-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TkBwntR4yFKMS16eg8QYxY9G/xE8BjNaFXz41SIgcCzL6Yoa3ATZi33vAandsgMI 9HN1Wf+dJKdb/v2U0quNfw== 0000891618-98-002884.txt : 19980616 0000891618-98-002884.hdr.sgml : 19980616 ACCESSION NUMBER: 0000891618-98-002884 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19980612 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19980615 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AUREAL SEMICONDUCTOR INC CENTRAL INDEX KEY: 0000892433 STANDARD INDUSTRIAL CLASSIFICATION: PRINTED CIRCUIT BOARDS [3672] IRS NUMBER: 943117385 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 000-22626 FILM NUMBER: 98648072 BUSINESS ADDRESS: STREET 1: 4245 TECHNOLOGY DR CITY: FREMONT STATE: CA ZIP: 94538-6339 BUSINESS PHONE: 5102524245 MAIL ADDRESS: STREET 1: 4245 TECHNOLOGY DR CITY: FREMONT STATE: CA ZIP: 94538-6339 FORMER COMPANY: FORMER CONFORMED NAME: MEDIA VISION TECHNOLOGY INC DATE OF NAME CHANGE: 19931210 8-K 1 FORM 8-K 1 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: JUNE 12, 1998 AUREAL SEMICONDUCTOR INC. (Exact name of Registrant as specified in its charter) DELAWARE 0-20684 94-3117385 (State or other jurisdiction of (Commission File Number) (IRS Employer incorporation) Identification No.) 4245 TECHNOLOGY DRIVE FREMONT, CA 94538 (510) 252-4245 (Address and phone number of Registrant's principal executive offices) 2 ITEM 5. OTHER EVENTS On June 5, 1998, Aureal Semiconductor Inc. (the "Company") completed three financing transactions, the combined effect of which provided the Company with increased working capital and equity. The three transactions, which closed simultaneously, are summarized below: o The Company entered into a private placement transaction for the sale of $5 million of the Company's three-year 8% Series C Preferred Stock, par value $0.001 per share (the "Series C Preferred"). The purchaser of the Series C Preferred is an entity controlled by DDJ Capital Management, LLC ("DDJ"), the holder of approximately 16% of the Company's common stock ("Common Stock") as of the transaction date. The Series C Preferred is convertible at the lesser of the fixed conversion price ("Fixed Conversion Price") of $2.50 face value of the Series C Preferred per share of the Company's Common Stock, or at varying discounts from the then-current market price of the Common Stock if the Common Stock is trading at prices below $2.50 per share over certain periods of time ("Variable Conversion Price"). Conversion of the Series C Preferred can commence four months after the last closing (no later than July 10, 1998) of the sale of Series C Preferred. . The holders of the Series C Preferred may convert, at the Variable Conversion Price, at the rate of 15% of the originally issued Series C Preferred per month. All of the Series C Preferred may be converted into Common Stock at the Variable Conversion Price as of June 1999. No such limitations apply to conversions of the Series C Preferred at the Fixed Conversion Price. Accretion at the 8% rate on the outstanding Series C Preferred is terminated if at any time the Common Stock trades at a price in excess of 150% of the Fixed Conversion Price for twenty consecutive trading days. At such time as accretion is terminated, if ever, all restrictions related to the conversion of the Series C Preferred are eliminated. If not converted earlier, all outstanding Series C Preferred will convert into Common Stock three years from issue date. $3.66 million of the net proceeds from the sale of the Series C Preferred were used to pay down the outstanding balance under the Company's existing line of credit. The remaining net proceeds will be used for working capital purposes. o After the $3.66 million debt reduction noted above, the remaining balance of $31.5 million of the Company's pre-existing line of credit was cancelled and exchanged for the issuance of $39.375 million of the Company's 8% Series B Preferred Stock, par value $0.001 (the "Series B Preferred"). The line of credit was held by, and the new Series B Preferred was issued to, entities controlled by TCW Special Credits and DDJ, holders of approximately 43% and 16% of the Common Stock of the Company, respectively, as of the date of the transaction. The terms of the Series B Preferred include the holders' right to convert such shares into Common Stock of the Company, at the rate of $2.50 of Series B Preferred per share of Common Stock, at any time over the five-year term of the Series B Preferred. The 8% dividend may be paid in cash or in the form of additional shares of Series B Preferred, at the Company's option. Holders of the Series B Preferred will be entitled to vote the equivalent number of shares of Common Stock as would be held upon conversion. The shares may be redeemed, for cash, at face value (plus accrued dividends) at any time, at the option of the Company. 3 o In addition to the foregoing transactions, the Company also entered into a new $40 million line of credit agreement (the "Agreement") with the Technology Finance Division of Transamerica Business Credit Corporation and Goldman Sachs Credit Partners LP (collectively, the "Lenders"). The Agreement has a two year term and provides for the Company to borrow up to $32.5 million ("Tranch A") based upon specific accounts receivable balances held by the Company, and up to $7.5 million ("Tranch B") without specific asset-based collateral. Interest will accrue on Tranch A borrowings at the Reference Rate (usually the Prime Borrowing Rate) plus 3%. Interest will accrue on Tranch B borrowings at the Reference Rate plus 5%. In addition, the Company paid an origination fee of 1.5% of the face of the line of credit, and agreed to pay an additional 0.5% supplemental origination fee on the one-year anniversary of the Agreement. Under the Agreement, the Company is subject to certain financial covenants (including minimum revenue, minimum EBITDA, and minimum tangible net worth levels as set forth in the Agreement) over the term of the Agreement. In connection with the Agreement, the Company issued to the Lenders warrants to purchase 1,350,000 shares of the Company's Common Stock at the exercise price of $2.156 per share. The warrants are exercisable at any time during their five-year term. 4 ITEM 7. EXHIBITS
Exhibit No. Description ----------- ----------- 4.7 Aureal Semiconductor Inc. Regulation D Subscription Agreement for Series C Preferred Stock 4.8 Certificate of Designation of Series C Preferred Stock of Aureal Semiconductor Inc. 4.9 Registration Rights Agreement (Common stock underlying Series C Preferred Stock) 4.10 Loan and Security Agreement 4.11 Form of Warrant 4.12 8% Series B Convertible Preferred Stock Purchase Agreement 4.13 Certificate of Designation of 8% Series B Convertible Preferred Stock for Aureal Semiconductor Inc. 4.14 Amendment Number 4 to Registration Rights Agreement
SIGNATURES Pursuant to the requirements 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. Date: June 12, 1998 AUREAL SEMICONDUCTOR INC. /s/ David J. Domeier ------------------------------- David J. Domeier Vice President, Finance and Chief Financial Officer 5 EXHIBIT INDEX
Exhibit No. Description ----------- ----------- 4.7 Aureal Semiconductor Inc. Regulation D Subscription Agreement for Series C Preferred Stock 4.8 Certificate of Designation of Series C Preferred Stock of Aureal Semiconductor Inc. 4.9 Registration Rights Agreement (Common stock underlying Series C Preferred Stock) 4.10 Loan and Security Agreement 4.11 Form of Warrant 4.12 8% Series B Convertible Preferred Stock Purchase Agreement 4.13 Certificate of Designation of 8% Series B Convertible Preferred Stock for Aureal Semiconductor Inc. 4.14 Amendment Number 4 to Registration Rights Agreement
EX-4.7 2 AUREAL SEMICONDUCTOR INC. REGULATION D 1 Exhibit 4.7 AUREAL SEMICONDUCTOR INC. REGULATION D SUBSCRIPTION AGREEMENT THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE OR OTHER SECURITIES AUTHORITIES. THEY MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THOSE SECURITIES LAWS. THIS SUBSCRIPTION AGREEMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, ANY OF THE SECURITIES DESCRIBED HEREIN BY OR TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES AUTHORITIES, NOR HAVE SUCH AUTHORITIES REVIEWED OR DETERMINED THE ACCURACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. SUBSCRIBERS MUST RELY ON THEIR OWN ANALYSIS OF THE INVESTMENT AND ASSESSMENT OF THE RISKS INVOLVED. THIS REGULATION D SUBSCRIPTION AGREEMENT (this "Agreement") is made as of the 5th day of June, 1998, by and between Aureal Semiconductor Inc., a corporation duly organized and existing under the laws of the State of Delaware (the "Company"), and the undersigned subscriber executing this Agreement ("Subscriber" or "Holder"). THE PARTIES HEREBY AGREE AS FOLLOWS: This Agreement is executed by Subscriber in connection with the offer by the Company and the purchase by Subscriber of Series C Preferred Stock (the "Preferred Stock"), of the Company. The Preferred Stock is being offered at a per share purchase price of Ten Thousand Dollars ($10,000), U.S., in minimum subscription amounts of at least Two Hundred Thousand Dollars ($200,000), and increments of Fifty Thousand Dollars ($50,000) in excess thereof, with a minimum aggregate offering amount of Five Million Dollars ($5,000,000) (the "Minimum Offering Amount"), and up to a maximum aggregate amount of Fifteen Million Dollars ($15,000,000) (the "Maximum Offering Amount") (collectively, the "Offering"). The terms of the Preferred Stock, 'including, the terms on which the Preferred Stock may be converted into common stock, $.001 par value, of the Company (the "Common Stock"), are set forth in the Certificate of Designation of the Series C Preferred Stock (the "Certificate of Designation"), substantially in the form attached hereto as Exhibit A. The solicitation of this subscription and, if accepted by the Company, the offer and sale of the Preferred Stock are being made in reliance upon the provisions of Regulation D ("Regulation D") promulgated under the Securities Act of 1933, as amended ("the Act"). The Preferred Stock and the Common Stock issuable upon 2 conversion thereof (the "Conversion Shares"), are sometimes referred to herein singularly as "Security" and collectively as the "Securities." It is agreed as follows: 1. Offering. 1.1 Offer to Subscribe; Purchase Price and Closing; and Placement Fees. Subject to satisfaction of the conditions to closing set forth in Section 1.2 below, Subscriber hereby offers to subscribe for and purchase Preferred Stock for the aggregate purchase price in the amount set forth in Section 8 of this Agreement, in accordance with the terms and conditions of this Agreement. Assuming that the Minimum Offering Amount and corresponding subscription agreements accepted by the Company are received the closing of a sale and purchase of Preferred Stock as to each Subscriber (the "Closing") shall be deemed to occur when this Agreement has been executed by both Subscriber and the Company, the conditions herein have been satisfied and full payment shall have been made to the Company, by wire transfer for payment or cancellation of indebtedness in consideration for the Company's delivery of certificates representing the Preferred Stock subscribed for. 1.2 Conditions to Subscriber's Obligations. Subscriber's obligations hereunder are conditioned upon all of the following: 1.2.1 the following documents shall have been executed and received by Gray Cary Ware & Freidenrich LLP, legal counsel of the Company ("GCWF") and a copy has been received by Subscriber: the Registration Rights Agreement, substantially in the form attached hereto as Exhibit B (the "Registration Rights Agreement") (executed by the Company), an opinion of counsel, substantially in the form attached hereto as Exhibit C (the "Opinion of Counsel") (signed by GCWF), the Irrevocable Instructions to Transfer Agent, substantially in the form attached hereto as Exhibit D (the "Irrevocable Instructions to Transfer Agent") (executed by the Company and the Company's transfer agent, the "Transfer Agent"), certificates representing the Preferred Stock issued in the name of the Subscriber (or its nominee), and the Certificate of Designation, in the form of Exhibit A (together with written evidence showing that it has been filed with and accepted by the Secretary of State of Delaware); 1.2.2 the Company's Common Stock shall be listed for and trading, on the Over-the Counter Bulletin Board; 1.2.3 other than losses described in the Disclosure Documents (defined below in Section 2.2.4), there have been no material adverse changes in the Company's business prospects or financial condition since the date of the last balance sheet included in the Disclosure Documents, including but not limited to incurring material liabilities; 1.2.4 the representations and warranties of the Company are true and correct in all material respects at the Closing as if made on such date, and the Company shall deliver a certificate, signed by an officer of the Company, to such effect to GCWF; -2- 3 1.2.5 the Minimum Offering Amount and corresponding subscription agreements accepted by the Company shall have been received by GCWF; and 1.2.6 the Company shall have reserved for issuance a sufficient number of shares of Common Stock to effect conversions of the Preferred Stock. 2. Representations and Warranties of Subscriber. Subscriber hereby represents and warrants to the Company as follows: 2.1 Accredited Investor. Subscriber is an accredited investor, as defined in Rule 501 of Regulation D. 2.2 Investment Experience, Access to Information; Independent Investigation. 2.2.1 Access to Information. Subscriber or Subscriber's professional advisor has been granted the opportunity to ask questions of and receive answers from representatives of the Company, its officers, directors, employees and agents concerning the terms and conditions of this Offering, the Company and its business and prospects, and to obtain any additional information which Subscriber or Subscriber's professional advisor deems necessary to verify the accuracy and completeness of the information received. 2.2.2 Reliance on Own Advisors. Subscriber has relied completely on the advice of, or has consulted with, Subscriber's own personal tax, investment, legal or other advisors and has not relied on the Company or any of its affiliates, officers, directors, attorneys, accountants or any affiliates of any thereof and each other person, if any, who controls any thereof, within the meaning of Section 15 of the Act for any tax or legal advice (other than reliance on information in the Disclosure Documents as defined in Section 2.2.4 below and on the Opinion of Counsel). The foregoing, however, does not limit or modify Subscriber's right to rely upon representations and warranties of the Company in Section 4 of this Agreement. 2.2.3 Capability to Evaluate. Subscriber has such knowledge and experience in financial and business matters so as to enable such Subscriber to utilize the information made available to It in connection with the Offering, in order to evaluate the merits and risks of the prospective investment, which are substantial, including without limitation those set forth in the Disclosure Documents (as defined in Section 2.2.4 below). 2.2.4 Disclosure Documents. Subscriber, in making, Subscriber's investment decision to subscribe for the Securities hereunder, represents that (a) Subscriber has received and had an opportunity to review (i) the Company's Annual Report on Form 10-K for the year ended December 28, 1997 (the "Company's Annual Report") and the Company's Quarterly Report on Form 10-Q for the quarter ended March 29, 1998, and (ii) the Capitalization Schedule, attached as Exhibit E, (the "Capitalization Schedule") and (b) Subscriber has read, reviewed, and relied solely on the documents described in (a) above, the Company's representations and warranties and other information in this Agreement, including the exhibits, any other written information prepared by the Company which has been specifically provided to Subscriber in connection with this Offering (the documents described in this Section 2.2.4(a) and -3- 4 (b) are collectively referred to as the "Disclosure Documents"), and an independent investigation made by Subscriber and Subscriber's representatives, if any; (c) Subscriber has, prior to the date of this Agreement, been given an opportunity to review material contracts and documents of the Company which have been filed as exhibits to the Company's filings under the Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act") and has had an opportunity to ask questions of and receive answers from the Company's officers and directors; and (d) is not relying, on any oral representation of the Company or any other person, nor any written representation or assurance from the Company other than those referred to in Section 4 or otherwise contained in the Disclosure Documents or incorporated herein or therein. The foregoing however, does not limit or modify Subscriber's right to rely upon representations and warranties of the Company in Section 4 of this Agreement. Subscriber acknowledges and agrees that the Company has no responsibility for, does not ratify, and is under no responsibility whatsoever to comment upon or correct any reports, analyses or other comments made about the Company by any third parties, including, but not limited to, analysts' research reports or comments (collectively, "Third Party Reports"), and Subscriber has not relied upon any Third Party Reports in making the decision to invest. 2.2.5 Investment Experience; Fend for Self. Subscriber has substantial experience in investing in securities and he, she or it has made investments in securities other than those of the Company. Subscriber acknowledges that Subscriber is able to fend for Subscriber's self in the transaction contemplated by this Agreement, that Subscriber has the ability to bear the economic risk of Subscriber's investment pursuant to this Agreement and that Subscriber is an "Accredited Investor" by virtue of the fact that Subscriber meets the investor qualification standards set forth in Section 2.1 above. Subscriber has not been organized for the purpose of investing in securities of the Company, although such investment is consistent with Subscriber's purposes. 2.3 Exempt Offering Under Regulation D. 2.3.1 Investment; No Distribution. Subscriber is acquiring the Securities to be issued and sold hereunder for his, her or its own account (or a trust account if such Subscriber is a trustee) for investment and not as a nominee and not with a present view to the distribution thereof. Subscriber is aware that there are legal and practical limits on Subscriber's ability to sell or dispose of the Securities and, therefore, that Subscriber must bear the economic risk of the investment for an indefinite period of time and has adequate means of providing for Subscriber's current needs and possible personal contingencies and has need for only limited liquidity of this investment. Subscriber's commitment to illiquid investments is reasonable in relation to Subscriber's net worth. By making the representations in this Section 2.3.1, the Subscriber does not agree to hold the Securities for any minimum or other specific term and reserves the right to dispose of the Securities at any time in accordance with or pursuant to a registration statement or an exemption from registration under the Act, except as otherwise required in this Agreement or in the Registration Rights Agreement. 