their respective businesses, except where the failure to

possess such certificates, authorizations or permits would not have,

individually or in the aggregate, a Material Adverse Effect, and neither the

Company nor any such Subsidiary has received any notice of proceedings relating

to the revocation or modification of any such certificate, authorization or

permit.

 

                                       10

<PAGE>

 

            (o) Foreign Corrupt Practices. Neither the Company, nor any of its

Subsidiaries, nor any director, officer, agent, employee or other Person acting

on behalf of the Company or any of its Subsidiaries has, in the course of its

actions for, or on behalf of, the Company (i) used any corporate funds for any

unlawful contribution, gift, entertainment or other unlawful expenses relating

to political activity; (ii) made any direct or indirect unlawful payment to any

foreign or domestic government official or employee from corporate funds; (iii)

violated or is in violation of any provision of the U.S. Foreign Corrupt

Practices Act of 1977, as amended; or (iv) made any unlawful bribe, rebate,

payoff, influence payment, kickback or other unlawful payment to any foreign or

domestic government official or employee.

 

            (p) Sarbanes-Oxley Act. Except as described on Schedule 5(p), the

Company's form 10-K for the year ended December 31, 2004 or in the Form 10-QSB

for the quarter ended March 31, 2005, the Company is in compliance with any and

all applicable requirements of the Sarbanes-Oxley Act of 2002 that are effective

as of the date hereof and applicable to the Company, and any and all applicable

rules and regulations promulgated by the SEC thereunder that are effective as of

the date hereof and applicable to the Company, except where such noncompliance

would not have, individually or in the aggregate, a Material Adverse Effect.

 

            (q) Transactions With Affiliates. Except as described in the SEC

Documents filed at least ten (10) days prior to the date hereof and other than

the grant of stock options and transactions with Affiliates disclosed on

Schedule 5(q), none of the officers, directors or employees of the Company is

presently a party to any transaction with the Company or any of its Subsidiaries

(other than for ordinary course services as employees, officers or directors),

including any contract, agreement or other arrangement providing for the

furnishing of services to or by, providing for rental of real or personal

property to or from, or otherwise requiring payments to or from any such

officer, director or employee or, to the knowledge of the Company, any

corporation, partnership, trust or other entity in which any such officer,

director, or employee has a substantial interest or is an officer, director,

trustee or partner.

 

            (r) Equity Capitalization. As of the date hereof, the authorized

capital stock of the Company consists of (i) 15,000,000 shares of Common Stock,

of which as of the date hereof, 3,825,019 are issued and 3,502,117 are

outstanding, 1,565,710 shares are reserved for issuance pursuant to the

Company's stock option, purchase plans and pursuant to securities (other than

the Notes and the Warrants) exercisable or exchangeable for, or convertible

into, shares of Common Stock and (ii) 5,000,000 shares of preferred stock, $0.01

par value per share, of which as of the date hereof none of which is issued and

outstanding or reserved for issuance. All of such outstanding shares have been,

or upon issuance will be, validly issued and are fully paid and nonassessable.

Except as disclosed in Schedule 5(r): (i) none of the Company's share capital is

subject to preemptive rights or any other similar rights or any liens or

encumbrances suffered or permitted by the Company; (ii) there are no outstanding

options, warrants, scrip, rights to subscribe to, calls or commitments of any

character whatsoever relating to, or securities or rights convertible into, or

 

                                       11

<PAGE>

 

