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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act Of 1934
Date of Report (Date of earliest event reported) September 13, 1999
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SONIC FOUNDRY, INC.
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(Exact name of registrant as specified in its charter)
MARYLAND 1-14007 39-1783372
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(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization) File Number) Identification No.)
754 Williamson Street, Madison, WI 53703
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(Address of principal executive offices)
(608)256-3133
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(Issuer's telephone number)
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Item 1. Changes in Control of Registrant
None
Item 2. Acquisition or Disposition of Assets
None
Item 3. Bankruptcy or Receivership
None
Item 4. Changes in Registrant's Certifying Accountant
None
Item 5. Other Events
On September 13, 1999 the Company issued $5,000,000 7.5%
redeemable convertible subordinated debentures due September
2002. The notes and accrued interest are convertible into common
stock at a rate of $10.28 per share, subject to certain
adjustments. In addition, the Company issued 97,276 warrants
expiring September 2004 each excercisable for one share of common
stock at a strike price of $10.28 per share.
Concurrent with this private financing, Sonic Foundry's 7,662,483
preferred shares outstanding have been converted to 3,831,239
common shares.
Item 6. Resignations of Registrant's Directors
None
Item 7.(a),(b) Financial Statements
None
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Item 7(c) EXHIBIT LIST
NUMBER DESCRIPTION
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10.17 Convertible Debenture Purchase Agreement dated September 13, 1999
between Purchasers and the Registrant
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SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Sonic Foundry, Inc.
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(Registrant)
September 24, 1999 By: /s/ Kenneth A. Minor
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Kenneth A. Minor
Chief Financial Officer
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EXHIBIT 10.17
CONVERTIBLE DEBENTURE PURCHASE AGREEMENT (this "Agreement"), dated as of
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September 13, 1999, among Sonic Foundry, Inc., a Maryland corporation (the
"Company"), and the investors signatory hereto (each such investor is a
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"Purchaser" and all such investors are, collectively, the "Purchasers").
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WHEREAS, subject to the terms and conditions set forth in this Agreement,
the Company desires to issue and sell to the Purchasers and the Purchasers,
severally and not jointly, desire to purchase from the Company an aggregate
principal amount of $5,000,000 of the Company's 7.5% Convertible Debentures, due
September 13, 2002, which shall be in the form of Exhibit A (the "Debentures"),
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and which are convertible into shares of the Company's common stock, $.01 par
value per share (the "Common Stock").
IN CONSIDERATION of the mutual covenants contained in this Agreement, and
for other good and valuable consideration the receipt and adequacy are hereby
acknowledged, the Company and the Purchasers agree as follows:
ARTICLE I
PURCHASE AND SALE
1.1 The Closing.
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(a) The Closing. (i) Subject to the terms and conditions set forth
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in this Agreement, the Company shall issue and sell to the Purchasers and the
Purchasers shall, severally and not jointly, purchase from the Company the
Debentures for an aggregate purchase price of $5,000,000. The closing of the
purchase and sale of the Debentures (the "Closing") shall take place at the
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offices of Robinson Silverman Pearce Aronsohn & Berman LLP ("Robinson
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Silverman"), 1290 Avenue of the Americas, New York, New York 10104, immediately
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following the execution hereof or such later date as the parties shall agree.
The date of the Closing is hereinafter referred to as the "Closing Date."
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(ii) Prior to the Closing Date, the parties shall deliver or shall
cause to be delivered the following: (A) the Company shall deliver to each
Purchaser (1) the Debentures in the aggregate principal amount indicated below
such Purchaser's name on the signature page to this Agreement, registered in the
name of such Purchaser, (2) a Common Stock purchase warrant, in the form of
Exhibit D, registered in the name of such Purchaser, pursuant to which such
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Purchaser shall have the right at any time and from time to time thereafter
through the fifth anniversary of the Closing Date to acquire the number of
shares of Common Stock indicated below such Purchaser's name on the signature
page to this (collectively, the "Warrants"), (3) the legal opinion of McBreen &
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Kopko, outside counsel to the Company, in the form of Exhibit C,
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and (4) all other documents, instruments and writings required to have been
delivered at or prior to the Closing Date by the Company pursuant to this
Agreement, including an executed Registration Rights Agreement, dated the date
hereof, among the Company and the Purchasers, in the form of Exhibit B (the
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"Registration Rights Agreement"), and the Irrevocable Transfer Agent
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Instructions, in the form of Exhibit E, delivered to and acknowledged by the
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Company's transfer agent (the "Transfer Agent Instructions"); and (B) each
Purchaser shall deliver (1) the purchase price indicated below such Purchaser's
name on the signature page to this Agreement in United States dollars in
immediately available funds by wire transfer to an account designated in writing
by the Company for such purpose, and (2) all documents, instruments and writings
required to have been delivered at or prior to the Closing Date by such
Purchaser pursuant to this Agreement, including, without limitation, an executed
Registration Rights Agreement.
1.2 Certain Defined Terms. For purposes of this Agreement,
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"Conversion Price," "Original Issue Date" and "Trading Day" shall have the
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meanings set forth in the Debentures; "Business Day" shall mean any day except
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Saturday, Sunday and any day which shall be a federal legal holiday or a day on
which banking institutions in the State of New York or the State of Maryland are
authorized or required by law or other governmental action to close.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
2.1 Representations, Warranties and Agreements of the Company. The
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Company hereby makes the following representations and warranties to the
Purchasers:
(a) Organization and Qualification. The Company is a corporation duly
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incorporated, validly existing and in good standing under the laws of the State
of Maryland, with the requisite corporate power and authority to own and use its
properties and assets and to carry on its business as currently conducted. The
Company has no subsidiaries other than as set forth in Schedule 2.1(a)
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(collectively the "Subsidiaries"). Each of the Subsidiaries is an entity, duly
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incorporated or otherwise organized, validly existing and in good standing under
the laws of the jurisdiction of its incorporation or organization (as
applicable), with the full power and authority to own and use its properties and
assets and to carry on its business as currently conducted. Each of the Company
and the Subsidiaries is duly qualified to do business and is in good standing as
a foreign corporation in each jurisdiction in which the nature of the business
conducted or property owned by it makes such qualification necessary, except
where the failure to be so qualified or in good standing, as the case may be,
could not, individually or in the aggregate, (x) adversely affect the legality,
validity or enforceability of the Securities (as defined below) or any of this
Agreement, the Registration Rights Agreement or the Warrants (collectively, the
"Transaction Documents"), (y) have or result in a material adverse effect on the
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results of operations, assets, prospects, or condition (financial or otherwise)
of the Company and the Subsidiaries, taken as a whole, or (z) adversely impair
the Company's ability to perform fully on a timely basis its obligations under
any of the Transaction Documents (any of (x), (y) or (z), a "Material Adverse
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Effect").
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(b) Authorization; Enforcement. The Company has the requisite
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corporate power and authority to enter into and to consummate the transactions
contemplated by each of the Transaction Documents and otherwise to carry out its
obligations thereunder. The execution and delivery of each of the Transaction
Documents by the Company and the consummation by it of the transactions
contemplated thereby have been duly authorized by all necessary action on the
part of the Company and no further action is required by the Company. Each of
the Transaction Documents and the Debentures has been duly executed by the
Company and, when delivered (or filed, as the case may be) in accordance with
the terms hereof, will constitute the valid and binding obligation of the
Company enforceable against the Company in accordance with its terms. Neither
the Company nor any Subsidiary is in violation of any of the provisions of its
respective certificate of incorporation, by-laws or other charter documents.
(c) Capitalization. The number of authorized, issued and outstanding
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capital stock of the Company is set forth in Schedule 2.1(c). No shares of
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Common Stock are entitled to preemptive or similar rights, nor is any holder of
the Common Stock entitled to preemptive or similar rights arising out of any
agreement or understanding with the Company by virtue of any of the Transaction
Documents. No shares of the Company's 5% Series B Convertible Preferred Stock,
$.01 par value per share, are currently issued and outstanding. Except as a
result of the purchase and sale of the Debentures and the Warrants and except as
disclosed in Schedule 2.1(c), there are no outstanding options, warrants, script
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rights to subscribe to, calls or commitments of any character whatsoever
relating to, or securities, rights or obligations convertible into or
exchangeable for, or giving any Person (as defined below) any right to subscribe
for or acquire, any shares of Common Stock, or contracts, commitments,
understandings, or arrangements by which the Company or any Subsidiary is or may
become bound to issue additional shares of Common Stock, or securities or rights
convertible or exchangeable into shares of Common Stock. To the knowledge of the
Company, except as specifically disclosed in the SEC Documents (as defined
below) or Schedule 2.1(c), no Person or group of related Persons beneficially
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owns (as determined pursuant to Rule 13d-3 promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")), or has the right to
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acquire by agreement with or by obligation binding upon the Company, in excess
of 5% of the Common Stock. A "Person" means an individual or corporation,
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partnership, trust, incorporated or unincorporated association, joint venture,
limited liability company, joint stock company, government (or an agency or
subdivision thereof) or other entity of any kind.
(d) Issuance of the Debentures and the Warrants. The Debentures and
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the Warrants are duly authorized and, when issued and paid for in accordance
with the terms hereof, will be duly and validly issued, fully paid and
nonassessable, free and clear of all liens, encumbrances and rights of first
refusal of any kind (collectively, "Liens"). The Company has on the date hereof
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and will, at all times while the Debentures and the Warrants are outstanding,
maintain an adequate reserve of duly authorized shares of Common Stock, reserved
for issuance to the holders of the Debentures and the Warrants, to enable it to
perform its conversion, exercise and other obligations under this Agreement, the
Debentures and the Warrants. Such number of reserved and available shares of
Common Stock is not less than the sum of (i) the number of shares of Common
Stock which would be issuable upon conversion in full of the Debentures,
assuming such conversion occurred on the Original Issue Date, and (ii) the
number of shares of Common Stock issuable upon exercise of the Warrants (such
number of shares of Common
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Stock as contemplated in clauses (i)-(ii), the "Initial Minimum"). All such
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authorized shares of Common Stock shall be duly reserved for issuance to the
holders of the Debentures and the Warrants. The shares of Common Stock issuable
upon conversion of the Debentures and upon exercise of the Warrants are
collectively referred to herein as the "Underlying Shares." The Debentures, the
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Warrants and the Underlying Shares are collectively referred to herein as, the
"Securities." When issued in accordance with the Debentures and the Warrants,
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the Underlying Shares will be duly authorized, validly issued, fully paid and
nonassessable, free and clear of all Liens.
(e) No Conflicts. The execution, delivery and performance of the
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Transaction Documents by the Company and the consummation by the Company of the
transactions contemplated thereby do not and will not (i) conflict with or
violate any provision of its certificate of incorporation, bylaws or other
charter documents (each as amended through the date hereof), or (ii) subject to
obtaining the Required Approvals (as defined below), 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 (with or without notice, lapse of time
or both) of, any agreement, loan, credit facility, indenture or instrument
(evidencing a Company debt or otherwise) to which the Company or any Subsidiary
is a party or by which any property or asset of the Company or any Subsidiary is
bound or affected, or (iii) result in a violation of any law, rule, regulation,
order, judgment, injunction, decree or other restriction of any court or
governmental authority to which the Company is subject (including Federal and
state securities laws and regulations), or by which any property or asset of the
Company is bound or affected, except in the case of each of clauses (ii) and
(iii), as could not, individually or in the aggregate, have or result in a
Material Adverse Effect. The business of the Company is not being conducted in
violation of any law, ordinance or regulation of any governmental authority,
except for violations which, individually or in the aggregate, could not have or
result in a Material Adverse Effect.
(f) Filings, Consents and Approvals. Neither the Company nor any
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Subsidiary is required to obtain any consent, waiver, authorization or order of,
give any notice to, or make any filing or registration with, any court or other
Federal, state, local or other governmental authority or other Person in
connection with the execution, delivery and performance by the Company of the
Transaction Documents, other than (i) the filings required pursuant to Section
3.11, (ii) the filing with the Securities and Exchange Commission (the
"Commission") of a registration statement meeting the requirements set forth in
the Registration Rights Agreement and covering the resale of the Underlying
Shares by the Purchasers (the "Underlying Shares Registration Statement"), (iii)
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the application(s) to the American Stock Exchange ("AMEX") for the listing of
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the Underlying Shares for trading on the AMEX (and with any other national
securities exchange or market on which the Common Stock is then listed), (iv)
applicable Blue Sky filings and (v) in all other cases where the failure to
obtain such consent, waiver, authorization or order, or to give such notice or
make such filing or registration could not have or result in, individually or in
the aggregate, a Material Adverse Effect (collectively, the "Required
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Approvals").
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(g) Litigation; Proceedings. There is no action, suit, notice of
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violation, proceeding or investigation pending or, to the knowledge of the
Company, threatened against or
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affecting the Company or any of its Subsidiaries or any of their respective
properties before or by any court, governmental or administrative agency or
regulatory authority (Federal, state, county, local or foreign) which (i)
adversely affects or challenges the legality, validity or enforceability of any
of the Transaction Documents or the Securities or (ii) could, individually or in
the aggregate, have or result in a Material Adverse Effect.
(h) No Default or Violation. Neither the Company nor any Subsidiary
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(i) is in default under or in violation of (and no event has occurred which has
not been waived which, with notice or lapse of time or both, would result in a
default by the Company or any Subsidiary under), nor has the Company or any
Subsidiary received notice of a claim that it is in default under or that it is
in violation of, any indenture, loan or credit agreement or any other agreement
or instrument to which it is a party or by which it or any of its properties is
bound, (ii) is in violation of any order of any court, arbitrator or
governmental body, or (iii) is in violation of any statute, rule or regulation
of any governmental authority, except as could not individually or in the
aggregate, have or result in a Material Adverse Effect.
(i) Private Offering. Assuming the accuracy of the representations
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and warranties of the Purchasers set forth in Sections 2.2(b)-(g), the offer,
issuance and sale of the Securities to the Purchasers as contemplated hereby are
exempt from the registration requirements of the Securities Act of 1933, as
amended (the "Securities Act"). Neither the Company nor any Person acting on
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its behalf has taken any action that could subject the offering, issuance or
sale of the Securities to the registration requirements of the Securities Act.
(j) SEC Documents; Financial Statements. Except as set forth in
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Schedule 2.1 (j) attached hereto, the Company has filed all reports required to
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be filed by it under the Exchange Act, including pursuant to Section 13(a) or
15(d) thereof, for the two (2) years preceding the date hereof (or such shorter
period as the Company was required by law to file such material) (the foregoing
materials being collectively referred to herein as the "SEC Documents" and,
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together with the Schedules to this Agreement, the "Disclosure Materials") on a
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timely basis or has received a valid extension of such time of filing and has
filed any such SEC Documents prior to the expiration of any such extension. As
of their respective dates, the SEC Documents complied in all material respects
with the requirements of the Securities Act and the Exchange Act and the rules
and regulations of the Commission promulgated thereunder, and none of the SEC
Documents, when filed, 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 light of the circumstances under which
they were made, not misleading. All material agreements to which the Company is
a party or to which the property or assets of the Company are subject have been
filed as exhibits to the SEC Documents as required. The financial statements of
the Company included in the SEC Documents comply in all material respects with
applicable accounting requirements and the rules and regulations of the
Commission with respect thereto as in effect at the time of filing. Such
financial statements have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis during the periods involved
("GAAP"), except as may be otherwise specified in such financial statements or
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the notes thereto, and fairly present in all material respects the financial
position of the Company and its consolidated subsidiaries as of and for the
dates thereof and the results of operations and cash flows for the periods then
ended, subject, in the case of
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unaudited statements, to normal, immaterial, year-end audit adjustments. Since
June 30,1999, except as specifically disclosed in the SEC Documents, (a) there
has been no event, occurrence or development that has or that could result in a
Material Adverse Effect, (b) the Company has not incurred any liabilities
(contingent or otherwise) other than (x) liabilities incurred in the ordinary
course of business consistent with past practice and (y) liabilities not
required to be reflected in the Company's financial statements pursuant to GAAP
or required to be disclosed in filings made with the Commission, (c) the Company
has not altered its method of accounting or the identity of its auditors and (d)
the Company has not declared or made any payment or distribution of cash or
other property to its stockholders or officers or directors (other than in
compliance with existing Company stock option plans) with respect to its capital
stock, or purchased, redeemed (or made any agreements to purchase or redeem) any
shares of its capital stock. The Company last filed audited financial statements
with the Commission on December 22, 1998, and has not received any comments from
the Commission in respect thereof.
(k) Investment Company. The Company is not, and is not an Affiliate
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(as defined in Rule 405 under the Securities Act) of, an "investment company"
within the meaning of the Investment Company Act of 1940, as amended.
(l) Certain Fees. Except as are payable to Brighton Capital, Ltd. by
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the Company, no fees or commissions will be payable by the Company to any
broker, financial advisor or consultant, finder, placement agent, investment
banker, or bank with respect to the transactions contemplated by this Agreement.
The Purchasers shall have no obligation with respect to any fees or with respect
to any claims made by or on behalf of other Persons for fees of a type
contemplated in this Section that may be due in connection with the transactions
contemplated by this Agreement. The Company shall indemnify and hold harmless
the Purchasers, their employees, officers, directors, agents, and partners, and
their respective Affiliates, from and against all claims, losses, damages, costs
(including the costs of preparation and attorney's fees) and expenses suffered
in respect of any such claimed or existing fees, as such fees and expenses are
incurred.
(m) Solicitation Materials. Neither the Company nor any Person acting
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on the Company's behalf has solicited any offer to buy or sell the Securities by
means of any form of general solicitation or advertising.
(n) Form S-3 Eligibility. The Company is eligible to register
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securities for resale with the Commission under Form S-3 promulgated under the
Securities Act.
(o) Exclusivity. The Company shall not issue and sell the Debentures
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to any Person other than the Purchasers other than with the specific prior
written consent of the Purchasers.
(p) Seniority. Except as set forth in Schedule 2.1(p), no
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indebtedness of the Company is senior to the Debentures in right of payment,
whether with respect to interest or upon liquidation, dissolution or otherwise.
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(q) Listing and Maintenance Requirements Compliance. The Company has
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not, in the two (2) years preceding the date hereof, received notice (written or
oral) from the AMEX or any other stock exchange, market or trading facility on
which the Common Stock is or has been listed (or on which it has been quoted) to
the effect that the Company is not in compliance with the listing or maintenance
requirements of such exchange or market. The Company is, and has no reason to
believe that it will not in the foreseeable future continue to be, in compliance
with all such maintenance requirements.
(r) Patents and Trademarks. The Company has, or has rights to use,
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all patents, patent applications, trademarks, trademark applications, service
marks, trade names, copyrights, licenses and rights which are necessary or
material for use in connection with its business, and which the failure to so
have would have a Material Adverse Effect (collectively, the "Intellectual
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Property Rights"). To the best knowledge of the Company all such Intellectual
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Property Rights are enforceable and there is no existing infringement by another
Person of any of the Intellectual Property Rights.
(s) Registration Rights; Rights of Participation. Except as set forth
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on Schedule 6(b) to the Registration Rights Agreement, the Company has not
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granted or agreed to grant to any Person any rights (including "piggy-back"
registration rights) to have any securities of the Company registered with the
Commission or any other governmental authority which has not been satisfied. No
Person, has any right of first refusal, preemptive right, right of
participation, or any similar right to participate in the transactions
contemplated by the Transaction Documents.
(t) Regulatory Permits. The Company and its Subsidiaries possess all
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certificates, authorizations and permits issued by the appropriate Federal,
state or foreign regulatory authorities necessary to conduct their respective
businesses as described in the SEC Documents, except where the failure to
possess such permits could not, individually or in the aggregate, have or result
in a Material Adverse Effect ("Material Permits"), and neither the Company nor
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any such Subsidiary has received any notice of proceedings relating to the
revocation or modification of any Material Permit.
(u) Title. The Company and the Subsidiaries have good and marketable
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title in fee simple to all real property owned by them which is material to the
business of the Company and its Subsidiaries and good and marketable title in
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, except
for Liens 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 its Subsidiaries. Any real property and facilities held under lease
by the Company and 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.
(v) Disclosure. The Company confirms that it has not provided any of
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the Purchasers or its agents or counsel with any information that constitutes
or might constitute material non-public information. The Company understands
and confirms that the Purchaser
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<PAGE>
shall be relying on the foregoing representations in effecting transactions in
securities of the Company. All disclosure provided to the Purchasers regarding
the Company, its business and the transactions contemplated hereby, including
the Schedules to this Agreement, furnished by or on behalf of the Company 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 light of the circumstances under which they were made, not
misleading.
2.2 Representations and Warranties of the Purchasers. Each Purchaser
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hereby represents and warrants to the Company as follows:
(a) Organization; Authority. Such Purchaser is a corporation, limited
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liability company or limited partnership validly existing and in good standing
under the laws of the jurisdiction of its organization with the requisite power
and authority, to enter into and to consummate the transactions contemplated by
the Transaction Documents and otherwise to carry out its obligations thereunder.
The purchase by such Purchaser of the Securities hereunder has been duly
authorized by all necessary corporate or partnership action on the part of such
Purchaser. Each of this Agreement and the Registration Rights Agreement has been
duly executed and delivered by such Purchaser and constitutes the valid and
legally binding obligation of such Purchaser, enforceable against it in
accordance with its terms.
(b) Investment Intent. Such Purchaser is acquiring the Securities
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offered and sold to it hereunder as principal for its own account for investment
purposes only and not with a view to or for distributing or reselling such
Securities or any part thereof or interest therein, without prejudice, however,
to such Purchaser's right, subject to the provisions of this Agreement and the
Registration Rights Agreement, at all times to sell or otherwise dispose of all
or any part of such Securities pursuant to an effective registration statement
under the Securities Act and in compliance with applicable state securities laws
or under an exemption from such registration. By making this representation,
such Purchaser does not represent that it will hold such Securities for any
period of time.
(c) Purchaser Status. At the time such Purchaser was offered the
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Debentures and its respective Warrant, it was, and at the date hereof it is, and
at each exercise date under its respective Warrant, it will be, an "accredited
investor" as defined in Rule 501(a) under the Securities Act.
(d) Experience of the Purchaser. Such Purchaser, either alone or
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together with its representatives, has such knowledge, sophistication and
experience in business and financial matters so as to be capable of evaluating
the merits and risks of the prospective investment in the Securities, and has so
evaluated the merits and risks of such investment.
(e) Ability of the Purchaser to Bear Risk of Investment. Such
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Purchaser is able to bear the economic risk of an investment in the Securities
and, at the present time, is able to afford a complete loss of such investment.
(f) Access to Information. Such Purchaser acknowledges that it has
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reviewed the Disclosure Materials and has been afforded (i) the opportunity to
ask such questions as it has
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<PAGE>
deemed necessary of, and to receive answers from, representatives of the Company
concerning the terms and conditions of the offering of the Securities and the
merits and risks of investing in the Securities; (ii) access to information
about the Company and the Company's financial condition, results of operations,
business, properties, management and prospects sufficient to enable it to
evaluate its investment; and (iii) the opportunity to obtain such additional
information which the Company possesses or can acquire without unreasonable
effort or expense that is necessary to make an informed investment decision with
respect to the investment and to verify the accuracy and completeness of the
information contained in the Disclosure Materials. Neither such inquiries nor
any other investigation conducted by or on behalf of such Purchaser or its
representatives or counsel shall modify, amend or affect such Purchaser's right
to rely on the truth, accuracy and completeness of the Disclosure Materials and
the Company's representations and warranties contained in the Transaction
Documents.
(g) General Solicitation. Such Purchaser is not purchasing the
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Securities as a result of or subsequent to any advertisement, article, notice or
other communication regarding the Securities published in any newspaper,
magazine or similar media or broadcast over television or radio or presented at
any seminar or any other general solicitation or general advertisement.
(h) Reliance. Such Purchaser understands and acknowledges that (i)
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the Securities are being offered and sold to it without registration under the
Securities Act in a private placement that is exempt from the registration
provisions of the Securities Act and (ii) the availability of such exemption,
depends in part on, and the Company will rely upon the accuracy and truthfulness
of, the foregoing representations and such Purchaser hereby consents to such
reliance.