2.3.2 No General Solicitation. The Securities were not offered to Subscriber through, and Subscriber is not aware of, any form of general solicitation or general advertising, including, without limitation, (i) any advertisement, article, notice or other -4- 5 communication published in any newspaper, magazine or similar media or broadcast over television or radio, and (ii) any seminar or meeting whose attendees have been invited by any general solicitation or general advertising. 2.3.3 Restricted Securities. Subscriber understands that the Preferred Stock issued at Closing is, and the Conversion Shares will be, characterized as "restricted securities" under the federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving, a public offering and that under such laws and applicable regulations such securities may not be transferred or resold without registration under the Act or pursuant to an exemption therefrom. In this connection, Subscriber represents that Subscriber is familiar with Rule 144 under the Act, as presently in effect, and understands the resale limitations imposed thereby and by the Act. 2.3.4 Disposition. Without in any way limiting the representations set forth above, Subscriber further agrees not to make any disposition of all or any portion of the Securities unless and until: (a) There is then in effect a registration statement under the Act covering a such proposed disposition and such disposition is made in accordance with such registration statement; or (b) such disposition is made pursuant to an exemption from registration under the Act. (c) In the case of Section 2.3.4(b), in order to have a disposition of any or all of the Securities registered on the books of the Company, the Company may reasonable request an opinion of counsel, reasonably satisfactory to the Company, that such disposition will not require registration of the Securities under the Act. It is agreed that the Company does not require opinions of counsel for transactions made pursuant to Regulation D under the Act. It is agreed that the Company will not require opinions of counsel for transactions made pursuant to Rule 144 except in unusual circumstances. 2.4 Due Authorization. 2.4.1 Authority. The person executing this Subscription Agreement, if executing this Agreement in a representative or fiduciary capacity, has full power and authority to execute and deliver this Agreement and each other document included herein for which a signature is required in such capacity and on behalf of the subscribing individual, partnership, trust, estate, corporation or other entity for whom or which Subscriber is executing this Agreement. 3. Acknowledgments. Subscriber is aware that: 3.1 Risks of Investment. Subscriber recognizes that an investment in the Company involves substantial risks, including the potential loss of Subscriber's entire investment herein. Subscriber recognizes that this Agreement and the exhibits hereto do not purport to contain all the information which would be contained in a registration statement under the Act; -5- 6 3.2 No Government Approval. No federal or state agency has passed upon the Securities, recommended or endorsed the Offering, or made any finding or determination as to the fairness of this transaction; 3.3 No Registration. The Securities and any component thereof have not been registered under the Act or any applicable state securities laws by reason of exemptions from the registration requirements of the Act and such laws, and may not be sold, pledged, assigned or otherwise disposed of in the absence of an effective registration of the Securities and any component thereof under the Act or unless an exemption from such registration is available; 3.4 Restrictions on Transfer. Subscriber may not attempt to sell, transfer, assign, pledge or otherwise dispose of all or any portion of the Securities or any component thereof in the absence of either an effective registration statement or an exemption from the registration requirements of the Act and applicable state securities laws; 3.5 No Assurances of Registration. There can be no assurance that any registration statement will become effective at the scheduled time. Therefore, Subscriber may bear the economic risk of Subscriber's investment for an indefinite period of time; 3.6 Exempt Transaction. Subscriber understands that the Securities are being offered and sold in reliance on specific exemptions from the registration requirements of federal and state law and that the representations, warranties, agreements, acknowledgments and understandings set forth herein are being relied upon by the Company in determining the applicability of such exemptions and the suitability of Subscriber to acquire such Securities; 3.7 Legends. It is understood that the certificates evidencing the Preferred Stock and the Conversion Shares shall bear the following legend (the "Legend") (prior to registration as provided in Section 5.3): "The securities represented hereby have not been registered under the Securities Act of 1933, as amended, or applicable state securities laws, nor the securities laws of any other Jurisdiction. They may not be sold or transferred in the absence of an effective registration statement under those securities laws or pursuant to an exemption therefrom." 4. Representations and Warranties of the Company. Subject to the exceptions set forth in the disclosure schedule attached hereto as Schedule A, the Company hereby makes the following representations and warranties to Subscriber (which shall be true at the signing of this Agreement, as of Closing, and as of any such later date as contemplated hereunder) and agrees With Subscriber that: 4.1 Organization, Good Standing, and Qualification. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, USA and has all requisite corporate power and authority to carry on its business as now conducted and as proposed to be conducted. The Company is duly qualified to transact business and is in good standing, in each Jurisdiction in which the failure to so qualify would have -6- 7 a material adverse effect on the business or properties of the Company and its subsidiaries taken as a whole. The Company is not the subject of any pending, threatened or, to its knowledge, contemplated' investigation or administrative or legal proceeding by the Internal Revenue Service, the taxing authorities of any state or local Jurisdiction, or the Securities and Exchange Commission ("SEC"), or any state securities commission, or any other governmental entity, which have not been disclosed in the Disclosure Documents. 4.2 Corporate Condition. The Company's condition is, in all material respects, as described in the Disclosure Documents, except for changes in the ordinary course of business and normal year-end adjustments that are not, in the aggregate, materially adverse to the Company. There have been no material adverse changes to the Company's business, financial condition, or prospects since the date of such Disclosure Documents. In addition, other than losses described in the Disclosure Documents, there have been no material adverse changes in the Company's business prospects or financial condition since the date of the last balance sheet included in the Disclosure Documents, including but not limited to incurring material liabilities. The financial statements contained in the Disclosure Documents have been prepared in accordance with Generally accepted accounting principles, consistently applied (except as otherwise permitted by Regulation S-X of the Exchange Act), and fairly present the consolidated financial condition of the Company as of the dates of the balance sheets included therein and the consolidated results of its operations and cash flows for the periods then ended. Without limiting the foregoing, there are no material liabilities, contingent or actual, that are not disclosed in the Disclosure Documents (other than liabilities incurred by the Company in the ordinary course of its business, consistent with its past practice, after the period covered by the Disclosure Documents). The Company has paid all material taxes which are due, except for taxes which it reasonably disputes and have been disclosed in the Disclosure Documents. There is no material claim, litigation, or administrative proceeding pending, or, to the best of the Company's knowledge, threatened against the Company, except as disclosed in the Disclosure Documents. This Agreement and the Disclosure Documents do not contain any untrue statement of a material fact and do not omit to state any material fact required to be stated therein or herein necessary to make the statements contained therein or herein not misleading in the light of the circumstances under which they were made. No event or circumstance exists relating to the Company which under applicable law, requires public disclosure but which has not been so publicly announced or disclosed. 4.3 Authorization. All corporate action on the part of the Company by its officers, directors and shareholders necessary for the authorization, execution and delivery of this Agreement, the performance of all obligations of the Company hereunder and the authorization, issuance and delivery of the certificates representing, the Preferred Stock being sold hereunder and the issuance (and/or the reservation for issuance) of the Conversion Shares have been taken, and this Agreement, the Certificate of Designation, the Irrevocable Instructions to Transfer Agent and the Registration Rights Agreement constitute valid and legally binding obligations of the Company, enforceable in accordance with their terms, except insofar as the enforceability may be limited by applicable bankruptcy, insolvency, reorganization, or other similar laws affecting creditors' rights generally or by principles governing the availability of equitable remedies. The Company has obtained all consents and approvals required for it to execute, deliver and perform each agreement referenced in the previous sentence. No filings or registration with any -7- 8 governmental authority are necessary for the execution, delivery or performance by the Company of the aforementioned agreements. 4.4 Valid Issuance of Preferred Stock and Common Stock. The Preferred Stock when issued, sold and delivered in accordance with the terms hereof, for the consideration expressed herein will be validly issued, fully paid and nonassessable and, based in part upon the representations of Subscriber in this Agreement, will be issued in compliance with all applicable U.S. federal and state securities laws. The Conversion Shares, when issued in accordance with the terms of the Certificate of Designation, shall be duly and validly issued and outstanding, fully paid and nonassessable, and based in part on the representations and warranties of Subscriber of and the Preferred Stock, will be issued in compliance with all applicable U.S. federal and state securities laws. The Preferred Stock and the Conversion Shares will be issued free of any preemptive rights. The Company currently has or will have as of the first Closing Date that number of shares equal to one hundred fifty percent (150%) of the number of shares of Common Stock issuable upon conversion of the Preferred Stock at the Fixed Conversion Price (as defined in the Certificate of Designation) determined as of the Last Closing date reserved for issuance upon conversion of the Preferred Stock. 4.5 Compliance with Other Instruments. The Company is not in violation or default of any provisions of its Certificate of Incorporation or Bylaws each as amended, and in effect on and as of the date of the Agreement or of any material provision of any material instrument or material contract to which it is a party or by which it is bound or, to its knowledge, of any provision of any federal or state judgment, writ, decree, order, statute, rule or governmental regulation applicable to the Company, which could reasonably have a material adverse affect on the Company's business or prospects, except as described in the Disclosure Documents. The execution, delivery and performance of this Agreement and the other agreements entered into in conjunction with the Offering and the consummation of the transactions contemplated hereby will not result in any such violation or be in conflict with or constitute, with or without the passage of time and giving, of notice, either a default under any such provision, instrument or contract or an event which results in the creation of any lien, charge or encumbrance upon any assets of the Company. 4.6 Compliance with Law. Except as disclosed in the SEC Documents (as defined below) filed and publicly available prior to the date of this Agreement, the Company is in compliance with all applicable statutes, laws, ordinances, regulations, rules, judgments, decrees and orders of any governmental authority applicable to its business or operations, except for instances of possible noncompliance that, individually or in the aggregate, would not have a material adverse effect on the Company and its financial position or results of operations. The Company has in effect all federal, state, local and foreign governmental approvals, authorizations, certificates, filings, franchises, licenses, notices, permits and rights ("Permits") necessary for it to own, lease or operate its properties and assets and to carry on its business as now conducted, except for Permits that absence of which would not cause, individually or in the aggregate, a material adverse effect on the Company and its financial position or results of operations. No default has occurred under any such Permits which, individually or in the aggregate, would have a material adverse effect on the Company and its financial position or results of operations. None -8- 9 of such Permits is or will be impaired or in any way affected by the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby. 4.7 Reporting Company. The Company is subject to the reporting requirements of the Exchange Act (therefore, a "Reporting Company"), has a class of securities registered under Section 12 of the Exchange Act, and has filed all reports required by the Exchange Act since November 18, 1992 (the "SEC Documents"). As of their respective dates, the SEC Documents complied as to form in all material respects with the requirements of the Exchange Act, and the rules and regulations of the Commission promulgated thereunder applicable to such SEC Documents. The SEC Documents have been prepared in accordance with GAAP (except in the case of unaudited statements, as permitted by Form 10-QSB, Form 10-Q or Form 8-K), applied on a consistent basis during the period involved (except as may be indicated in the notes thereto) and fairly present the financial position, results of operations and cash flows of the Company as of and at the dates and for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). Except as set forth in the SEC Documents and except for liabilities or obligations incurred in the ordinary course of business consistent with past practice, the Company does not have any liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise) required by GAAP to be set forth on a balance sheet of the Company or in the notes thereto which, individually or in the aggregate, could reasonably be expected to have a material adverse effect on the Company and its financial position or results of operations. The Company undertakes to furnish Subscriber with copies of such reports as may be reasonably requested by Subscriber prior to consummation of this Offering and thereafter, to make such reports available, as long as Subscriber holds the Securities. The Company has not furnished to the Subscriber any material nonpublic information concerning the Company. 4.8 Capitalization. The capitalization of the Company as of March 31, 1997, is, and the capitalization as of the Closing, after taking into account the offering of the Securities contemplated by this Agreement and all other share issuances occurring prior to this Offering, will be, as set forth in the Capitalization Schedule as set forth in Exhibit E. Except as disclosed in the Capitalization Schedule, as of the date of this Agreement, (i) there are no outstanding options, warrants, scrip, rights to subscribe for, calls or commitments of any character whatsoever relating to, or securities or rights convertible into or exercisable or exchangeable for, any shares of capital, stock of the Company or any of its subsidiaries, or arrangements by which the Company or any of its subsidiaries is or may become bound to issue additional shares of capital stock of the, Company or any of its subsidiaries, and (ii) there are no agreements or arrangements under which the Company or any of its subsidiaries is obligated to register the sale of any of its or their securities under the Act or relating to the voting, transfer or sale of any such securities (except the Registration Rights Agreement). 4.9 Intellectual Property. The Company has valid, unrestricted and exclusive patents, trademarks, trademark- registrations, trade names, copyrights, know-how, technology and other intellectual property necessary to the conduct of its business as set forth on Exhibit F 1. The Company has granted such licenses or has assigned or otherwise transferred a portion of (or all of) such valid, unrestricted and exclusive patents, trademarks, trademark registrations, trade names, copyrights, know-how, technology and other intellectual property necessary to the -9- 10 conduct of its business as set forth on Exhibit F-2. The Company has been granted licenses, know-how, technology and/or other intellectual property necessary to the conduct of its business as set forth on Exhibit F-3. To the best of the Company's knowledge, the Company is not infringing on the intellectual property rights of any third party, nor is any third party infringing, on the Company's intellectual property rights. There are no restrictions in any agreements, licenses, franchises, or other instruments which preclude the Company from engaging in its business as presently conducted. 4.10 Use of Proceeds. As of the date hereof, the Company expects to use the proceeds from this Offering (less fees and expenses) for the retirement of debt and general working capital purposes. 4.11 No Rights of Participation. No person or entity, including, but not limited to, current or former stockholders of the Company, underwriters, brokers, agents or other third parties, has any right of first refusal, preemptive right, right of participation, or any similar right to participate in the financing contemplated by this Agreement which has not been waived. 4.12 Company Acknowledgment. The Company hereby acknowledges that Subscriber may elect to hold the Securities for various periods of time, as permitted by the terms of this Agreement, the Certificate of Designation, and other agreements contemplated hereby, and the Company further acknowledges that Subscriber and the Placement Agent have made no representations or warranties, either written or oral, as to how long the Securities will be held by Subscriber or regarding, Subscriber's trading history or investment strategies. 4.13 Termination Date of Offering. In no event shall the Last Closing ("Last Closing") of a sale and purchase of the Preferred Stock occur later than July 10, 1998. Which date can be extended upon written approval by the: Company and holders of a majority of the Preferred Stock. 