exercisable or exchangeable for, any share capital of the Company or any of its

Subsidiaries, or contracts, commitments, understandings or arrangements by which

the Company or any of its Subsidiaries is or may become bound to issue

additional share capital of the Company or any of its Subsidiaries or options,

warrants, scrip, rights to subscribe to, calls or commitments of any character

whatsoever relating to, or securities or rights convertible into, or exercisable

or exchangeable for, any share capital of the Company or any of its

Subsidiaries; (iii) there are no outstanding debt securities, notes, credit

agreements, credit facilities or other agreements, documents or instruments

evidencing Indebtedness of the Company or any of its Subsidiaries or by which

the Company or any of its Subsidiaries is or may become bound; (iv) there are no

financing statements securing obligations in any material amounts, either singly

or in the aggregate, filed in connection with the Company; (v) there are no

agreements or arrangements under which the Company or any of its Subsidiaries is

obligated to register the sale of any of their securities under the 1933 Act

(except the Registration Rights Agreement or any other registration rights

granted to certain other investors financing the MD Acquisition or any finder's

fees paid or payable in connection with this Agreement or any other financing

transactions closing in connection with the MD Acquisition); (vi) there are no

outstanding securities or instruments of the Company or any of its Subsidiaries

which contain any redemption or similar provisions, and there are no contracts,

commitments, understandings or arrangements by which the Company or any of its

Subsidiaries is or may become bound to redeem a security of the Company or any

of its Subsidiaries; (vii) there are no securities or instruments containing

anti-dilution or similar provisions that will be triggered by the issuance of

the Securities; (viii) the Company does not have any stock appreciation rights

or "phantom stock" plans or agreements or any similar plan or agreement; and

(ix) the Company and its Subsidiaries have no liabilities or obligations

required to be disclosed in the SEC Documents but not so disclosed in the SEC

Documents, other than those (A) incurred in the ordinary course of the Company's

or its Subsidiaries' respective businesses or (B) incurred in connection with

the MD Acquisition and which, individually or in the aggregate, do not or would

not have a Material Adverse Effect. The Company has furnished to the Initial

Purchasers true, correct and complete copies of the Company's Certificate of

Incorporation, as amended and as in effect on the date hereof (the "CERTIFICATE

OF INCORPORATION"), and the Company's Bylaws, as amended and as in effect on the

date hereof (the "BYLAWS"), and the terms of all securities convertible into, or

exercisable or exchangeable for, shares of Common Stock and the material rights

of the holders thereof in respect thereto.

 

            (s) Indebtedness and Other Contracts. Except as disclosed in the SEC

Documents or in Schedule 5(s), neither the Company nor any of its Subsidiaries

(i) has any outstanding Indebtedness, (ii) is a party to any contract, agreement

or instrument, the violation of which, or default under which, by the other

party(ies) to such contract, agreement or instrument would result in a Material

Adverse Effect, (iii) is in violation of any term of or in default under any

contract, agreement or instrument relating to any Indebtedness, except where

such violations and defaults would not result, individually or in the aggregate,

in a Material Adverse Effect, or (iv) is a party to any contract, agreement or

instrument relating to any Indebtedness, the performance of which, in the

judgment of the Company's officers, has or is expected to have a Material

Adverse Effect. Schedule 5(s) provides a detailed description of the material

terms of any such outstanding Indebtedness.

 

            (t) Absence of Litigation. There is no action, suit, proceeding,

inquiry or investigation before or by the Principal Market, any court, public

board, government agency, self-regulatory organization or body pending or, to

the Knowledge of the Company, threatened against or affecting the Company, the

Common Stock or any of the Company's Subsidiaries or any of the Company's or the

Company's Subsidiaries' officers or directors, except as set forth in Schedule

5(t).

 

                                       12

<PAGE>

 

            (u) Insurance. The Company and each of its Subsidiaries are insured

by insurers of recognized financial responsibility against such losses and risks

and in such amounts as management of the Company believes to be prudent and

customary in the businesses in which the Company and its Subsidiaries are

engaged. Neither the Company nor any such Subsidiary has been refused any

insurance coverage sought or applied for and neither the Company nor any such

Subsidiary has any reason to believe that it will not be able to renew its

existing insurance coverage as and when such coverage expires or to obtain

similar coverage from similar insurers as may be necessary to continue its

business at a cost that would not have a Material Adverse Effect.

 

            (v) Employee Relations. (i) Neither the Company nor any of its

Subsidiaries is a party to any collective bargaining agreement or employs any

member of a union. The Company and its Subsidiaries believe that their relations

with their employees are satisfactory. No executive officer (as defined in Rule

501(f) of the 1933 Act) of the Company has notified the Company that such

officer intends to leave the Company or otherwise terminate such officer's

employment with the Company. No executive officer of the Company, to the

Knowledge of the Company, is, or is now expected to be, in violation of any

material term of any employment contract, confidentiality, disclosure or

proprietary information agreement, non-competition agreement, or any other

contract or agreement or any restrictive covenant, and the continued employment

of each such executive officer does not subject the Company or any of its

Subsidiaries to any liability with respect to any of the foregoing matters.