(i) No Conflicts. The execution, delivery and performance of this
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Agreement by each Purchaser and the consummation by each Purchaser of the
transaction contemplated hereby do not and will not conflict with or violate any
provision of its charter documents.
(j) ERISA. Each Purchaser hereby certifies that the funds provided
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for the transaction hereunder do not constitute assets of any "Employee Benefit
Plan" as defined in Section 3(3) of Employee Retirement Income Security Act of
1974, as amended ("ERISA").
The Company acknowledges and agrees that each of the Purchasers makes
no representations or warranties with respect to the transactions contemplated
hereby other than those specifically set forth in this Section 2.2.
ARTICLE III
OTHER AGREEMENTS OF THE PARTIES
3.1 Transfer Restrictions. (a) Securities may only be disposed of
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pursuant to an effective registration statement under the Securities Act, to the
Company or pursuant to an available exemption from or in a transaction not
subject to the registration requirements of the Securities Act. In connection
with any transfer of Securities other than pursuant to an effective registration
statement or to the Company, except as otherwise set forth herein, the Company
may require the transferor thereof to provide to the Company an opinion of
counsel selected by the
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<PAGE>
transferor, the form and substance of which opinion shall be reasonably
satisfactory to the Company, to the effect that such transfer does not require
registration of such transferred securities under the Securities Act.
Notwithstanding the foregoing, the Company hereby consents to and agrees to
register on the books of the Company and with any transfer agent for the
securities of the Company any transfer of Securities by a Purchaser to an
Affiliate of such Purchaser or to one or more funds or managed accounts under
common management with such Purchaser, and any transfer among any such
Affiliates or one or more funds or managed accounts, provided that the
transferee certifies to the Company that it is an "accredited investor" as
defined in Rule 501(a) under the Securities Act and that it is acquiring the
Securities solely for investment purposes (subject to the qualifications
hereof). Any such transferee shall agree in writing to be bound by the terms of
this Agreement and shall have the rights of a Purchaser under this Agreement and
the Registration Rights Agreement.
(b) The Purchasers agree to the imprinting, so long as is required by
this Section 3.1(b), of the following legend on the Securities:
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE
SECURITIES ARE [CONVERTIBLE] [EXERCISABLE] HAVE BEEN REGISTERED WITH THE
SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY
STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT
BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN
A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS.
Underlying Shares shall not contain the legend set forth above nor any
other legend if the conversion of Debentures and exercise of the Warrants or
other issuances of Underlying Shares as contemplated hereby, by the Debentures
or the Warrants occurs at any time while an Underlying Shares Registration
Statement is effective under the Securities Act or, in the event there is not an
effective Underlying Shares Registration Statement, at such time, in the opinion
of counsel to the Company, such legend is not required under applicable
requirements of the Securities Act (including judicial interpretations and
pronouncements issued by the staff of the Commission). The Company shall cause
its counsel to issue the legal opinion included in the Transfer Agent
Instructions to the Company's transfer agent on the day that the Underlying
Shares Registration Statement is declared effective by the Commission. The
Company agrees that, in the event any Underlying Shares are issued with a legend
in accordance with this Section 3.1(b), it will, within three (3) Trading Days
after request therefor by a Purchaser, provide such Purchaser with a certificate
or certificates representing such Underlying Shares, free from such legend at
such time as such legend would not have been required under this Section 3.1(b)
had such issuance occurred on the date of such request. The Company may not make
any notation on its records or give instructions to any transfer agent of the
Company which enlarge the restrictions of transfer set forth in this Section.
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<PAGE>
3.2 Acknowledgment of Dilution. The Company acknowledges that the
--------------------------
issuance of the Underlying Shares upon (i) conversion of the Debentures in
accordance with the terms of the Debentures, and (ii) exercise of the Warrants
in accordance with their terms, will result in dilution of the outstanding
shares of Common Stock, which dilution may be substantial under certain market
conditions. The Company further acknowledges that its obligation to issue
Underlying Shares upon (x) conversion of the Debentures in accordance with the
terms of the Debentures, and (y) exercise of the Warrants in accordance with
their terms, is unconditional and absolute, subject to the limitations set forth
herein in the Debentures or pursuant to the Warrants, regardless of the effect
of any such dilution.
3.3 Furnishing of Information. As long as the Purchasers own Securities,
-------------------------
the Company covenants to timely file (or obtain extensions in respect thereof
and file within the applicable grace period) all reports required to be filed by
the Company after the date hereof pursuant to Section 13(a) or 15(d) of the
Exchange Act. As long as the Purchasers own Securities, if the Company is not
required to file reports pursuant to such sections, it will prepare and furnish
to the Purchasers and make publicly available in accordance with Rule 144(c)
promulgated under the Securities Act such information as is required for the
Purchasers to sell the Securities under Rule 144 promulgated under the
Securities Act. The Company further covenants that it will take such further
action as any holder of Securities may reasonably request, all to the extent
required from time to time to enable such Person to sell Underlying Shares
without registration under the Securities Act within the limitation of the
exemptions provided by Rule 144 promulgated under the Securities Act, including
the legal opinion referenced above in this Section. Upon the request of any such
Person, the Company shall deliver to such Person a written certification of a
duly authorized officer as to whether it has complied with such requirements.
3.4 Integration. The Company shall not, and shall use its best efforts to
-----------
ensure that, no Affiliate of the Company shall, sell, offer for sale or solicit
offers to buy or otherwise negotiate in respect of any security (as defined in
Section 2 of the Securities Act) that would be integrated with the offer or sale
of the Securities in a manner that would require the registration under the
Securities Act of the sale of the Securities to the Purchasers.
3.5 Increase in Authorized Shares. If on any date the Company would be,
-----------------------------
if a notice of conversion or exercise (as the case may be) were to be delivered
on such date, precluded from (a) issuing (a) 100% (which percentage rate shall
increase to 200% on and after the Put Exercise Date (as defined in the
Debentures), if any, if, on or prior to such date, the Company shall have failed
to pay the entire Put Price (as defined in the Debentures) pursuant to the Put
Notice (as defined in the Debentures)) of the number of Underlying Shares as
would then be issuable upon a conversion in full of the Debentures, and (b) the
number of Underlying Shares upon exercise in full of the Warrants (the "Current
-------
Required Minimum"), in either case, due to the unavailability of a sufficient
- ----------------
number of authorized but unissued or reserved shares of Common Stock, then the
Board of Directors of the Company shall promptly (and in any case, within 30
Business Days from such date) prepare and mail to the stockholders of the
Company proxy materials requesting authorization to amend the Company's
certificate of incorporation to increase the number of shares of Common Stock
which the Company is authorized to issue to at least such number of shares as
reasonably requested by the Purchasers in order to provide for such number of
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<PAGE>
authorized and unissued shares of Common Stock to enable the Company to comply
with its issuance, conversion exercise and reservation of shares obligations as
set forth in this Agreement, the Debentures and the Warrants (the sum of (x) the
number of shares of Common Stock then outstanding plus all shares of Common
Stock issuable upon exercise of all outstanding options, warrants and
convertible instruments, and (y) the Current Required Minimum, shall be a
reasonable number). In connection therewith, the Board of Directors shall (a)
adopt proper resolutions authorizing such increase, (b) recommend to and
otherwise use its best efforts to promptly and duly obtain stockholder approval
to carry out such resolutions (and hold a special meeting of the stockholders no
later than the 60/th/ day after delivery of the proxy materials relating to such
meeting) and (c) within five (5) Business Days of obtaining such stockholder
authorization, file an appropriate amendment to the Company's certificate of
incorporation to evidence such increase.
3.6 Reservation and Listing of Underlying Shares. (a) The Company shall
--------------------------------------------
(i) in the time and manner required by AMEX and such other exchange, market or
quotation system on which the Common Stock is traded, prepare and file with the
AMEX (and such other national securities exchange or market or trading or
quotation facility) an additional shares listing application covering a number
of shares of Common Stock which is not less than the Initial Minimum, (ii) take
all steps necessary to cause such shares of Common Stock to be approved for
listing in the AMEX (as well as on any such other national securities exchange
or market or trading or quotation facility on which the Common Stock is then
listed) as soon as possible thereafter, and (iii) provide to the Purchasers
evidence of such listing, and the Company shall maintain the listing of its
Common Stock thereon. If the number of Underlying Shares issuable upon
conversion in full of the then outstanding Debentures and upon exercise of the
then unexercised portion of the Warrants exceeds 85% of the number of Underlying
Shares previously listed on account thereof with AMEX (and any such other
required exchanges), then the Company shall take the necessary actions to
immediately list a number of Underlying Shares as equals no less than the then
Current Required Minimum.
(b) The Company shall maintain a reserve of shares of Common Stock
for issuance upon conversion of the Debentures and upon exercise in full of the
Warrants in accordance with this Agreement, the Debentures and the Warrants,
respectively, in such amount as may be required to fulfill its obligations in
full under the Transaction Documents, which reserve shall equal no less than the
then Current Required Minimum.
3.7 Conversion and Exercise Procedures. The Transfer Agent Instructions,
----------------------------------
Conversion Notice (as defined in the Debentures) and Notice of Exercise under
the Warrants set forth the totality of the procedures with respect to the
conversion of the Debentures and exercise of the Warrants, including the form of
legal opinion, if necessary, that shall be rendered to the Company's transfer
agent and such other information and instructions as may be reasonably necessary
to enable the Purchasers to convert their Debentures and exercise their Warrants
as contemplated in the Debentures and the Warrants (as applicable).
3.8 Notice of Breaches. Each of the Company and the Purchasers shall give
------------------
prompt written notice to the other of any breach by it of any representation,
warranty or other agreement
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<PAGE>
contained in any Transaction Document, as well as any events or occurrences
arising after the date hereof which would reasonably be likely to cause any
representation or warranty or other agreement of such party, as the case may be,
contained therein to be incorrect or breached as of the Closing Date. However,
no disclosure by either party pursuant to this Section shall be deemed to cure
any breach of any representation, warranty or other agreement contained in any
Transaction Document.
3.9 Conversion and Exercise Obligations of the Company. The Company shall
--------------------------------------------------
honor conversions of the Debentures and exercises of the Warrants and shall
deliver Underlying Shares in accordance with the respective terms, conditions
and time periods set forth in the Debentures and the Warrants.
3.10 Right of First Refusal; Subsequent Registrations. (a) The Company
------------------------------------------------
shall not, directly or indirectly, without the prior written consent of the
Purchasers, offer, sell, grant any option to purchase, or otherwise dispose of
(or announce any offer, sale, grant or any option to purchase or other
disposition) any of its or its Affiliates' equity or equity-equivalent
securities including the issuance of any debt or other instrument at any time
over life thereof convertible into or exchangeable for Common Stock, or any
other transaction intended to be exempt or not subject to registration under the
Securities Act (a "Subsequent Placement") for a period of 180 days after the
--------------------
Closing Date, except (i) the granting of options or warrants to employees,
officers and directors, and the issuance of shares upon exercise of options
granted, under any stock option plan heretofore or hereinafter duly adopted by
the Company, (ii) shares of Common Stock issuable upon exercise of any currently
outstanding warrants and upon conversion of any currently outstanding
convertible securities of the Company, in each case disclosed in Schedule
--------
2.1(c), (iii) shares of Common Stock issuable upon conversion of Debentures and
- ------
upon exercise of the Warrants in accordance with the Debentures or the Warrants,
respectively, (iv) shares of Common Stock issued as payment of the purchase
price in connection with a Strategic Transaction (as defined below), and (v)
shares of Common Stock issued in connection with a public offering, unless (A)
the Company delivers to the Purchasers a written notice (the "Subsequent
----------
Placement Notice") of its intention to effect such Subsequent Placement, which
- ----------------
Subsequent Placement Notice shall describe in reasonable detail the proposed
terms of such Subsequent Placement, the amount of proceeds intended to be raised
thereunder, the Person with whom such Subsequent Placement shall be effected,
and attached to which shall be a term sheet or similar document relating thereto
and (B) the Purchasers shall not have notified the Company by 5:00 p.m. (New
York City time) on the tenth (10/th/) Trading Day after their receipt of the
Subsequent Placement Notice of their willingness to cause the Purchasers to
provide (or to cause its sole designee to provide), subject to completion of
mutually acceptable documentation, financing to the Company on the same terms
set forth in the Subsequent Placement Notice. If the Purchasers shall notify
the Company of their intention to enter into negotiations, the closing of such
financing shall occur at a date no later than thirty (30) Trading Days after the
Company's receipt of such notification. If the Purchasers shall fail to notify
the Company of their intention to enter into such negotiations within such time
period, the Company may effect the Subsequent Placement substantially upon the
terms and to the Persons (or Affiliates of such Persons) set forth in the
Subsequent Placement Notice; provided, that the Company shall provide the
--------
Purchasers with a second Subsequent Placement Notice, and the Purchasers shall
again have the right of first refusal set forth above in this paragraph (a), if
the Subsequent Placement subject to
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<PAGE>
the initial Subsequent Placement Notice shall not have been consummated for any
reason on the terms set forth in such Subsequent Placement Notice within thirty
(30) Trading Days after the date of the initial Subsequent Placement Notice with
the Person (or an Affiliate of such Person) identified in the Subsequent
Placement Notice. If the Purchasers shall indicate a willingness to provide
financing in excess of the amount set forth in the Subsequent Placement Notice,
then each Purchaser shall be entitled to provide financing pursuant to such
Subsequent Placement Notice up to an amount equal to such Purchaser's pro-rata
portion of the aggregate principal amount of Debentures purchased by the
Purchasers under this Agreement, but the Company shall not be required to accept
financing from the Purchasers in an amount in excess of the amount set forth in
the Subsequent Placement Notice. For purposes of this Section 3.10, a "Strategic
---------
Transaction" shall mean a transaction or relationship in which the Company
- -----------
issues Common Stock to an entity which is, itself or through its subsidiaries,
an operating company in a business related to the business of the Company and in
which the Company receives material benefits in addition to the investment of
funds, but shall not include a transaction in which the Company is issuing
securities primarily for the purpose of raising capital.
(b) Except for (x) Underlying Shares, (y) other "Registrable
Securities" (as such term is defined in the Registration Rights Agreement) to be
registered, and securities of the Company permitted pursuant to Schedule 6(b) of
the Registration's Rights Agreement to be registered, in the Underlying Shares
Registration Statement in accordance with the Registration Rights Agreement, and
(z) Common Stock permitted to be issued pursuant to paragraph (a)(i), (ii) and
(iii) of Section 3.10(a), the Company shall not, for a period of not less than
90 Trading Days after the date that the Underlying Shares Registration Statement
is declared effective by the Commission, without the prior written consent of
the Purchasers (i) issue or sell any of its or any of its Affiliates' equity or
equity-equivalent securities pursuant to Regulation S promulgated under the
Securities Act, or (ii) register any securities of the Company. Any days that a
Purchaser is not permitted to sell Underlying Shares under the Underlying Shares
Registration Statement shall be added to such 90 Trading Day period for the
purposes of (i) and (ii) above.
3.11 Certain Securities Laws Disclosures; Publicity. The Company shall:
----------------------------------------------
(i) issue a press release acceptable to the Purchasers disclosing the
transactions contemplated hereby on the Closing Date, (ii) file with the
Commission a Report on Form 8-K disclosing the transactions contemplated hereby
within ten (10) Business Days after the Closing Date, and (iii) timely file with
the Commission a Form D promulgated under the Securities Act as required under
Regulation D promulgated under the Securities Act and provide a copy thereof to
the Purchasers promptly after the filing thereof. The Company shall, no less
than two (2) Business Days prior to the filing of any disclosure required by
clauses (ii) and (iii) above, provide a copy thereof to the Purchasers. No
such filing or disclosure may be made that mentions the Purchasers by name
without the prior consent of the Purchasers. Such filings shall be subject to
Section 4.11 hereof.
3.12 Transfer of Intellectual Property Rights. Except in connection with
----------------------------------------
the sale of all or substantially all of the assets of the Company or a bona fide
licensing arrangement in the ordinary course of the Company's business, the
Company shall not transfer, sell or otherwise dispose of any Intellectual
Property Rights, or allow any of the Intellectual Property Rights to become
subject to any Liens, or fail to renew such Intellectual Property Rights (if
renewable and it would otherwise lapse if not renewed), without the prior
written consent of the Purchasers.
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<PAGE>
3.13 Use of Proceeds. The Company shall use the net proceeds from the
---------------
sale of the Debentures hereunder for working capital purposes only and not for
the satisfaction of any Company debt (which, for such purposes, shall include
accounts payable).
3.14 Reimbursement. If any Purchaser, other than by reason of its gross
-------------
negligence or willful misconduct, becomes involved in any capacity in any
action, proceeding or investigation brought by or against any Person, including
stockholders of the Company, in connection with or as a result of the
consummation of the transactions contemplated by Transaction Documents, the
Company will reimburse such Purchaser for its reasonable legal and other
expenses (including the cost of any investigation and preparation) incurred in
connection therewith, as such expenses are incurred. In addition, other than
with respect to any matter in which a Purchaser is a named party, the Company
will pay such Purchaser the charges, as reasonably determined by such Purchaser,
for the time of any officers or employees of such Purchaser devoted to appearing
and preparing to appear as witnesses, assisting in preparation for hearings,
trials or pretrial matters, or otherwise with respect to inquiries, hearings,
trials, and other proceedings relating to the subject matter of this Agreement.
The reimbursement obligations of the Company under this paragraph shall be in
addition to any liability which the Company may otherwise have, shall extend
upon the same terms and conditions to any Affiliates of the Purchasers who are
actually named in such action, proceeding or investigation, and partners,
directors, agents, employees and controlling persons (if any), as the case may
be, of the Purchasers and any such Affiliate, and shall be binding upon and
inure to the benefit of any successors, assigns, heirs and personal
representatives of the Company, the Purchasers and any such Affiliate and any
such Person. The Company also agrees that neither the Purchasers nor any such
Affiliates, partners, directors, agents, employees or controlling persons shall
have any liability to the Company or any Person asserting claims on behalf of or
in right of the Company in connection with or as a result of the consummation of
the Transaction Documents except to the extent that any losses, claims, damages,
liabilities or expenses incurred by the Company result from the gross negligence
or willful misconduct of the applicable Purchaser or entity in connection with
the transactions contemplated by this Agreement.
3.15 Limitations on Short Sales. Each Purchaser agrees that it will not
--------------------------
enter into any Short Sales (as hereinafter defined) from the period commencing
on the Closing Date and ending on the date which is which is earlier to occur of
one year after the date hereof or such date which such Purchaser no longer
beneficially owns any Debentures. For purposes of this Section 3.15, a "Short
-----
Sale" by a Purchaser shall mean a sale of Common Stock by such Purchaser that is
- ----
marked as a short sale and that is made at a time when there is no equivalent
offsetting long position in Common Stock held by the Purchaser. For purposes of
determining whether there is an equivalent offsetting long position in Common
Stock held by a Purchaser, Underlying Shares that have not yet been converted
pursuant to the Debenture shall be deemed to be held long by the Purchaser,
Warrant Shares that have not yet been exercised pursuant to the Warrant shall be
deemed to be held long by the Purchaser, and the number of Underlying Shares and
Warrant Shares then held by a Purchaser on any particular date of computation
shall be equal to (i) with respect to Underlying Shares, such number of
Underlying Shares issuable pursuant to the Debenture assuming such holder
converted all the outstanding principal amount of the Debenture on such date and
(ii) with respect to Warrant Shares, the number of Warrant Shares issuable
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<PAGE>
pursuant to the Warrant assuming such holder exercised all of the outstanding
Warrant Shares on such date.
ARTICLE IV
MISCELLANEOUS
4.1 Fees and Expenses. At the Closing, the Company shall reimburse
-----------------
the Purchasers for their legal fees and expenses incurred in connection with the
preparation and negotiation of the Transaction Documents by paying to Robinson
Silverman $25,000 for the preparation and negotiation of the Transaction
Documents. Other than the amounts contemplated in the immediately preceding
sentence, and except as otherwise set forth in the Registration Rights
Agreement, each party shall pay the fees and expenses of its advisers, counsel,
accountants and other experts, if any, and all other expenses incurred by such
party incident to the negotiation, preparation, execution, delivery and
performance of this Agreement. The Company shall pay all stamp and other taxes
and duties levied in connection with the issuance of the Securities.
4.2 Entire Agreement; Amendments. The Transaction Documents,
----------------------------
together with the Exhibits and Schedules thereto, and the Transfer Agent
Instructions contain the entire understanding of the parties with respect to the
subject matter hereof and supersede all prior agreements and understandings,
oral or written, with respect to such matters, which the parties acknowledge
have been merged into such documents, exhibits and schedules.
4.3 Notices. Any and all notices or other communications or
-------
deliveries required or permitted to be provided hereunder shall be in writing
and shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section prior to 6:30 p.m. (New
York City time) on a Business Day, (ii) the Business Day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Agreement later than 6:30 p.m. (New
York City time) on any date and earlier than 11:59 p.m. (New York City time) on
such date, (iii) the Business Day following the date of mailing, if sent by
nationally recognized overnight courier service, or (iv) upon actual receipt by
the party to whom such notice is required to be given. The address for such
notices and communications shall be as follows:
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<PAGE>
If to the Company: Sonic Foundry, Inc.
754 Williamson Street
Madison, WI 53703
Facsimile No.: (608) 256-6689
Attn: Chief Financial Officer
With copies to: McBreen & Kopko
20 N. Wacker Drive, Suite 2520
Chicago, IL 60606
Facsimile No.: (312)332-2657
Attn: James R. Stern, Esq.
If to a Purchaser: To the address set forth under such Purchaser's
name on the signature pages hereto.
or such other address as may be designated in writing hereafter, in the same
manner, by such Person.
4.4 Amendments; Waivers. No provision of this Agreement may be
-------------------
waived or amended except in a written instrument signed, in the case of an
amendment, by the Company and each of the Purchasers or, in the case of a
waiver, by the party against whom enforcement of any such waiver is sought. No
waiver of any default with respect to any provision, condition or requirement of
this Agreement shall be deemed to be a continuing waiver in the future or a
waiver of any other provision, condition or requirement hereof, nor shall any
delay or omission of either party to exercise any right hereunder in any manner
impair the exercise of any such right accruing to it thereafter.
4.5 Headings. The headings herein are for convenience only, do not
--------
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof.
4.6 Successors and Assigns. This Agreement shall be binding upon
----------------------
and inure to the benefit of the parties and their successors and permitted
assigns. The Company may not assign this Agreement or any rights or obligations
hereunder without the prior written consent of the Purchasers. Except as set
forth in Section 3.1(a), the Purchasers may not assign this Agreement or any of
the rights or obligations hereunder without the consent of the Company. This
provision shall not limit any Purchaser's right to transfer securities or
transfer or assign rights under the Registration Rights Agreement.
4.7 No Third-Party Beneficiaries. This Agreement is intended for the
----------------------------
benefit of the parties hereto and their respective successors and permitted
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other Person.
4.8 Governing Law. The corporate laws of the State of Maryland
-------------
shall govern all issues concerning the relative rights of the Company and its
stockholders. All other questions concerning the construction, validity,
enforcement and interpretation of this Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the State of New
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<PAGE>
York, without regard to the principles of conflicts of law thereof. 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 (including with respect to
the enforcement of the any of the Transaction Documents), 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 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 via registered or
certified mail or overnight delivery (with evidence of delivery) to such party
at the address in effect for 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.
4.9 Survival. The representations, warranties, agreements and
--------
covenants contained herein shall survive the Closing and the delivery and
conversion or exercise (as the case may be) of the Debentures and the Warrants.
4.10 Execution. This Agreement may be executed in two or more
---------
counterparts, all of which when taken together shall be considered one and the
same agreement and shall become effective when counterparts have been signed by
each party and delivered to the other party, it being understood that both
parties need not sign the same counterpart. In the event that any signature is
delivered by facsimile transmission, such signature shall create a valid and
binding obligation of the party executing (or on whose behalf such signature is
executed) the same with the same force and effect as if such facsimile signature
page were an original thereof.