4.14 Underwriter's Fees and Rights of First Refusal. The Company is not obligated to pay any compensation or other fees, costs or related expenditures in cash or securities to any underwriter, broker, agent or other representative other than the Placement Agent in connection with this Offering. 4.15 Current Public Information. The Company is currently eligible to register the resale of its Common Stock on a registration statement on Form S-3 under the Act. 4.16 Acknowledgment of Dilution. The number of Conversion Shares issuable upon conversion of the Preferred Stock may increase substantially in certain circumstances including the circumstance wherein the trading price of the Common Stock declines. The Company has studied and fully understands the nature of the Securities being sold hereunder and recognizes that they have a potential dilutive effect. The board of directors of the Company has concluded in its (good faith business judgment that such issuance is in the best interests of the Company. The Company acknowledges that its obligation to issue Conversion Shares upon conversion of the Preferred Stock is binding upon it and enforceable regardless of the dilution that such issuance may have on the ownership interests of the other stockholders. -10- 11 4.17 Foreign Corrupt Practices. Neither the Company nor any of its subsidiaries, nor any director, officer, agent, employee or other person acting on behalf of the Company or any subsidiary has in the course of its actions for, or on behalf of, the Company, used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expenses relating to political activity; made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds; violated or is in violation of any provision of the U. S. Foreign Corrupt Practices Act of 1977, as amended; or made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment to any foreign or domestic Government official or employee. 4.18 Key Employees. Each Key Employee (as defined below) is currently serving the Company in the capacity disclosed in the Company's Annual Report. No Key Employee, to the best knowledge of the Company and its subsidiaries, is in violation of any material term of any employment contract, confidentiality, disclosure or proprietary information agreement, non-competition agreement, or any other contract or agreement or any restrictive covenant, and the continued employment of each Key Employee does not subject the Company or any of its subsidiaries to any liability with respect to any of the foregoing, matters. No Key Employee has, to the best knowledge of the Company and its subsidiaries, any intention to terminate his employment with, or services to, the Company or any of its subsidiaries. "Key Employee" means each of the employees listed in the Company's Annual Report. 4.19 Representations Correct. The foregoing representations, warranties and agreements are true, correct and complete in all material respects, and shall survive the Closing and the issuance of the Preferred Stock. 5. Covenants of the Company. 5.1 Independent Auditors. The Company shall, until at least three (3) years after the date of the Last Closing, maintain as its independent auditors an accounting firm authorized to practice before the SEC. 5.2 Corporate Existence and Taxes. The Company shall, until at least the later of (i) the date that is three (3) years after the date of the Last Closing or (ii) the conversion or redemption of all of the Preferred Stock purchased pursuant to this Agreement, maintain its corporate existence in good standing and remain a Reporting Company (provided, however, that the foregoing covenant shall not prevent the Company from entering into any merger or corporate reorganization as otherwise allowed pursuant to the terms of the Certificate of Designation) and shall pay all its taxes when due except for taxes which the Company disputes. 5.3 Registration Rights. The Company will enter into a registration rights agreement covering the resale of the Conversion Shares substantially in the form of the Registration Rights Agreement attached as Exhibit B. 5.4 Notification of Final Closing Date by Company. Within five (5) business days after the Last Closing, the Company shall notify Subscriber in writing that the Last Closing has occurred, the date of the Last Closing, the dates that Subscriber is entitled to convert -11- 12 Subscriber's Preferred Stock, the value of the Fixed Conversion Price, as that term is defined in the Certificate of Designation, and the name and telephone number of an administrative contact person at the Company whom Subscriber may contact regarding, information related to conversion of the Preferred Stock as contemplated by the Certificate of Designation. 5.5 Capital Raising Limitations; Rights of Participation. 5.5.1 Right of First Offer. The Company agrees that, during the period beginning, on the date hereof and terminating on the first anniversary of the date of the Last Closing, if the Company issues or sells, or agrees to issue or sell any equity or debt securities of the Company or any of its subsidiaries (or any security convertible into or exercisable or exchangeable, directly or indirectly, for equity or debt securities of the Company or any of its subsidiaries) ("Future Offerings"), the Company shall deliver to each Subscriber at least ten (10) business days prior to the closing of such Future Offering, written notice describing the proposed Future Offering, including the terms and conditions thereof, and providing each Subscriber and its affiliates an option (a "Right of Participation"), during the ten (10) business day period following delivery of such notice, to purchase an amount of the securities being offered in the Future Offering, equal to the Right of Participation Amount (as defined below), on the same terms as contemplated by such Future Offering (the limitations referred to in this sentence are collectively referred to as the "Capital Raising, Limitations"). 5.5.2 Amount of Subscriber's Right of Participation. The amount of securities which a Subscriber is entitled to purchase in such a Future Offering (the "Right of Participation Amount") shall be the lesser of (i) the dollar amount invested by Subscriber in this Offering or (ii) a number obtained by multiplying the aggregate amount of securities being offered in the Future Offering by a fraction, the numerator of which is the purchase price of the Preferred Stock purchased by the Subscriber pursuant to this Agreement and the denominator of which is the aggregate dollar amount of Preferred Stock placed in the future Offering 5.5.3 Exceptions to the Capital Raising Limitation. The Capital Raising, Limitations shall not apply to any transaction involving issuances of securities in connection with a merger, consolidation, acquisition or sale of assets, or in connection with any strategic partnership or joint venture (the primary purpose of which is not to raise equity capital), or in connection with the disposition or acquisition of a business, product or license by the Company or exercise of options by employees, consultants or directors. The Capital Raising Limitations also shall not apply to (a) the issuance of securities pursuant to an underwritten public offering, (b) the issuance of securities upon exercise or conversion of the Company's options, warrants or other convertible securities outstanding as of the date hereof or (c) the grant of additional options or warrants, or the issuance of additional securities, under any Company stock option or restricted stock plan for the benefit of the Company's employees, directors or consultants. 5.6 Financial 10-K Statements, Etc. and Current Reports on Form 8-K. The Company shall make available to the Subscriber copies of its annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on form 8-K for as long as the Preferred Stock may remain outstanding -12- 13 5.7 Opinion of Counsel. Subscribers shall, upon purchase of the Preferred Stock pursuant to this Agreement, receive an opinion letter from GCWF, in the form attached as Exhibit C. 5.8 Removal of Legend Upon Conversion. As contemplated by the Certificate of Designation. upon conversion of the Preferred Stock, Subscriber shall submit a Notice of Conversion and Resale, substantially in the form attached hereto as Exhibit G. The Legend shall be removed and the Company shall issue a certificate without such Legend to the holder of any Security upon which it is stamped, and a certificate for a security shall be originally issued without the Legend if, unless otherwise required by state securities laws, (a) the sale of such Security is registered under the Act, or (b) such holder provides the Company with an opinion of counsel (if so required by the Company or the Transfer Agent), in form, substance and scope customary for opinions of counsel in comparable transactions (the reasonable cost of which shall be borne by the Company), to the effect that a public sale or transfer of such Security may be made without registration under the Act, or (c) such holder provides the Company with reasonable assurances that such Security can be sold pursuant to Rule 144. Each Subscriber agrees to sell all Securities, including those represented by a certificate(s) from which the Legend has been removed, or which were originally issued without the Legend, pursuant to an effective registration statement and to deliver a prospectus in connection with such sale or in compliance with an exemption from the registration requirements of the Act. In the event the Legend is removed from any Security or any Security is issued without the Leaned and thereafter the effectiveness of a registration statement covering the resale of such Security is suspended or the Company determines that a supplement or amendment thereto is required by applicable securities laws, then upon reasonable advance notice to Subscriber holding such Security, the Company may require that the Legend be placed on any such Security that cannot then be sold pursuant to an effective registration statement or Rule 144 or with respect to which the opinion referred to in clause (b) next above has not been rendered, which Legend shall be removed when such Security may be sold pursuant to an effective registration statement or Rule 144 or such holder provides the opinion with respect thereto described in clause (b) next above. 5.9 Listing. The Company shall (1) use its best efforts to continue the listing and trading of its Common Stock (including all Conversion Shares) on either the OTC Bulletin Board, the Nasdaq Small Cap Market, the Nasdaq National Market System ("NMS"), the New York Stock Exchange ("NYSE"), or the American Stock Exchange ("AMEX") or any other national exchange or over-the-counter market system; (ii) take all action necessary to cause and maintain the listing and trading, of its Common Stock on the OTC Bulletin Board or the Nasdaq Small Cap Market at any time the Common Stock is not listed and traded on NMS, NYSE or AMEX; and (iii) comply in all respects with the Company's reporting, filing and other obligations under the bylaws or rules of the National Association of Securities Dealers ("NASD") and such exchanges, as applicable. 5.10 The Company's Instructions to Transfer Agent. The Company will issue to its Transfer Agent the Irrevocable Instructions to Transfer Agent substantially in the form of Exhibit D instructing the Transfer Agent to issue certificates, registered in the name of each Subscriber or its nominee, for the Conversion Shares in such amounts as specified from time to time by such Subscriber to the Company upon conversion of the Preferred Stock. Such -13- 14 certificates shall bear a Legend only to the extent permitted by Section 5.7 hereof. The Company warrants that no instruction, other than such instructions referred to in Section 5.7 hereof or in this Section 5.10 and stop transfer instructions to give effect to Section 3.7 hereof in the case of Conversion Shares prior to registration of the Conversion Shares under the Act, will be given by the Company to its Transfer Agent and that the Securities shall otherwise be freely transferable on the books and records of the Company as and to the extent provided in this Agreement and the Registration Rights Agreement. Nothing in this Section shall affect in any way each Subscriber's obligations and agreement set forth in Sections 2.3.3 or 2.3.4 hereof to resell the Securities pursuant to an effective registration statement and to deliver a prospectus in connection with such sale or in compliance with an exemption from the registration requirements of applicable securities laws. If (a) a Subscriber provides the Company with an opinion of counsel (if so required by the Company or the Transfer Agent), which opinion of counsel shall be in form, substance and scope Customary for opinions of counsel in comparable transactions (the reasonable cost of which shall be borne by the Company), to the effect that the Securities to be sold or transferred may be sold or transferred pursuant to an exemption from registration or (b) a Subscriber transfers Securities to an affiliate which is an accredited investor pursuant to Rule 144, the Company shall permit the transfer, and, in the case of Conversion Shares, promptly instruct its transfer agent to issue one or if more certificates in such name and in such denomination as specified by such Subscriber. The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to a Subscriber by vitiating, the intent and purpose of the transaction contemplated hereby. Accordingly, the Company acknowledges that the remedy at law for a breach of its obligations under this Section 5.10 will be inadequate and agrees, in the event of a breach or threatened breach by the Company of the provisions of this Section 5.10, that a Subscriber shall be entitled, in addition to all other available remedies, to an injunction restraining any breach and requiring , immediate issuance and transfer, without the necessity of showing economic loss and without any bond or other security being required. The Company shall not terminate its agency relationship with the Transfer Agent for any reason prior to the date which is three (3) years after the Last Closing, unless the Company's Transfer Agent shall continue acting as transfer agent pursuant to the terms of the Irrevocable Instructions to Transfer Agent until such time that a successor transfer agent (i) is appointed by the Company; and (ii) executes and agrees to be bound by the terms of the Irrevocable Instructions to Transfer Agent. 5.11 Restrictions on Performance. The Company shall not at any time after the date hereof enter into an agreement or other instrument limiting in any manner its ability to perform its obligations under this Agreement or the Certificate of Designation, or making such performance or the issuance of the Conversion Shares a default under any such agreement or instrument. 6. Miscellaneous. 6.1 Representations and Warranties Survive the Closing; Severability. Subscriber's and the Company's representations and warranties shall survive the Closing of the transactions contemplated by this Agreement notwithstanding any due diligence investigation made by or on behalf of the party seeking to rely thereon. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said -14- 15 provision; provided that no such severability shall be effective if it materially changes the economic benefit of this Agreement to any party. 6.2 Successors and Assigns. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. Subscriber may assign Subscriber s rights hereunder, in connection with any private sale of the Preferred Stock of such Subscriber, so long, as, as a condition precedent to such transfer, the transferee executes an acknowledgment agreeing to be bound by the applicable provisions of this Agreement. 6.3 Governing Law. This Agreement shall be governed by and construed under the laws of the State of California without respect to conflict of laws principles. 6.4 Execution in Counterparts Permitted. This Agreement may be executed in any number of counterparts, each of which shall be enforceable against the parties actually executing such counterparts, and all of which together shall constitute one (1) instrument. 6.5 Titles and Subtitles; Gender. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. The use in this Agreement of a masculine, feminine or neither pronoun shall be deemed to include a reference to the others. 6.6 Written Notice. Any notice, demand or request required or permitted to be given by the Company or Subscriber pursuant to the terms of this Agreement shall be in writing, and shall be deemed given when delivered personally, or by facsimile (with a hard copy to follow by overnight courier addressed to the parties at the addresses and/or facsimile telephone number of the parties set forth at the end of this Agreement or such other address as a party may request by notifying, the other in writing, 6.7 Expenses. Each of the Company and Subscriber shall pay all costs and expenses that it respectively incurs, with respect to the negotiation, execution, delivery and performance of this Agreement. -15- 16 6.8 Entire Agreement; Written Amendments Required. This Agreement, including the Exhibits attached hereto, the Certificate of Designation, the Preferred Stock certificates, the Registration Rights Agreement, the Irrevocable Instructions to Transfer Agent and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof, and no party shall be liable or bound to any other party in any manner by any warranties, representations or covenants except as specifically set forth herein or therein. Except as expressly provided herein, neither this Agreement nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument signed by the party against whom enforcement of any such amendment, waiver, discharge or termination is sought. -16- 17 IN WITNESS WHEREOF, the undersigned Subscriber does represent and certify under penalty of perjury that the foregoing statements are true and correct and that Subscriber by the following signature(s) executed this Agreement. Dated this 5th of June, 1998. B III Capital Partners, L.P., By: DDJ Capital III, LLC, its General Partner By: DDJ Capital Management, LLC, its Manager Goldman Sachs & Company /s/ Daniel G. Harmetz FFC B III Capital Partners, L.P. - ----------------------------------------------- ------------------------------------------------------------------ Your Signature PRINT EXACT NAME IN WHICH YOU WANT THE SECURITIES TO BE REGISTERED Daniel G. Harmetz DELIVERY INSTRUCTIONS Goldman Sachs & Co. - ----------------------------------------------- ------------------------------------------------------------------ Name: Please Print Please type or print address where your security is to be delivered Member ATTN: Marjory Boliscar - ----------------------------------------------- ------------------------------------------------------------------ Title/Representative Capacity (if applicable) One New York Plaza - ----------------------------------------------- ------------------------------------------------------------------ Name of Company You Represent (if applicable) Street Address Wellesley, Massachusetts New York, NY - ----------------------------------------------- ------------------------------------------------------------------ Place of Execution of this Agreement City, State or Province, Country, Offshore Postal Code T: 212-902-8058 F: 212-357-0413 ------------------------------------------------------------------ Phone Number (For Federal Express) and Fax Number (re: Notice)