 

                  (ii) The Company and its Subsidiaries are in compliance with

all federal, state, local and foreign laws and regulations respecting labor,

employment and employment practices and benefits, terms and conditions of

employment and wages and hours, except where failure to be in compliance would

not, either individually or in the aggregate, reasonably be expected to result

in a Material Adverse Effect.

 

            (w) Title. The Company and its Subsidiaries do not own any real

property. The Company and its Subsidiaries have good and marketable title to all

personal property owned by them which is material to the business of the Company

and its Subsidiaries, in each case free and clear of all liens, encumbrances and

defects except such as do not materially affect the value of such property and

do not interfere with the use made and proposed to be made of such property by

the Company and any of its Subsidiaries. Any real property and facilities held

under lease by the Company and any of its Subsidiaries are held by them under

valid, subsisting and enforceable leases with such exceptions as are not

material and do not interfere with the use made and proposed to be made of such

property and buildings by the Company and its Subsidiaries.

 

            (x) Intellectual Property Rights. The Company and its Subsidiaries

own or possess adequate rights or licenses to use all trademarks, service marks,

and all applications and registrations therefor, trade names, patents, patent

rights, copyrights, original works of authorship, inventions, licenses,

approvals, governmental authorizations, trade secrets and other intellectual

property rights ("INTELLECTUAL PROPERTY RIGHTS") necessary to conduct their

respective businesses as now conducted. Except as set forth in Schedule 5(x),

none of the Company's Intellectual Property Rights have expired or terminated,

or are expected to expire or terminate, within three years from the date of this

Agreement. The Company does not have any

 

                                       13

<PAGE>

 

knowledge of any infringement by the Company or its Subsidiaries of Intellectual

Property Rights of others. There is no claim, action or proceeding pending, or

to the knowledge of the Company, being threatened, against the Company or its

Subsidiaries regarding its Intellectual Property Rights. The Company is unaware

of any facts or circumstances which might give rise to any of the foregoing

infringements or claims, actions or proceedings. The Company and its

Subsidiaries have taken reasonable security measures to protect the secrecy,

confidentiality and value of all of their Intellectual Property Rights.

 

            (y) Environmental Laws. The Company and its Subsidiaries (i) are in

compliance with any and all Environmental Laws (as hereinafter defined), (ii)

have received all permits, licenses or other approvals required of them under

applicable Environmental Laws to conduct their respective businesses and (iii)

are in compliance with all terms and conditions of any such permit, license or

approval where, in each of the foregoing clauses (i), (ii) and (iii), the

failure to so comply could be reasonably expected to have, individually or in

the aggregate, a Material Adverse Effect. The term "ENVIRONMENTAL LAWS" means

all federal, state, local or foreign laws relating to pollution or protection of

human health or the environment (including, without limitation, ambient air,

surface water, groundwater, land surface or subsurface strata), including,

without limitation, laws relating to emissions, discharges, releases or

threatened releases of chemicals, pollutants, contaminants, or toxic or

hazardous substances or wastes (collectively, "HAZARDOUS MATERIALS") into the

environment, or otherwise relating to the manufacture, processing, distribution,

use, treatment, storage, disposal, transport or handling of Hazardous Materials,

as well as all authorizations, codes, decrees, demands or demand letters,

injunctions, judgments, licenses, notices or notice letters, orders, permits,

plans or regulations issued, entered, promulgated or approved thereunder.

 

            (z) Subsidiary Rights. Except as set forth in Schedule 5(z), the

Company or one of its Subsidiaries has the unrestricted right to vote, and

(subject to limitations imposed by applicable law) to receive dividends and

distributions on, all capital securities of its Subsidiaries as owned by the

Company or such Subsidiary.