4.11 Publicity. The Company and the Purchasers shall consult with
---------
each other in issuing any press releases or otherwise making public statements
or filings and other communications with the Commission or any regulatory agency
or stock market or trading facility with respect to the transactions
contemplated hereby and neither party shall issue any such press release or
otherwise make any such public statement, filings or other communications
without the prior written consent of the other, which consent shall not be
unreasonably withheld or delayed, except that no prior consent shall be required
if such disclosure is required by law, in which such case the disclosing party
shall provide the other party with prior notice of such public statement, filing
or other communication. Notwithstanding the foregoing and except pursuant to the
Underlying Shares Registration Statement, the Company shall not publicly
disclose the names of the Purchasers, or include the names of the Purchasers in
any filing with the Commission, or any regulatory agency, trading facility or
stock market without the prior written consent of the Purchasers, except to the
extent such disclosure (but not any disclosure as to the controlling Persons
thereof) is required by law, in which case the Company shall provide the
Purchasers with prior notice of such disclosure.
4.12 Severability. In case any one or more of the provisions of
------------
this Agreement shall be invalid or unenforceable in any respect, the validity
and enforceability of the remaining terms and provisions of this Agreement shall
not in any way be affecting or impaired thereby and the parties will attempt to
agree upon a valid and enforceable provision which shall be a
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<PAGE>
reasonable substitute therefor, and upon so agreeing, shall incorporate such
substitute provision in this Agreement.
4.13 Remedies. In addition to being entitled to exercise all
--------
rights provided herein or granted by law, including recovery of damages, each of
the Purchasers will be entitled to specific performance of the obligations of
the Company under the Transaction Documents. The Company and each of the
Purchasers agree that monetary damages may not be adequate compensation for any
loss incurred by reason of any breach of its obligations described in the
foregoing sentence and hereby agrees to waive in any action for specific
performance of any such obligation the defense that a remedy at law would be
adequate.
4.14 Independent Nature of Purchasers' Obligations and Rights. The
--------------------------------------------------------
obligations of each Purchaser hereunder is several and not joint with the
obligations of the other Purchaser hereunder, and neither Purchaser shall be
responsible in any way for the performance of the obligations of the other
Purchaser hereunder. Nothing contained herein or in any other agreement or
document delivered at any closing, and no action taken by any Purchaser pursuant
hereto or thereto, shall be deemed to constitute the Purchasers as a
partnership, an association, a joint venture or any other kind of entity, or
create a presumption that the Purchasers are in any way acting in concert with
respect to such obligations or the transactions contemplated by this Agreement.
Each Purchaser shall be entitled to protect and enforce its rights, including
without limitation the rights arising out of this Agreement or out of the other
Transaction Documents, and it shall not be necessary for the other Purchaser to
be joined as an additional party in any proceeding for such purpose.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGES FOLLOWS]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Convertible
Debenture Purchase Agreement to be duly executed by their respective authorized
signatories as of the date first indicated above.
SONIC FOUNDRY, INC.
By:_____________________________________
Name:
Title:
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOR PURCHASER FOLLOWS]
<PAGE>
STRONG RIVER INVESTMENTS, INC.
By:_____________________________________
Name:
Title:
Debentures Purchase Price: $3,000,000
Number of Shares underlying Warrant: 58,366
Address for Notice:
Strong River Investments, Inc.
c/o Cavallo Capital Corp.
630 Fifth Avenue, Suite 2000
New York, NY 10111
Facsimile No.: (212) 332-3256
Attn: Avi Vigder
With copies to: Robinson Silverman Pearce Aronsohn &
Berman LLP
1290 Avenue of the Americas
New York, NY 10104
Facsimile No.: (212) 541-4630 and (212) 541-1432
Attn: Kenneth L. Henderson, Esq.
Eric L. Cohen, Esq.
<PAGE>
MONTROSE INVESTMENTS L.P.
By:_____________________________________
Name:
Title:
Debentures Purchase Price: $2,000,000
Number of Shares underlying Warrant: 38,910
Address for Notice:
Montrose Investments, Ltd.
300 Crescent Court, Suite 700
Dallas, TX 75201
Facsimile: (214) 758-1221
Attn: Will Rose
With copies to:
Robinson Silverman Pearce Aronsohn &
Berman LLP
1290 Avenue of the Americas
New York, NY 10104
Facsimile No.: (212) 541-4630 and (212) 541-1432
Attn: Kenneth L. Henderson, Esq.
Eric L. Cohen, Esq.
<PAGE>
_____________________________________________________________________________
CONVERTIBLE DEBENTURE PURCHASE AGREEMENT
Among
SONIC FOUNDRY, INC.,
and
THE INVESTORS SIGNATORY HERETO
Dated as of September 13, 1999
_____________________________________________________________________________
<PAGE>
EXHIBIT A
---------
NEITHER THIS DEBENTURE NOR THE SECURITIES INTO WHICH THIS DEBENTURE IS
CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS.
No. 9 $500,000
SONIC FOUNDRY, INC.
7.5% CONVERTIBLE DEBENTURE
DUE SEPTEMBER 13, 2002
THIS DEBENTURE is one of a series of duly authorized and issued debentures
of Sonic Foundry, Inc., a Maryland corporation, having a principal place of
business at 754 Williamson Street, Madison, WI 53703 (the "Company"), designated
-------
as its 7.5% Convertible Debentures, due September 13, 2002, in the aggregate
principal amount of Five Million Dollars ($5,000,000) (the "Debentures").
----------
FOR VALUE RECEIVED, the Company promises to pay to Montrose Investments
L.P., or its registered assigns (the "Holder"), the principal sum of Five
------
Hundred Thousand Dollars ($500,000), on September 13, 2002 or such earlier date
as the Debentures are required or permitted to be repaid as provided hereunder
(such date, the "Maturity Date") and to pay on the Maturity Date interest to the
-------------
Holder on the aggregate unconverted and then outstanding principal amount of
this Debenture, at the rate of 7.5% per annum. Interest shall accrue daily
commencing on the Original Issue Date (as defined in Section 7) until payment in
full of the principal sum, together with all accrued and unpaid interest and
other amounts which may become due hereunder, has been made. Interest hereunder
will be paid to the Person (as defined in Section 7) in whose name this
Debenture is registered on the records of the Company regarding registration and
transfers of Debentures (the "Debenture Register"). All overdue accrued and
------------------
unpaid interest shall entail a late fee at the rate of 15% per annum or such
lesser maximum amount that is permitted to be paid by applicable law (to accrue
daily, from the date such interest is due hereunder through and including the
date of payment), payable in cash.
This Debenture is subject to the following additional provisions:
Section 1. This Debenture is exchangeable for an equal aggregate
----------
principal amount of Debentures of different authorized denominations, as
requested by the Holder
<PAGE>
surrendering the same. No service charge will be made for such registration of
transfer or exchange.
Section 2. This Debenture has been issued subject to certain
----------
investment representations of the original Holder set forth in the Purchase
Agreement (as defined in Section 7) and may be transferred or exchanged only in
compliance with the Purchase Agreement. Prior to due presentment to the Company
for transfer of this Debenture, the Company and any agent of the Company may
treat the Person (as defined in Section 7), in whose name this Debenture is duly
registered on the Debenture Register as the owner hereof for the purpose of
receiving payment as herein provided and for all other purposes, whether or not
this Debenture is overdue, and neither the Company nor any such agent shall be
affected by notice to the contrary.
Section 3. Events of Default.
---------- -----------------
(a) "Event of Default", wherever used herein, means any one of the
----------------
following events (whatever the reason and whether it shall be voluntary or
involuntary or effected by operation of law or pursuant to any judgment, decree
or order of any court, or any order, rule or regulation of any administrative or
governmental body):
(i) any default in the payment of the principal of, interest on or
liquidated damages in respect of, any Debentures, free of any claim of
subordination, as and when the same shall become due and payable (whether
on a Conversion Date (as defined herein) or the Maturity Date or by
acceleration or otherwise);
(ii) the Company shall fail to observe or perform any other
covenant, agreement or warranty contained in, or otherwise commit any
breach of the Purchase Agreement, the Registration Rights Agreement (as
defined in Section 7) the Common Stock purchase Warrants delivered to the
original Holder pursuant to the Purchase Agreement or any Debentures, and
such failure or breach shall not have been remedied within five (5) days
after the date on which notice of such failure or breach shall have been
given;
(iii) the Company or any of its subsidiaries shall commence a case
under any applicable bankruptcy or insolvency laws as now or hereafter in
effect or any successor thereto, or the Company commences any other
proceeding under any reorganization, arrangement, adjustment of debt,
relief of debtors, dissolution, insolvency or liquidation or similar law of
any jurisdiction whether now or hereafter in effect relating to the Company
or any subsidiary thereof or there is commenced against the Company or any
subsidiary thereof any such bankruptcy, insolvency or other proceeding
which remains undismissed for a period of 60 days; or the Company or any
subsidiary thereof is adjudicated insolvent or bankrupt; or any order of
relief or other order approving any such case or proceeding is entered; or
the Company or any subsidiary thereof suffers any appointment of any
custodian or the like for it or any substantial part of its property which
continues undischarged or unstayed for a period of 60 days; or the Company
or
-29-
<PAGE>
any subsidiary thereof makes a general assignment for the benefit of
creditors; or the Company shall fail to pay, or shall state that it is
unable to pay, or shall be unable to pay, its debts generally as they
become due; or the Company or any subsidiary thereof shall call a meeting
of its creditors with a view to arranging a composition, adjustment or
restructuring of its debts; or the Company or any subsidiary thereof shall
by any act or failure to act indicate its consent to, approval of or
acquiescence in any of the foregoing; or any corporate or other action is
taken by the Company or any subsidiary thereof for the purpose of effecting
any of the foregoing;
(iv) the Company shall default in any of its obligations under any
mortgage, credit agreement or other facility, indenture agreement,
factoring agreement or other instrument under which there may be issued, or
by which there may be secured or evidenced any indebtedness for borrowed
money or money due under any long term leasing or factoring arrangement of
the Company in an amount exceeding one hundred thousand dollars ($100,000),
whether such indebtedness now exists or shall hereafter be created and such
default shall result in such indebtedness becoming or being declared due
and payable prior to the date on which it would otherwise become due and
payable;
(v) the Common Stock shall either be delisted from the American
Stock Exchange ("AMEX") or suspended from trading on the AMEX, without
----
being relisted thereon or on the New York Stock Exchange, Nasdaq National
Market or the Nasdaq SmallCap Market (each, a "Subsequent Market") or
-----------------
having such suspension lifted and/or resuming trading for three (3)
consecutive Trading Days (as defined in Section 7);
(vi) the Company shall be a party to any Change of Control
Transaction (as defined in Section 7), shall agree to sell or dispose all
or in excess of 33% of its assets in one or more transactions (whether or
not such sale would constitute a Change of Control Transaction), or shall
redeem or repurchase more than 50,000 shares of Common Stock or other
equity securities of the Company (other than redemptions of Underlying
Shares (as defined in Section 7));
(vii) an Underlying Shares Registration Statement (as defined in
Section 7) shall not have been declared effective by the Commission (as
defined in Section 7) on or prior to the 150/th/ day after the Original
Issue Date;
(viii) if, during the Effectiveness Period (as defined in the
Registration Rights Agreement), the effectiveness of the Underlying Shares
Registration Statement lapses for any reason for more than an aggregate of
five (5) Trading Days (which need not be consecutive days), or the Holder
shall not be permitted to resell Registrable Securities (as defined in the
Registration Rights Agreement) under the Underlying Shares Registration
Statement for more than an aggregate of five (5) Trading Days (which need
not be consecutive Trading Days);
-30-
<PAGE>
(ix) an Event (as hereinafter defined) shall not have been cured to
the satisfaction of the Holder prior to the expiration of thirty (30) days
from the Event Date (as defined below) relating thereto (other than an
Event resulting from a failure of an Underlying Shares Registration
Statement to be declared effective by the Commission on or prior to the
180/th/ day after the Original Issue Date, which shall be covered by
Section 3(a)(vii));
(xi) the Company shall fail for any reason to deliver certificates
to a Holder prior to the twelfth (12th) day after a Conversion Date
pursuant to and in accordance with Section 4(b) or the Company shall
provide notice to the Holder, including by way of public announcement, at
any time, of its intention not to comply with requests for conversions of
any Debentures in accordance with the terms hereof; or
(xii) the Company shall fail for any reason to deliver the payment in
cash pursuant to a Buy-In (as defined herein) within seven (7) days after
notice is deemed delivered hereunder.
(b) During the time that any portion of this Debenture remains
outstanding, if any Event of Default occurs and is continuing, the full
principal amount of this Debenture (and, at the Holder's option, all other
Debentures then held by such Holder), together with interest and other amounts
owing in respect thereof, to the date of acceleration shall become, immediately
due and payable in cash. The aggregate amount payable upon an Event of Default
shall be equal to the sum of (i) the Mandatory Prepayment Amount (as defined in
Section 7) plus (ii) the product of (A) the number of Underlying Shares issued
in respect of conversions hereunder or as payment of interest hereunder, in
either case, within thirty (30) days of the date of a declaration of an Event of
Default and then held by the Holder and (B) the Per Share Market Value (as
defined in Section 7) on the date prepayment is due or the date the full
prepayment price is paid, whichever is greater. Interest shall accrue on the
prepayment amount hereunder from the seventh (7/th/) day after such amount is
due (being the date of an Event of Default) through the date of prepayment in
full thereof at the rate of 15% per annum or such lesser maximum amount that is
permitted to be paid by applicable law, to accrue daily from the date such
payment is due hereunder through and including the date of payment. All
Debentures and Underlying Shares for which the full prepayment price hereunder
shall have been paid in accordance herewith shall be promptly surrendered to or
as directed by the Company. The Holder need not provide and the Company hereby
waives any presentment, demand, protest or other notice of any kind, and the
Holder may immediately and without expiration of any grace period enforce any
and all of its rights and remedies hereunder and all other remedies available to
it under applicable law. Such declaration may be rescinded and annulled by
Holder at any time prior to payment hereunder. No such rescission or annulment
shall affect any subsequent Event of Default or impair any right consequent
thereon.
Section 4. Conversion.
---------- ----------
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<PAGE>
(a) (i) Conversion at Option of Holder. (A) This Debenture shall be
------------------------------
convertible into shares of Common Stock at the option of the Holder, in whole
or in part at any time and from time to time, after the Original Issue Date
(subject to the limitations on conversion set forth in Section 4(a)(iii)
hereof). The number of shares of Common Stock issuable upon a conversion
hereunder shall be determined by adding the sum of (i) the quotient obtained by
dividing (x) the outstanding principal amount of this Debenture to be converted
and (y) the Conversion Price (as defined herein), and (ii) the amount equal to
the product of (x) the outstanding principal amount of this Debenture to be
converted and (y)(I) the product of (1) the quotient obtained by dividing 7.5%
by 365 and (2) the number of days for which such principal amount was
outstanding, divided by (II) the Conversion Price on the Conversion Date.
(B) Notwithstanding anything to the contrary contained herein,
if on any Conversion Date:
(1) the number of shares of Common Stock at the time authorized,
unissued and unreserved for all purposes, or held as treasury stock, is
insufficient to pay interest hereunder in shares of Common Stock;
(2) after the Interest Effectiveness Date (as defined in Section
7) such shares of Common Stock (x) are not registered for resale pursuant
to an effective Underlying Shares Registration Statement and (y) may not be
sold without volume restrictions pursuant to Rule 144(k) promulgated under
the Securities Act (as defined in Section 7), as determined by counsel to
the Company pursuant to a written opinion letter, addressed to the
Company's transfer agent in the form and substance acceptable to the
applicable Holder and such transfer agent (if the shares of Common Stock
are permitted by the Holder to be delivered under this clause (2) prior to
the Effectiveness Date (as defined in the Registration Rights Agreement)
and thereafter an Underlying Shares Registration Statement shall be
declared effective by the Commission, the Company shall, within three (3)
Trading Days after the date of such declaration of effectiveness, exchange
such shares for shares of Common Stock that are free of restrictive
legends of any kind);
(3) the Common Stock is not listed or quoted on the AMEX or on a
Subsequent Market;
(4) the Company has failed to timely satisfy its conversion
obligations hereunder; or
(5) the issuance of such shares of Common Stock would result in
a violation of Sections 4(a)(iii)(A) and (B),
then, at the option of the Holder, the Company, in lieu of
delivering shares of Common Stock pursuant to Section 4(a)(i)(A)(ii), shall
deliver, within three (3) Trading Days of each applicable Conversion Date, an
amount of cash equal to the product of (a) the
-32-
<PAGE>
outstanding principal amount of the Debentures to be converted on such
Conversion Date and (b) the product of (x) the quotient obtained by dividing
7.5% by 365 and (y) the number of days for which such principal amount was
outstanding.
(C) The Holder shall effect conversions by surrendering the
Debentures (or such portions thereof) to be converted, together with the form of
conversion notice attached hereto as Exhibit A (a "Conversion Notice") to the
--------- -----------------
Company. Each Conversion Notice shall specify the principal amount of Debentures
to be converted and the date on which such conversion is to be effected, which
date may not be prior to the date such Conversion Notice is deemed to have been
delivered hereunder (a "Conversion Date"). If no Conversion Date is specified in
---------------
a Conversion Notice, the Conversion Date shall be the date that such Conversion
Notice is deemed delivered hereunder. Subject to Section 4(b), each Conversion
Notice, once given, shall be irrevocable. If the Holder is converting less than
all of the principal amount represented by the Debenture(s) tendered by the
Holder with the Conversion Notice, or if a conversion hereunder cannot be
effected in full for any reason, the Company shall honor such conversion to the
extent permissible hereunder and shall promptly deliver to such Holder (in the
manner and within the time set forth in Section 4(b)) a new Debenture for such
principal amount as has not been converted.
(ii) [INTENTIONALLY OMITTED].
(iii) Certain Conversion Restrictions.
--------------------------------
(A)(1) A Holder may not convert Debentures or receive shares
of Common Stock as payment of interest hereunder to the extent such conversion
or receipt of such interest payment would result in the Holder, together with
any affiliate thereof, beneficially owning (as determined in accordance with
Section 13(d) of the Exchange Act (as defined in Section 7) and the rules
promulgated thereunder) in excess of 4.999% of the then issued and outstanding
shares of Common Stock, including shares issuable upon conversion of, and
payment of interest on, the Debentures held by such Holder after application of
this Section. Since the Holder will not be obligated to report to the Company
the number of shares of Common Stock it may hold at the time of a conversion
hereunder, unless the conversion at issue would result in the issuance of shares
of Common Stock in excess of 4.999% of the then outstanding shares of Common
Stock without regard to any other shares which may be beneficially owned by the
Holder or an affiliate thereof, the Holder shall have the authority and
obligation to determine whether the restriction contained in this Section will
limit any particular conversion hereunder and to the extent that the Holder
determines that the limitation contained in this Section applies, the
determination of which portion of the principal amount of Debentures are
convertible shall be the responsibility and obligation of the Holder. If the
Holder has delivered a Conversion Notice for a principal amount of Debentures
that would result in the issuance in excess of the permitted amount hereunder,
the Company shall notify the Holder of this fact and shall honor the conversion
for the maximum principal amount permitted to be converted on such Conversion
Date in accordance with the periods described un Section 4(b) and, at the option
of the Holder, either retain any principal amount tendered for conversion in
-33-
<PAGE>
excess of the permitted amount hereunder, the Company shall notify the Holder of
this fact and shall honor the conversion for the maximum principal amount
permitted to be converted on such Conversion Date in accordance with the periods
described un Section 4(b) and, at the option of the Holder, either retain any
principal amount tendered for conversion in excess of the permitted amount
hereunder for future conversions or return such excess principal amount to the
Holder. The provisions of this Section may be waived by a Holder (but only as to
itself and not to any other Holder) upon not less than 75 days prior notice to
the Company. Other Holders shall be unaffected by any such waiver.
(2) A Holder may not convert Debentures or receive shares of
Common Stock as payment of interest hereunder to the extent such conversion or
receipt of such interest payment would result in the Holder, together with any
affiliate thereof, beneficially owning (as determined in accordance with Section
13(d) of the Exchange Act and the rules promulgated thereunder) in excess of
9.999% of the then issued and outstanding shares of Common Stock, including
shares issuable upon conversion of, and payment of interest on, the Debentures
held by such Holder after application of this Section. Since the Holder will not
be obligated to report to the Company the number of shares of Common Stock it
may hold at the time of a conversion hereunder, unless the conversion at issue
would result in the issuance of shares of Common Stock in excess of 9.999% of
the then outstanding shares of Common Stock without regard to any other shares
which may be beneficially owned by the Holder or an affiliate thereof, the
Holder shall have the authority and obligation to determine whether the
restriction contained in this Section will limit any particular conversion
hereunder and to the extent that the Holder determines that the limitation
contained in this Section applies, the determination of which portion of the
principal amount of Debentures are convertible shall be the responsibility and
obligation of the Holder. If the Holder has delivered a Conversion Notice for a
principal amount of Debentures that would result in the issuance of in excess of
the permitted amount hereunder, the Company shall notify the Holder of this fact
and shall honor the conversion for the maximum principal amount permitted to be
converted on such Conversion Date in accordance with the periods described un
Section 4(b) and, at the option of the Holder, either retain any principal
amount tendered for conversion in excess of the permitted amount hereunder for
future conversions or return such excess principal amount to the Holder. The
provisions of this Section may be waived by a Holder (but only as to itself and
not to any other Holder) upon not less than 75 days prior notice to the Company.
Other Holders shall be unaffected by any such waiver.
(B) If the Common Stock is then listed for trading on the AMEX and the
Company has not obtained the Shareholder Approval (as defined below), then the
Company may not issue in excess of 1,298,800 shares of Common Stock upon
conversions of Debentures or as payment of interest thereon in shares of Common
Stock, which number shall be subject to adjustment pursuant to Sections
4(c)(ii), (iii), (iv), (v) and (vi) (such number of shares, the "Issuable
--------
Maximum"). The Issuable Maximum equals 19.999% of the number of shares of
- -------
Common Stock outstanding immediately prior to the closing of transactions set
forth in the Purchase Agreement. If on any Conversion Date (A) the Common Stock
is listed for trading on the AMEX, (B) the Conversion Price then in effect is
such that the aggregate number of shares of Common Stock that would then be
issuable upon conversion in full of all then outstanding Debentures and as
payment of interest thereon in shares of Common Stock, together with any shares
of Common Stock previously issued upon conversion of Debentures and as payment
of interest thereon, would exceed Issuable Maximum, and (C) the Company shall
not have
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<PAGE>
previously obtained the vote of shareholders (the "Shareholder Approval"), if
--------------------
any, as may be required by the applicable rules and regulations of the American
Stock Exchange (or any successor entity) applicable to approve the issuance of
shares of Common Stock in excess of the Issuable Maximum pursuant to the terms
hereof, then the Company shall issue to the Holder so requesting a conversion a
number of shares of Common Stock equal to the Issuable Maximum and, with respect
to the remainder of the principal amount of Debentures then held by such Holder
for which a conversion in accordance with the Conversion Price would result in
an issuance of shares of Common Stock in excess of the Issuable Maximum (the
"Excess Principal"), the converting Holder shall have the option to require the
----------------
Company to either (1) use its best efforts to obtain the Shareholder Approval
applicable to such issuance as soon as is possible, but in any event not later
than the 75th day after such request, or (2) pay cash to the converting Holder
in an amount equal to the Mandatory Prepayment Amount for the Excess Principal.
If the converting Holder shall have elected the first option pursuant to the
immediately preceding sentence and the Company shall have failed to obtain the
Shareholder Approval on or prior to the 75th day after such request, then within
three (3) days of such 75th day, the Company shall pay cash to the converting
Holder an amount equal to the Mandatory Prepayment Amount for the Excess
Principal. If the Company fails to pay the Mandatory Prepayment Amount in full
pursuant to this Section within seven (7) days of the date payable, the Company
will pay interest thereon at a rate of 15% per annum (or such lesser maximum
amount that is permitted to be paid by applicable law) to the converting Holder,
accruing daily from the Conversion Date until such amount, plus all such
interest thereon, is paid in full.