THIS AGREEMENT IS ACCEPTED BY THE COMPANY IN THE AMOUNT OF $5,000,000 ON THE 5TH DAY OF JUNE, 1998. Aureal Semiconductor Inc. /s/ Kenneth A. Kokinakis ------------------------------- Kenneth A. Kokinakis, President -17- EX-4.8 3 CERTIFICATE OF DESIGNATION OF SERIES C PREF STOCK 1 Exhibit 4.8 CERTIFICATE OF DESIGNATION OF SERIES C PREFERRED STOCK OF AUREAL SEMICONDUCTOR INC. It is hereby certified that: 1. The name of the Company (hereinafter called the "Company") is Aureal Semiconductor Inc., a corporation validly organized and existing under the laws of the state of Delaware. 2. The Amended and Restated Certificate of Incorporation of the Company authorizes the issuance of five million (5,000,000) shares of preferred stock, $0.001 par value per share, and expressly vests in the Board of Directors of the Company the authority provided therein to issue any or all of said shares in one (1) or more Series C and by resolution or resolutions to establish the designation and number and to fix the relative rights and preferences of each series to be issued. 3. The Board of Directors of the Company, pursuant to the authority expressly vested in it as aforesaid, has adopted the following resolutions creating a Series C issue of Preferred Stock: RESOLVED, that fifteen hundred (1,500) of the five million (5,000,000) authorized shares of Preferred Stock of the Company shall be designated Series C Preferred Stock, $0.001 par value per share, and shall possess the rights and preferences set forth below: Section 1. Designation and Amount. The shares of such series shall have a par value of $0.001 per share and shall be designated as Series C Preferred Stock (the "Series C Preferred Stock") and the number of shares constituting the Series C Preferred Stock shall be fifteen hundred (1,500). The Series C Preferred Stock shall be offered at a purchase price of Ten Thousand Dollars ($10,000) per share (the "Original Series C Issue Price"), with an eight percent (8%) per annum accretion rate as set forth herein. Section 2. Rank. The Series C Preferred Stock shall rank: (i) junior to any other class or series of capital stock of the Company hereafter created (subject to Section Section 8 hereof) specifically ranking by its terms senior to the Series C Preferred Stock (collectively, the "Senior Securities"); (ii) prior to all of the Company's Common Stock, $0.001 par value per share ("Common Stock"); (iii) prior to any class or series of capital stock of the Company hereafter created not specifically ranking, by its terms senior to or on parity with any Series C Preferred Stock of whatever subdivision (collectively, with the Common Stock, "Junior Securities"); and (iv) on parity with the Series A Preferred Stock of the Company or any class or series of capital stock of the Company hereafter created specifically ranking by its terms on parity with the Series C Preferred Stock ("Parity Securities") in each case as to distributions of assets upon 2 liquidation, dissolution or winding up of the Company, whether voluntary or involuntary (all such distributions being referred to collectively as "Distributions"). Section 3. Dividends. The Series C Preferred Stock will bear no dividends, and the holders of the Series C Preferred Stock ("Holders") shall not be entitled to receive dividends on the Series C Preferred Stock. Section 4. Liquidation. (a) In the event of any liquidation, dissolution or winding up of the Company ("Liquidation Event"), either voluntary or involuntary, the then Holders of Series C Preferred Stock shall be entitled to receive, immediately after any distributions to Senior Securities required by the Company's Certificate of Incorporation or any certificate of designation. and prior in preference to any distribution to Junior Securities but in parity with any distribution to Parity Securities, a cash amount per share equal to the sum of (i) 125% of the aggregate Principal Amount (as defined in Section 5 below) of Holder's outstanding shares of Series C Preferred Stock and (ii) 100% of any accrued Accretion (as defined in Section 5 below) on such shares. If upon the occurrence of such event, and after payment in full of the preferential amounts with respect to the Senior Securities, the assets and funds available to be distributed among the Holders of the Series C Preferred Stock and Parity Securities shall be insufficient to permit the payment to such Holders of the full preferential amounts due to the Holders of the Series C Preferred Stock and the Parity Securities, respectively, then the entire assets and funds of the Company legally available for distribution shall be distributed among the Holders of the Series C Preferred Stock and the Parity Securities, pro rata, based on the respective liquidation amounts to which each such series of stock is entitled by the Company's Certificate of Incorporation and any certificate(s) of designation relating thereto. (b) At each Holder's option, a sale, conveyance or disposition of all or substantially all of the assets of the Company or the effectuation by the Company of a transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Company is disposed of shall be deemed to be a Liquidation Event as defined in Section 4(a); provided further that (i) a consolidation, merger, acquisition, or other business combination of the Company with or into any other publicly traded company or companies shall not be treated as a Liquidation Event as defined in Section 4(a) but instead shall be treated pursuant to Section 5(d) hereof, and (ii) a consolidation, merger, acquisition, or other business combination of the Company with or into any other non-publicly traded company or companies, where the surviving entity is not a publicly traded entity, shall be treated as a Liquidation Event as defined in Section 4(a). The Company shall not effect any transaction described in subSection 4(b)(ii) unless it first gives ten (10) business days prior notice of such transaction (during which time the Holder shall be entitled to immediately convert any or all of its Series C Preferred Stock into Common Stock at the Conversion Price, as defined below, then in effect, which conversion shall not be subject to the conversion restrictions set forth in Section 5(a); provided however, that, if such conversion takes place prior to the end of the four (4) month holding period set forth in Section 5(a), for purposes of calculating the Variable Conversion Price (as defined in Section 5(a), "X" shall equal ninety percent (90%). -2- 3 (c) In the event that, immediately prior to the closing of a transaction described in Section 4(b) which would constitute a Liquidation Event, the cash distributions required by Section 4(a) or Section 6 have not been made, the Company shall either: (i) cause such closing to be postponed until such cash distributions have been made, or (ii) cancel such transaction, in which event the rights of the Holders of Series C Preferred Stock shall be the same as existing immediately prior to such proposed transaction. Section 5. Conversion. Subject to Section 4(b) herein, the record Holder of Series C Preferred Stock shall have conversion rights as follows (the "Conversion Rights"): (a) Right to Convert. The record Holder of Series C Preferred Stock shall be entitled to convert, subject to the Company's right of Redemption upon Receipt of Notice of Conversion set forth in Section 6(a) and the conversion restrictions herein below, any portion or all of its Series C Preferred Stock on or after the date that is four (4) months after the Last Closing Date, as defined below, at the office of the Company or its designated transfer agent (the "Transfer Agent"), into that number of fully-paid and non-assessable shares of Common Stock calculated in accordance with the following formula (the "Conversion Rate"): Number of shares of Common Stock issued upon conversion of each share of Series C Preferred Stock = Principal Amount + Accretion ---------------------------- Conversion Price where: - Principal Amount = $10,000 per share of Series C Preferred Stock; - Accretion = (.08) X (N/365) X Principal Amount, where N = the number of days between (i) the Closing Date for the Series C Preferred Stock for which conversion is being elected, and (ii) the applicable Date of Conversion (as defined in Section 5(b)(iv) below) for the Series C Preferred Stock for which conversion is being elected or the Accretion Termination Date (as defined below), whichever is earlier; and - Accretion Termination Date = in the event that, anytime after the date hereof, the Closing Bid Price of the Company's Common Stock is equal to or greater than 150% of the Fixed Conversion Price (as defined below) for twenty (20) consecutive trading days, the last such trading day is referred to as the "Accretion Termination Date" and the accrual of Accretion shall terminate (an "Accretion Termination") on such date; and - Conversion Price = the lesser of (x) $2.50 (the "Fixed Conversion Price"), or (y) X% of the lowest average Closing Bid Price, as that term is defined below, of the Company's Common Stock for any consecutive five (5) trading days during the thirty (30) trading days immediately preceding the Date of Conversion, as defined below (the "Variable Conversion Price"), where -3- 4
Number of Months Between Last Closing Date and Date of Conversion "X" ----------------------------------- --- 4 months - 5 months 90% 5 months and 1 day - 6 months 88% 6 months and 1 day - 7 months 86% 7 months and 1 day - 8 months 84% 8 months and 1 day - 9 months 82% More than 9 months 80%
and provided that, unless otherwise indicated herein, beginning on the date that is four (4) months following the Last Closing Date, as defined below, the right of the Holder to convert into Common Stock using the Variable Conversion Price initially shall be limited (such limitations shall not apply to conversions at the Fixed Conversion Price) to a maximum of fifteen percent (15%) of the aggregate number of shares of Series C Preferred Stock issued to such Holder, and for each one (1) month period which expires thereafter, the Holder shall accrue the right to convert into Common Stock an additional fifteen percent (15%) of the number of shares of Series C Preferred Stock issued to such Holder (the number of shares that may be converted at any given time using the Variable Conversion Price, in the aggregate, is referred to hereinafter as the "Variable Price Conversion Quota"); and provided, further, in the event that the Holder elects not to convert its full Variable Price Conversion Quota during any one (1) month period, the unconverted amount shall be carried forward and added to the Variable Price Conversion Quota, and thereafter the Holder may, from time to time, convert any portion of the Variable Price Conversion Quota at the Variable Conversion Price; and provided, further, that (i) subsequent to the date that is four (4) months after the Last Closing Date, there shall be no restrictions on the number of shares of Series C Preferred Stock that may be converted into Common Stock using the Fixed Conversion Price, whether or not the Fixed Conversion Price is less than the Variable Conversion Price; (ii) subsequent to the date that is eleven (11) months following the Last Closing Date, there shall be no restrictions on the number of shares of Series C Preferred Stock that may be converted into Common Stock using the Conversion Price then in effect and (iii) if the Company completes an offering of debt or equity securities ("Future Convertible Securities") for cash in a private capital raising transaction that are convertible into Common Stock of the Company prior to the date that is twelve (12) months following the Last Closing Date, the aggregate Variable Price Conversion Quota shall be increased (but not decreased), at any time that such Future Convertible Securities become convertible into Common Stock, by an amount equal to the dollar amount of the Future Convertible Securities that are then convertible (or have been converted) into Common Stock, divided by the total dollar amount of Series C Preferred Stock that were issued in this offering (expressed as a percentage, but not greater than 100%). As used herein, a "Closing Date" shall mean the date of the "Closing" (as defined in the Subscription Agreement between the Company and the Holders) of a purchase and sale of Series C Preferred Stock that occurs pursuant to the offering of the Series C Preferred Stock by the Company, and the "Last Closing Date" shall be the date of the last such closing. For purposes hereof, any Holder which acquires Series C Preferred Stock from another Holder (the "Transferor") and not upon original issuance from the Company shall be entitled to -4- 5 exercise its conversion right as to the percentages of such shares specified under Section Section 5((a)) in such amounts and at such times such that the number of shares eligible for conversion by such Holder at any time shall be in the same proportion that the number of shares of Series C Preferred Stock acquired by such Holder from its Transferor bears to the total number of shares of Series C Preferred Stock originally issued by the Company to such Transferor (or its predecessor Transferor). For purposes hereof, the term "Closing Bid Price" shall mean the closing bid price of the Company's Common Stock on the OTC Bulletin Board, or if no longer traded on the OTC Bulletin Board, the closing bid price on the principal national securities exchange or the over-the-counter on which the Common Stock is so traded and if not available, the mean of the high and low prices on the principal national securities exchange or the National Market System or over-the counter market on which the Common Stock is so traded; "Closing Ask Price" shall mean the closing ask price of the Company's Common Stock determined in the same manner; and "Mean Closing Price" shall mean the average of the day's Closing Bid Price and Closing Ask Price. (b) Mechanics of Conversion. In order to convert Series C Preferred Stock into full shares of Common Stock, the Holder shall (i) send via facsimile, on or prior to 11:59 p.m., New York City time (the "Conversion Notice Deadline") on the Date of Conversion, a copy of the fully executed notice of conversion ("Notice of Conversion") to the Company at the office of the Company and to its designated transfer agent (the "Transfer Agent") for the Series C Preferred Stock stating that the Holder elects to convert, which notice shall specify the Date of Conversion, the number of shares of Series C Preferred Stock to be converted, the applicable Conversion Price and a calculation of the number of shares of Common Stock issuable upon such conversion (together with a copy of the front page of each certificate to be converted) and (ii) surrender to a common courier for delivery to the office of the Company or the Transfer Agent, the original certificates representing the Series C Preferred Stock being converted (the "Preferred Stock Certificates"), duly endorsed for transfer; provided, however, that the Company shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such conversion unless either the Preferred Stock Certificates are delivered to the Company or its Transfer Agent as provided above, or the Holder notifies the Company or its Transfer Agent that such certificates have been lost, stolen or destroyed (subject to the requirements of subparagraph (i) below). Upon receipt by the Company of a facsimile copy of a Notice of Conversion, the Company shall immediately send, via facsimile, a confirmation of receipt of the Notice of Conversion to Holder which shall specify that the Notice of Conversion has been received and the name and telephone number of a contact person at the Company whom the Holder should contact regarding information related to the Conversion. In the case of a dispute as to the calculation of the Conversion Rate, the Company shall promptly issue to the Holder the number of Shares that are not disputed and shall submit the disputed calculations to its outside accountant via facsimile within three (3) days of receipt of Holder's Notice of Conversion. The Company shall cause the accountant to perform the calculations and notify the Company and Holder of the results no later than two business days from the time it receives the disputed calculations. Accountant's calculation shall be deemed conclusive absent manifest error. (i) Lost or Stolen Certificates. Upon receipt by the Company of evidence of the loss, theft, destruction or mutilation of any Preferred Stock Certificates, and (in -5- 6 the case of loss, theft or destruction) of indemnity or security reasonably satisfactory to the Company, and upon surrender and cancellation of the Preferred Stock Certificate(s), if mutilated, the Company shall execute and deliver new Preferred Stock Certificate(s) of like tenor and date. However, the Company shall not be obligated to re-issue such lost or stolen Preferred Stock Certificates if Holder contemporaneously requests the Company to convert such Series C Preferred Stock into Common Stock. (ii) Delivery of Common Stock Upon Conversion. The Company shall or shall cause the Transfer Agent to, as soon as practicable after receipt by the Company or the Transfer Agent of a facsimile copy of a Notice of Conversion and receipt by Company or the Transfer Agent of all necessary documentation duly executed and in proper form required for conversion, including the original Preferred Stock Certificates to be converted (or after provision for security or indemnification in the case of lost or destroyed certificates, if required), issue and surrender to a common courier for either overnight or (if delivery is outside the United States) two (2) day delivery to the Holder at the address of the Holder as shown on the stock records of the Company a certificate for the number of shares of Common Stock to which the Holder shall be entitled as aforesaid. (iii) No Fractional Shares. If any conversion of the Series C Preferred Stock would create a fractional share of Common Stock or a right to acquire a fractional share of Common Stock, such fractional share shall be disregarded and the number of shares of Common Stock issuable upon conversion, in the aggregate, shall be the next higher number of shares. (iv) Date of Conversion. The date on which conversion occurs (the "Date of Conversion") shall be deemed to be the date set forth in such Notice of Conversion, provided (i) that the advance copy of the Notice of Conversion is sent via facsimile to the Company before 11:59 p.m., New York City time, on the Date of Conversion, and (ii) that the original Preferred Stock Certificates representing the Series C Preferred Stock to be converted are surrendered by depositing such certificates with a common courier, for delivery to the Company or the Transfer Agent as provided above, as soon as practicable after the Date of Conversion. The person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record Holder or Holders of such shares of Common Stock on the Date of Conversion. -6- 7 (c) Automatic Conversion or Redemption. Each share of Series C Preferred Stock outstanding on the date which is three (3) years after the Last Closing Date or, if not a business day, the first business day thereafter ("Maturity Date") automatically shall, at the option of the Company, either (i) be converted ("Automatic Conversion") into Common Stock on such date at the Conversion Rate then in effect (calculated in accordance with