 

            (aa) Tax Status. The Company and each of its Subsidiaries (i) has

made or filed all foreign, federal and state income and all other tax returns,

reports and declarations required to be made or filed by any jurisdiction to

which it is subject, (ii) has paid or accrued all taxes and other governmental

assessments and charges that are material in amount, shown or determined to be

due on such returns, reports and declarations, except those being contested in

good faith and (iii) has set aside on its books provision reasonably adequate

for the payment of all taxes for periods subsequent to the periods to which such

returns, reports or declarations apply. There are no unpaid or unaccrued taxes

in any material amount claimed to be due by the taxing authority of any

jurisdiction, and the officers of the Company know of no basis for any such

claim. No liens have been filed and no claims are being asserted by or against

the Company or any of its Subsidiaries with respect to any taxes (other than

liens for taxes not yet due and payable). Except as disclosed on Schedule 5(aa),

neither the Company nor its Subsidiaries has received notice of assessment or

proposed assessment of any taxes claimed to be owed by it or any other Person on

its behalf. Neither the Company nor its Subsidiaries is a party to any tax

sharing or tax indemnity agreement or any other agreement of a similar nature

that remains in effect. Each of the Company and its Subsidiaries has complied in

all material respects with all applicable legal requirements relating to the

payment and withholding of taxes

 

                                        14

<PAGE>

 

and, within the time and in the manner prescribed by law, has withheld from

wages, fees and other payments and paid over to the proper governmental or

regulatory authorities all amounts required.

 

            (bb) Internal Accounting Controls. Except as set forth in the SEC

Documents and on Schedule 5(bb), the Company and each of its Subsidiaries

maintain a system of internal accounting controls sufficient to provide

reasonable assurance that (i) transactions are executed in accordance with

management's general or specific authorizations, (ii) transactions are recorded

as necessary to permit preparation of financial statements in conformity with

generally accepted accounting principles and to maintain asset and liability

accountability, (iii) access to assets or incurrence of liabilities is permitted

only in accordance with management's general or specific authorization and (iv)

the recorded accountability for assets and liabilities is compared with the

existing assets and liabilities at reasonable intervals and appropriate action

is taken with respect to any difference.

 

            (cc) Ranking of Notes. Except as set forth on Schedule 5(cc), no

Indebtedness of the Company is senior to or ranks pari passu with the Notes in

right of payment, whether with respect of payment of redemptions, interest,

damages or upon liquidation or dissolution or otherwise.

 

            (dd) Manipulation of Price. The Company has not, and to its

knowledge no one acting on its behalf has, (i) taken, directly or indirectly,

any action designed to cause or to result in the stabilization or manipulation

of the price of any security of the Company to facilitate the sale or resale of

any of the Securities, (ii) sold, bid for, purchased, or paid any compensation

for soliciting purchases of, any of the Securities, or (iii) paid or agreed to

pay to any person any compensation for soliciting another to purchase any other

securities of the Company.

 

            (ee) Disclosure. Other than in connection with the acquisition of

MediaDefender, Inc. (the "MD ACQUISITION"), the Company confirms that neither it

nor any other Person acting on its behalf has provided any of the Initial

Purchasers or their agents or counsel with any information that constitutes or

could reasonably be expected to constitute material, nonpublic information. The

Company understands and confirms that each of the Initial Purchasers and the

other Holders will rely on the foregoing representations in effecting

transactions in securities of the Company. The Company has provided each of the

Initial Purchasers with a true, correct and complete copy of all of the executed

documentation in connection with the MD Acquisition (the "MD DOCUMENTS"). All of

the representations and warranties, including those of MediaDefender, Inc.,

contained in the MD Documents are true and correct as of the date hereof. All

disclosure provided in this Agreement and the Schedules hereto are true and

correct and do not contain any untrue statement of a material fact or omit to

state any material fact necessary in order to make the statements made therein,

in the light of the circumstances under which they were made, not misleading.

Each press release issued by the Company during the twelve (12) months preceding

the date of this Agreement did not at the time of release contain any untrue

statement of a material fact or omit to state a material fact required to be

stated therein or necessary in order to make the statements therein, in the

light of the circumstances under which they are made, not misleading. Except as

set forth in Schedule 5(ee), no event or circumstance has occurred or

information exists with respect to the Company or any of its Subsidiaries or its

or their business, properties, prospects, operations or financial

 

                                       15

<PAGE>

 

conditions, which, under applicable law, rule or regulation, requires public

disclosure or announcement by the Company but which has not been so publicly

announced or disclosed.