(b) (i) Not later than three (3) Trading Days after any Conversion
Date, the Company will deliver to the Holder (i) a certificate or certificates
which shall be free of restrictive legends and trading restrictions (other than
those required by Section 3.1(b) of the Purchase Agreement) representing the
number of shares of Common Stock being acquired upon the conversion of
Debentures (subject to the limitations set forth in Section 4(a)(iii) hereof),
(ii) Debentures in a principal amount equal to the principal amount of
Debentures not converted, and (iii) a bank check in the amount of accrued and
unpaid interest (if the Company is required to pay accrued interest in cash);
provided, that the Company shall not be obligated to issue certificates
- --------
evidencing the shares of Common Stock issuable upon conversion of the principal
amount of Debentures until Debentures are delivered for conversion to the
Company, or the Holder notifies the Company that such Debentures have been lost,
stolen or destroyed and provides a bond (or other adequate security) reasonably
satisfactory to the Company to indemnify the Company from any loss incurred by
it in connection therewith. The Company shall, upon request of the Holder, if
available, use its best efforts to deliver any certificate or certificates
required to be delivered by the Company under this Section electronically
through the Depository Trust Corporation or another established clearing
corporation performing similar functions. If in the case of any Conversion
Notice such certificate or certificates are not delivered to or as directed by
the applicable Holder by the third (3/rd/) Trading Day after a Conversion Date,
the Holder shall be entitled by written notice to the Company at any time on or
before its receipt of such certificate or certificates thereafter, to rescind
such conversion, in which event the Company shall immediately return the
certificates representing the principal amount of Debentures tendered for
conversion.
-35-
<PAGE>
(ii) If the Company fails to deliver to the Holder such certificate
or certificates pursuant to Section 4(b)(i) by the fifth (5/th/) Trading Day
after the Conversion Date, the Company shall pay to such Holder, in cash, as
liquidated damages and not as a penalty, $5,000 for each Trading Day after such
fifth (5/th/) Trading Day until such certificates are delivered. Nothing herein
shall limit a Holder's right to pursue actual damages or declare an Event of
Default pursuant to Section 3 herein for the Company's failure to deliver
certificates representing shares of Common Stock upon conversion within the
period specified herein and such Holder shall have the right to pursue all
remedies available to it at law or in equity including, without limitation, a
decree of specific performance and/or injunctive relief. The exercise of any
such rights shall not prohibit the Holders from seeking to enforce damages
pursuant to any other Section hereof or under applicable law. Further, if the
Company shall not have delivered any cash due in respect of conversions of
Debentures or as payment of interest thereon by the fifth (5/th/) Trading Day
after the Conversion Date, the Holder may, by notice to the Company, require the
Company to issue shares of Common Stock pursuant to Section 4(c), except that
for such purpose the Conversion Price applicable thereto shall be the lesser of
the Conversion Price on the Conversion Date and the Conversion Price on the date
of such Holder demand. Any such shares will be subject to the provision of this
Section.
(iii) In addition to any other rights available to the Holder, if the
Company fails to deliver to the Holder such certificate or certificates pursuant
to Section 4(b)(i) by the fifth (5/th/) Trading Day after the Conversion Date,
and if after such fifth (5/th/) Trading Day the Holder purchases (in an open
market transaction or otherwise) Common Stock to deliver in satisfaction of a
sale by such Holder of the Underlying Shares which the Holder anticipated
receiving upon such conversion (a "Buy-In"), then the Company shall (A) pay in
------
cash to the Holder (in addition to any remedies available to or elected by the
Holder) the amount by which (x) the Holder's total purchase price (including
brokerage commissions, if any) for the Common Stock so purchased exceeds (y) the
product of (1) the aggregate number of shares of Common Stock that such Holder
anticipated receiving from the conversion at issue multiplied by (2) the market
price of the Common Stock at the time of the sale giving rise to such purchase
obligation and (B) at the option of the Holder, either reissue Debentures in
principal amount equal to the principal amount of the attempted conversion or
deliver to the Holder the number of shares of Common Stock that would have been
issued had the Company timely complied with its delivery requirements under
Section 4(b)(i). For example, if the Holder purchases Common Stock having a
total purchase price of $11,000 to cover a Buy-In with respect to an attempted
conversion of Debentures with respect to which the market price of the
Underlying Shares on the date of conversion was a total of $10,000 under clause
(A) of the immediately preceding sentence, the Company shall be required to pay
the Holder $1,000. The Holder shall provide the Company written notice
indicating the amounts payable to the Holder in respect of the Buy-In.
Notwithstanding anything contained herein to the contrary, if a Holder requires
the Company to make payment in respect of a Buy-In for the failure to timely
deliver certificates hereunder and the Company timely pays in full such payment,
the Company shall not be required to pay such Holder liquidated damages under
Section 4(b)(ii) in respect of the certificates resulting in such Buy-In.
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<PAGE>
(c) (i) The conversion price in effect on any Conversion Date (the
"Conversion Price") shall be $10.28 (the "Fixed Conversion Price"), provided,
---------------- ---------------------- --------
that, if the Company has declined or failed to prepay in full the aggregate
principal amount of Debentures (plus accrued interest thereon) tendered to the
Company following the exercise by the Holder of a Put Right (as defined in
Section 6) pursuant to a Put Notice (as defined in Section 6), then the
Conversion Price shall, with respect to such aggregate principal amount of
Debentures tendered to the Company following the exercise by the Holder of such
Put Right, on and after the date of such decline or failure to prepay such
amount, be the lesser of (A) the Fixed Conversion Price and (B) the average of
the five (5) lowest Per Share Market Values during the forty (40) Trading Days
immediately preceding the applicable Conversion Date, provided, however, that
-------- -------
such forty (40) Trading Day period shall be extended for the number of Trading
Days during such period in which (A) trading in the Common Stock is suspended by
the AMEX or a Subsequent Market on which the Common Stock is then listed, or (B)
after the date declared effective by the Commission, the Underlying Shares
Registration Statement is not effective, or (C) after the date declared
effective by the Commission, the Prospectus included in the Underlying Shares
Registration Statement may not be used by the Holder for the resale of
Underlying Shares.
If (a) an Underlying Shares Registration Statement is not filed on or
prior to the Filing Date (as defined under the Registration Rights Agreement)
(if the Company files such Underlying Shares Registration Statement without
affording the Holder the opportunity to review and comment on the same as
required by Section 3(a) of the Registration Rights Agreement, the Company shall
not be deemed to have satisfied this clause (a)), or (b) the Company fails to
file with the Commission a request for acceleration in accordance with Rule
12d1-2 promulgated under the Exchange Act, within five (5) days of the date that
the Company is notified (orally or in writing, whichever is earlier) by the
Commission that an Underlying Shares Registration Statement will not be
"reviewed," or not subject to further review, or (c) the Underlying Shares
Registration Statement is not declared effective by the Commission on or prior
to the Effectiveness Date, or (d) such Underlying Shares Registration Statement
is filed with and declared effective by the Commission but thereafter ceases to
be effective as to all Registrable Securities at any time prior to the
expiration of the Effectiveness Period (as defined in the Registration Rights
Agreement), without being succeeded within ten (10) Business Days by an
amendment to such Underlying Shares Registration Statement or by a subsequent
Underlying Shares Registration Statement filed with and declared effective by
the Commission, or (e) the Common Stock shall be delisted or suspended from
trading on the AMEX or on any Subsequent Market for more than three (3) Business
Days (which need not be consecutive days), or (f) the conversion rights of the
Holders are suspended for any reason, or (g) an amendment to the Underlying
Shares Registration Statement is not filed by the Company with the Commission
within ten (10) Business Days of the Commission's notifying the Company that
such amendment is required in order for the Underlying Shares Registration
Statement to be declared effective (any such failure or breach being referred to
as an "Event," and for purposes of clauses (a), (c), (f) the date on which such
-----
Event occurs, or for purposes of clause (b) the date on which such five (5) day
period is exceeded, or for purposes of clauses (d) and (g) the date which such
10 Business Day-period is exceeded, or for purposes of clause (e) the date on
which such three (3) Business Day-period is exceeded, being referred to as
"Event Date"), then the Conversion Price shall be
----------
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<PAGE>
decreased by 2.0% on the Event Date and each monthly anniversary thereof until
the earlier to occur of the second month anniversary after the Event Date and
such time as the applicable Event is cured. Commencing on the second month
anniversary after the Event Date, the Holder shall have the option to either (x)
require further cumulative 2.0% discounts to continue or (y) require the Company
to pay to the Holder 2.0% of the aggregate principal amount of Debentures then
held by such Holder, in cash, as liquidated damages and not as a penalty, on the
first day of each monthly anniversary of the Event Date, until such time as the
applicable Event is cured. Any decrease in the Conversion Price pursuant to this
Section shall remain in effect notwithstanding the fact that the Event causing
such decrease has been subsequently cured and further monthly decreases have
ceased. The provisions of this Section are not exclusive and shall in no way
limit the Company's obligations under the Registration Rights Agreement.
(ii) If the Company, at any time while any Debentures are
outstanding, (a) shall pay a stock dividend or otherwise make a distribution or
distributions on shares of its Common Stock or any other equity or equity
equivalent securities payable in shares of Common Stock, (b) subdivide
outstanding shares of Common Stock into a larger number of shares, (c) combine
(including by way of reverse stock split) outstanding shares of Common Stock
into a smaller number of shares, or (d) issue by reclassification of shares of
the Common Stock any shares of capital stock of the Company, then the Conversion
Price shall be multiplied by a fraction of which the numerator shall be the
number of shares of Common Stock (excluding treasury shares, if any) outstanding
before such event and of which the denominator shall be the number of shares of
Common Stock outstanding after such event. Any adjustment made pursuant to this
Section shall become effective immediately after the record date for the
determination of stockholders entitled to receive such dividend or distribution
and shall become effective immediately after the effective date in the case of a
subdivision, combination or re-classification.
(iii) If the Company, at any time while any Debentures are
outstanding, shall issue rights, options or warrants to all holders of Common
Stock (and not to Holders) entitling them to subscribe for or purchase shares of
Common Stock at a price per share less than the Per Share Market Value at the
record date mentioned below, then the Conversion Price shall be multiplied by a
fraction, of which the denominator shall be the number of shares of the Common
Stock (excluding treasury shares, if any) outstanding on the date of issuance of
such rights or warrants plus the number of additional shares of Common Stock
offered for subscription or purchase, and of which the numerator shall be the
number of shares of the Common Stock (excluding treasury shares, if any)
outstanding on the date of issuance of such rights or warrants plus the number
of shares which the aggregate offering price of the total number of shares so
offered would purchase at such Per Share Market Value. Such adjustment shall be
made whenever such rights or warrants are issued, and shall become effective
immediately after the record date for the determination of stockholders entitled
to receive such rights, options or warrants. However, upon the expiration of
any such right, option or warrant to purchase shares of the Common Stock the
issuance of which resulted in an adjustment in the Conversion Price pursuant to
this Section, if any such right, option or warrant shall expire and shall not
have been exercised, the Conversion Price shall immediately upon such expiration
be
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<PAGE>
recomputed and effective immediately upon such expiration be increased to the
price which it would have been (but reflecting any other adjustments in the
Conversion Price made pursuant to the provisions of this Section after the
issuance of such rights or warrants) had the adjustment of the Conversion Price
made upon the issuance of such rights, options or warrants been made on the
basis of offering for subscription or purchase only that number of shares of the
Common Stock actually purchased upon the exercise of such rights, options or
warrants actually exercised.
(iv) If the Company or any subsidiary thereof, as applicable with
respect to Common Stock Equivalents (as defined below), at any time while
Debentures are outstanding, shall issue shares of Common Stock or rights,
warrants, options or other securities or debt that is convertible into or
exchangeable for shares of Common Stock ("Common Stock Equivalents"), other than
------------------------
(i) issuances pursuant to any grant or exercise of any stock or options which
may hereafter be granted or exercised under any employee benefit plan of the
Company now existing or to be implemented in the future; (ii) shares of Common
Stock issued as payment of the purchase price in connection with a Strategic
Transaction (as defined below), and (iii) warrants issued to Brighton Capital,
Ltd. in connection with this transaction, entitling any Person to acquire shares
of Common Stock at a price per share less than the Conversion Price (if the
holder of the Common Stock or Common Stock Equivalent so issued shall at any
time, whether by operation of purchase price adjustments, reset provisions,
floating conversion, exercise or exchange prices or otherwise, or due to
warrants, options or rights issued in connection with such issuance at a price
less than the prevailing Conversion Price, such issuance shall be deemed to have
occurred for less than the Conversion Price), then in effect, then the
Conversion Price shall be multiplied by a fraction, the numerator of which shall
be the number of shares of Common Stock outstanding immediately prior to the
issuance of such shares of Common Stock or such Common Stock Equivalents plus
the number of shares of Common Stock which the offering price for such shares of
Common Stock or Common Stock Equivalents would purchase at the Conversion Price,
and the denominator of which shall be the sum of the number of shares of Common
Stock outstanding immediately prior to such issuance plus the number of shares
of Common Stock so issued or issuable, provided, that for purposes hereof, all
--------
shares of Common Stock that are issuable upon conversion, exercise or exchange
of Common Stock Equivalents shall be deemed outstanding immediately after the
issuance of such Common Stock Equivalents. Such adjustment shall be made
whenever such shares of Common Stock or Common Stock Equivalents are issued.
However, upon the expiration of any Common Stock Equivalents the issuance of
which resulted in an adjustment in the Conversion Price pursuant to this
Section, if any such Common Stocks Equivalents shall expire and shall not have
been exercised, the Conversion Price shall immediately upon such expiration be
recomputed and effective immediately upon such expiration be increased to the
price which it would have been (but reflecting any other adjustments in the
Conversion Price made pursuant to the provisions of this Section after the
issuance of such Common Stock Equivalents) had the adjustment of the Conversion
Price made upon the issuance of such Common Stock Equivalents been made on the
basis of offering for subscription or purchase only that number of shares of
Common Stock actually purchased upon the exercise of such Common Stock
Equivalents actually exercised. For purposes of this Section, a "Strategic
---------
Transaction" shall mean a transaction or relationship in which the Company
- -----------
issues shares of Common Stock to an entity which is, itself or through its
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<PAGE>
subsidiaries, an operating company in a business related to the business of the
Company and in which the Company receives material benefits in addition to the
investment of funds, but shall not include a transaction in which the Company is
issuing securities primarily for the purpose of raising capital.
(v) If the Company, at any time while Debentures are outstanding,
shall distribute to all holders of Common Stock (and not to Holders) evidences
of its indebtedness or assets or rights or warrants to subscribe for or purchase
any security, then in each such case the Conversion Price at which Debentures
shall thereafter be convertible shall be determined by multiplying the
Conversion Price in effect immediately prior to the record date fixed for
determination of stockholders entitled to receive such distribution by a
fraction of which the denominator shall be the Per Share Market Value determined
as of the record date mentioned above, and of which the numerator shall be such
Per Share Market Value on such record date less the then fair market value at
such record date of the portion of such assets or evidence of indebtedness so
distributed applicable to one outstanding share of the Common Stock as
determined by the Board of Directors in good faith; provided, however, that in
-------- -------
the event of a distribution exceeding ten percent (10%) of the net assets of the
Company, if the Holders of a majority in interest of the Debentures dispute such
valuation, such fair market value shall be determined by a nationally recognized
or major regional investment banking firm or firm of independent certified
public accountants of recognized standing (which may be the firm that regularly
examines the financial statements of the Company) (an "Appraiser") selected in
---------
good faith by the holders of a majority in interest of Debentures then
outstanding; and provided, further, that the Company, after receipt of the
-------- -------
determination by such Appraiser shall have the right to select an additional
Appraiser, in good faith, in which case the fair market value shall be equal to
the average of the determinations by each such Appraiser. In either case the
adjustments shall be described in a statement provided to the Holders of the
portion of assets or evidences of indebtedness so distributed or such
subscription rights applicable to one share of Common Stock. Such adjustment
shall be made whenever any such distribution is made and shall become effective
immediately after the record date mentioned above.
(vi) In case of any reclassification of the Common Stock or any
compulsory share exchange pursuant to which the Common Stock is converted into
other securities, cash or property, the Holders shall have the right thereafter
to, at their option, (A) convert the then outstanding principal amount, together
with all accrued but unpaid interest and any other amounts then owing hereunder
in respect of this Debenture only into the shares of stock and other securities,
cash and property receivable upon or deemed to be held by holders of the Common
Stock following such reclassification or share exchange, and the Holders of the
Debentures shall be entitled upon such event to receive such amount of
securities, cash or property as the shares of the Common Stock of the Company
into which the then outstanding principal amount, together with all accrued but
unpaid interest and any other amounts then owing hereunder in respect of this
Debenture could have been converted immediately prior to such reclassification
or share exchange would have been entitled or (B) require the Company to prepay
the aggregate of its outstanding principal amount of Debentures, plus all
interest and other amounts due and payable thereon, at a price determined in
accordance with Section 3(b).
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<PAGE>
The entire prepayment price shall be paid in cash. This provision shall
similarly apply to successive reclassifications or share exchanges.
(vii) No adjustments in the Conversion Price shall be required if
such adjustment is less than $0.01; provided, however, that any adjustments
which by reason of this Section are not required to be made shall be carried
forward and taken into account in any subsequent adjustment. All calculations
under this Section 4 shall be made to the nearest cent or to the nearest 1/100th
of a share, as the case may be.
(viii) Whenever the Conversion Price is adjusted pursuant to any of
Section 4(c)(ii) - (v), the Company shall promptly mail to each Holder a notice
setting forth the Conversion Price after such adjustment and setting forth a
brief statement of the facts requiring such adjustment.
(ix) If (A) the Company shall declare a dividend (or any other
distribution) on the Common Stock; (B) the Company shall declare a special
nonrecurring cash dividend on or a redemption of the Common Stock; (C) the
Company shall authorize the granting to all holders of the Common Stock rights
or warrants to subscribe for or purchase any shares of capital stock of any
class or of any rights; (D) the approval of any stockholders of the Company
shall be required in connection with any reclassification of the Common Stock,
any consolidation or merger to which the Company is a party, any sale or
transfer of all or substantially all of the assets of the Company, of any
compulsory share exchange whereby the Common Stock is converted into other
securities, cash or property; (E) the Company shall authorize the voluntary or
involuntary dissolution, liquidation or winding up of the affairs of the
Company; then, in each case, the Company shall cause to be filed at each office
or agency maintained for the purpose of conversion of the Debentures, and shall
cause to be mailed to the Holders at their last addresses as they shall appear
upon the stock books of the Company, at least 20 calendar days prior to the
applicable record or effective date hereinafter specified, a notice stating (x)
the date on which a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record is not to be taken,
the date as of which the holders of the Common Stock of record to be entitled to
such dividend, distributions, redemption, rights or warrants are to be
determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of the Common Stock
of record shall be entitled to exchange their shares of the Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer or share exchange; provided, however, that
-------- -------
the failure to mail such notice or any defect therein or in the mailing thereof
shall not affect the validity of the corporate action required to be specified
in such notice. Holders are entitled to convert Debentures during the 20-day
period commencing the date of such notice to the effective date of the event
triggering such notice.
(xi) In case of any (1) merger or consolidation of the Company with
or into another Person that would constitute a Change of Control Transaction, or
(2) sale, directly or indirectly, by the Company of more than one-half of the
assets of the Company (on an as valued
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<PAGE>
basis) in one or a series of related transactions, or (3) tender or other offer
or exchange (whether by the Company or another Person) pursuant to which holders
of Common Stock are permitted to tender or exchange their shares for other
securities, stock, cash or property of the Company or another Person; then a
Holder shall have the right to (A) if permitted under Section 3(b) hereof,
exercise its rights of prepayment under Section 3(b) with respect to such event,
(B) convert its aggregate principal amount of Debentures then outstanding into
the shares of stock and other securities, cash and property receivable upon or
deemed to be held by holders of Common Stock following such merger,
consolidation or sale, and such Holder shall be entitled upon such event or
series of related events to receive such amount of securities, cash and property
as the shares of Common Stock into which such aggregate principal amount of
Debentures could have been converted immediately prior to such merger,
consolidation or sales would have been entitled, (C) in the case of a merger or
consolidation, (x) require the surviving entity to issue shares of convertible
preferred stock or convertible debentures with such aggregate stated value or in
such face amount, as the case may be, equal to the aggregate principal amount of
Debentures then held by such Holder, plus all accrued and unpaid interest and
other amounts owing thereon, which newly issued shares of preferred stock or
debentures shall have terms identical (including with respect to conversion) to
the terms of this Debenture (except, in the case of preferred stock, as may be
required to reflect the differences between equity and debt) and shall be
entitled to all of the rights and privileges of a Holder of Debentures set forth
herein and the agreements pursuant to which the Debentures were issued
(including, without limitation, as such rights relate to the acquisition,
transferability, registration and listing of such shares of stock other
securities issuable upon conversion thereof), and (y) simultaneously with the
issuance of such convertible preferred stock or convertible debentures, shall
have the right to convert such instrument only into shares of stock and other
securities, cash and property receivable upon or deemed to be held by holders of
Common Stock following such merger or consolidation, or (D) in the event of an
exchange or tender offer or other transaction contemplated by clause (3) of this
Section, tender or exchange its aggregate principal amount of Debentures for
such securities, stock, cash and other property receivable upon or deemed to be
held by holders of Common Stock that have tendered or exchanged their shares of
Common Stock following such tender or exchange, and such Holder shall be
entitled upon such exchange or tender to receive such amount of securities, cash
and property as the shares of Common Stock into which such aggregate principal
amount of Debentures could have been converted (taking into account all then
accrued and unpaid dividends) immediately prior to such tender or exchange would
have been entitled as would have been issued. In the case of clause (C), the
conversion price applicable for the newly issued shares of convertible preferred
stock or convertible debentures shall be based upon the amount of securities,
cash and property that each share of Common Stock would receive in such
transaction and the Conversion Price in effect immediately prior to the
effectiveness or closing date for such transaction. The terms of any such
merger, sale, consolidation, tender or exchange shall include such terms so as
to continue to give the Holders the right to receive the securities, cash and
property set forth in this Section upon any conversion or redemption following
such event. This provision shall similarly apply to successive such events.
(d) The Company covenants that it will at all times reserve and keep
available out of its authorized and unissued shares of Common Stock solely for
the purpose of issuance
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<PAGE>
upon conversion of the Debentures and payment of interest on the Debentures,
each as herein provided, free from preemptive rights or any other actual
contingent purchase rights of persons other than the Holders, not less than such
number of shares of the Common Stock as shall (subject to any additional
requirements of the Company as to reservation of such shares set forth in the
Purchase Agreement) be issuable (taking into account the adjustments and
restrictions of Section 4(b)) upon the conversion of the outstanding principal
amount of the Debentures and payment of interest hereunder. The Company
covenants that all shares of Common Stock that shall be so issuable shall, upon
issue, be duly and validly authorized, issued and fully paid, nonassessable and,
if the Underlying Shares Registration Statement has been declared effective
under the Securities Act, registered for public sale in accordance with such
Underlying Shares Registration Statement.
(e) Upon a conversion hereunder the Company shall not be required to
issue stock certificates representing fractions of shares of the Common Stock,
but may if otherwise permitted, make a cash payment in respect of any final
fraction of a share based on the Per Share Market Value at such time. If the
Company elects not, or is unable, to make such a cash payment, the Holder shall
be entitled to receive, in lieu of the final fraction of a share, one whole
share of Common Stock.
(f) The issuance of certificates for shares of the Common Stock on
conversion of the Debentures shall be made without charge to the Holders thereof
for any documentary stamp or similar taxes that may be payable in respect of the
issue or delivery of such certificate, provided that the Company shall not be
required to pay any tax that may be payable in respect of any transfer involved
in the issuance and delivery of any such certificate upon conversion in a name
other than that of the Holder of such Debentures so converted and the Company
shall not be required to issue or deliver such certificates unless or until the
person or persons requesting the issuance thereof shall have paid to the Company
the amount of such tax or shall have established to the satisfaction of the
Company that such tax has been paid.