the formula in Section 5(a) above), and the Maturity Date shall be deemed the Date of Conversion with respect to such conversion for purposes of this Certificate of Designation of Series C Preferred Stock ("Certificate of Designation"), or (ii) be redeemed ("Automatic Redemption") by the Company for cash in an amount equal to the Total Value (as defined below) of the Series C Preferred Stock being redeemed. If the Company elects to redeem, on the Maturity Date, the Company shall send to the Holders of outstanding Series C Preferred Stock notice (the "Automatic Redemption Notice") via facsimile of its intent to effect an Automatic Redemption of the outstanding Series C Preferred Stock. If the Company does not send such notice to Holder on such date, an Automatic Conversion shall be deemed to have occurred. If an Automatic Conversion occurs, the Company and the Holders shall follow the applicable conversion procedures set forth in this Certificate of Designation; provided, however, that the Holders are not required to send the Notice of Conversion contemplated by Section 5(b). If the Company elects to redeem, each Holder of outstanding Series C Preferred Stock shall send their certificates representing the Series C Preferred Stock to the Company in order to receive payment, and the Company shall pay the applicable redemption price to each respective Holder within five (5) days of the receipt of such certificates. The Company shall not be obligated to deliver the redemption price unless the certificates representing the Series C Preferred Stock are delivered to the Company, or, in the event one or more certificates have been lost, stolen, mutilated or destroyed, unless the Holder has complied with Section 5(b)(i). If the Company elects to redeem under this Section 5(c) and the Company fails to pay the Holders the redemption price within five (5) business days of its receipt of the certificates representing the Series C Preferred Stock to be redeemed as required by this Section 5(c), then an Automatic Conversion shall be deemed to have occurred and, upon receipt of the Preferred Stock Certificates, the Company shall immediately deliver to the Holders the certificates representing the number of shares of Common Stock to which the Holders would have been entitled upon Automatic Conversion using the lowest Conversion Price (as defined in Section 5 hereof) in effect during the period beginning on the Maturity Date and ending on the date the Transfer Agent issues Common Stock pursuant to this Section 5(c). Nothing in this Section 5(c) shall be construed to limit Holder's ability to pursue Holder's rights under Section 13 hereof. For purposes hereof, "Total Value" shall mean the Stated Value of the Series C Preferred Stock being redeemed, plus Conversion Failure Payments (as defined below), Late Registration Payments (as defined in the Registration Rights Agreement) and any other cash payments then due from the Company and then unpaid. "Stated Value" shall mean the Original Series C Issue Price (as defined in Section 1) of each share of Series C Preferred Stock, together with the accrued but unpaid Accretion (as defined in Section 5(a)). (d) Adjustment to Conversion Rate. (i) Adjustment to Fixed Conversion Price Due to Stock Split, Stock Dividend, Etc. If, prior to the conversion of all of the Series C Preferred Stock, the number of -7- 8 outstanding shares of Common Stock is increased by a stock split, stock dividend, or other similar event, the Fixed Conversion Price shall be proportionately reduced, or if the number of outstanding shares of Common Stock is decreased by a combination or reclassification of shares, or other similar event, the Fixed Conversion Price shall be proportionately increased. (ii) Adjustment to Variable Conversion Price. If, at any time when any Series C Preferred Stock is issued and outstanding, the number of outstanding shares of Common Stock is increased or decreased by a stock split, stock dividend, or other similar event, which event shall have taken place during the reference period for determination of the Conversion Price for any conversion of the Series C Preferred Stock, then the Variable Conversion Price shall be calculated giving appropriate effect to the stock split, stock dividend, combination, reclassification or other similar event for all five (5) trading days immediately preceding, the Date of Conversion. (iii) Adjustment Due to Merger, Consolidation, Etc. If, prior to the conversion of all outstanding Series C Preferred Stock, there shall be any merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event, as a result of which shares of Common Stock of the Company shall be changed into (or the shares of Common Stock become entitled to receive) the same or a different number of shares of the same or another class or classes of stock or securities of the Company or another entity or there is a sale of all or substantially all the Company's assets or there is a change of control transaction not deemed to be a liquidation pursuant to Section 4(c), then the Holders of Series C Preferred Stock shall thereafter have the right to receive upon conversion of Series C Preferred Stock, upon the basis and upon the terms and conditions specified herein and in lieu of the shares of Common Stock immediately theretofore issuable upon conversion, such stock, securities and/or other assets which the Holder would have been entitled to receive in such transaction had the Series C Preferred Stock been converted immediately prior to such transaction, and in any such case appropriate provisions shall be made with respect to the rights and interests of the Holders of the Series C Preferred Stock to the end that the provisions hereof (including, without limitation, provisions for the adjustment of the Conversion Price and of the number of shares issuable upon conversion of the Series C Preferred Stock) shall thereafter be applicable, as nearly as may be practicable in relation to any securities thereafter deliverable upon the exercise hereof. The Company shall not effect any transaction described in this subsection Section 5(d)(iii) unless (a) it first gives at least ten (10) business days prior notice of such merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event (during which time the Holder shall be entitled to convert its Series C Preferred Stock into Common Stock, which conversions shall not be subject to the conversion restrictions set forth in Section 5(a)), and (b) the resulting successor or acquiring entity (if not the Company) assumes by written instrument the obligations of the Company under this Certificate of Designation including this subsection Section 5(d)(iii). (iv) Adjustment Due to Distribution. If at any time after the Last Closing Date, the Company shall declare or make any distribution of its assets (or rights to acquire its assets) to Holders of Common Stock as a partial liquidating dividend, by way of return of capital or otherwise (including any dividend or distribution to the Company's shareholders in cash or shares (or rights to acquire shares) of capital stock of any other public or private company, including, but not limited to a subsidiary or spin-off of the Company (a "Distribution"), then the Holders of Series C -8- 9 Preferred Stock shall be entitled, upon any conversion of Series C Preferred Stock after the date of record for determining shareholders entitled to such Distribution, to receive the amount of such assets which would have been payable to the Holder with respect to the shares of Common Stock issuable upon such conversion had such Holder been the holder of such shares of Common Stock on the record date for determination of shareholders entitled to such Distribution. (v) Issuance of Other Securities With Variable Conversion Price. If, at any time after the Last Closing Date the Company shall issue any securities which are convertible into or exchangeable for Common Stock ("Convertible Securities") either (i) at a conversion or exchange rate based on a discount from the market price of the Common Stock at the time of conversion or exercise or (ii) with a fixed conversion or exercise price less than the Fixed Conversion Price, then, at the Holder's option: (X) in the case of clause (i), the Variable Conversion Price in respect of any conversion of Series C Preferred Stock after such issuance shall be calculated utilizing the greatest discount applicable to any such Convertible Securities (provided such Conversion Price shall never be increased as a result of such calculation), and (Y) in the case of clause (ii), the Fixed Conversion Price shall be reduced to such lesser conversion or exercise price. Notwithstanding the above, the following securities shall not trigger the adjustments required by this subsection (iv): (A) Company stock options, (B) warrants given in exchange for asset financing and (C) securities other than (A) or (B) above, which, in the aggregate, total less than the aggregate Principal Amount of Series C Preferred Stock placed in this offering. (vi) No Fractional Shares. If any adjustment under this Section 5(d) would create a fractional share of Common Stock or a right to acquire a fractional share of Common Stock, such fractional share shall be disregarded and the number of shares of Common Stock issuable upon conversion shall be the next higher number of shares. Section 6. Redemption by Company. (a) Company's Right to Redeem Upon Receipt of Notice of Conversion. If the Conversion Price of the Company's Common Stock is less than the Fixed Conversion Price (as defined in Section 5(a)), at the time of receipt of a Notice of Conversion pursuant to Section 5(b), the Company shall have the right, in its sole discretion, to redeem in whole or in part any Series C Preferred Stock submitted for conversion at the Redemption Rate (as defined below), immediately prior to and in lieu of conversion ("Redemption Upon Receipt of Notice of Conversion"). If the Company elects to redeem some, but not all, of the Series C Preferred Stock submitted for conversion, the Company shall redeem from among the shares of Series C Preferred Stock submitted by the various shareholders for conversion on the applicable date, a pro-rata amount from each such Holder so submitting Series C Preferred Stock for conversion. (i) Redemption Price Upon Receipt of a Notice of Conversion. The redemption price of Series C Preferred Stock under this Section 6(a) shall be calculated as follows ("Redemption Rate"): (The original Principal Amount of each share of Series C Preferred Stock X 125%) + (accrued but unpaid Accretion) + Conversion Failure Payments, Late -9- 10 Registration Payments and (any other cash payments then due from the Company and then unpaid). (ii) Mechanics of Redemption Upon Receipt of Notice of Conversion. The Company shall effect each such redemption by giving notice of its election to redeem, by facsimile, by 5:00 p.m. New York City time the next business day following receipt of a Notice of Conversion from a Holder, and the Company shall provide a copy of such redemption notice by overnight or two (2) day courier, to (A) the Holder of the Series C Preferred Stock submitted for conversion at the address and facsimile number of such Holder appearing in the Company's register for the Series C Preferred Stock and (B) the Company's Transfer Agent. Such redemption notice shall indicate whether the Company will redeem all or part of the Series C Preferred Stock submitted for conversion and the applicable redemption price. (iii) Redemption Buy-In. If (i) subsequent to the tender of a Notice of Conversion, but prior to its receipt of a Notice of Redemption Upon Notice of Conversion, the Holder sells shares of Common Stock (the "Redemption Sold Shares") which such Holder anticipated receiving upon such conversion, (ii) the Company effects a Redemption Upon Receipt of Notice of Conversion with respect to such conversion, and (iii) the Holder purchases (in an open market transaction), no later than the close of trading on the trading day following its receipt of the Notice of Redemption Upon Notice of Conversion, shares of Common Stock to make delivery upon the sale of the Redemption Sold Shares (a "Redemption Buy-In"), the Company shall pay such Holder (in addition to the applicable Redemption Rate) the amount by which (x) such Holder's total purchase price (including brokerage commission, if any) for the shares of Common Stock purchased in the Redemption Buy-In exceeds (y) the net proceeds received by such Holder from the sale of the Redemption Sold Shares. For example, if a Holder purchases shares of Common Stock having a total purchase price of $11,000 to cover a Redemption Buy-In with respect to shares of Common Stock sold for $10,000, the Company will be required to pay such Holder $1,000. A Holder shall provide the Company written notification (and trading records, if reasonably requested by the Company) indicating any amounts payable to Holder pursuant to this Section. Notwithstanding the above, the Holder shall not be entitled to the payments set forth in this section if the Company shall have notified the Holder, in writing, at least one (1) business day prior to the Date of Conversion, that the Company intends to redeem any conversions effected over a certain period of time following such notice (and such period of time includes the Date of Conversion), provided that (A) if the Company delivers such notice, it shall be obligated to redeem any conversions effected during such period, unless it terminates such period in writing upon at least one (1) business day's notice prior to the Date of Conversion to the Holders and (B) in order to give such notice, the Company Must Have Immediately Available Funds or Credit Facilities to effect such redemptions as required in Section 6(c) below. (b) Company's Right to Redeem at its Election. At any time, commencing twelve (12) months and one (1) day after the Last Closing Date, provided that such date shall be extended for each day during which there is continuing an Event of Default, the Company shall have the right, in its sole discretion, to redeem ("Redemption at Company's Election"), from time to time, any or all of the shares of Series C Preferred Stock; provided (i) the Company shall first provide thirty (30) business days advance written notice as provided in subparagraph Section 6(b)(ii) below (which can be given beginning thirty (30) business days prior to the date which is -10- 11 twelve (12) months and one (1) day after the Last Closing Date), and (ii) that the Company shall only be entitled to redeem Series C Preferred Stock having an aggregate Stated Value (as defined below) of at least One Million Dollars ($1,000,000). If the Company elects to redeem some, but not all, of the shares of Series C Preferred Stock, the Company shall redeem a pro-rata amount from each Holder of the Series C Preferred Stock. (i) Redemption Price At Company's Election. The "Redemption Price At Company's Election" shall be calculated as a percentage of Total Value, as that term is defined above, of the Series C Preferred Stock redeemed pursuant to this Section 6(b), which percentage shall vary depending, on the date of Redemption at Company's Election (as defined below), and shall be determined as follows:
Date of Notice of Redemption at Company's Election % of Total Value -------------------------------------------------- ---------------- 12 months and 1 day to 18 months following Last Closing Date 130% 18 months and 1 day to 24 months following Last Closing Date 125% 24 months and 1 day to 30 months following Last Closing Date 120% 30 months and 1 day to 36 months following Last Closing Date 115%
(ii) Mechanics of Redemption at Company's Election. The Company shall effect each such redemption by giving at least thirty (30) business days prior written notice ("Notice of Redemption At Company's Election") to (A) the Holders of the Series C Preferred Stock selected for redemption, at the address and facsimile number of such Holder appearing in the Company's Series C Preferred Stock register and (B) the Transfer Agent, which Notice of Redemption At Company's Election shall be deemed to have been delivered three (3) business days after the Company's mailing (by overnight or two (2) day courier, with a copy by facsimile) of such Notice of Redemption At Company's Election. Such Notice of Redemption At Company's Election shall indicate (1) the Principal Amount of the shares of Series C Preferred Stock that have been selected for redemption, (ii) the date which such redemption is to become effective (the "Date of Redemption At Company's Election") and (iii) the applicable Redemption Price At Company's Election, as defined in subsection (b)(i) above. Notwithstanding the above, Holder may convert into Common Stock pursuant to Section 5, prior to the close of business on the Date of Redemption at Company's Election, any Series C Preferred Stock which it is otherwise entitled to convert, which conversions shall not be subject to the conversion restrictions set forth in Section 5(a), including Series C Preferred Stock that has been selected for redemption at the Company's election pursuant to this subsection Section 6(b); provided, however, that the Company shall still be entitled to exercise its right to redeem upon receipt of a Notice of Conversion if otherwise allowed pursuant to Section 6(a). -11- 12 (c) Company Must Have Immediately Available Funds or Credit Facilities. The Company shall not be entitled to send any Redemption Notice and begin the redemption procedure under Sections Section 6(a) and Section 6(b) unless it has: (i) the full amount of the redemption price in cash, available in a demand or other immediately available account in a bank or other financial institution; or (ii) immediately available credit facilities, in the full amount of the redemption price with a bank or other financial institution; or (iii) an agreement with a standby underwriter willing to purchase from the Company a sufficient number of shares of stock to provide proceeds necessary to redeem any stock that is not converted prior to redemption; or (iv) a combination of the items set forth in (i), (ii) and (iii) above, aggregating the full amount of the redemption price. If the foregoing conditions of this Section 6(c) are satisfied and the Company complies with Section 6(d) hereof, then any Series C Preferred Stock called for by a Redemption at Company's Election shall cease to be outstanding for all purposes hereunder (including the right to convert or to accrete additional Accretion or to exercise any other right or privilege hereunder) on the Date of Redemption at Company's Election and shall instead represent the right to receive the Redemption Price at Company's Election without interest from and after the Date of Redemption at Company's Election. (d) Payment of Redemption Price. (i) Each Holder submitting Series C Preferred Stock being redeemed under this Section 6 shall send their Preferred Stock Certificates so redeemed to the Company or its Transfer Agent, and the Company shall pay the applicable redemption price to that Holder within five (5) business days of the Date of Redemption at Company's Election. The Company shall not be obligated to deliver the redemption price unless the Preferred Stock Certificates so redeemed are delivered to the Company or its Transfer Agent, or, in the event one (1) or more certificates have been lost, stolen, mutilated or destroyed, unless the Holder has complied with Section 5(b)(i). (ii) If