 

            (ff) The provisions of the Security Agreement are effective to

create in favor of the Collateral Agent for the benefit of the Collateral Agent

and the Holders a legal, valid and enforceable security interest in all right,

title and interest of the Company and the Guarantors in the Security Agreement

Collateral, and the Collateral Agent, for the benefit of the Collateral Agent

and the Holders, has a fully perfected first lien on, and security interest in,

all right, title and interest in all of the Security Agreement Collateral

described therein to the extent the Security Agreement Collateral consists of

the type of property in which a security interest may be perfected by filing a

financing statement under the UCC, subject to no other Liens other than

Permitted Liens.

 

             (gg) The provisions of the Trademark Security Agreement, taken

together with the Security Agreement, are effective to create in favor of the

Collateral Agent for the benefit of the Collateral Agent and the Holders a

legal, valid and enforceable security interest in all right, title and interest

of the Company and the Guarantors in the Trademark Collateral, and the

Collateral Agent, for the benefit of the Collateral Agent and the Holders, has a

fully perfected first lien on, and security interest in, all right, title and

interest in all of the Trademark Collateral described therein, subject to no

other Liens other than Permitted Liens. The recordation of the Trademark

Security Agreement in the United States Patent and Trademark Office together

with filings on Form UCC-1 made pursuant to the Trademark Security Agreement

will create a perfected security interest in the Trademark Collateral to the

extent the Trademark Collateral consists of the type of property in which a

security interest may be perfected by such filing and recordation; provided,

that additional action may be required under the UCC with respect to proceeds.

 

            (hh) The provisions of the Patent Security Agreement, taken together

with the Security Agreement, are effective to create in favor of the Collateral

Agent for the benefit of the Collateral Agent and the Holders a legal, valid and

enforceable security interest in all right, title and interest of the Company

and the Guarantors in the Patent Collateral, and the Collateral Agent, for the

benefit of the Collateral Agent and the Holders, has a fully perfected first

lien on, and security interest in, all right, title and interest in all of the

Patent Collateral described therein, subject to no other Liens other than

Permitted Liens. The recordation of the Patent Security Agreement in the United

States Patent and Trademark Office together with filings on Form UCC-1 made

pursuant to the Patent Security Agreement will create a perfected security

interest in the Patent Collateral to the extent the Patent Collateral consists

of the type of property in which a security interest may be perfected by such

filing and recordation; provided, that additional action may be required under

the UCC with respect to proceeds.

 

            (ii) The provisions of the Copyright Security Agreement, taken

together with the Security Agreement, are effective to create in favor of the

Collateral Agent for the benefit of the Collateral Agent and the Holders a

legal, valid and enforceable security interest in all right, title and interest

of the Company and the Guarantors in the Copyright Collateral, and the

Collateral Agent, for the benefit of the Collateral Agent and the Holders, has a

fully perfected first lien on, and security interest in, all right, title and

interest in all of the Copyright Collateral described therein, subject to no

other Liens other than Permitted Liens. The recordation of the

 

                                       16

<PAGE>

 

Copyright Security Agreement in the United States Copyright Office together with

filings on Form UCC-1 made pursuant to the Copyright Security Agreement will

create a perfected security interest in the Copyright Collateral to the extent

the Copyright Collateral consists of the type of property in which a security

interest may be perfected by such filing and recordation; provided, that

additional action may be required under the UCC with respect to proceeds.

 

            (jj) The security interests created in favor of the Collateral

Agent, for the benefit of the Collateral Agent and the Holders, under the Pledge

Agreement constitute first priority perfected security interests in the Pledged

Collateral described therein, subject to no security interests of any other

Person. Assuming the continued possession by the Collateral Agent of the Pledged

Collateral constituting certificated securities, no filings or recordings are

required in order to perfect (or maintain the perfection or priority of) the

security interests created in the Pledged Collateral under the Pledge Agreement

to the extent such Pledged Collateral constitutes certificated securities.

 

            (kk) Except with respect to Permitted Liens, there is no financing

statement, security agreement, chattel mortgage, real estate mortgage or other

document filed or recorded with any filing records, registry or other public

office, that purports to cover, affect or give notice of any present or possible

future Lien on any assets or property of the Company or any Subsidiary or any

rights relating thereto.