(g) Any and all notices or other communications or deliveries to be
provided by the Holders of the Debentures hereunder, including, without
limitation, any Conversion Notice, shall be in writing and delivered personally,
by facsimile, sent by a nationally recognized overnight courier service or sent
by certified or registered mail, postage prepaid, addressed to the Company, at
the address indicated on the first page of this Debenture, attention Chief
Financial Officer, or such other address or facsimile number as the Company may
specify for such purposes by notice to the Holders delivered in accordance with
this Section, with a copy to McBreen & Kopko, 20 N. Wacker Drive, Suite 2520,
Chicago, IL 60606, facsimile No.: (312) 332-2657, attention: James R. Stern,
Esq. Any and all notices or other communications or deliveries to be provided
by the Company hereunder shall be in writing and delivered personally, by
facsimile, sent by a nationally recognized overnight courier service or sent by
certified or registered mail, postage prepaid, addressed to each Holder of the
Debentures at the facsimile telephone number or address of such Holder appearing
on the books of the Company, or if no such facsimile telephone number or address
appears, at the principal place of business of the holder. Any notice or other
communication or deliveries hereunder shall be deemed given and
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<PAGE>
effective on the earliest of (i) the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile telephone number
specified in this Section prior to 8:00 p.m. (New York City time), (ii) the date
after the date of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified in this Section later than
8:00 p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York
City time) on such date, (iii) four days after deposit in the United States
mail, (iv) the Business Day following the date of mailing, if send by nationally
recognized overnight courier service, or (v) upon actual receipt by the party to
whom such notice is required to be given.
Section 5. Optional Prepayment.
---------- -------------------
(a) (i) The Company shall have the right, exercisable at any time
after the twentieth (20/th/) day following the date the Underlying Shares
Registration Statement is declared effective by the Commission, upon thirty (30)
days' prior written notice to the Holders to be prepaid (the "Optional
--------
Prepayment Notice"), to prepay, all or any portion of the outstanding principal
- -----------------
amount of the Debentures which have not previously been repaid or for which
Conversion Notices have not previously been delivered. The prepayment price
applicable to such prepayments shall equal the Optional Prepayment Price (as
defined in Section 7) and shall be paid in cash. Any such prepayment shall be
free of any claim of subordination. The Holders shall have the right to tender,
and the Company shall honor, Conversion Notices delivered prior to the
expiration of the thirtieth (30/th/) day after receipt by the Holders of an
Optional Prepayment Notice for such Debentures (the thirtieth (30/th/) day after
receipt by the Holders of an Optional Prepayment Notice is referred to herein as
the "Optional Prepayment Date").
------------------------
(ii) The Company shall not be entitled to deliver a Company Optional
Prepayment Notice to the Holder (and, if after delivery thereof and prior to the
Company Optional Prepayment Date, any of the following conditions shall cease to
be met, such notice, at the option of the Holders, shall be deemed no longer
effective) if: (i) the number of shares of Common Stock at the time authorized,
unissued and unreserved for all purposes is insufficient to satisfy the
Company's conversion obligations of the aggregate principal amount of Debentures
then outstanding, or (ii) there is neither an effective Underlying Shares
Registration Statement under which the Holders can resell all of the issued
Underlying Shares and all of the Underlying Shares as are issuable upon
conversion in full of the Debentures subject to a Company Optional Prepayment
Notice nor may all of such issued and issuable Underlying Shares be sold by the
Holders subject to such prepayment without volume restrictions pursuant to Rule
144 promulgated under the Securities Act, as determined by counsel to the
Company pursuant to a written opinion letter, addressed to the Company's
transfer agent in the form and substance acceptable to the Holders and such
transfer agent, or (iii) the shares of Common Stock are not then listed for
trading on the AMEX or on a Subsequent Market.
(b) If any portion of the Optional Prepayment Price shall not be paid
by the Company by the second (2/nd/) Business Day following the Optional
Prepayment Date, the Optional Prepayment Price shall be increased by 15% per
annum or such lesser maximum amount that is permitted to be paid by applicable
law, to accrue daily from the date such interest
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<PAGE>
is due hereunder through and including the date of payment (which amount shall
be paid as liquidated damages and not as a penalty). In addition, if any portion
of the optional Prepayment Price remains unpaid through the expiration of the
Optional Prepayment Date, the Holder subject to such prepayment may elect by
written notice to the Company to either (x) demand conversion in accordance with
the formula and the time period therefor set forth in Section 4 of any portion
of the principal amount of Debentures for which the Optional Prepayment Price,
plus accrued liquidated damages thereof, has not been paid in full (the "Unpaid
------
Prepayment Principal Amount"), in which event the applicable Per Share Market
- ---------------------------
Value shall be the lower of the Per Share Market Value calculated on the
Optional Prepayment Date and the Per Share Market Value as of the Holder's
written demand for conversion, or (y) invalidate ab initio such optional
prepayment, notwithstanding anything herein contained to the contrary. If the
Holder elects option (x) above, the Company shall, within three (3) Trading Days
after such election is deemed delivered hereunder, deliver to the Holder the
shares of Common Stock issuable upon conversion of the Unpaid Prepayment
Principal Amount subject to such conversion demand and otherwise perform its
obligations hereunder with respect thereto. If the Holder elects option (y)
above, the Company shall promptly, and in any event not later than three (3)
Trading Days from receipt of notice of such election, return to the Holder new
Debentures for the full Unpaid Prepayment Principal Amount and shall no longer
have any prepayment rights under this Debenture. If, upon an election under
option (x) above, the Company fails to deliver the certificates representing the
shares of Common Stock issuable upon conversion of the Unpaid Prepayment
Principal Amount within the time period set forth in this Section, the Company
shall pay to the Holder in cash, as liquidated damages and not as a penalty,
$5,000 per day until the Company delivers such certificates to the Holder.
Section 6. Put Option.
---------- ----------
(a) At any time after the eighth (8/th/) month anniversary of the
Original Issue Date the Holder shall have the right (the "Put Right") to
---------
request, on one or more occasions, that the Company prepay all or a portion of
the outstanding principal amount of this Debenture (including any and all
interest and all other amounts, expenses, costs and liquidated damages due
hereunder) at a price equal to the Put Price (as defined in Section 7), by
delivering to the Company a written notice (a "Put Notice") specifying (i) the
----------
outstanding principal amount of this Debenture (including any and all interest
and all other amounts, expenses, costs and liquidated damages due hereunder)
subject to the Put Right and (ii) the applicable Put Price.
(b) Upon receipt by the Company of a Put Notice, the Company shall,
within five (5) days, deliver to the Holder exercising the Put Right a notice
stating whether the Company agrees to prepay the outstanding principal amount of
the Debenture subject to the Put Right. In the event the Company delivers
notice of its agreement to effect such prepayment (a "Company Acceptance
------------------
Notice"), the provisions in subsection (c) below shall apply. In the event the
- ------
Company fails to deliver a Company Acceptance Notice within five (5) days of the
receipt of the Put Notice or indicates that it will not prepay the outstanding
principal amount of the Debenture subject to the Put Right, the Holder shall
have the right to convert the principal amount of the Debentures subject to the
Put Right pursuant to Section 4(c)(i) hereof.
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<PAGE>
(c) Assuming the Company has delivered a Company Acceptance Notice,
on or prior to the thirtieth (30/th/) day following the date of the delivery of
the Put Notice (the "Put Exercise Date"), (i) the Holder shall deliver to the
-----------------
Company the principal amount of Debentures, subject to the Put Option, properly
endorsed, and (ii) the Company shall deliver to the Holder, in immediately
available funds, the Put Price. The Put Price shall be paid in cash and shall
be free of any claim of subordination. If any portion of the Put Price shall
not be paid on or prior to the Put Exercise Date, as an alternative to any other
rights or remedies set forth herein and not in addition to such other rights or
remedies, the Put Price shall be increased by 15% per annum (to accrue daily)
until paid (which amount shall be paid as liquidated damages and not as a
penalty) and the Holder shall have the right to convert the principal amount of
the Debentures subject to the Put Right pursuant to Section 4(c)(i) hereof.
Section 7. Definitions. For the purposes hereof, the following terms
---------- -----------
shall have the following meanings:
"Business Day" means any day except Saturday, Sunday and any day which
------------
shall be a legal holiday or a day on which banking institutions in the State of
New York or the State of Maryland are authorized or required by law or other
government action to close.
"Change of Control Transaction" means the occurrence of any of (i) an
-----------------------------
acquisition after the date hereof by an individual or legal entity or "group"
(as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of in
excess of 33.33% of the voting securities of the Company, (ii) a replacement of
more than one-half of the members of the Company's board of directors which is
not approved by those individuals who are members of the board of directors on
the date hereof in one or a series of related transactions, (iii) the merger of
the Company with or into another entity, the direct or indirect consolidation or
sale of all or substantially all of the assets of the Company in one or a series
of related transactions, unless following such transaction, the holders of the
Company's securities continue to hold at least 66.66% of such securities
following such transaction or (iv) the execution by the Company of an agreement
to which the Company is a party or by which it is bound, providing for any of
the events set forth above in (i), (ii) or (iii).
"Commission" means the Securities and Exchange Commission.
----------
"Common Stock" means the common stock, $.01 par value per share, of
------------
the Company and stock of any other class into which such shares may hereafter
have been reclassified or changed.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
------------
"Interest Effectiveness Date" means the earlier to occur of (x) the
---------------------------
Effectiveness Date and (y) the date that an Underlying Shares Registration
Statement is declared effective by the Commission.
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<PAGE>
"Mandatory Prepayment Amount" for any Debentures shall equal the sum
---------------------------
of (i) the greater of (A) 115% of the principal amount of Debentures to be
prepaid, plus all accrued and unpaid interest thereon, and (B) the principal
amount of Debentures to be prepaid, plus all accrued and unpaid interest
thereon, divided by the Conversion Price on (x) the date the Mandatory
Prepayment Amount is demanded or otherwise due or (y) the date the Mandatory
Prepayment Amount is paid in full, whichever is less, multiplied by the Per
Share Market Value on (x) the date the Mandatory Prepayment Amount is demanded
or otherwise due or (y) the date the Mandatory Prepayment Amount is paid in
full, whichever is greater, and (ii) all other amounts, costs, expenses and
liquidated damages due in respect of such Debentures.
"Optional Prepayment Price" for any Debentures shall equal the sum of
-------------------------
(i) the product of (A) the applicable Percentage Rate and (B) the principal
amount of Debentures to be prepaid, plus all accrued and unpaid interest
thereon, and (ii) all other amounts, expenses, costs and liquidated damages due
in respect of such Debentures.
"Original Issue Date" shall mean the date of the first issuance of the
-------------------
Debentures regardless of the number of transfers of any Debenture and regardless
of the number of instruments which may be issued to evidence such Debenture.
"Percentage Rate" means initially means 101%, provided, that such rate
--------------- --------
will cumulatively increase by 1% on each monthly anniversary of the Original
Issue Date (for example on the third monthly anniversary of the Original Issue
Date, such rate will be 104%).
"Per Share Market Value" means on any particular date (a) the closing
----------------------
bid price per share of Common Stock on such date on the AMEX or on such
Subsequent Market on which the shares of Common Stock are then listed or quoted,
or if there is no such price on such date, then the closing bid price on the
AMEX or on such Subsequent Market on the date nearest preceding such date, or
(b) if the shares of Common Stock are not then listed or quoted on the AMEX or a
Subsequent Market, the closing bid price for a share of Common Stock in the
over-the-counter market, as reported by the National Quotation Bureau
Incorporated or similar organization or agency succeeding to its functions of
reporting prices) at the close of business on such date, or (c) if the shares of
Common Stock are not then reported by the National Quotation Bureau Incorporated
(or similar organization or agency succeeding to its functions of reporting
prices), then the average of the "Pink Sheet" quotes for the relevant conversion
period, as determined in good faith by the Holder, or (d) if the shares of
Common Stock are not then publicly traded the fair market value of a share of
Common Stock as determined by an Appraiser selected in good faith by the Holders
of a majority in interest of the principal amount of Debentures then
outstanding.
"Person" means a corporation, an association, a partnership,
------
organization, a business, an individual, a government or political subdivision
thereof or a governmental agency.
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<PAGE>
"Purchase Agreement" means the Convertible Debenture Purchase
------------------
Agreement, dated as of the Original Issue Date, between the Company and the
original Holder of Debentures, as amended, modified or supplemented from time to
time in accordance with its terms.
"Put Price" for any Debentures shall equal the sum of (i) the product
---------
of (A) the applicable Percentage Rate and (B) the principal amount of the
Debentures subject to the Put Right, plus all accrued and unpaid interest
thereon, and (ii) all other amounts, expenses, costs and liquidated damages due
in respect of such Debentures.
"Registration Rights Agreement" means the Registration Rights
-----------------------------
Agreement, dated as of the Original Issue Date, between the Company and the
original Holder of Debentures, as amended, modified or supplemented from time to
time in accordance with its terms.
"Securities Act" means the Securities Act of 1933, as amended.
--------------
"Trading Day" means (a) a day on which the shares of Common Stock are
-----------
traded on the AMEX or on such Subsequent Market on which the shares of Common
Stock are then listed or quoted, or (b) if the shares of Common Stock are not
listed on the AMEX or a Subsequent Market, a day on which the shares of Common
Stock are traded in the over-the-counter market, as reported by the OTC Bulletin
Board, or (c) if the shares of Common Stock are not quoted on the OTC Bulletin
Board, a day on which the shares of Common Stock are quoted in the over-the-
counter market as reported by the National Quotation Bureau Incorporated (or any
similar organization or agency succeeding its functions of reporting prices);
provided, however, that in the event that the shares of Common Stock are not
- -------- -------
listed or quoted as set forth in (a), (b) and (c) hereof, then Trading Day shall
mean any day except Saturday, Sunday and any day which shall be a legal holiday
or a day on which banking institutions in the State of New York are authorized
or required by law or other government action to close.
"Underlying Shares" means the shares of Common Stock issuable upon
-----------------
conversion of Debentures or as payment of interest in accordance with the terms
hereof.
"Underlying Shares Registration Statement" means a registration
----------------------------------------
statement meeting the requirements set forth in the Registration Rights
Agreement, covering among other things the resale of the Underlying Shares and
naming the Holder as a "selling stockholder" thereunder.
Section 8. Except as expressly provided herein, no provision of this
----------
Debenture shall alter or impair the obligation of the Company, which is absolute
and unconditional, to pay the principal of, interest and liquidated damages (if
any) on, this Debenture at the time, place, and rate, and in the coin or
currency, herein prescribed. This Debenture is a direct obligation of the
Company. This Debenture ranks pari passu with all other Debentures now or
---- -----
hereafter issued under the terms set forth herein. As long as there are
Debentures outstanding, the Company shall not and shall cause it subsidiaries
not to, without the consent of the Holders, (i) amend its certificate of
incorporation, bylaws or other charter documents so as to
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<PAGE>
adversely affect any rights of the Holders; (ii) repay, repurchase or offer to
repay, repurchase or otherwise acquire shares of its Common Stock or other
equity securities other than as to the Underlying Shares to the extent permitted
or required under the Transaction Documents; or (iii) enter into any agreement
with respect to any of the foregoing. The Company may only voluntarily prepay
the outstanding principal amount on the Debentures in accordance with Section 5
hereof.
Section 9. This Debenture shall not entitle the Holder to any of the
---------
rights of a stockholder of the Company, including without limitation, the right
to vote, to receive dividends and other distributions, or to receive any notice
of, or to attend, meetings of stockholders or any other proceedings of the
Company, unless and to the extent converted into shares of Common Stock in
accordance with the terms hereof.
Section 10. If this Debenture shall be mutilated, lost, stolen or
----------
destroyed, the Company shall execute and deliver, in exchange and substitution
for and upon cancellation of a mutilated Debenture, or in lieu of or in
substitution for a lost, stolen or destroyed debenture, a new Debenture for the
principal amount of this Debenture so mutilated, lost, stolen or destroyed but
only upon receipt of evidence of such loss, theft or destruction of such
Debenture, and of the ownership hereof, and indemnity, if requested, all
reasonably satisfactory to the Company.
Section 11. Other than liens for taxes, assessments or other
----------
governmental charges which are not yet due and payable or which are being
contested in good faith with an adequate reserve or other appropriate provision
having been made therefor, and except as set forth in Schedule 2.1(p) to the
Purchase Agreement, no indebtedness of the Company is senior to this Debenture
in right of payment, whether with respect to interest, damages or upon
liquidation or dissolution or otherwise. Notwithstanding anything herein to the
contrary, the Company shall be permitted to incur liens for purchase money
obligations to acquire assets; provided that: (1) each such lien attaches to
such asset concurrently with or within 10 days after the acquisition thereof (2)
does not exceed the purchase price of such asset (3) the indebtedness secured by
all such liens shall not exceed $2,000,000, and (4) each such lien encumbers
only the asset so purchased. Except for (i) indebtedness created under the
Purchase Agreement, (ii) unsecured indebtedness for non-current liabilities for
post-employment healthcare and other insurance benefits, (iii) unsecured
indebtedness for trade payables and related accrued expenses, in each case
arising in the ordinary course of business, (iv) unsecured indebtedness for
deposits in an aggregate amount not to exceed $100,000, made in the ordinary
course of business to secure liability to insurance carriers, and (v)
indebtedness existing on the date hereof and renewals and extensions thereof
(provided that the amount owed thereunder is not increased), which liens are set
forth on schedule 2.1(p), the Company will not and will not permit any of its
subsidiaries to, directly or indirectly, enter into, create, incur, assume or
suffer to exist any indebtedness of any kind, on or with respect to any of its
property or assets now owned or hereafter acquired or any interest therein or
any income or profits therefrom.
Section 12. This Debenture shall be governed by and construed in
----------
accordance with the laws of the State of New York, without giving effect to
conflicts of laws thereof. The
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<PAGE>
Company and the Holders hereby irrevocably submit 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, or that such suit, action or proceeding is improper. Each of the
Company and the Holder hereby irrevocably waives personal service of process and
consents to process being served in any such suit, action or proceeding by
receiving a copy thereof sent to the Company at the address in effect for
notices to it under this instrument 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.
Section 13. Any waiver by the Company or the Holder of a breach of
----------
any provision of this Debenture shall not operate as or be construed to be a
waiver of any other breach of such provision or of any breach of any other
provision of this Debenture. The failure of the Company or the Holder to insist
upon strict adherence to any term of this Debenture on one or more occasions
shall not be considered a waiver or deprive that party of the right thereafter
to insist upon strict adherence to that term or any other term of this
Debenture. Any waiver must be in writing.
Section 14. (a) If any provision of this Debenture is invalid,
----------
illegal or unenforceable, the balance of this Debenture shall remain in effect,
and if any provision is inapplicable to any person or circumstance, it shall
nevertheless remain applicable to all other persons and circumstances.
(b) If it shall be found that any interest or other
amount deemed interest due hereunder shall violate applicable laws governing
usury, the applicable rate of interest or due hereunder shall be reduced to the
maximum permitted rate of interest under such law.
Section 15. Whenever any payment or other obligation hereunder shall
----------
be due on a day other than a Business Day, such payment shall be made on the
next succeeding Business Day.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOLLOWS]
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this Convertible Debenture
to be duly executed by a duly authorized officer as of the date first above
indicated.
SONIC FOUNDRY, INC.
By:________________________________
Name:
Title:
Attest:
By:___________________________
Name:
Title:
<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Debenture)
The undersigned hereby elects to convert the attached Debenture into shares of
common stock, $.01 par value per share (the "Common Stock"), of Sonic Foundry,
Inc. (the "Company") according to the conditions hereof, as of the date written
below. If shares are to be issued in the name of a person other than
undersigned, the undersigned will pay all transfer taxes payable with respect
thereto and is delivering herewith such certificates and opinions as reasonably
requested by the Company in accordance therewith. No fee will be charged to the
holder for any conversion, except for such transfer taxes, if any.
Conversion calculations:
Date to Effect Conversion
Principal Amount of Debentures to be Converted
Number of shares of Common Stock to be Issued
Applicable Conversion Price
Signature
Name
Address
<PAGE>
EXHIBIT B
---------
REGISTRATION RIGHTS AGREEMENT
-----------------------------
This Registration Rights Agreement (this "Agreement") is made and
---------
entered into as of September 13, 1999, among Sonic Foundry, Inc., a Maryland
corporation (the "Company"), and the investors signatory hereto (each such
-------
investor is a "Purchaser" and all such investors are, collectively, the
---------
"Purchasers").
- ------------
This Agreement is made pursuant to the Convertible Debenture Purchase
Agreement, dated as of the date hereof among the Company and the Purchasers (the
"Purchase Agreement").
------------------
The Company and the Purchasers hereby agree as follows:
1. Definitions
-----------
Capitalized terms used and not otherwise defined herein that are
defined in the Purchase Agreement shall have the meanings given such terms in
the Purchase Agreement. As used in this Agreement, the following terms shall
have the following meanings:
"Affiliate" means, with respect to any Person, any other Person that
---------
directly or indirectly controls or is controlled by or under common control with
such Person. For the purposes of this definition, "control," when used with
-------
respect to any Person, means the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of such Person,
whether through the ownership of voting securities, by contract or otherwise;
and the terms of "affiliated," "controlling" and "controlled" have meanings
---------- ----------- ----------
correlative to the foregoing.
"Business Day" means any day except Saturday, Sunday and any day which
------------
shall be a legal holiday or a day on which banking institutions in the states of
New York and Maryland generally are authorized or required by law or other
government actions to close.
"Closing Date" shall have the meaning set forth in the Purchase
------------
Agreement.
"Commission" means the Securities and Exchange Commission.
----------
"Common Stock" means the Company's common stock, $.01 par value per
------------
share, or such securities into which such stock shall hereafter be reclassified.
"Debentures" means the Company's 7.5% Convertible Debentures due three
----------
years from the date of issuance thereof, issued to the Purchasers pursuant to
the Purchase Agreement.
"Effectiveness Date" means the 90/th/ day following the Closing Date.
------------------
"Effectiveness Period" shall have the meaning set forth in Section
--------------------
2(a).
<PAGE>
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
------------
"Filing Date" means the 30/th/ day following the Closing Date.
-----------
"Holder" or "Holders" means the holder or holders, as the case may be,
------ -------
from time to time of Registrable Securities.
"Indemnified Party" shall have the meaning set forth in Section 5(c).
-----------------
"Indemnifying Party" shall have the meaning set forth in Section 5(c).
------------------
"Losses" shall have the meaning set forth in Section 5(a).
------
"Person" means an individual or a corporation, partnership, trust,
------
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or political subdivision
thereof) or other entity of any kind.
"Proceeding" means an action, claim, suit, investigation or proceeding
----------
(including, without limitation, an investigation or partial proceeding, such as
a deposition), whether commenced or threatened.
"Prospectus" means the prospectus included in the Registration
----------
Statement (including, without limitation, a prospectus that includes any
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A promulgated under the
Securities Act), as amended or supplemented by any prospectus supplement, with
respect to the terms of the offering of any portion of the Registrable
Securities covered by the Registration Statement, and all other amendments and
supplements to the Prospectus, including post-effective amendments, and all
material incorporated by reference or deemed to be incorporated by reference in
such Prospectus.
"Registrable Securities" means the shares of Common Stock issuable
----------------------
upon (i) conversion in full of the Debentures, and (ii) exercise in full of the
Warrants.
"Registration Statement" means the registration statement and any
----------------------
additional registration statements contemplated by Section 2(a), including (in
each case) the Prospectus, amendments and supplements to such registration
statement or Prospectus, including pre- and post-effective amendments, all
exhibits thereto, and all material incorporated by reference or deemed to be
incorporated by reference in such registration statement.