the Company elects to redeem pursuant to Section 6(a) hereof, and the Company fails to pay Holder the redemption price within the time frame as required by this Section 6(d), then the Company shall issue shares of Common Stock to any such Holder who has submitted a Notice of Conversion in compliance with Section 5(b) hereof. The shares to be issued to Holder pursuant to this provision shall be the number of shares determined using the lowest Conversion Price (as defined in Section 5 hereof) in effect during the period beginning on the date Holder sends its Notice of Conversion to Company or Transfer Agent via facsimile and ending on the date the Transfer Agent issues Common Stock pursuant to this Section 6(d)(ii). Nothing in this Section 6(d) shall be construed to limit Holder's ability to pursue Holder's rights under Section 13 hereof. -12- 13 (e) Blackout Period. Notwithstanding the foregoing, the Company may not either send out a redemption notice or effect a redemption pursuant to Section 6(b) above during a Blackout Period (defined as a period during which the Company's officers or directors would be prohibited from buying or selling stock pursuant to the Securities Exchange Act of 1934, as amended, because of their holding of material non-public information), unless the Company shall first disclose the non-public information that resulted in the Blackout Period; provided, however, that no redemption shall be effected until at least ten (10) days after the Company shall have given the Holder written notice that the Blackout Period has been lifted. The Blackout period shall not be construed to apply to the Company's standard quarterly period in which the officers and directors of the Company are prohibited from buying or selling the Company's securities unless the Company possesses material nonpublic information as to the Company's financial performance or condition or a major transaction to be entered into by the Company. Section 7. Voting Rights. The Holders of the Series C Preferred Stock shall have no voting power whatsoever, except as otherwise provided by the General Corporation Law of the State of Delaware ("Delaware Law"), and no Holder of Series C Preferred Stock shall vote or otherwise participate in any proceeding in which actions shall be taken by the Company or the shareholders thereof or be entitled to notification as to any meeting of the shareholders. Notwithstanding the above, the Company shall provide Holder with notification of any meeting of the shareholders regarding any major corporate events affecting the Company. In the event of any taking by the Company of a record of its shareholders for the purpose of determining shareholders who are entitled to receive payment of any dividend or other distribution, any right to subscribe for, purchase or otherwise acquire any share of any class or any other securities or property (including by way of merger, consolidation or reorganization), or to receive any other right, or for the purpose of determining shareholders who are entitled to vote in connection with any proposed sale, lease or conveyance of all or substantially all of the assets of the Company, or any proposed liquidation, dissolution or winding up of the Company, the Company shall mail a notice to Holder, at least ten (10) days prior to the record date specified therein, of the date on which any such record is to be taken for the purpose of such dividend, distribution, right or other event, and a brief statement regarding the amount and character of such dividend, distribution, right or other event to the extent known at such time. To the extent that under Delaware Law the vote of the Holders of the Series C Preferred Stock, voting separately as a class, is required to authorize a given action of the Company, the affirmative vote or consent of the Holders of at least a majority of the shares of Series C Preferred Stock represented at a duly held meeting at which a quorum is present or by written consent of a majority of the number of shares of outstanding Series C Preferred Stock (except as otherwise may be required under Delaware Law) shall constitute the approval of such action by the class. To the extent that under Delaware Law the Holders of the Series C Preferred Stock are entitled to vote on a matter with holders of Common Stock, voting together as one (1) class, each share of Series C Preferred Stock shall be entitled to a number of votes equal to the number of shares of Common Stock into which it is then convertible using the record date for the taking of such vote of stockholders as the date as of which the Conversion Price is calculated. Holders of the Series C Preferred Stock also shall be entitled to notice of all shareholder meetings or written -13- 14 consents with respect to which they would be entitled to vote, which notice would be provided pursuant to the Company's by-laws and applicable statutes. Section 8. Protective Provision. So long as Series C Preferred Stock is outstanding, the Company shall not without first obtaining the approval (by vote or written consent, as provided by Delaware Law) of the Holders of at least sixty six and two thirds percent (66 2/3%) of the then outstanding Series C Preferred Stock: (a) alter or change the rights, preferences or privileges of the Series C Preferred Stock or any securities so as to affect adversely the Series C Preferred Stock; (b) create any new class or series of stock having a preference over the Series C Preferred Stock with respect to Distributions (as defined in Section 2 above), other than preferred stock issued solely to existing debtholders of the Company under the Second Amended and Restated Loan Agreement dated May __, 1998 in exchange for such debt or increase the size of the authorized number of Series C Preferred Stock or create any new unsecured debt having a preference over the Series C Preferred Stock with respect to the cash distributions required in Section 4 hereof, or increase the authorized amount of Series C Preferred Stock; or (c) do any act or thing not authorized or contemplated by this Designation which would result in taxation of the holders of shares of Series C Preferred Stock under Section 305 of the Internal Revenue Code of 1986, as amended (or any comparable provision of the Internal Revenue Code as hereafter from time to time amended). Section 9. Status of Converted or Redeemed Stock. In the event any shares of Series C Preferred Stock shall be converted or redeemed pursuant to Section 5 or Section 6 hereof, the shares so converted or redeemed shall be canceled, shall return to the status of authorized but unissued Preferred Stock of no designated series, and shall not be issuable by the Company as Series C Preferred Stock. Section 10. Authorization and Reservation of Shares of Common Stock. (a) Authorized and Reserved Amount. The Company shall have authorized and reserved and keep available for issuance that number of shares equal to one hundred fifty percent (150%) of the number of shares of Common Stock issuable upon conversion of the Series C Preferred Stock at the Fixed Conversion Price determined as of the Last Closing date(the "Authorized and Reserved Amount") solely for the purpose of effecting the conversion of the Series C Preferred Stock, which number shall not be reduced. The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock a sufficient number of shares of Common Stock to provide for the full conversion of all outstanding Series C Preferred Stock, and issuance of the shares of Common Stock in connection therewith. (b) Increases to Authorized and Reserved Amount. Without limiting any other provision of this Section 10, if the Authorized and Reserved Amount for any three (3) consecutive trading days (the last of such three (3) trading days being the "Reservation Trigger Date") shall be less than one hundred twenty-five percent (125%) of the number of shares of Common Stock -14- 15 issuable upon conversion of the Series C Preferred Stock on such trading days (a "Share Authorization Failure"), the Company shall immediately notify all Holders of such occurrence and shall take action as soon as possible, but in any event within sixty (60) days after a Reservation Trigger Date (including, if necessary, seeking shareholder approval to authorize the issuance of additional shares of Common Stock) to increase the Authorized and Reserved Amount to one hundred fifty percent (150%) of the number of shares of Common Stock then issuable upon conversion of the Series C Preferred Stock. (c) Reduction of Authorized and Reserved Amount Under Certain Circumstances. Prior to complete conversion of all Series C Preferred Stock the Company shall not reduce the number of shares required to be reserved for issuance under this Section 10 without the written consent of all Holders except for a reduction proportionate to a reverse stock split effected for a business purpose other than affecting the obligations of Company under this Section 10, which reverse stock split affects all shares of Common Stock equally. (d) Allocations of Authorized and Reserved Amount. The initial Authorized and Reserved Amount shall be allocated pro rata among the Holders of Series C Preferred Stock based on the number of shares of Series C Preferred Stock initially issued to each Holder. Each increase to the Authorized and Reserved Amount shall be allocated pro rata among the Holders of Series C Preferred Stock based on the number of shares of Series C Preferred Stock held by each Holder at the time of the increase in the Authorized and Reserved Amount, as the case may be. In the event a holder shall sell or otherwise transfer any of such Holder's Series C Preferred Stock, each transferee shall be allocated a pro rata portion of such transferor's Authorized and Reserved Amount. Any portion of the Authorized and Reserved Amount which remains allocated to any person or entity which does not hold any Series C Preferred Stock shall be allocated to the remaining holders of Series C Preferred Stock, pro rata based on the number of shares of Series C Preferred Stock then held by such Holders. Section 11. Failure to Satisfy Conversions. (a) Conversion Failure Payments. If, at any time, (x) a Holder submits a Notice of Conversion (or is deemed to submit such notice pursuant to Section 5(c) hereof), and the Company fails for any reason to deliver, on or prior to the expiration of the third (3rd) business day after the Deadline ("Delivery Period") for such conversion, such number of shares of Common Stock to which such Converting Holder is entitled upon such conversion (which shares shall be listed, authorized, reserved, registered, and freely tradeable to the extent required in this Certificate of Designation, the Registration Rights Agreement between the Company and the Holder(s) and the Subscription Agreement between the Company and the Holder(s), collectively referred to as the "Governing Agreements"), or (y) the Company provides notice to Holder at any time of its intention not to issue shares of Common Stock upon exercise by Holder of its conversion rights in accordance with the terms of this Certificate of Designation (each of (x) and (y) being a "Conversion Failure"), then the Company shall pay to such Holder cash damages in an amount equal to the lower of: (i) the Conversion Failure Payment Amount (as defined below), and -15- 16 (ii) the highest interest rate permitted by applicable law, where: "D" means the number of days beginning on the date of the Conversion Failure through and including the Cure Date with respect to such Conversion Failure; "Cure Date" means (i) with respect to a Conversion Failure described in clause (x) of its definition, the date the Company effects the conversion of the Series C Preferred Stock submitted for conversion and (ii) with respect to a Conversion Failure described in clause (y) of its definition, the date the Company undertakes in writing to timely issue Common Stock in satisfaction of all conversions of Series C Preferred Stock in accordance with the terms of this Certificate of Designation. "Conversion Failure Payment Amount" means $1,000 per occurrence, unless and until such conversion failure constitutes an "Event of Default" under Section 12(c)(i), at which time "Default Payments" as defined in Section 12(a) shall also begin to accrue. The payments to which a Holder shall be entitled pursuant to this Section are referred to herein as "Conversion Failure Payments." The parties agree that the damages caused by a breach hereof would be difficult or impossible to estimate accurately. A Holder may elect to receive accrued Conversion Failure Payments in cash or to convert all or any portion of such accrued Conversion Failure Payments, at any time, into Common Stock at the lowest Conversion Price in effect during the period beginning on the date of the Conversion Failure through the Cure Date for such Conversion Failure. In the event a Holder elects to receive any Conversion Failure Payments in cash, it shall so notify the Company in writing. In the event a Holder elects to convert all or any portion of the Conversion Failure Payments, such Holder shall indicate on a Notice of Conversion such portion of the Conversion Failure Payments which such Holder elects to so convert and such conversion shall otherwise be effected in accordance with provisions of Section 5. (b) Buy-In Cure. Unless a Conversion Failure described in clause (y) of Section 11(a) hereof has occurred with respect to such a Holder, if (i) the Company fails for any reason to deliver during the Delivery Period shares of Common Stock to a Holder upon a conversion of the Series C Preferred Stock and (ii) after the applicable Delivery Period with respect to such conversion, a Holder purchases (in an open market transaction or otherwise) shares of Common Stock to make delivery upon a sale by a Holder of the shares of Common Stock (the "Sold Shares") which such Holder anticipated receiving upon such conversion (a "Buy-In"), the Company shall pay such Holder within two (2) business days following, receipt of written notice of a claim pursuant to Section 11(b) (in addition to any other remedies available to Holder) the amount by which (x) such Holder's total purchase price (including brokerage commission, if any) for the shares of Common Stock so purchased exceeds (y) the net proceeds received by such Holder from the sale of the Sold Shares. For example, if a Holder purchases shares of Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to shares of Common Stock sold for $10,000, the Company will be required to pay such Holder $1,000. A Holder shall provide the Company written notification indicating any amounts payable to Holder pursuant to this Section 11. -16- 17 (c) Adjustment to Conversion Price. If a Holder has not received certificates for all shares of Common Stock within three (3) business days following the expiration of the Delivery Period with respect to a conversion of any portion of any of such Holder's Series C Preferred Stock for any reason, then the Conversion Price applicable upon conversion of such portion of the Series C Preferred Stock shall thereafter be the lowest Conversion Price in effect during the period beginning on, and including, such Conversion Date through and including the Cure Date. If there shall occur a Conversion Failure of the type described in clause (y) of Section 11(a), then the Fixed Conversion Price with respect to any conversion of Series C Preferred Stock thereafter shall be the lowest Conversion Price in effect at any time during the period beginning on, and including, the date of the occurrence of such Conversion Failure through and including the Cure Date. The Conversion Price shall thereafter be subject to further adjustment for any events described in Section 5(d). Section 12. Events of Default. (a) Holder's Option to Demand Prepayment. Upon the occurrence of an Event of Default (as herein defined), the Company shall, unless a specific cash payment is already specified in the Governing Agreements with respect to such default, pay the Holders (beginning after the specified cure period) an amount equal to one percent (1%) per month of the aggregate amount of outstanding Series C Preferred Stock held by Holder, accruing daily until the Event of Default is cured or until the Series C Preferred Stock is prepaid under this Section, payable in cash by a cashiers check, no later than five (5) days after the end of any month(s) for which such amounts accrue ("Default Payments"). Notwithstanding the above and whether or not the above Default Payments have been paid, each Holder shall have the right to elect at any time and from time to time prior to the cure by Company of such Event of Default to have all or any portion of such Holder's then outstanding Series C Preferred Stock prepaid by the Company for an amount equal to the Holder Demand Prepayment Amount (as herein defined). (i) The right of a Holder to elect prepayment shall be exercisable upon the occurrence of an Event of Default by such Holder in its sole discretion by delivery of a Demand Prepayment Notice (as herein defined) in accordance with the procedures set forth in this Section 12. Notwithstanding the exercise of such right, the Holder shall be entitled to exercise all other rights and remedies available under the provisions of this Certificate of Designation and at law or in equity. (ii) A Holder shall effect each demand for prepayment under this Section 12 by giving at least two (2) business days prior written notice (the "Demand Prepayment Notice") of the date which such prepayment is to become effective (the "Effective Date of Demand of Prepayment"), the Series C Preferred Stock selected for prepayment and the Holder Demand Prepayment Amount to the Company at the address and facsimile number provided in the stock records of the Company, which Demand Prepayment Notice shall be deemed to have been delivered on the business day after the date of transmission of Holder's facsimile (with a copy sent by overnight courier to the Company) of such notice. (iii) The Holder Demand Prepayment Amount shall be paid to a Holder whose Series C Preferred Stock is being prepaid within one (1) business day following the -17- 18 Effective Date of Demand of Prepayment: provided, however, that the Company shall not be obligated to deliver any portion of the Holder Demand Prepayment Amount until one (1) business day following either the date on which the certificates representing the Series C Preferred Stock being prepaid are delivered to the office of the Company or the Transfer Agent, or the date on which the Holder notifies the Company or the Transfer Agent that such Preferred Stock Certificates have been lost, stolen or destroyed and delivers the documentation required in accordance with Section 5(b)(i) hereof. (b) Holder Demand Prepayment Amount. The "Holder Demand Prepayment Amount" means the greater of: (a) the sum of (1) the Total Value of the Series C Preferred Stock for which demand is being made. through the date of prepayment plus (2) 30% of the original Principal Amount of such Series C Preferred Stock, and (b) the product of (1) the highest price at which the Common Stock is traded on the date of the Event of Default (or on the most recent trading date for the Common Stock if the Common Stock is not traded on such date) divided by the Conversion Price in effect as of the date of the Event of Default, and (2) the Total Value through the date of prepayment. (c) Events of Default. An "Event of Default" means