 

            (ll) Schedule 5(ll) hereto sets forth the account numbers and

locations of all bank accounts (including, without limitation, all deposit

accounts, investment accounts, securities accounts and brokerage accounts) of

the Company and its Subsidiaries

 

      6.     COVENANTS

 

            (a) Best Efforts. Each party shall use its best efforts timely to

satisfy each of the conditions to be satisfied by it as provided in Sections 6

and 7 of this Agreement.

 

            (b) Form D and Blue Sky. The Company agrees to file a Form D with

respect to the Securities as required under Regulation D and to provide a copy

thereof to each Holder of the Securities promptly after such filing. The Company

shall, on or before the Closing Date, take such action as the Company shall

reasonably determine is necessary in order to obtain an exemption for or to

qualify the Securities for sale to the Initial Purchasers at the Closing

pursuant to this Agreement under applicable securities or "Blue Sky" laws of the

states of the United States (or to obtain an exemption from such qualification),

and shall provide evidence of any such action so taken to the Initial Purchasers

on or prior to the Closing Date. The Company shall make all filings and reports

relating to the offer and sale of the Securities required under applicable

securities or "Blue Sky" laws of the states of the United States following the

Closing Date.

 

            (c) Reporting Status. Until the date on which the Investors (as

defined in the Registration Rights Agreement) shall have sold all the Warrant

Shares and none of the Notes or Warrants is outstanding (the "REPORTING

PERIOD"), the Company shall use its best efforts to timely file (or obtain

extensions in respect thereof and file within the applicable period) all reports

required to be filed with the SEC pursuant to the 1934 Act, and the Company

shall not

 

                                       17

<PAGE>

 

terminate its status as an issuer required to file reports under the 1934 Act

even if the 1934 Act or the rules and regulations thereunder would otherwise

permit such termination.

 

            (d) Use of Proceeds. The Company will use the proceeds from the sale

of the Securities for the MD Acquisition and costs and expenses related thereto

and for general working capital purposes and not for (i) repayment of any other

outstanding pari passu or junior Indebtedness of the Company or (ii) redemption

or repurchase of any of its equity securities.

 

            (e) Financial Information. The Company agrees to send the following

to each Investor during the Reporting Period (i) unless the following are filed

with the SEC through EDGAR and are available to the public through the EDGAR

system, within one (1) Business Day after the filing thereof with the SEC, (A) a

copy of its Annual Reports on Form 10-K or 10-KSB, (B) a copy of its quarterly

reports on Form 10-Q, (C) any interim reports or any consolidated balance

sheets, income statements, stockholders' equity statements and/or cash flow

statements for any period other than annual, (D) any Current Reports on Form 8-K

and (E) any registration statements (other than on Form S-8) or amendments filed

pursuant to the 1933 Act, and (ii) copies of any notices and other information

made available or given to the stockholders of the Company generally,

contemporaneously with the making available or giving thereof to the

stockholders.

 

            (f) Listing. To the extent required, the Company shall promptly

secure the listing of all of the Registrable Securities (as defined in the

Registration Rights Agreement) upon each national securities exchange and

automated quotation system, if any, upon which the Common Stock is then listed

(subject to official notice of issuance) and shall maintain such listing of all

Registrable Securities from time to time issuable under the terms of the

Transaction Documents. The Company shall maintain the Common Stocks'

authorization for quotation on the Principal Market. Neither the Company nor any

of its Subsidiaries shall take any action which would be reasonably expected to

result in the delisting or suspension of the Common Stock on the Principal

Market. The Company shall pay all fees and expenses in connection with

satisfying its obligations under this Section 6(f).