"Rule 144" means Rule 144 promulgated by the Commission pursuant to
--------
the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Rule 415" means Rule 415 promulgated by the Commission pursuant to
--------
the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
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<PAGE>
"Rule 424" means Rule 424 promulgated by the Commission pursuant to
--------
the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Securities Act" means the Securities Act of 1933, as amended, and the
--------------
rules and regulations promulgated thereunder.
"Special Counsel" means one special counsel to the Holders, for which
---------------
the Holders will be reimbursed by the Company pursuant to Section 4.
"Underwritten Registration or Underwritten Offering" means a
--------------------------------------------------
registration in connection with which securities of the Company are sold to an
underwriter for reoffering to the public pursuant to an effective registration
statement.
"Warrants" means the Common Stock purchase warrants issued to the
--------
Purchasers pursuant to the Purchase Agreement and the Common Stock purchase
warrant issued or issuable to Brighton Capital, Ltd., as compensation for
consulting services in respect of the financing under which the Debentures were
issued and sold.
2. Shelf Registration
------------------
(a) On or prior to the Filing Date, the Company shall prepare and
file with the Commission a "Shelf" Registration Statement covering the number of
Registrable Securities contemplated by Section 2(b) for an offering to be made
on a continuous basis pursuant to Rule 415. The Registration Statement shall be
on Form S-3 (or on another appropriate form in the event that the Company is not
eligible to file a Registration Statement on Form S-3 for the resale of the
Registrable Securities as mutually agreed to by the Company and the Holders).
The Company shall use its best efforts to cause the Registration Statement to be
declared effective under the Securities Act as promptly as possible after the
filing thereof, but in any event prior to the Effectiveness Date, and shall use
its best efforts to keep such Registration Statement continuously effective
under the Securities Act until the date which is two (2) years after the date
that such Registration Statement is declared effective by the Commission or such
earlier date when all Registrable Securities covered by such Registration
Statement have been sold or may be sold without volume restrictions pursuant to
Rule 144(k) as determined by the counsel to the Company pursuant to a written
opinion letter to such effect, addressed and acceptable to the Company's
transfer agent and the affected Holders (the "Effectiveness Period"), provided,
-------------------- --------
that the Company shall not be deemed to have used its best efforts to keep the
Registration Statement effective during the Effectiveness Period if it
voluntarily takes any action that would result in the Holders not being able to
sell the Registrable Securities covered by such Registration Statement during
the Effectiveness Period, unless such action is required under applicable law or
the Company has filed a post-effective amendment to the Registration Statement
and the Commission has not declared it effective.
(b) The initial Registration Statement required to be filed hereunder
shall include (but not be limited to), for the benefit of the Holders, a number
of shares of Common
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<PAGE>
Stock equal to the sum of (i) the number of shares of Common Stock as would be
issuable upon exercise in full of the Warrants, (ii) the number of shares of
Common Stock as would be issuable upon conversion in full of the outstanding
principal amount of the Debentures, assuming for such purposes that such
conversion occurred on the Filing Date and the conversion price applicable to
such conversion is $6.00, and (iii) the number of shares of Common Stock as
would be issuable as payment of dividend on the full principal amount of the
Debentures for two (2) years, assuming an applicable conversion price of $6.00.
(c) If the Holders of a majority of the Registrable Securities then
outstanding so elect, an offering of Registrable Securities pursuant to the
Registration Statement may be effected in the form of an Underwritten Offering.
In such event, and, if the managing underwriters advise the Company and such
Holders in writing that in their opinion the amount of Registrable Securities
proposed to be sold in such Underwritten Offering exceeds the amount of
Registrable Securities which can be sold in such Underwritten Offering, there
shall be included in such Underwritten Offering the amount of such Registrable
Securities which in the opinion of such managing underwriters can be sold, and
such amount shall be allocated pro-rata among the Holders proposing to sell
Registrable Securities in such Underwritten Offering.
(d) If any of the Registrable Securities are to be sold in an
Underwritten Offering, the investment banker in interest that will administer
the offering will be selected by the Holders of a majority of the Registrable
Securities included in such offering upon consultation with the Company. No
Holder may participate in any Underwritten Offering hereunder unless such Holder
(i) agrees to sell its Registrable Securities on the basis provided in any
underwriting agreements approved by the Persons entitled hereunder to approve
such arrangements and (ii) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents required
under the terms of such arrangements.
3. Registration Procedures
-----------------------
In connection with the Company's registration obligations hereunder,
the Company shall:
(a) Prepare and file with the Commission on or prior to the Filing
Date, a Registration Statement on the form contemplated by Section 2(a) which
Registration Statement shall contain (except if otherwise directed by the
Holders) the "Plan of Distribution" attached hereto as Annex A, and cause the
-------
Registration Statement to become effective and remain effective as provided
herein; provided, however, that not less than five (5) Business Days prior to
-------- -------
the filing of the Registration Statement or any related Prospectus or any
amendment or supplement thereto (including any document that would be
incorporated or deemed to be incorporated therein by reference), the Company
shall, (i) furnish to the Holders, their Special Counsel and any managing
underwriters, copies of all such documents proposed to be filed, which documents
(other than those incorporated or deemed to be incorporated by reference) will
be subject to the review of such Holders, their Special Counsel and such
managing underwriters, and (ii) cause its officers and directors, counsel and
independent certified public accountants to respond to such inquiries as shall
be necessary, in the reasonable opinion of respective counsel to such Holders
and such underwriters, to conduct a reasonable investigation within the meaning
of
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<PAGE>
the Securities Act. The Company shall not file the Registration Statement or any
such Prospectus or any amendments or supplements thereto to which the Holders of
a majority of the Registrable Securities, their Special Counsel, or any managing
underwriters, shall reasonably object.
(b) (i) Prepare and file with the Commission such amendments,
including post-effective amendments, to the Registration Statement and the
Prospectus used in connection therewith as may be necessary to keep the
Registration Statement continuously effective as to the applicable Registrable
Securities for the Effectiveness Period and prepare and file with the Commission
such additional Registration Statements in order to register for resale under
the Securities Act all of the Registrable Securities; (ii) cause the related
Prospectus to be amended or supplemented by any required Prospectus supplement,
and as so supplemented or amended to be filed pursuant to Rule 424; (iii)
respond as promptly as reasonably possible to any comments received from the
Commission with respect to the Registration Statement or any amendment thereto
and as promptly as reasonably possible provide the Holders true and complete
copies of all correspondence from and to the Commission relating to the
Registration Statement; and (iv) comply in all material respects with the
provisions of the Securities Act and the Exchange Act with respect to the
disposition of all Registrable Securities covered by the Registration Statement
during the applicable period in accordance with the intended methods of
disposition by the Holders thereof set forth in the Registration Statement as so
amended or in such Prospectus as so supplemented.
(c) (i) File additional Registration Statements if the number of
Registrable Securities at any time exceeds 85% of the number of shares of Common
Stock then registered in a Registration Statement. The Company shall have
twenty (20) days to file such additional Registration Statements after such
requirement notice of which may be given by the Holders. In such event, the
Registration Statement required to be filed by the Company shall include a
number of shares of Common Stock equal to no less than 200% of the number of
shares of Common Stock into which all then outstanding principal amount of
Debentures are convertible (assuming such conversion occurred on the Filing Date
for such Registration Statement or the date of the filing of the final
acceleration request therefor, whichever date yields a lower Conversion Price)
and any other Registrable Securities not then registered in a Registration
Statement.
(ii) File such supplements or attach "stickers" to the
Registration Statement or Prospectus as and when required by the Commission to
evidence a material amount of resales by a Holder pursuant to a Prospectus. In
connection therewith, if such supplements or such "stickers" are periodically
required by the Commission, the Company shall, within four (4) Business Days,
file such supplements or "stickers" whenever a Holder has sold 50% of the
Registrable Securities covered by the then outstanding Prospectus (as last
supplemented or "stickered") in order to cover 100% of the number of the
outstanding Registrable Securities.
(d) Notify the Holders of Registrable Securities to be sold, their
Special Counsel and any managing underwriters as promptly as reasonably possible
(and, in the case of (i)(A) below, not less than five (5) Business Days (or, in
the case of a supplement or "sticker" required to be filed pursuant to Section
3(c)(ii), within one (1) Business Day) prior to such filing
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<PAGE>
and (if requested by any such Person) confirm such notice in writing no later
than one (1) Business Day following the day (i)(A) when a Prospectus or any
Prospectus supplement or post-effective amendment to the Registration Statement
is proposed to be filed; (B) when the Commission notifies the Company whether
there will be a "review" of such Registration Statement and whenever the
Commission comments in writing on such Registration Statement (the Company shall
provide true and complete copies thereof and all written responses thereto to
each of the Holders); and (C) with respect to the Registration Statement or any
post-effective amendment, when the same has become effective; (ii) of any
request by the Commission or any other Federal or state governmental authority
for amendments or supplements to the Registration Statement or Prospectus or for
additional information; (iii) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement covering any or
all of the Registrable Securities or the initiation of any Proceedings for that
purpose; (iv) if at any time any of the representations and warranties of the
Company contained in any agreement (including any underwriting agreement)
contemplated hereby ceases to be true and correct in all material respects; (v)
of the receipt by the Company of any notification with respect to the suspension
of the qualification or exemption from qualification of any of the Registrable
Securities for sale in any jurisdiction, or the initiation or threatening of any
Proceeding for such purpose; and (vi) of the occurrence of any event or passage
of time that makes the financial statements included in the Registration
Statement ineligible for inclusion therein or any statement made in the
Registration Statement or Prospectus or any document incorporated or deemed to
be incorporated therein by reference untrue in any material respect or that
requires any revisions to the Registration Statement, Prospectus or other
documents so that, in the case of the Registration Statement or the Prospectus,
as the case may be, it will not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
(e) Use its best efforts to avoid the issuance of, or, if issued,
obtain the withdrawal of (i) any order suspending the effectiveness of the
Registration Statement, or (ii) any suspension of the qualification (or
exemption from qualification) of any of the Registrable Securities for sale in
any jurisdiction, at the earliest practicable moment.
(f) If requested by any managing underwriter or the Holders of a
majority in interest of the Registrable Securities to be sold in connection with
an Underwritten Offering, (i) promptly incorporate in a Prospectus supplement or
post-effective amendment to the Registration Statement such information as such
managing underwriters and such Holders reasonably agree should be included
therein, and (ii) make all required filings of such Prospectus supplement or
such post-effective amendment as soon as practicable after the Company has
received notification of the matters to be incorporated in such Prospectus
supplement or post-effective amendment; provided, however, that the Company
-------- -------
shall not be required to take any action pursuant to this Section 3(f) that
would, in the opinion of counsel for the Company, violate applicable law or be
materially detrimental to the business prospects of the Company.
(g) Furnish to each Holder, their Special Counsel and any managing
underwriters, without charge, at least one conformed copy of each Registration
Statement and each amendment thereto, including financial statements and
schedules, all documents incorporated or deemed to be incorporated therein by
reference, and all exhibits to the extent
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requested by such Person (including those previously furnished or incorporated
by reference) promptly after the filing of such documents with the Commission.
(h) Promptly deliver to each Holder, their Special Counsel, and any
underwriters, without charge, as many copies of the Prospectus or Prospectuses
(including each form of prospectus) and each amendment or supplement thereto as
such Persons may reasonably request; and the Company hereby consents to the use
of such Prospectus and each amendment or supplement thereto by each of the
selling Holders and any underwriters in connection with the offering and sale of
the Registrable Securities covered by such Prospectus and any amendment or
supplement thereto.
(i) Prior to any public offering of Registrable Securities, use its
best efforts to register or qualify or cooperate with the selling Holders, any
underwriters and their Special Counsel in connection with the registration or
qualification (or exemption from such registration or qualification) of such
Registrable Securities for offer and sale under the securities or Blue Sky laws
of such jurisdictions within the United States as any Holder or underwriter
requests in writing, to keep each such registration or qualification (or
exemption therefrom) effective during the Effectiveness Period and to do any and
all other acts or things necessary or advisable to enable the disposition in
such jurisdictions of the Registrable Securities covered by a Registration
Statement; provided, however, that the Company shall not be required to qualify
-------- -------
generally to do business in any jurisdiction where it is not then so qualified
or to take any action that would subject it to general service of process in any
such jurisdiction where it is not then so subject or subject the Company to any
material tax in any such jurisdiction where it is not then so subject.
(j) Cooperate with the Holders and any managing underwriters to
facilitate the timely preparation and delivery of certificates representing
Registrable Securities to be delivered to a transferee pursuant to a
Registration Statement, which certificates shall be free, to the extent
permitted by the Purchase Agreement, of all restrictive legends, and to enable
such Registrable Securities to be in such denominations and registered in such
names as any such managing underwriters or Holders may request.
(k) Upon the occurrence of any event contemplated by Section
3(d)(vi), as promptly as reasonably possible, prepare a supplement or amendment,
including a post-effective amendment, to the Registration Statement or a
supplement to the related Prospectus or any document incorporated or deemed to
be incorporated therein by reference, and file any other required document so
that, as thereafter delivered, neither the Registration Statement nor such
Prospectus will contain an untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(l) Use its best efforts to cause all Registrable Securities relating
to such Registration Statement to be listed on the American Stock Exchange
("AMEX") or on any other stock market or trading facility on which the shares of
-----
Common Stock are traded, listed or quoted (each a "Subsequent Market") as and
-----------------
when required pursuant to the Purchase Agreement.
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(m) Enter into such agreements (including an underwriting agreement
in form, scope and substance as is customary in Underwritten Offerings) and take
all such other actions in connection therewith (including those reasonably
requested by any managing underwriters and the Holders of a majority of the
Registrable Securities being sold) in order to expedite or facilitate the
disposition of such Registrable Securities, and whether or not an underwriting
agreement is entered into, (i) make such representations and warranties to such
Holders and such underwriters as are customarily made by issuers to underwriters
in underwritten public offerings, and confirm the same if and when requested;
(ii) in the case of an Underwritten Offering obtain and deliver copies thereof
to each Holder and the managing underwriters, if any, of opinions of counsel to
the Company and updates thereof addressed to each Holder and each such
underwriter, in form, scope and substance reasonably satisfactory to any such
managing underwriters and Special Counsel to the selling Holders covering the
matters customarily covered in opinions requested in Underwritten Offerings and
such other matters as may be reasonably requested by such Special Counsel and
underwriters; (iii) immediately prior to the effectiveness of the Registration
Statement, and, in the case of an Underwritten Offering, at the time of delivery
of any Registrable Securities sold pursuant thereto, use its best reasonable
efforts to obtain and deliver copies to the Holders and the managing
underwriters, if any, of "cold comfort" letters and updates thereof from the
independent certified public accountants of the Company (and, if necessary, any
other independent certified public accountants of any subsidiary of the Company
or of any business acquired by the Company for which financial statements and
financial data is, or is required to be, included in the Registration
Statement), addressed to the Company in form and substance as are customary in
connection with Underwritten Offerings; (iv) if an underwriting agreement is
entered into, the same shall contain indemnification provisions and procedures
no less favorable to the selling Holders and the underwriters, if any, than
those set forth in Section 5 (or such other provisions and procedures acceptable
to the managing underwriters, if any, and holders of a majority of Registrable
Securities participating in such Underwritten Offering); and (v) deliver such
documents and certificates as may be reasonably requested by the Holders of a
majority of the Registrable Securities being sold, their Special Counsel and any
managing underwriters to evidence the continued validity of the representations
and warranties made pursuant to Section 3(m)(i) above and to evidence compliance
with any customary conditions contained in the underwriting agreement or other
agreement entered into by the Company.
(n) Make available for inspection by the selling Holders, any
representative of such Holders, any underwriter participating in any disposition
of Registrable Securities, and any attorney or accountant retained by such
selling Holders or underwriters, at the offices where normally kept, during
reasonable business hours, all financial and other records, pertinent corporate
documents and properties of the Company and its subsidiaries, and cause the
officers, directors, agents and employees of the Company and its subsidiaries to
supply all information in each case reasonably requested by any such Holder,
representative, underwriter, attorney or accountant in connection with the
Registration Statement; provided, however, that any information that is
-------- -------
determined in good faith by the Company in writing to be of a confidential
nature at the time of delivery of such information shall be kept confidential by
such Persons, unless (i) disclosure of such information is required by court or
administrative order or is necessary to respond to inquiries of regulatory
authorities; (ii) disclosure of such information, in the opinion of counsel to
such Person, is required by law; (iii) such information becomes
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generally available to the public other than as a result of a disclosure or
failure to safeguard by such Person; or (iv) such information becomes available
to such Person from a source other than the Company and such source is not known
by such Person to be bound by a confidentiality agreement with the Company.
(o) Comply with all applicable rules and regulations of the
Commission.
(p) The Company may require each selling Holder to furnish to the
Company such information regarding the distribution of such Registrable
Securities and the beneficial ownership of Common Stock held by such Holder as
is required by law to be disclosed in the Registration Statement, and the
Company may exclude from such registration the Registrable Securities of any
such Holder who unreasonably fails to furnish such information within a
reasonable time after receiving such request.
(q) If the Registration Statement refers to any Holder by name or
otherwise as the holder of any securities of the Company, then such Holder shall
have the right to require (if such reference to such Holder by name or otherwise
is not required by the Securities Act or any similar Federal statute then in
force) the deletion of the reference to such Holder in any amendment or
supplement to the Registration Statement filed or prepared subsequent to the
time that such reference ceases to be required.
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<PAGE>
4. Registration Expenses
---------------------
(a) All fees and expenses incident to the performance of or
compliance with this Agreement by the Company, except as and to the extent
specified in Section 4(b), shall be borne by the Company whether or not pursuant
to an Underwritten Offering and whether or not the Registration Statement is
filed or becomes effective and whether or not any Registrable Securities are
sold pursuant to the Registration Statement. The fees and expenses referred to
in the foregoing sentence shall include, without limitation, (i) all
registration and filing fees (including, without limitation, fees and expenses
(A) with respect to filings required to be made with the AMEX and any Subsequent
Market on which the Common Stock is then listed for trading, and (B) in
compliance with state securities or Blue Sky laws (including, without
limitation, fees and disbursements of counsel for the Holders in connection with
Blue Sky qualifications or exemptions of the Registrable Securities and
determination of the eligibility of the Registrable Securities for investment
under the laws of such jurisdictions as the managing underwriters, if any, or
the Holders of a majority of Registrable Securities may designate)), (ii)
printing expenses (including, without limitation, expenses of printing
certificates for Registrable Securities and of printing prospectuses if the
printing of prospectuses is requested by the managing underwriters, if any, or
by the holders of a majority of the Registrable Securities included in the
Registration Statement), (iii) messenger, telephone and delivery expenses, (iv)
fees and disbursements of counsel for the Company and Special Counsel for the
Holders, (v) Securities Act liability insurance, if the Company so desires such
insurance, and (vi) fees and expenses of all other Persons retained by the
Company in connection with the consummation of the transactions contemplated by
this Agreement. In addition, the Company shall be responsible for all of its
internal expenses incurred in connection with the consummation of the
transactions contemplated by this Agreement (including, without limitation, all
salaries and expenses of its officers and employees performing legal or
accounting duties), the expense of any annual audit and the fees and expenses
incurred in connection with the listing of the Registrable Securities on any
securities exchange as required hereunder.
(b) If the Holders require an Underwritten Offering pursuant to the
terms hereof and there shall be at such time an effective Registration Statement
covering all of the Registrable Securities pursuant to which the Holders are
both named Selling Securityholders thereunder and permitted to utilize the
Prospectus thereunder to resell such Registrable Securities held by them, then
the Company shall be responsible for all costs, fees and expenses in connection
therewith, except for the fees and disbursements of the Underwriters (including
any underwriting commissions and discounts) and their legal counsel and
accountants. By way of illustration which is not intended to diminish from the
provisions of Section 4(a), the Holders shall not be responsible for, and the
Company shall be required to pay, the fees or disbursements incurred by the
Company (including by its legal counsel and accountants) in connection with, the
preparation and filing of a Registration Statement and related Prospectus for
such offering, the maintenance of such Registration Statement in accordance with
the terms hereof, the listing of the Registrable Securities in accordance with
the requirements hereof, and printing expenses incurred to comply with the
requirements hereof. If the Holders require an Underwritten Offering at a time
when all of the circumstances specified in the opening clause to the first
sentence of this Section 4(b) are present, then such Holders shall bear all the
fees and disbursements of the Underwriters, including those costs specified in
this Section 4(b).
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<PAGE>
5. Indemnification
---------------
(a) Indemnification by the Company. The Company shall,
------------------------------
notwithstanding any termination of this Agreement, indemnify and hold harmless
each Holder, the officers, directors, agents (including any underwriters
retained by such Holder in connection with the offer and sale of Registrable
Securities), brokers (including brokers who offer and sell Registrable
Securities as principal as a result of a pledge or any failure to perform under
a margin call of Common Stock), investment advisors and employees of each of
them, each Person who controls any such Holder (within the meaning of Section 15
of the Securities Act or Section 20 of the Exchange Act) and the officers,
directors, agents and employees of each such controlling Person, to the fullest
extent permitted by applicable law, from and against any and all losses, claims,
damages, liabilities, costs (including, without limitation, costs of preparation
and attorneys' fees) and expenses (collectively, "Losses"), as incurred, arising
------
out of or relating to any untrue or alleged untrue statement of a material fact
contained in the Registration Statement, any Prospectus or any form of
prospectus or in any amendment or supplement thereto or in any preliminary
prospectus, or arising out of or relating to any omission or alleged omission of
a material fact required to be stated therein or necessary to make the
statements therein (in the case of any Prospectus or form of prospectus or
supplement thereto, in light of the circumstances under which they were made)
not misleading, except to the extent, but only to the extent, that (1) such
untrue statements or omissions are based solely upon information regarding such
Holder furnished in writing to the Company by such Holder expressly for use
therein, or to the extent that such information relates to such Holder or such
Holder's proposed method of distribution of Registrable Securities and was
reviewed and expressly approved in writing by such Holder expressly for use in
the Registration Statement, such Prospectus or such form of Prospectus or in any
amendment or supplement thereto or (2) in the case of an occurrence of an event
of the type specified in Section 3(d)(ii)-(vi), the use by such Holder of an
outdated or defective Prospectus after the Company has notified such Holder in
writing that the Prospectus is outdated or defective and prior to the receipt by
such Holder of the Advice contemplated in Section 6(f). The Company shall
notify the Holders promptly of the institution, threat or assertion of any
Proceeding of which the Company is aware in connection with the transactions
contemplated by this Agreement.
(b) Indemnification by Holders. Each Holder shall, severally and not
--------------------------
jointly, indemnify and hold harmless the Company, its directors, officers,
agents and employees, each Person who controls the Company (within the meaning
of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the
directors, officers, agents or employees of such controlling Persons, to the
fullest extent permitted by applicable law, from and against all Losses (as
determined by a court of competent jurisdiction in a final judgment not subject
to appeal or review) arising solely out of or based solely upon any untrue
statement of a material fact contained in the Registration Statement, any
Prospectus, or any form of prospectus, or in any amendment or supplement
thereto, or arising solely out of or based solely upon any omission of a
material fact required to be stated therein or necessary to make the statements
therein not misleading to the extent, but only to the extent, that such untrue
statement or omission is contained in any information so furnished in writing by
such Holder to the Company specifically
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<PAGE>
for inclusion in the Registration Statement or such Prospectus or to the extent
that such information relates to such Holder or such Holder's proposed method of
distribution of Registrable Securities and was reviewed and expressly approved
in writing by such Holder expressly for use in the Registration Statement, such
Prospectus or such form of Prospectus, or in any amendment or supplement
thereto. In no event shall the liability of any selling Holder hereunder be
greater in amount than the dollar amount of the net proceeds received by such
Holder upon the sale of the Registrable Securities giving rise to such
indemnification obligation.