any one of the following: (i) either (a) a Conversion Failure described in Section 11(a) hereof which is uncured thirty (30) days after the applicable Date of Conversion or (b) a material failure by the Company to comply with the Conversion Failure remedies described in Section 11(a)(2) hereof; (ii) a Share Authorization Failure described in Section 10(b) hereof, if such Share Authorization Failure continues uncured for ninety (90) days after the Reservation Trigger Date (for purposes of this subsection (ii), a prepayment demand may be made by a Holder only to the extent that there is an insufficient number of shares of Common Stock authorized and reserved to effect conversion of all of such Holder's outstanding Series C Preferred Stock, provided, however, that Holder need not actually convert any Series C Preferred Stock and exhaust its available authorized and reserved shares of Common Stock in order to demand such prepayment); (iii) the Company fails, and such failure continues uncured for three (3) business days after the Company has been notified thereof in writing by a Holder, to satisfy the share reservation requirements of Section 10 hereof; (iv) the Company fails to pay any cash payments due to Holder under the terms of this Certificate of Designation within five (5) days after Holder has notified the Company, in writing, that such payment is past due and that the Holder intends to declare an "Event of Default" under this Section 12; (v) the Company fails to cause the registration statement required by the Registration Rights Agreement to become effective within six (6) months of the Last Closing Date, or fails to maintain an effective registration statement as required by the Registration Rights Agreement between the Company and the Holder(s) (the "Registration Rights Agreement") -18- 19 except where (A) such failure lasts no longer than seven (7) consecutive trading days or twenty one (21) days in any twelve (12) month period, or (B) the Conversion Shares may be sold immediately, without volume limitation, without registration under the Act, by virtue of Rule 144 or similar provisions; (vi) after the date that is four (4) months after the Last Closing Date, for three (3) consecutive trading days or for an aggregate of ten (10) trading days in any nine (9) month period, the Common Stock (including any of the shares of Common Stock issuable upon conversion of the Series C Preferred Stock) is (i) suspended from trading on any of the OTC Bulletin Board, Nasdaq SmallCap, NMS, NYSE, or the AMEX or (ii) is not listed and qualified for trading on at least one of the OTC Bulletin Board, Nasdaq SmallCap, NMS, NYSE, or AMEX; (vii) the Company fails, and such failure continues uncured for three (3) business days after the Company has been notified thereof in writing by a Holder, to remove any restrictive legend on any Certificate for any shares of Common Stock issued to a Holder upon conversion of any Series C Preferred Stock as and when required by this Certificate of Designation, the Subscription Agreement, between the Company and the Holder(s) (the "Subscription Agreement") or the Registration Rights Agreement; (viii) the Company breaches, and such breach continues uncured (after any cure period specifically set forth in the Governing Agreements, if applicable) for three (3) business days after the Company has been notified thereof in writing by a Holder, any significant covenant or other material term or condition of any of the Governing Agreements which is not specifically addressed in subsections Section 12(c)(i) - (iv) above or subsections Section 12(c)(ix) - (xi) below, and which directly or indirectly has or could have a material effect on (x) the Holder's ability to convert its Series C Preferred Stock, or to receive and resell on the Company's primary exchange or market the Common Stock issuable upon conversion, or (y) the Company's ability to make any cash payments provided for in the Governing Agreements (including without limitation, the failure to make any required liquidated damage or other cash payment hereunder or under the Registration Rights Agreement), provided that if such breach provides for money damages in the applicable Governing Agreement, and such money damages are being timely paid, then such breach shall not constitute a default under this subsection unless such breach continues for sixty (60) days after which the Holder may immediately demand the Holder Demand Prepayment Amount if such breach has not been cured. Notwithstanding the above, the terms of this subsection (viii) shall not apply to any Event of Default which is specifically addressed in subsections Section 12(c)(i) - (iv) above or subsections Section 12(c)(ix) - (xi) below. (ix) any representation or warranty of the Company made herein or in any agreement, statement or certificate given in writing pursuant hereto or in connection herewith (including, without limitation, the Subscription Agreement and Registration Rights Agreement), shall be false or misleading in any material respect when made, until, in the case of a warranty, the Company has complied with the warranty, provided that, in the case of a false representation, no Default Payments shall accrue absent proof of fraud; -19- 20 (x) the Company or any subsidiary of the Company shall make an assignment for the benefit of its creditors, or apply for or consent to the appointment of a receiver or trustee for it or for a substantial part of its property or business, or such receiver or trustee shall otherwise be appointed; or (xi) bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings for relief under any bankruptcy law, or any law for the relief of debtors shall be instituted by or against the Company or any subsidiary of the Company (and such proceedings shall continue unstayed for thirty (30) days). (d) Failure to Pay Demand Prepayment Amount. If the Company fails to pay the Holder Demand Prepayment Amount within five (5) business days of its receipt of a Demand Prepayment Notice, then such Holder shall have the right, at any time and from time to time prior to the payment of the Holder Demand Prepayment Amount, to require the Company, upon written notice, to immediately convert (in accordance with the terms of Section 5) all or any portion of the Holder Demand Prepayment Amount, into shares of Common Stock at the then current Conversion Price, provided that if the Company has not delivered the full number of shares of Common Stock issuable upon such conversion, which shares shall be listed, registered, and freely tradable, each to the extent required by the Governing Agreements, within three (3) business days after the Company receives written notice of such conversion, the Conversion Price with respect to such Holder Demand Prepayment Amount shall thereafter be deemed to be the lowest Conversion Price in effect during the period beginning on the date of the Event of Default through the date on which the Company delivers to the Holder the full number of freely tradable shares of Common Stock issuable upon such conversion, which shares shall be listed, registered, and freely tradable, each to the extent required by the Governing Agreements. In the event the Company is not able to pay all amounts due and payable with respect to all Series C Preferred Stock subject to Holder Demand Prepayment Notices, the Company shall pay the Holders such amounts pro rata, based on the total amounts payable to such Holder relative to the total amounts payable to all Holders. Section 13. Remedies, Other Obligations, Breaches and Injunctive Relief. The remedies provided in this Certificate of Designation shall be cumulative and in addition to all other remedies available under the Certificate of Designation at law or in equity (including a decree of specific performance and/or other injunctive relief), no remedy contained herein shall be deemed a waiver of compliance with the provision giving rise to such remedy and nothing herein shall limit a holder's right to pursue actual damages for any failure by the Company to comply with the terms of this Certificate of Designation. Amounts set forth or provided for herein with respect to payments, conversion and the like (and the computation thereof) shall be the amounts to be received by the holder hereof and shall not, except as expressly provided herein, be subject to any other obligation of the Company (or the performance thereof). The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the holders of Series A Preferred Stock and that the remedy at law for any such breach may be inadequate. The Company therefore agrees, in the event of any such breach or threatened breach, the holders of Series A Preferred Stock shall be entitled, in addition to all other available remedies, to an injunction restraining any breach, without the necessity of showing economic loss and without any bond or other security being required. -20- 21 Section 14. Arbitration. Any controversy or claim arising out of or related to this Certificate of Designation or the reach thereof, shall be settled by binding arbitration in San Francisco, California in accordance with the Expedited Procedures (Rules 53-57) of the Commercial Arbitration Rules of the American Arbitration Association ("AAA"). A proceeding shall be commenced upon written demand by Company or any Subscriber to the other. The arbitrator(s) shall enter a judgment by default against any party which fails or refuses to appear in any properly noticed arbitration proceeding. The proceeding shall be conducted by one (1) arbitrator, unless the amount alleged to be in dispute exceeds two hundred fifty thousand dollars ($250,000), in which case three (3) arbitrators shall preside. The arbitrator(s) will be chosen by the parties from a list provided by the AAA, and if they are unable to agree within ten (10) days, the AAA shall select the arbitrator(s). The arbitrators must be experts in securities law and financial transactions. The arbitrators shall assess costs and expenses of the arbitration, including all attorneys' and experts' fees, as the arbitrators believe is appropriate in light of the merits of the parties' respective positions in the issues in dispute. Each party submits irrevocable to the jurisdiction of the United States District Court sitting in San Francisco, California in each case for purposes of enforcement of any discovery order, judgment or award in connection with such arbitration. The award of the arbitrator(s) shall be final and binding upon the parties and may be enforced in any court having jurisdiction. The arbitration shall be held in such place as set by the arbitrator(s) in accordance with Rule 55. -21- 22 Section 15. Assignability. The Series C Preferred Stock shall be freely assignable by a Holder subject to applicable securities laws and any agreement to the contrary signed by such Holder. Signed on June 4, 1998 /s/ Kenneth A. Kokinakis ------------------------------- Kenneth A. Kokinakis, President Attest: /s/ Brendan O'Flaherty - ------------------------------- Brendan O'Flaherty, Secretary -22- EX-4.9 4 REGISTRATION RIGHTS AGREEMENT 1 Exhibit 4.9 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT ("Agreement") is entered into as of June 5, 1998, by and among Aureal Semiconductor Inc., a corporation duly incorporated and existing under the laws of the State of Delaware ("Company"), and the subscribers (hereinafter referred to as "Subscribers") to the Company's offering ("Offering") of up to Fifteen Million Dollars ($15,000,000) of Series C Preferred Stock (the "Preferred Stock", or the "Convertible Securities") pursuant to the Regulation D Subscription Agreement dated June 5, 1998 between the Company and each of the Subscribers ("Subscription Agreement"). 1. Definitions. For purposes of this Agreement: (a) The terms "register," "registered," and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Securities Act of 1933 (the "Act"), and pursuant to Rule 415 under the Act or any successor rule, and the declaration or ordering of effectiveness of such registration statement or document. (b) For purposes hereof, the term "Registrable Securities" means the shares of the Company's Common Stock together with any capital stock issued in replacement of, in exchange for or otherwise in respect of such Common Stock (the "Common Stock") issued or issuable upon conversion of the Convertible Securities Notwithstanding the above: 1. Common Stock which would otherwise be deemed to be Registrable Securities shall not constitute Registrable Securities if those shares of Common Stock may be resold in a public transaction without volume limitations or other material restrictions without registration under the Act, including without limitation, pursuant to Rule 144 under the Act; and 2. any Registrable Securities resold in a public transaction shall cease to constitute Registrable Securities. (c) The number of shares of "Registrable Securities then outstanding" shall be determined by the number of shares of Common Stock which have been issued or are issuable upon conversion of the Convertible Securities at the time of such determination. (d) The term "Holder" means any person owning or having the right to acquire Registrable Securities or any permitted assignee thereof. (e) The term "Due Date" means the date that is exactly four (4) months after the Last Closing (as defined in the Subscription Agreement). Capitalized terms not otherwise defined in this Agreement shall have the meaning set forth in the Subscription Agreement or in the Certificate of Designation of the Preferred Stock (the "Certificate"). 2 2. Required Registration. (a) The Company shall, within two (2) calendar months after the last Closing of the Offering, file a registration statement ("Registration Statement") on Form S-3 or as an amendment of a previously filed Form S-3 (or other suitable form at the Company's discretion, but subject to the reasonable approval of Subscribers), covering the resale of all shares of Registrable Securities then outstanding or issuable upon conversion of all then outstanding Convertible Securities. Such Registration Statement shall initially cover that number of shares equal to one hundred fifty percent (150%) of the number of shares of Common Stock issuable to each Subscriber upon conversion of all outstanding Convertible Securities at the Fixed Conversion Price determined as of the last Closing date. The Company shall use its best efforts to have the Registration Statement declared effective as soon as possible. In the event that the Company determines, which determination shall be made by the Company within five (5) business days after the last business day of each month after the effective date of the Registration Statement or is notified at any time by a Holder, that the Registration Statement does not cover a sufficient number of shares of Common Stock to effect the resales of a number of shares of Common Stock equal to one hundred fifty percent (150%) of the number of shares of Common Stock issuable to each Subscriber upon conversion of all outstanding Convertible Securities then eligible for conversion, at the Conversion Price (as defined in the Certificate of Designation of the Series A Preferred Stock, referred to herein as the "Certificate of Designation") in effect on the last business day of such month (the "Assumed Conversion Price"), the Company shall, within five (5) business days, amend the Registration Statement or file a new Registration Statement (an "Amended" or "New" Registration Statement, respectively), as appropriate, to add such number of additional shares as would be necessary to effect the resales of a number of shares of Common Stock equal to at least one hundred fifty percent (150%) of the number of shares of Common Stock issuable to each Subscriber upon conversion of all outstanding Convertible Securities then eligible for conversion, at the Assumed Conversion Price then in effect. If the Registration Statement is not filed within two (2) calendar months after the Last Closing of the Offering, Company shall pay the Subscribers an amount equal to one percent (1%) per month of the aggregate amount of outstanding Convertible Securities held by Subscriber, accruing daily until the Registration Statement is filed, payable in cash or Common Stock at the Subscriber's option, as set forth below ("Late Filing Payment"). If the Registration Statement is not declared effective by the Due Date, or if any other Amended or New Registration Statement required to be filed hereunder is not declared effective within two (2) calendar months of the date it is required to be filed, the Company shall pay the Subscribers an amount equal to one percent (1%) per month of the aggregate amount of outstanding Convertible Securities held by Subscriber, accruing daily until the Registration Statement or a registration statement filed pursuant to Section 3 of this Agreement is declared effective (the "Late Registration Payment"). Notwithstanding the above, any Late Registration Payments otherwise due to a Subscriber shall be reduced by the amount of any Late Filing Payments that have previously been paid in full to such Subscriber. Any Late Filing Payment or Late Registration Payment shall be payable in cash or Common Stock, at the Subscriber's option, as follows: If Subscriber elects to be paid in cash, such Late Filing Payment or Late Registration Payment shall be paid to such Subscriber by a cashiers check, no later than ten (10) days after the end of (i) the month in which the Company receives the Holder's cash 3 payment request and (ii) any subsequent month(s) for which such amounts accrue. If Subscriber elects to be paid in Common Stock, such number of shares shall be determined as follows: Upon conversion of each Convertible Security or any portion thereof, the Company shall issue to the Subscriber the number of shares of Common Stock determined as set forth in Section 5(a) of the Certificate of Designation, plus an additional number of shares of Common Stock attributable to such Convertible Securities (the "Additional Shares") determined as set forth below: Additional Shares = Late Registration Payment + Late Filing Payment ----------------------------------------------- Conversion Price With respect to the Preferred Stock, "Conversion Price" has the definition ascribed to it in the Certificate of Designation. Such Additional Shares shall also be deemed "Registrable Securities" as defined herein. The Company covenants to use its best efforts to use Form S-3 for the registration required by this Section during all applicable times contemplated by this Agreement. (b) The Registration Statement shall be prepared as a "shelf" registration statement under Rule 415, and shall be maintained effective until all Registrable Securities cease to exist. (c) The Company represents that it is presently eligible to effect the registration contemplated hereby on Form S-3 and will use its best efforts to continue to take such actions as are necessary to maintain such eligibility. 