 

            (g) Fees. The Company shall reimburse the Initial Purchasers and JMB

Capital Partners for all reasonable out-of-pocket expenses incurred in

connection with the transactions contemplated hereby regardless of whether or

not the transactions contemplated hereby actually occur. To secure the Company's

obligation, the Company has made an initial expense deposit of Fifty Thousand

Dollars ($50,000) upon execution of the term sheet, and such deposit was

delivered to JMB Capital Partners. The Company shall also reimburse the

Collateral Agent and the Holders for all reasonable out-of-pocket expenses

incurred in connection with the custody or preservation of the Collateral and

all reasonable out-of-pocket expenses incurred in connection with the

performance of any of their rights and obligations under the Transaction

Documents and any consents, amendments, waivers or other modifications thereto,

and, including without limitation, all reasonable fees, expenses and

disbursements of counsel to the Collateral Agent and/or the Holders in

connection with the negotiation, preparation, execution and administration of

the Transaction Documents and any consents, amendments, waivers or other

modifications thereto. The Company shall be responsible for the payment of any

placement agent's fees, financial advisory fees, or broker's commissions

relating to or arising out of the transactions contemplated hereby, including,

without limitation, any fees or commissions

 

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payable to the Collateral Agent. The Company shall pay, and hold each Holder of

the Securities harmless against, any liability, loss or expense (including,

without limitation, reasonable attorney's fees and out-of-pocket expenses)

arising in connection with any claim relating to any such payment. Except as

otherwise set forth in the Transaction Documents, each party to this Agreement

shall bear its own expenses in connection with the sale of the Securities to the

Initial Purchasers.

 

            (h) Pledge of Securities. The Company acknowledges and agrees that

the Securities may be pledged by an Investor (as defined in the Registration

Rights Agreement) in connection with a bona fide margin agreement or other loan

or financing arrangement that is secured by the Securities. The pledge of

Securities shall not be deemed to be a transfer, sale or assignment of the

Securities hereunder, and no Investor effecting a pledge of Securities shall be

required to provide the Company with any notice thereof or otherwise make any

delivery to the Company pursuant to this Agreement or any other Transaction

Document, including, without limitation, Section 4(f) hereof; provided that an

Investor and its pledgee shall be required to comply with the provisions of

Section 4(f) hereof in order to effect a sale, transfer or assignment of

Securities to such pledgee. The Company hereby agrees to execute and deliver

such documentation as a pledgee of the Securities may reasonably request in

connection with a pledge of the Securities to such pledgee by an Investor.

 

            (i) Disclosure of Transactions and Other Material Information. On or

before 5:30 p.m., New York Time, on the fourth Business Day following the date

of this Agreement, the Company shall file a press release and a Current Report

on Form 8-K describing the terms of the transactions contemplated by this

Agreement in the form required by the 1934 Act and attaching the material

Transaction Documents (including, without limitation, this Agreement (and all

schedules to this Agreement), the form of each of the Notes, the form of

Warrant, the Registration Rights Agreement) and the MD Documents as exhibits to

such filing (including all attachments, the "INITIAL 8-K FILING"). On or before

5:30 p.m., New York Time, on the fourth Business Day following the date of the

signing and closing of the MD Acquisition, the Company shall file a press

release and a Current Report on Form 8-K describing the MD Acquisition in the

form required by the 1934 Act and attaching the MD Documents (including, without

limitation, Agreement and Plan of Merger (the "MERGER AGREEMENT")(and all

schedules to the Merger Agreement) (including all attachments, the "MD 8-K

FILING"). From and after the filing of the Registration Statement with the SEC,

the Company, any of its Subsidiaries or MediaDefender, Inc., or any of their

respective officers, directors, employees or agents, shall not provide to any

Holder of the Securities any material nonpublic information that is not

disclosed in the Registration Statement filing. The Company shall not, and shall

instruct each of its Subsidiaries and its and each of their respective officers,

directors, employees and agents, not to provide any Holder of the Securities

with any material, nonpublic information regarding the Company or any of its

Subsidiaries from and after the filing of the Registration Statement with the

SEC without the express written consent of such Holder. In the event of a breach

of the foregoing covenant by the Company, any of its Subsidiaries, or any of its

or their respective officers, directors, employees and agents, in addition to

any other remedy provided herein or in the Transaction Documents, any Holder of

the Securities shall have the right to make a public disclosure, in the form of

a press release, public advertisement or otherwise, of such material, nonpublic

information without the prior approval by the Company, its Subsidiaries, or any

of its or their respective officers, directors, employees or agents. No Holder

of the Securities shall have any

 

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<PAGE>

 

liability to the Company, its Subsidiaries, or any of its or their respective

officers, directors, employees, stockholders or agents for any such disclosure.