(c) Conduct of Indemnification Proceedings. If any Proceeding shall
--------------------------------------
be brought or asserted against any Person entitled to indemnity hereunder (an
"Indemnified Party"), such Indemnified Party shall promptly notify the Person
-----------------
from whom indemnity is sought (the "Indemnifying Party") in writing, and the
------------------
Indemnifying Party shall assume the defense thereof, including the employment of
counsel reasonably satisfactory to the Indemnified Party and the payment of all
fees and expenses incurred in connection with defense thereof; provided, that
the failure of any Indemnified Party to give such notice shall not relieve the
Indemnifying Party of its obligations or liabilities pursuant to this Agreement,
except (and only) to the extent that it shall be finally determined by a court
of competent jurisdiction (which determination is not subject to appeal or
further review) that such failure shall have proximately and materially
adversely prejudiced the Indemnifying Party.
An Indemnified Party shall have the right to employ separate counsel
in any such Proceeding and to participate in the defense thereof, but the fees
and expenses of such counsel shall be at the expense of such Indemnified Party
or Parties unless: (1) the Indemnifying Party has agreed in writing to pay such
fees and expenses; or (2) the Indemnifying Party shall have failed promptly to
assume the defense of such Proceeding and to employ counsel reasonably
satisfactory to such Indemnified Party in any such Proceeding; or (3) the named
parties to any such Proceeding (including any impleaded parties) include both
such Indemnified Party and the Indemnifying Party, and such Indemnified Party
shall have been advised by counsel that a conflict of interest is likely to
exist if the same counsel were to represent such Indemnified Party and the
Indemnifying Party (in which case, if such Indemnified Party notifies the
Indemnifying Party in writing that it elects to employ separate counsel at the
expense of the Indemnifying Party, the Indemnifying Party shall not have the
right to assume the defense thereof and such counsel shall be at the expense of
the Indemnifying Party). The Indemnifying Party Shall not be liable for the fees
and expenses of more than one such counsel. The Indemnifying Party shall not be
liable for any settlement of any such Proceeding effected without its written
consent, which consent shall not be unreasonably withheld. No Indemnifying Party
shall, without the prior written consent of the Indemnified Party, effect any
settlement of any pending Proceeding in respect of which any Indemnified Party
is a party, unless such settlement includes an unconditional release of such
Indemnified Party from all liability on claims that are the subject matter of
such Proceeding.
All fees and expenses of the Indemnified Party (including reasonable
fees and expenses to the extent incurred in connection with investigating or
preparing to defend such Proceeding in a manner not inconsistent with this
Section) shall be paid to the Indemnified Party, as incurred, within ten (10)
Business Days of written notice thereof to the Indemnifying Party (regardless of
whether it is ultimately determined that an Indemnified Party is not entitled to
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indemnification hereunder; provided, that the Indemnifying Party may require
--------
such Indemnified Party to undertake to reimburse all such fees and expenses to
the extent it is finally judicially determined that such Indemnified Party is
not entitled to indemnification hereunder).
(d) Contribution. If a claim for indemnification under Section 5(a)
------------
or 5(b) is unavailable to an Indemnified Party (by reason of public policy or
otherwise), then each Indemnifying Party, in lieu of indemnifying such
Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such Losses, in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party and
Indemnified Party in connection with the actions, statements or omissions that
resulted in such Losses as well as any other relevant equitable considerations.
The relative fault of such Indemnifying Party and Indemnified Party shall be
determined by reference to, among other things, whether any action in question,
including any untrue or alleged untrue statement of a material fact or omission
or alleged omission of a material fact, has been taken or made by, or relates to
information supplied by, such Indemnifying Party or Indemnified Party, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such action, statement or omission. The amount paid or
payable by a party as a result of any Losses shall be deemed to include, subject
to the limitations set forth in Section 5(c), any reasonable attorneys' or other
reasonable fees or expenses incurred by such party in connection with any
Proceeding to the extent such party would have been indemnified for such fees or
expenses if the indemnification provided for in this Section was available to
such party in accordance with its terms.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 5(d) were determined by pro rata
--- ----
allocation or by any other method of allocation that does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section 5(d), no Holder shall be required
to contribute, in the aggregate, any amount in excess of the amount by which the
proceeds actually received by such Holder from the sale of the Registrable
Securities subject to the Proceeding exceeds the amount of any damages that such
Holder has otherwise been required to pay by reason of such untrue or alleged
untrue statement or omission or alleged omission. No Person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any Person who was not
guilty of such fraudulent misrepresentation.
The indemnity and contribution agreements contained in this Section
are in addition to any liability that the Indemnifying Parties may have to the
Indemnified Parties.
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6. Miscellaneous
-------------
(a) Remedies. In the event of a breach by the Company or by a Holder,
--------
of any of their obligations under this Agreement, each Holder or the Company, as
the case may be, in addition to being entitled to exercise all rights granted by
law and under this Agreement, including recovery of damages, will be entitled to
specific performance of its rights under this Agreement. The Company and each
Holder agree that monetary damages would not provide adequate compensation for
any losses incurred by reason of a breach by it of any of the provisions of this
Agreement and hereby further agrees that, in the event of any action for
specific performance in respect of such breach, it shall waive the defense that
a remedy at law would be adequate.
(b) No Inconsistent Agreements. Neither the Company nor any of its
--------------------------
subsidiaries has entered, as of the date hereof, nor shall the Company or any of
its subsidiaries, on or after the date of this Agreement, enter into any
agreement with respect to its securities that is inconsistent with the rights
granted to the Holders in this Agreement or otherwise conflicts with the
provisions hereof. Except as and to the extent specified in Schedule 6(b)
-------------
hereto, neither the Company nor any of its subsidiaries has previously entered
into any agreement granting any registration rights with respect to any of its
securities to any Person. Without limiting the generality of the foregoing,
without the written consent of the Holders of a majority of the then outstanding
Registrable Securities, the Company shall not grant to any Person the right to
request the Company to register any securities of the Company under the
Securities Act unless the rights so granted are subject in all respects to the
prior rights in full of the Holders set forth herein, and are not otherwise in
conflict or inconsistent with the provisions of this Agreement.
(c) No Piggyback on Registrations. Except as and to the extent
-----------------------------
specified in Schedule 6(b) hereto, neither the Company nor any of its security
-------------
holders (other than the Holders in such capacity pursuant hereto) may include
securities of the Company in the Registration Statement other than the
Registrable Securities, and the Company shall not after the date hereof enter
into any agreement providing any such right to any of its security holders.
(d) Piggy-Back Registrations. If at any time when there is not an
------------------------
effective Registration Statement covering all of the Registrable Securities and
the Underlying Shares, the Company shall determine to prepare and file with the
Commission a registration statement relating to an offering for its own account
or the account of others under the Securities Act of any of its equity
securities, other than on Form S-4 or Form S-8 (each as promulgated under the
Securities Act) or their then equivalents relating to equity securities to be
issued solely in connection with any acquisition of any entity or business or
equity securities issuable in connection with stock option or other employee
benefit plans, then the Company shall send to each holder of Registrable
Securities written notice of such determination and, if within twenty (20) days
after receipt of such notice, any such holder shall so request in writing, the
Company shall include in such registration statement all or any part of such
Registrable Securities such holder requests to be registered; provided, however,
-------- -------
that the Company shall not be required to register any Registrable Securities
pursuant to this Section 6(d) that are eligible for sale pursuant to Rule 144(k)
of the Commission.
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(e) Prospectus Delivery Requirements. Each Holder covenants and
--------------------------------
agrees that (i) it will not sell any Registrable Securities under the
Registration Statement until it has received copies of the Prospectus as then
amended or supplemented as contemplated in Section 3(h) and notice from the
Company that such Registration Statement and any post-effective amendments
thereto have become effective as contemplated by Section 3(d) and (ii) it and
its officers, directors or Affiliates, if any, will comply with the prospectus
delivery requirements of the Securities Act as applicable to any of them in
connection with sales of Registrable Securities pursuant to the Registration
Statement.
(f) Discontinued Disposition. Each Holder agrees by its acquisition
------------------------
of such Registrable Securities that, upon receipt of a notice from the Company
of the occurrence of any event of the kind described in Sections 3(d)(ii),
3(d)(iii), 3(d)(iv), 3(d)(v) or 3(d)(vi), such Holder will forthwith discontinue
disposition of such Registrable Securities under the Registration Statement
until such Holder's receipt of the copies of the supplemented Prospectus and/or
amended Registration Statement contemplated by Section 3(k), or until it is
advised in writing (the "Advice") by the Company that the use of the applicable
------
Prospectus may be resumed, and, in either case, has received copies of any
additional or supplemental filings that are incorporated or deemed to be
incorporated by reference in such Prospectus or Registration Statement. The
Company may provide appropriate stop orders to enforce the provisions of this
paragraph.
(g) Amendments and Waivers. The provisions of this Agreement,
----------------------
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless the same shall be in writing and signed by the Company
and the Holders of at least two-thirds of the then outstanding Registrable
Securities. Notwithstanding the foregoing, a waiver or consent to depart from
the provisions hereof with respect to a matter that relates exclusively to the
rights of Holders and that does not directly or indirectly affect the rights of
other Holders may be given by Holders of at least a majority of the Registrable
Securities to which such waiver or consent relates; provided, however, that the
-------- -------
provisions of this sentence may not be amended, modified, or supplemented except
in accordance with the provisions of the immediately preceding sentence.
(h) Notices. Any and all notices or other communications or
-------
deliveries required or permitted to be provided hereunder shall be in writing
and shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section prior to 6:30 p.m. (New
York City time) on a Business Day, (ii) the Business Day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in the Purchase Agreement later than 6:30
p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York City
time) on such date, (iii) the Business Day following the date of mailing, if
sent by nationally recognized overnight courier service, or (iv) upon actual
receipt by the party to whom such notice is required to be given. The address
for such notices and communications shall be as follows:
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If to the Company: Sonic Foundry, Inc.
754 Williamson Street
Madison, WI 53703
Facsimile No.: (608) 256-6689
Attn: Chief Financial Officer
With copies to: McBreen & Kopko
20 N. Wacker Drive, Suite 2520
Chicago, IL 60606
Facsimile No.: (312)332-2657
Attn: James R. Stern, Esq.
If to a Purchaser: To the address set forth under such Purchaser's name
on the signature pages hereto.
If to any other Person who is then the registered Holder:
To the address of such Holder as it appears in the
stock transfer books of the Company
or such other address as may be designated in writing hereafter, in the same
manner, by such Person.
(i) Successors and Assigns. This Agreement shall inure to the benefit
----------------------
of and be binding upon the successors and permitted assigns of each of the
parties and shall inure to the benefit of each Holder. The Company may not
assign its rights or obligations hereunder without the prior written consent of
each Holder. Each Holder may assign their respective rights hereunder in the
manner and to the Persons as permitted under the Purchase Agreement.
(j) Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when so executed shall be deemed to be an original
and, all of which taken together shall constitute one and the same Agreement.
In the event that any signature is delivered by facsimile transmission, such
signature shall create a valid binding obligation of the party executing (or on
whose behalf such signature is executed) the same with the same force and effect
as if such facsimile signature were the original thereof.
(k) Governing Law. All questions concerning the construction,
-------------
validity, enforcement and interpretation of this Agreement shall be governed by
and construed and enforced in accordance with the internal laws of the State of
New York, without regard to the principles of conflicts of law thereof. 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 improper. Each party hereby irrevocably
waives personal service of process and consents to process being served in
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any such suit, action or proceeding by mailing a copy thereof to such party at
the address in effect for 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.
(l) Cumulative Remedies. The remedies provided herein are cumulative
-------------------
and not exclusive of any remedies provided by law.
(m) Severability. If any term, provision, covenant or restriction of
------------
this Agreement is held by a court of competent jurisdiction to be invalid,
illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their reasonable efforts to find and employ an alternative
means to achieve the same or substantially the same result as that contemplated
by such term, provision, covenant or restriction. It is hereby stipulated and
declared to be the intention of the parties that they would have executed the
remaining terms, provisions, covenants and restrictions without including any of
such that may be hereafter declared invalid, illegal, void or unenforceable.
(n) Headings. The headings in this Agreement are for convenience of
--------
reference only and shall not limit or otherwise affect the meaning hereof.
(o) Shares Held by the Company and its Affiliates. Whenever the
---------------------------------------------
consent or approval of Holders of a specified percentage of Registrable
Securities is required hereunder, Registrable Securities held by the Company or
its Affiliates (other than any Holder or transferees or successors or assigns
thereof if such Holder is deemed to be an Affiliate solely by reason of its
holdings of such Registrable Securities) shall not be counted in determining
whether such consent or approval was given by the Holders of such required
percentage.
(p) Independent Nature of Purchasers' Obligations and Rights. The
--------------------------------------------------------
obligations of each Purchaser hereunder is several and not joint with the
obligations of any other Purchaser hereunder, and neither Purchaser shall be
responsible in any way for the performance of the obligations of any other
Purchaser hereunder. Nothing contained herein or in any other agreement or
document delivered at any closing, and no action taken by any Purchaser pursuant
hereto or thereto, shall be deemed to constitute the Purchasers as a
partnership, an association, a joint venture or any other kind of entity, or
create a presumption that the Purchasers are in any way acting in concert with
respect to such obligations or the transactions contemplated by this Agreement.
Each Purchaser shall be entitled to protect and enforce its rights, including
without limitation the rights arising out of this Agreement, and it shall not be
necessary for any other Purchaser to be joined as an additional party in any
proceeding for such purpose.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGES TO FOLLOW]
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Registration Rights
Agreement as of the date first written above.
SONIC FOUNDRY, INC.
By:_____________________________________
Name:
Title:
<PAGE>
STRONG RIVER INVESTMENTS, INC.
By:_____________________________________
Name:
Title:
Address for Notice:
Strong River Investments, Inc.
c/o Cavallo Capital Corp.
630 Fifth Avenue, Suite 2000
New York, NY 10111
Facsimile No.: (212) 332-3256
Attn: Avi Vigder
With copies to: Robinson Silverman Pearce Aronsohn &
Berman LLP
1290 Avenue of the Americas
New York, NY 10104
Facsimile No.: (212) 541-4630 and (212) 541-1432
Attn: Kenneth L. Henderson, Esq.
Eric L. Cohen. Esq.
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<PAGE>
MONTROSE INVESTMENTS L.P.
By:_____________________________________
Name:
Title:
Address for Notice:
Montrose Investments, Ltd.
300 Crescent Court, Suite 700
Dallas, TX 75201
Facsimile: (214) 758-1221
Attn: Will Rose
Kim Rozman
With copies to:
Robinson Silverman Pearce Aronsohn &
Berman LLP
1290 Avenue of the Americas
New York, NY 10104
Facsimile No.: (212) 541-4630 and (212) 541-1432
Attn: Kenneth L. Henderson, Esq.
Eric L. Cohen. Esq.
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<PAGE>
Annex A
-------
Plan of Distribution
--------------------
The Selling Stockholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of Common Stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The Selling Stockholders may use any one or more of the
following methods when selling shares:
. ordinary brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
. block trades in which the broker-dealer will attempt to sell the shares as
agent but may position and resell a portion of the block as principal to
facilitate the transaction;
. purchases by a broker-dealer as principal and resale by the broker-dealer
for its account;
. an exchange distribution in accordance with the rules of the applicable
exchange;
. privately negotiated transactions;
. broker-dealers may agree with the Selling Stockholders to sell a specified
number of such shares at a stipulated price per share;
. a combination of any such methods of sale; and
. any other method permitted pursuant to applicable law.
The Selling Stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
The Selling Stockholders may also engage in short sales, including, short
sales against the box, puts and calls and other transactions in securities of
the Company or derivatives of Company securities and may sell or deliver shares
in connection with these trades. The Selling Stockholders may pledge their
shares to their brokers under the margin provisions of customer agreements. If
a Selling Stockholder defaults on a margin loan, the broker may, from time to
time, offer and sell the pledged shares.
Broker-dealers engaged by the Selling Stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the Selling Stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The Selling Stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
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<PAGE>
The Selling Stockholders and any broker-dealers or agents that are involved
in selling the shares may be deemed to be "underwriters" within the meaning of
the Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.
The Company is required to pay all fees and expenses incident to the
registration of the shares, including fees and disbursements of counsel to the
Selling Stockholders. The Company has agreed to indemnify the Selling
Stockholders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
<PAGE>
EXHIBIT C
---------
<PAGE>
EXHIBIT D
---------
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREUNDER AND IN COMPLIANCE WITH
APPLICABLE STATE SECURITIES OR BLUE SKY LAWS.
SONIC FOUNDRY, INC.
WARRANT
-------
Warrant No. 2 Dated: September 13, 1999
Sonic Foundry, Inc., a Maryland corporation (the "Company"), hereby
certifies that, for value received, Strong River Investments, Inc., or its
registered assigns ("Holder"), is entitled, subject to the terms set forth
below, to purchase from the Company up to a total of 58,366 shares of common
stock, $.01 par value per share (the "Common Stock"), of the Company (each such
share, a "Warrant Share" and all such shares, the "Warrant Shares") at an
exercise price equal to $10.28 per share (as adjusted from time to time as
provided in Section 9, the "Exercise Price"), at any time and from time to time
from and after the date hereof and through and including September 13, 2004 (the
"Expiration Date"), and subject to the following terms and conditions:
1. Registration of Warrant. The Company shall register this
-----------------------
Warrant, upon records to be maintained by the Company for that purpose (the
"Warrant Register"), in the name of the record Holder hereof from time to time.
The Company may deem and treat the registered Holder of this Warrant as the
absolute owner hereof for the purpose of any exercise hereof or any distribution
to the Holder, and for all other purposes, and the Company shall not be affected
by notice to the contrary.
2. Registration of Transfers and Exchanges.
---------------------------------------
<PAGE>
(a) The Company shall register the transfer of any portion of
this Warrant in the Warrant Register, upon surrender of this Warrant, with the
Form of Assignment attached hereto duly completed and signed, to the Transfer
Agent or to the Company at the office specified in or pursuant to Section 3(b).
Upon any such registration or transfer, a new warrant to purchase Common Stock,
in substantially the form of this Warrant (any such new warrant, a "New
Warrant"), evidencing the portion of this Warrant so transferred shall be issued
to the transferee and a New Warrant evidencing the remaining portion of this
Warrant not so transferred, if any, shall be issued to the transferring Holder.
The acceptance of the New Warrant by the transferee thereof shall be deemed the
acceptance of such transferee of all of the rights and obligations of a holder
of a Warrant.
(b) This Warrant is exchangeable, upon the surrender hereof by
the Holder to the office of the Company specified in or pursuant to Section 3(b)
for one or more New Warrants, evidencing in the aggregate the right to purchase
the number of Warrant Shares which may then be purchased hereunder. Any such New
Warrant will be dated the date of such exchange.
3. Duration and Exercise of Warrants.
---------------------------------
(a) This Warrant shall be exercisable by the registered Holder
on any business day before 8:00 P.M., New York City time, at any time and from
time to time on or after the date hereof to and including the Expiration Date.
At 8:00 P.M., New York City time on the Expiration Date, the portion of this
Warrant not exercised prior thereto shall be and become void and of no value.
Prior to the Expiration Date, the Company may not call or otherwise redeem this
Warrant without the prior written consent of the Holder.
(b) Subject to Sections 2(b), 6 and 10, upon surrender of this
Warrant, with the Form of Election to Purchase attached hereto duly completed
and signed, to the Company at its address for notice set forth in Section 13 and
upon payment of the Exercise Price multiplied by the number of Warrant Shares
that the Holder intends to purchase hereunder, in the manner provided hereunder,
all as specified by the Holder in the Form of Election to Purchase, the Company
shall promptly (but in no event later than 3 business days after the Date of
Exercise (as defined herein)) issue or cause to be issued and cause to be
delivered to or upon the written order of the Holder and in such name or names
as the Holder may designate, a certificate for the Warrant Shares issuable upon
such exercise, free of restrictive legends except (i) either in the event that a
registration statement covering the resale of the Warrant Shares and naming the
Holder as a selling stockholder thereunder is not then effective or the Warrant
Shares are not freely transferable without volume restrictions pursuant to Rule
144(k) promulgated under the Securities Act of 1933, as amended (the "Securities
Act"), or (ii) if this Warrant shall have been issued pursuant to a written
agreement between the original Holder and the Company, as required by such
agreement. Any person so designated by the Holder to receive Warrant Shares
shall be deemed to have become holder of record of such Warrant Shares as of the
Date of Exercise of this Warrant.
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<PAGE>
A "Date of Exercise" means the date on which the Company shall
have received (i) this Warrant (or any New Warrant, as applicable), with the
Form of Election to Purchase attached hereto (or attached to such New Warrant)
appropriately completed and duly signed, and (ii) payment of the Exercise Price
for the number of Warrant Shares so indicated by the holder hereof to be
purchased.
(c) This Warrant shall be exercisable, either in its entirety
or, from time to time, for a portion of the number of Warrant Shares. If less
than all of the Warrant Shares which may be purchased under this Warrant are
exercised at any time, the Company shall issue or cause to be issued, at its
expense, a New Warrant evidencing the right to purchase the remaining number of
Warrant Shares for which no exercise has been evidenced by this Warrant.
4. Piggyback Registration Rights. During the Effectiveness Period
-----------------------------
(as defined in the Registration Rights Agreement, of even date herewith, between
the Company and the original Holder), the Company may not file any registration
statement with the Securities and Exchange Commission (other than registration
statements of the Company filed on Form S-8 or Form S-4, each as promulgated
under the Securities Act, pursuant to which the Company is registering
securities pursuant to a Company employee benefit plan or pursuant to a merger,
acquisition or similar transaction including supplements thereto, but not
additionally filed registration statements in respect of such securities) at any
time when there is not an effective registration statement covering the resale
of the Warrant Shares and naming the Holder as a selling stockholder thereunder,
unless the Company provides the Holder with not less than 20 days notice of its
intention to file such registration statement and provides the Holder the option
to include any or all of the applicable Warrant Shares therein. The piggyback
registration rights granted to the Holder pursuant to this Section shall
continue until all of the Holder's Warrant Shares have been sold in accordance
with an effective registration statement or upon the Expiration Date. The
Company will pay all registration expenses in connection therewith.
5. Demand Registration Rights. During the Effectiveness Period if
--------------------------
the Warrant Shares are not registered pursuant to an effective registration
statement, the Holder may make a written request for the registration under the
Securities Act (a "Demand Registration"), of all of the Warrant Shares (the
"Registrable Securities"), and the Company shall use its best efforts to effect
such Demand Registration as promptly as possible, but in any case within 90 days
of the receipt of such written request. Any request for a Demand Registration
shall specify the aggregate number of Registrable Securities proposed to be sold
and shall also specify the intended method of disposition thereof. The right to
cause a registration of the Registrable Securities under this Section 5 shall be
limited to one such registration. In any registration initiated as a Demand
Registration, the Company will pay all of its registration expenses in
connection therewith. A Demand Registration shall not be counted as a Demand
Registration hereunder until the registration statement filed pursuant to the
Demand Registration has been declared effective by the Securities and Exchange
Commission and maintained continuously effective for a period of at least 360
days or such shorter period when all Registrable Securities included therein
have been sold in accordance with such registration statement, provided, however
that any days on which such registration statement is not effective or on which
the
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<PAGE>
Holder is not permitted by the Company or any governmental authority to sell
Warrant Shares under such registration statement shall not count towards such
360 day period.
6. Payment of Taxes. The Company will pay all documentary stamp
----------------
taxes attributable to the issuance of Warrant Shares upon the exercise of this
Warrant; provided, however, that the Company shall not be required to pay any
tax which may be payable in respect of any transfer involved in the registration
of any certificates for Warrant Shares or Warrants in a name other than that of
the Holder. The Holder shall be responsible for all other tax liability that
may arise as a result of holding or transferring this Warrant or receiving
Warrant Shares upon exercise hereof.
7. Replacement of Warrant. If this Warrant is mutilated, lost,
----------------------
stolen or destroyed, the Company shall issue or cause to be issued in exchange
and substitution for and upon cancellation hereof, or in lieu of and
substitution for this Warrant, a New Warrant, but only upon receipt of evidence
reasonably satisfactory to the Company of such loss, theft or destruction and
indemnity, if requested, satisfactory to it. Applicants for a New Warrant under
such circumstances shall also comply with such other reasonable regulations and
procedures and pay such other reasonable charges as the Company may prescribe.
8. Reservation of Warrant Shares. The Company covenants that it
-----------------------------
will at all times reserve and keep available out of the aggregate of its
authorized but unissued Common Stock, solely for the purpose of enabling it to
issue Warrant Shares upon exercise of this Warrant as herein provided, the
number of Warrant Shares which are then issuable and deliverable upon the
exercise of this entire Warrant, free from preemptive rights or any other actual
contingent purchase rights of persons other than the Holder (taking into account
the adjustments and restrictions of Section 9). The Company covenants that all
Warrant Shares that shall be so issuable and deliverable shall, upon issuance
and the payment of the applicable Exercise Price in accordance with the terms
hereof, be duly and validly authorized, issued and fully paid and nonassessable.
9. Certain Adjustments. The Exercise Price and number of Warrant
-------------------
Shares issuable upon exercise of this Warrant are subject to adjustment from
time to time as set forth in this Section 9. Upon each such adjustment of the
Exercise Price pursuant to this Section 9, the Holder shall thereafter prior to
the Expiration Date be entitled to purchase, at the Exercise Price resulting
from such adjustment, the number of Warrant Shares obtained by multiplying the
Exercise Price in effect immediately prior to such adjustment by the number of
Warrant Shares issuable upon exercise of this Warrant immediately prior to such
adjustment and dividing the product thereof by the Exercise Price resulting from
such adjustment.
(a) If the Company, at any time while this Warrant is
outstanding, (i) shall pay a stock dividend (except scheduled dividends paid on
outstanding preferred stock as of the date hereof which contain a stated
dividend rate) or otherwise make a distribution or distributions on shares of
its Common Stock or on any other class of capital stock payable in shares of
Common Stock, (ii) subdivide outstanding shares of Common Stock into a larger
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<PAGE>
number of shares, or (iii) combine outstanding shares of Common Stock into a
smaller number of shares, the Exercise Price shall be multiplied by a fraction
of which the numerator shall be the number of shares of Common Stock (excluding
treasury shares, if any) outstanding before such event and of which the
denominator shall be the number of shares of Common Stock (excluding treasury
shares, if any) outstanding after such event. Any adjustment made pursuant to
this Section shall become effective immediately after the record date for the
determination of stockholders entitled to receive such dividend or distribution
and shall become effective immediately after the effective date in the case of a
subdivision or combination, and shall apply to successive subdivisions and
combinations.
(b) In case of any reclassification of the Common Stock, any
consolidation or merger of the Company with or into another person, the sale or
transfer of all or substantially all of the assets of the Company or any
compulsory share exchange pursuant to which the Common Stock is converted into
other securities, cash or property, then the Holder shall have the right
thereafter to exercise this Warrant only into the shares of stock and other
securities and property receivable upon or deemed to be held by holders of
Common Stock following such reclassification, consolidation, merger, sale,
transfer or share exchange, and the Holder shall be entitled upon such event to
receive such amount of securities or property equal to the amount of Warrant
Shares such Holder would have been entitled to had such Holder exercised this
Warrant immediately prior to such reclassification, consolidation, merger, sale,
transfer or share exchange. The terms of any such consolidation, merger, sale,
transfer or share exchange shall include such terms so as to continue to give to
the Holder the right to receive the securities or property set forth in this
Section 9(b) upon any exercise following any such reclassification,
consolidation, merger, sale, transfer or share exchange.
(c) If the Company, at any time while this Warrant is
outstanding, shall distribute to all holders of Common Stock (and not to holders
of this Warrant) evidences of its indebtedness or assets or rights or warrants
to subscribe for or purchase any security (excluding those referred to in
Sections 9(a), (b) and (d)), then in each such case the Exercise Price shall be
determined by multiplying the Exercise Price in effect immediately prior to the
record date fixed for determination of stockholders entitled to receive such
distribution by a fraction of which the denominator shall be the Exercise Price
determined as of the record date mentioned above, and of which the numerator
shall be such Exercise Price on such record date less the then fair market value
at such record date of the portion of such assets or evidence of indebtedness so
distributed applicable to one outstanding share of Common Stock as determined by
the Company's independent certified public accountants that regularly examines
the financial statements of the Company (an "Appraiser").
(d) If at any time the Company or any subsidiary thereof, as
applicable with respect to Common Stock Equivalents (as defined below), shall
issue shares of Common Stock or rights, warrants, options or other securities or
debt that is convertible into or exchangeable for shares of Common Stock
("Common Stock Equivalents"), other than: (i) issuances pursuant to any grant
- --------------------------
or exercise of any stock or options which may hereafter be granted or exercised
under any employee benefit plan of the Company now existing or to be
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<PAGE>
implemented in the future, and (ii) shares of Common Stock issued in as payment
of the purchase price in connection with a Strategic Transaction (as defined
below) entitling any person or entity to acquire shares of Common Stock at a
price per share less than both the market price of the Common Stock at the time
of issuance and the Exercise Price then in effect (if the holder of the Common
Stock or Common Stock Equivalent so issued shall at any time, whether by
operation of purchase price adjustments, reset provisions, floating conversion,
exercise or exchange prices or otherwise, or due to warrants, options or rights
issued in connection with such issuance at a price less than the prevailing
Exercise Price or market price, such issuance shall be deemed to have occurred
for less than such Exercise Price or market price), then, forthwith upon such
issue or sale, the Exercise Price shall be reduced to the price (calculated to
the nearest cent) determined by multiplying the Exercise Price in effect
immediately prior thereto by a fraction, the numerator of which shall be the sum
of (i) the number of shares of Common Stock outstanding immediately prior to
such issuance, and (ii) the number of shares of Common Stock which the aggregate
consideration received (or to be received, assuming exercise or conversion in
full of such Common Stock Equivalents) for the issuance of such additional
shares of Common Stock would purchase at the Exercise Price, and the denominator
of which shall be the sum of the number of shares of Common Stock outstanding
immediately after the issuance of such additional shares. For purposes hereof,
all shares of Common Stock that are issuable upon conversion, exercise or
exchange of Common Stock Equivalents shall be deemed outstanding immediately
after the issuance of such Common Stock Equivalents. Such adjustment shall be
made whenever such Common Stock or Common Stock Equivalents are issued. However,
upon the expiration of any Common Stock Equivalents the issuance of which
resulted in an adjustment in the Exercise Price pursuant to this Section, if any
such Common Stock Equivalents shall expire and shall not have been exercised,
the Exercise Price shall immediately upon such expiration be recomputed and
effective immediately upon such expiration be increased to the price which it
would have been (but reflecting any other adjustments in the Exercise Price made
pursuant to the provisions of this Section after the issuance of such Common
Stock Equivalents) had the adjustment of the Exercise Price made upon the
issuance of such Common Stock Equivalents been made on the basis of offering for
subscription or purchase only that number of shares of the Common Stock actually
purchased upon the exercise of such Common Stock Equivalents actually exercised.
For purposes of this Section 9(d), a "Strategic Transaction" shall mean a
---------------------
transaction or relationship in which the Company issues Common Stock to an
entity which is, itself or through its subsidiaries, an operating company in a
business related to the business of the Company and in which the Company
receives material benefits in addition to the investment of funds, but shall not
include a transaction in which the Company is issuing securities primarily for
the purpose of raising capital.
(e) In case of any (1) merger or consolidation of the Company
with or into another Person, or (2) sale by the Company of more than one-half of
the assets of the Company (on a book value basis) in one or a series of related
transactions, or (3) tender or other offer or exchange (whether by the Company
or another Person) pursuant to which holders of Common Stock are permitted to
tender or exchange their shares for other securities, stock, cash
-81-
<PAGE>
or property of the Company or another Person; then the Holder shall have the
right thereafter to (A) exercise this Warrant for the shares of stock and other
securities, cash and property receivable upon or deemed to be held by holders of
Common Stock following such merger, consolidation or sale, and the Holder shall
be entitled upon such event or series of related events to receive such amount
of securities, cash and property as the Common Stock for which this Warrant
could have been exercised immediately prior to such merger, consolidation or
sales would have been entitled, (B) in the case of a merger or consolidation,
(x) require the surviving entity to issue to the Holder a warrant entitling the
Holder to acquire shares of such entity's common stock, which warrant shall have
terms identical (including with respect to exercise) to the terms of this
Warrant and shall be entitled to all of the rights and privileges set forth
herein and the agreements pursuant to which this Warrant was issued (including,
without limitation, as such rights relate to the acquisition, transferability,
registration and listing of such shares of stock other securities issuable upon
exercise thereof), or (C) in the event of an exchange or tender offer or other
transaction contemplated by clause (3) of this Section, tender or exchange this
Warrant for such securities, stock, cash and other property receivable upon or
deemed to be held by holders of Common Stock that have tendered or exchanged
their shares of Common Stock following such tender or exchange, and the Holder
shall be entitled upon such exchange or tender to receive such amount of
securities, cash and property as the shares of Common Stock for which this
Warrant could have been exercised immediately prior to such tender or exchange
would have been entitled as would have been issued. In the case of clause (B),
the exercise price applicable for the newly issued warrant shall be based upon
the amount of securities, cash and property that each shares of Common Stock
would receive in such transaction and the Exercise Price immediately prior to
the effectiveness or closing date for such transaction. The terms of any such
merger, sale, consolidation, tender or exchange shall include such terms so as
continue to give the Holder the right to receive the securities, cash and
property set forth in this Section upon any conversion or redemption following
such event. This provision shall similarly apply to successive such events.
(f) For the purposes of this Section 9, the following clauses
shall also be applicable:
(i) Record Date. In case the Company shall take a record
-----------
of the holders of its Common Stock for the purpose of entitling them (A) to
receive a dividend or other distribution payable in Common Stock or in
securities convertible or exchangeable into shares of Common Stock, or (B) to
subscribe for or purchase Common Stock or securities convertible or exchangeable
into shares of Common Stock, then such record date shall 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 other
distribution or the date of the granting of such right of subscription or
purchase, as the case may be.
(ii) Treasury Shares. The number of shares of Common Stock
---------------
outstanding at any given time shall not include shares owned or held by or for
the account of the Company, and the disposition of any such shares shall be
considered an issue or sale of Common Stock.
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<PAGE>
(g) No adjustments in the Exercise Price shall be required if
such adjustment is less than $0.01; provided, however, that any adjustments
which by reason of this Section 9 are not required to be made shall be carried
forward and taken into account in any subsequent adjustment. All calculations
under this Section 9 shall be made to the nearest cent or to the nearest 1/100th
of a share, as the case may be.
(h) Whenever the Exercise Price is adjusted pursuant to Section
9(c) above, the Holder, after receipt of the determination by the Appraiser,
shall have the right to select an additional appraiser (which shall be a
nationally recognized accounting firm), in which case the adjustment shall be
equal to the average of the adjustments recommended by each of the Appraiser and
such appraiser. The Holder shall promptly mail or cause to be mailed to the
Company, a notice setting forth the Exercise Price after such adjustment and
setting forth a brief statement of the facts requiring such adjustment. Such
adjustment shall become effective immediately after the record date mentioned
above.
(i) If:
(i) the Company shall declare a dividend (or any
other distribution) on its Common Stock; or
(ii) the Company shall declare a special nonrecurring
cash dividend on or a redemption of its Common
Stock; or
(iii) the Company shall authorize the granting to all
holders of the Common Stock rights or warrants
to subscribe for or purchase any shares of
capital stock of any class or of any rights; or
(iv) the approval of any stockholders of the Company
shall be required in connection with any
reclassification of the Common Stock, any
consolidation or merger to which the Company is
a party, any sale or transfer of all or
substantially all of the assets of the Company,
or any compulsory share exchange whereby the
Common Stock is converted into other securities,
cash or property; or
(v) the Company shall authorize the voluntary
dissolution, liquidation or winding up of the
affairs of the Company,
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<PAGE>
then the Company shall cause to be mailed to each Holder at their last addresses
as they shall appear upon the Warrant Register, at least 30 calendar days prior
to the applicable record or effective date hereinafter specified, a notice
stating (x) the date on which a record is to be taken for the purpose of such
dividend, distribution, redemption, rights or warrants, or if a record is not to
be taken, the date as of which the holders of Common Stock of record to be
entitled to such dividend, distributions, redemption, rights or warrants are to
be determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of Common Stock of
record shall be entitled to exchange their shares of Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer, share exchange, dissolution, liquidation
or winding up; provided, however, that the failure to mail such notice or any
-------- -------
defect therein or in the mailing thereof shall not affect the validity of the
corporate action required to be specified in such notice.
10. Payment of Exercise Price. The Holder shall pay the Exercise
-------------------------
Price in one of the following manners:
(a) Cash Exercise. The Holder may deliver immediately available
-------------
funds; or
(b) Cashless Exercise. The Holder may surrender this Warrant to
-----------------
the Company together with a notice of cashless exercise, in which event the
Company shall issue to the Holder the number of Warrant Shares determined as
follows:
X = Y (A-B)/A
where:
X = the number of Warrant Shares to be issued to the Holder.
Y = the number of Warrant Shares with respect to which this
Warrant is being exercised.
A = the average of the closing sale prices of the Common
Stock for the five (5) trading days immediately prior to
(but not including) the Date of Exercise.
B = the Exercise Price.
For purposes of Rule 144 promulgated under the Securities Act, it is intended,
understood and acknowledged that the Warrant Shares issued in a cashless
exercise transaction shall be deemed to have been acquired by the Holder, and
the holding period for the Warrant Shares shall be deemed to have been
commenced, on the issue date.
11. Certain Exercise Restrictions.
-----------------------------
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<PAGE>
(a) The Holder may not exercise this Warrant to the extent such
exercise would result in the Holder, together with any affiliate thereof,
beneficially owning (as determined in accordance with Section 13(d) of the
Exchange Act of 1934 (the "Exchange Act") and the rules thereunder) in excess of
4.999% of the then issued and outstanding shares of Common Stock, including
shares issuable upon exercise of this Warrant after application of this Section.
The Holder shall have the sole authority and obligation to determine whether and
to what Warrant Shares the restriction contained in this Section applies. The
provisions of this Section may be waived by the Holder upon not less than 61
days prior notice to the Company.
(b) The Holder may not exercise this Warrant to the extent such
exercise would result in the Holder, together with any affiliate thereof,
beneficially owning (as determined in accordance with Section 13(d) of the
Exchange Act and the rules thereunder) in excess of 9.999% of the then issued
and outstanding shares of Common Stock, including shares issuable upon exercise
of this Warrant after application of this Section. The Holder shall have the
sole authority and obligation to determine whether and to what Warrant Shares
the restriction contained in this Section applies. The provisions of this
Section may be waived by the Holder upon not less than 61 days prior notice to
the Company.
12. Fractional Shares. The Company shall not be required to issue or
-----------------
cause to be issued fractional Warrant Shares on the exercise of this Warrant.
The number of full Warrant Shares which shall be issuable upon the exercise of
this Warrant shall be computed on the basis of the aggregate number of Warrant
Shares purchasable on exercise of this Warrant so presented. If any fraction of
a Warrant Share would, except for the provisions of this Section, be issuable on
the exercise of this Warrant, the Company shall pay an amount in cash equal to
the Exercise Price multiplied by such fraction.
13. Notices. Any and all notices or other communications or
-------
deliveries hereunder shall be in writing and shall be deemed given and effective
on the earliest of (i) the date of transmission, if such notice or communication
is delivered via facsimile at the facsimile telephone number specified in this
Section prior to 8:00 p.m. (New York City time) on a business day, (ii) the
business day after the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile telephone number specified in this
Section later than 8:00 p.m. (New York City time) on any date and earlier than
11:59 p.m. (New York City time) on such date, (iii) the business day following
the date of mailing, if sent by nationally recognized overnight courier service,
or (iv) upon actual receipt by the party to whom such notice is required to be
given. The addresses for such communications shall be: (i) if to the Company,
to Sonic Foundry, Inc., 754 Williamson Street, Madison, WI 53703, Attention:
[ ], Chief Financial Officer, or to Facsimile No. (608) 256-6689, or (ii) if
to the Holder, to the Holder at the address or facsimile number appearing on the
Warrant Register or such other address or facsimile number as the Holder may
provide to the Company in accordance with this Section.
14. Warrant Agent. The Company shall serve as warrant agent under
-------------
this Warrant. Upon thirty (30) days' notice to the Holder, the Company may
appoint a new warrant
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<PAGE>
agent. Any corporation into which the Company or any new warrant agent may be
merged or any corporation resulting from any consolidation to which the Company
or any new warrant agent shall be a party or any corporation to which the
Company or any new warrant agent transfers substantially all of its corporate
trust or shareholders services business shall be a successor warrant agent under
this Warrant without any further act. Any such successor warrant agent shall
promptly cause notice of its succession as warrant agent to be mailed (by first
class mail, postage prepaid) to the Holder at the Holder's last address as shown
on the Warrant Register.
15. Miscellaneous.
-------------
(a) This Warrant shall be binding on and inure to the benefit of
the parties hereto and their respective successors and assigns. This Warrant may
be amended only in writing signed by the Company and the Holder and their
successors and assigns.
(b) Subject to Section 15(a), above, nothing in this Warrant
shall be construed to give to any person or corporation other than the Company
and the Holder any legal or equitable right, remedy or cause under this Warrant.
This Warrant shall inure to the sole and exclusive benefit of the Company and
the Holder.
(c) The corporate laws of the State of Maryland shall govern all
issues concerning the relative rights of the Company and its stockholders. All
other questions concerning the construction, validity, enforcement and
interpretation of this Warrant shall be governed by and construed and enforced
in accordance with the internal laws of the State of New York, without regard to
the principles of conflicts of law thereof. The Company and the Holder hereby
irrevocably submit 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, or that such suit,
action or proceeding is improper. Each of the Company and the Holder hereby
irrevocably waives personal service of process and consents to process being
served in any such suit, action or proceeding by receiving a copy thereof sent
to the Company at the address in effect for notices to it under this instrument
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.
(d) The headings herein are for convenience only, do not
constitute a part of this Warrant and shall not be deemed to limit or affect any
of the provisions hereof.
(e) In case any one or more of the provisions of this Warrant
shall be invalid or unenforceable in any respect, the validity and
enforceability of the remaining terms and provisions of this Warrant shall not
in any way be affected or impaired thereby and the parties will attempt in good
faith to agree upon a valid and enforceable provision which shall be
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<PAGE>
a commercially reasonable substitute therefor, and upon so agreeing, shall
incorporate such substitute provision in this Warrant.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK,
SIGNATURE PAGE FOLLOWS]
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed by its authorized officer as of the date first indicated above.
SONIC FOUNDRY, INC.
By:_____________________________________
Name:___________________________________
Title:__________________________________
<PAGE>
FORM OF ELECTION TO PURCHASE
(To be executed by the Holder to exercise the right to purchase shares of Common
Stock under the foregoing Warrant)
To Sonic Foundry, Inc.:
In accordance with the Warrant enclosed with this Form of Election to
Purchase, the undersigned hereby irrevocably elects to purchase _____________
shares of common stock, $.01 par value per share, of Sonic Foundry, Inc. (the
"Common Stock") and, if such Holder is not utilizing the cashless exercise
provisions set forth in this Warrant, encloses herewith $________ in cash,
certified or official bank check or checks, which sum represents the aggregate
Exercise Price (as defined in the Warrant) for the number of shares of Common
Stock to which this Form of Election to Purchase relates, together with any
applicable taxes payable by the undersigned pursuant to the Warrant.
The undersigned requests that certificates for the shares of Common Stock
issuable upon this exercise be issued in the name of
PLEASE INSERT SOCIAL SECURITY OR
TAX IDENTIFICATION NUMBER
_________________________________
________________________________________________________________________________
(Please print name and address)
If the number of shares of Common Stock issuable upon this exercise shall
not be all of the shares of Common Stock which the undersigned is entitled to
purchase in accordance with the enclosed Warrant, the undersigned requests that
a New Warrant (as defined in the Warrant) evidencing the right to purchase the
shares of Common Stock not issuable pursuant to the exercise evidenced hereby be
issued in the name of and delivered to:
________________________________________________________________________________
(Please print name and address)
________________________________________________________________________________
________________________________________________________________________________
Dated:_______, ___ Name of Holder:
(Print)____________________________
(By:)______________________________
(Name:)
(Title:)
(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant)
<PAGE>
FORM OF ASSIGNMENT
[To be completed and signed only upon transfer of Warrant]
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto ________________________________ the right represented by the within
Warrant to purchase ____________ shares of Common Stock of Sonic Foundry, Inc.
to which the within Warrant relates and appoints ________________ attorney to
transfer said right on the books of Sonic Foundry, Inc. with full power of
substitution in the premises.
Dated:
_______________, ____
_______________________________________
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant)
_______________________________________
Address of Transferee
_______________________________________
_______________________________________
In the presence of:
__________________________
<PAGE>
EXHIBIT E
---------
TRANSFER AGENT INSTRUCTIONS
Ladies and Gentlemen:
Reference is made to that certain Convertible Debenture Purchase Agreement
(the "Purchase Agreement") between Sonic Foundry, Inc., a Maryland corporation
(the "Company"), and the buyers named therein (the "Holders") pursuant to which
the Company is issuing to the Holders its shares of 7.5% Convertible Debentures,
par value $.01 per share (the "Debentures"), and certain Common Stock purchase
warrants (the "Warrants") which shall be convertible and exercisable,
respectively, into shares of the Company's common stock, $.01 par value per
share (the "Common Stock"). The shares of Common Stock issuable upon conversion
of the Debentures and upon exercise of the Warrants are collectively referred to
herein as "Underlying Shares."
This letter shall serve as our irrevocable authorization and direction to
you (provided that you are the transfer agent for the Company with respect to
its Common Stock at such time) to issue Underlying Shares from time to time upon
notice from the Company to issue such Underlying Shares. So long as you have
previously received (x) an opinion of the Company's outside counsel
substantially in the form of Exhibit I attached hereto (which the Company shall
direct be delivered to you by such outside counsel upon the effectiveness of the
registration statement covering resales of Underlying Shares) stating that a
registration statement covering resales of Underlying Shares has been declared
effective by the Securities and Exchange Commission under the Securities Act of
1933, as amended, and that Underlying Shares may be issued (or reissued if they
have been issued at a time when there was not such an effective registration
statement) or resold without any restrictive legend (the "Opinion") and (y) a
copy of such registration statement, then certificates representing Underlying
Shares shall not bear any legend restricting transfer of Underlying Shares
thereby and should not be subject to any stop-transfer restriction. Provided,
however, that if you have not previously received a copy of the Opinion and such
registration statement, then the certificates representing Underlying Shares
shall bear the following legend:
THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND
EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE
UPON AN EXEMPTION
<PAGE>
FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR
PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT
TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE
WITH APPLICABLE STATE SECURITIES LAWS.
and, provided, further, that the Company may, from time to time, notify you to
place stop-transfer restrictions on the certificates for Underlying Shares in
the event, but only in the event, a registration statement covering Underlying
Shares is subject to amendment for events then current.
Please be advised that the Holders have relied upon this instruction letter
as an inducement to enter into the Purchase Agreement and, accordingly, the
Holders are a third party beneficiary to these instructions.
Please execute this letter in the space indicated to acknowledge your
agreement to act in accordance with these instructions. Should you have any
questions concerning this matter, please contact me at [ ].
Very truly yours,
Sonic Foundry, Inc.
By:
Name:______________________________
Title:_____________________________
ACKNOWLEDGED AND AGREED:
__________________________________________
By:_______________________________________
Name:_____________________________________
Title: ___________________________________
<PAGE>
Exhibit I
[Form of Outside Counsel Opinion]
[Addressee]
[Address]
To Whom It May Concern:
The Registration Statement on Form S-3 (File No. 333-______________) of
Sonic Foundry, Inc. (the "Registration Statement") was declared effective at
___:____ __.M. Eastern Time on _____________, 1999. Upon issuance of the
Underlying Shares referred to in the Company's instruction letter attached, you
are authorized to issue certificates for the Company's common stock without
restrictive legends.
Very truly yours,