Subject to the foregoing, neither the Company nor any Holder of the Securities

shall issue any press releases or any other public statements with respect to

the transactions contemplated hereby; provided, however, that the Company shall

be entitled, without the prior approval of any Holder of the Securities, to make

any press release or other public disclosure with respect to such transactions

(i) in substantial conformity with the Initial 8-K Filing and the MD 8-K Filing

and contemporaneously therewith and (ii) as is required by applicable law and

regulations (provided that in the case of clause (i) each Holder of the

Securities shall be consulted by the Company in connection with and given an

opportunity to review any such press release or other public disclosure prior to

its release).

 

            (j) Restriction on Redemption and Cash Dividends. Except as

permitted pursuant to Section 7(b), so long as any Notes are outstanding, the

Company shall not, directly or indirectly, redeem, or declare or pay any cash

dividend or distribution on, the Common Stock without the prior express written

consent of the Required Holders.

 

            (k) Additional Notes; Variable Securities; Dilutive Issuances. So

long as any Holder beneficially owns any Securities, the Company will not issue

any Notes other than to the Holders of the Securities as contemplated hereby and

the Company shall not issue any other securities that would cause a breach or

default under the Notes. For as long as any Notes or Warrants remain

outstanding, the Company shall not, in any manner, issue or sell any rights,

warrants or options to subscribe for or purchase Common Stock or directly or

indirectly convertible into or exchangeable or exercisable for Common Stock at a

price which varies or may vary with the market price of the Common Stock,

including by way of one or more reset(s) to any fixed price unless the

conversion, exchange or exercise price of any such security cannot be less than

the then applicable Exercise Price (as defined in the Warrants) with respect to

the Common Stock into which any Warrant is exercisable. For as long as any Notes

or Warrants remain outstanding, the Company shall not, in any manner, enter into

or affect any Dilutive Issuance (as defined in the Warrants) if the effect of

such Dilutive Issuance is to cause the Company to be required to issue upon

exercise of any Warrant any shares of Common Stock in excess of that number of

shares of Common Stock which the Company may issue upon exercise of the Warrants

without breaching the Company's obligations under the rules or regulations of

the Principal Market.

 

            (l) Corporate Existence. So long as any Holder beneficially owns any

Securities, the Company shall not be party to any Fundamental Transaction unless

the Company is in compliance with the applicable provisions governing

Fundamental Transactions set forth in the Notes and the Warrants.

 

            (m) Reservation of Shares. Immediately following the Closing and

continuing until the Warrants are exercised or the Warrants expire, the Company

shall take all action necessary to have authorized, and reserved for the purpose

of issuance, after the Closing Date, 130% of the shares of Common Stock issuable

upon exercise of the Warrants.

 

            (n) Conduct of Business. The business of the Company and its

Subsidiaries shall not be conducted in violation of any law, ordinance or

regulation of any governmental

 

                                       20

<PAGE>

 

entity, except where such violations would not result, either individually or in

the aggregate, in a Material Adverse Effect.

 

            (o) Integration. None of the Company, its Subsidiaries, their

affiliates and any Person acting on their behalf will take any action or steps

referred to in Section 5(h) that would require registration of any of the

Securities under the 1933 Act or cause the offering of the Securities to be

integrated with other offerings.

 

            (p) Registration Statement Eligibility. The Company shall use its

best efforts to maintain its eligibility to use the registration statement that

it files with the SEC so that it is available for the registration of the resale

of the Registrable Securities, as defined in the Registration Rights Agreement.

 

            (q) Holding Period. For the purposes of Rule 144, the Company

acknowledges that the holding period of the Warrant Shares may be tacked onto

the holding period of the Warrants (in the case of Cashless Exercise (as defined

in the Warrants)) and the Company agrees not to take a position contrary to this

Section 6(q).

 

            (r) Stockholder Approval. The Company shall prepare and file with

the SEC, as promptly as practicable after the date hereof but in no event later

than twenty (20) days after the date hereof, an information statement (the

"INFORMATION STATEMENT"), substantially in the form that has been previously

reviewed and reasonably approved by the Initial Pur