3. Piggyback Registration. If the Registration Statement described in Section 2 is not effective by the Due Date, and if (but without any obligation to do so) the Company proposes to register (including for this purpose a registration effected by the Company for shareholders other than the Holders) any of its Common Stock under the Act in connection with the public offering of such securities solely for cash (other than a registration relating solely for the sale of securities to participants in a Company stock plan or a registration on Form S-4 or from S-8 promulgated under the Act or any successor or similar form registering stock issuable upon a reclassification, upon a business combination involving an exchange of securities or upon an exchange offer for securities of the issuer or another entity), the Company shall, at such time, promptly give each Holder written notice of such registration (a "Piggyback Registration Statement"). Upon the written request of each Holder given by fax within ten (10) days after mailing of such notice by the Company, the Company shall cause to be included in such registration statement under the Act all of the Registrable Securities that each such Holder has requested to be registered ("Piggyback Registration") to the extent such inclusion does not violate the registration rights of any other securityholder of the company granted prior to the date hereof; nothing, herein shall prevent the Company from withdrawing or abandoning the registration statement prior to its effectiveness. 4. Limitation on Obligations to Register. 4 (a) In the case of a Piggyback Registration on an underwritten public offering by the Company, if the managing underwriter determines and advises in writing that the inclusion in the registration statement of all Registrable Securities proposed to be included would interfere with the successful marketing of the securities proposed to be registered by the Company, then the number of such Registrable Securities to be included in the registration statement, to the extent such Registrable Securities may be included in such Piggyback Registration Statement shall be allocated among all Holders who had requested Piggyback Registration pursuant to the terms hereof, in the proportion that the number of Registrable Securities which each such Holder, seeks to register bears to the total number of Registrable Securities sought to be included by all Holders. If required by the managing underwriter of such an underwritten public offering, the Holders shall enter into a reasonable agreement limiting the number of Registrable Securities to be included in such Piggyback Registration Statement and the terms, if any, regarding the future sale of such Registrable Securities. (b) In the event the Company believes that shares sought to be registered under Section 2 or Section 3 by Holders do not constitute "Registrable Securities" by virtue of Section I (b) of this Agreement, and the status of those shares as Registrable Securities is disputed, the Company shall provide, at its expense, an Opinion of Counsel, reasonably acceptable to the Holders of the Securities at issue (and satisfactory to the Company's transfer agent to permit the sale and transfer) that those securities may be sold immediately, without volume limitation, without registration under the Act, by virtue of Rule 144 or similar provisions. 5. Obligations of the Company. Whenever required under this Agreement to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible: (a) Prepare and file with the Securities and Exchange Commission ("SEC") a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective. (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement. (c) Furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. (d) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders of the Registrable Securities covered by such registration statement, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. 5 (e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement. (f) As promptly as practicable after becoming aware of such event, notify each Holder of Registrable Securities of the happening of any event of which the Company has knowledge, as a result of which the prospectus included in the registration statement, as then in effect, includes an untrue statement of a material fact or omits 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, and subject to Section 6 use its best efforts promptly to prepare a supplement or amendment to the registration statement to correct such untrue statement or omission, and deliver a number of copies of such supplement or amendment to each Holder as such Holder may reasonably request. (g) Provide Holders with written notice of the date that a registration statement registering the resale of the Registrable Securities is declared effective by the SEC, and the date or dates when the Registration Statement is no longer effective. (h) Provide Holders and their representatives the opportunity to conduct a reasonable due diligence inquiry of Company's pertinent financial and other records and make available its officers, directors and employees for questions regarding such information as it relates to information contained in the registration statement. 6. Black Out. In the event that, during the time that the Registration Statement is effective, the Company reasonably determines, based upon advice of counsel, that due to the existence of material non-public information, disclosure of such material non-public information would be required to make the statements contained in the Registration Statement not misleading, and the Company has a bona fide business purpose for preserving as confidential such material non-public information, the Company shall have the right to suspend the effectiveness of the Registration Statement, and no Holder shall be permitted to sell any Registrable Securities pursuant thereto, until such time as such suspension is no longer advisable; provided, however, that such time shall not exceed a period of sixty (60) days. As soon as such suspension is no longer advisable, the Company shall, if required, promptly, but in no event later than the date the Company files any documents with the Securities and Exchange Commission ("SEC") referencing such material information, file with the SEC an amendment to the Registration Statement disclosing such information and use its best efforts to have such amendment declared effective as soon as possible. In the event the effectiveness of the Registration Statement is suspended by the Company pursuant hereto, the Company shall promptly notify all Holders whose securities are covered by the Registration Statement of such suspension, and shall promptly notify each such Holder as soon as the effectiveness of the Registration Statement has been resumed. The Company shall be entitled to effect no more than three (3) such suspensions during the one (1) year period following the Last Closing, no more than two (2) of which shall occur during the last six (6) months of such one year period. 6 7. Furnish Information. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Agreement with regard to each selling Holder that such selling Holder shall furnish to the Company such information regarding Holder, the Registrable Securities held by it, and the intended method of disposition of such securities as shall be required to effect the registration of its Registrable Securities or to determine that registration is not required pursuant to Rule 144 or other applicable provision of the Act. 8. Expenses. All expenses other than underwriting, discounts and commissions and fees and expenses of counsel to the selling Holders incurred in connection with registrations, filings or qualifications pursuant hereto, including (without limitation) all registration, filing and qualification fees, printers' and accounting fees, fees and disbursements of counsel for the Company, shall be borne by the Company. 9. Indemnification. In the event any Registrable Securities are included in a Registration Statement or a Piggyback Registration Statement under this Agreement: (a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, the officers and directors of each Holder, any underwriter (as defined in the Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Act or the Securities Exchange Act of 1934, as amended (the "1934 Act"), against any losses, claims, damages, or liabilities joint or several) to which they may become subject under the Act, the 1934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following: (i) any untrue statement or alleged untrue statement of a material fact statements or omissions contained in such registration statement, including any preliminary prospectus or Final prospectus contained therein or any amendments or supplements thereto, or (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, and the Company will reimburse each such Holder, officer or director, underwriter or controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that (i) the indemnity agreement contained in this subsection 9(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld) and (ii) the Company shall not be liable in any such case for any such loss, claim, damage, liability, or action to the extent that it arises out of or is based upon a violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any such Holder, officer, director, underwriter or controlling person. (b) To the extent permitted by law, each selling Holder, severally and not jointly, will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the registration statement, each person, if any, who controls the Company within the meaning of the Act, any underwriter and any other Holder selling securities in such registration statement or any of its directors or officers or any person who controls such Holder, against any losses, claims, damages, or liabilities joint or several) to which the Company or any such director, officer, controlling, person, or underwriter or controlling person, or other such 7 Holder or director, officer or controlling person may become subject, under the Act, the 1934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereto) arise out of or are based upon any statement or omission in each case to the extent (and only to the extent) that such statement or omission is made in reliance upon and in conformity with written information furnished by such Holder expressly for use in connection with such registration statement; and each such Holder will reimburse any legal or other expenses reasonably incurred by the Company and any such director, officer, controlling person, underwriter or controlling person, other Holder, officer, director, or controlling person in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that (i) the indemnity agreement contained in this subsection 9(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld and (ii) the total amount for which any Holder shall be liable under this Section 9(b) shall not in any event exceed the net proceeds received by such Holder from the sale of the Registrable Securities sold by such Holder in such Registration. (c) Promptly after receipt by an indemnified party under this Section 9 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 9, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party shall have the right to retain its own counsel, with the reasonably incurred fees and expenses of one such counsel to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential conflicting interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 9, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 9. (d) In the event that the indemnity provided in paragraph (a) or (b) of this Section 9 is unavailable to or insufficient to hold harmless an indemnified party for any reason, the Company and each Holder agree to contribute to the aggregate claims, losses, damages and liabilities (including legal or other expenses reasonably incurred in connection with investigating or defending same) (collectively "Losses") to which the Company and one or more of the Holder may be subject in such proportion as is appropriate to reflect the relative fault of the Company and the Holders in connection with the statements or omissions which resulted in such Losses. Relative fault shall be determined by reference to whether any alleged untrue statement or omission relates to information provided by the Company or by the Holders. The Company and the Holders agree that it would not be just and equitable if contribution were determined by pro rata allocation or any other method of allocation which does not take account of the equitable considerations referred to above. Notwithstanding the provisions of this paragraph (d), no person 8 guilty of fraudulent misrepresentation (within the meaning of Section 10(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 9, each person who controls a Holder of Registrable Securities within the meaning of either the Securities Act or the Exchange Act and each director, officer, partner, employee and agent of a Holder shall have the same rights to contribution as such holder, and each person who controls the Company within the meaning of either the Act or the Exchange Act and each director of the Company, and each officer of the Company who has signed the registration statement, shall have the same rights to contribution as the Company, subject in each case to the applicable terms and conditions of this paragraph (d). (e) The obligations of the Company and Holders under this Section 9 shall survive the redemption and conversion, if any, of the Convertible Securities, the completion of any offering of Registrable Securities in a Registration Statement under this Agreement, and otherwise. 10. Reports Under Securities Exchange Act of 1934. With a view to making available to the Holders the benefits of Rule 144 promulgated under the Act and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration, the Company agrees to: (a) make and keep public information available, as those terms are understood and defined in Rule 144; (b) use its best efforts to file with the SEC in a timely manner all reports and other documents required of the Company under the Act and the 1934 Act; and 11. Amendment of Registration Rights. Any provision of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company, the Holders of a majority of the Registrable Securities and B III Capital Partners, L.P., provided that the amendment treats all Holders equally. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each Holder, each future Holder, and the Company. 12. Notices. All notices required or permitted under this Agreement shall be made in writing signed by the party making the same, shall specify the section under this Agreement pursuant to which it is given, and shall be addressed if to (i) the Company at: Aureal Semiconductor Inc., 4245 Technology Drive, Fremont, CA 94538 Telephone No. (510) 252-4245, Facsimile No. (510) 252-4491 and (ii) the Holders at their respective last address as the party as shown on the records of the Company. Any notice, except as otherwise provided in this Agreement, shall be made by fax and shall be deemed given at the time of transmission of the fax. 13. Termination. This Agreement shall terminate on the date all Registrable Securities cease to exist; but without prejudice to (i) the parties' rights and obligations arising from breaches of this Agreement occurring prior to such termination (ii) other indemnification obligations under this Agreement. 9 14. Assignment. No assignment, transfer or delegation, whether by operation of law or otherwise, of any rights or obligations under this Agreement by the Company or any Holder, respectively, shall be made without the prior written consent of the majority in an interest of the Holders or the Company, respectively; provided that the rights of a Holder may be transferred to a subsequent holder of the Holder's Registrable Securities (provided such transferee shall provide to the Company, together with or prior to such transferee's request to have such Registrable Securities included in a Piggyback Registration, a writing executed by such transferee agreeing to be bound as a Holder by the terms of this Agreement); and provided further that the Company may transfer its rights and obligations under this Agreement to a purchaser of all or a substantial portion of its business if the obligations of the Company under this Agreement are assumed in connection with such transfer, either by merger or other operation of law (which may include without limitation a transaction whereby the Registrable Securities are converted into securities of the successor in interest) or by specific assumption executed by the transferee. 15. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California applicable to agreements made in and wholly to be performed in that jurisdiction, except for matters arising under the Act or the Securities Exchange Act of 1934, which matters shall be construed and interpreted in accordance with such laws. 16. Execution in Counterparts Permitted. This Agreement may be executed in any number of counterparts, each of which shall be enforceable against the parties actually executing such counterparts, and all of which together shall constitute one (1) instrument. 10 IN WITNESS WHEREOF, the undersigned have executed this Agreement as of this 5th day of June, 1998. AUREAL SEMICONDUCTOR INC. By: /s/ Kenneth A. Kokinakis ------------------------------- Kenneth A. Kokinakis, President - CEO Address: Aureal Semiconductor Inc. 4245 Technology Drive Fremont, California 94538 Telephone No. (510) 252-4245 Facsimile No. (510) 252-4491 INVESTOR(S) B III Capital Partners, L.P. Investor's Name By: DDJ Capital III, LLC, its General Partner By: DDJ Capital Management, LLC, its Manager By: /s/ Daniel G. Harmetz ------------------------------- (Signature) Daniel G. Marmetz Member Address: c/o DDJ Capital Management, LLC 141 Linden Street, Suite 4 Wellesley, MA 02181 EX-4.10 5 LOAN AND SECURITY AGREEMENT 1 EXHIBIT 4.10 ================================================================================ LOAN AND SECURITY AGREEMENT BY AND AMONG AUREAL SEMICONDUCTOR INC. AS BORROWER, AND GOLDMAN SACHS CREDIT PARTNERS L.P. AND TRANSAMERICA BUSINESS CREDIT CORPORATION AS THE LENDERS, AND TRANSAMERICA BUSINESS CREDIT CORPORATION AS AGENT DATED AS OF JUNE 5, 1998 ================================================================================ 2 TABLE OF CONTENTS
Page(s) ------- 1. DEFINITIONS AND CONSTRUCTION ............................................... 1 1.1 Definitions .......................................................... 1 1.2 Accounting Terms ..................................................... 21 1.3 Code ................................................................. 21 1.4 Construction ......................................................... 21 1.5 Schedules and Exhibits ............................................... 21 2. LOAN AND TERMS OF PAYMENT .................................................. 22 2.1 Revolving Tranche A Advances ......................................... 22 2.2 Revolving Tranche B Advances ......................................... 22 2.3 Borrowing Procedures and Settlements ................................. 23 2.4 Payments ............................................................. 25 2.5 Overadvances ......................................................... 27 2.6 Interest: Rates, Payments, and Calculations .......................... 27 2.7 Collection of Accounts ............................................... 29 2.8 Crediting Payments; Application of Collections ....................... 30 2.9 Designated Account ................................................... 31 2.10 Maintenance of Loan Account; Statements of Obligations ............... 31 2.11 Fees ................................................................. 31 2.12 Taxes ................................................................ 32 3. CONDITIONS; TERM OF AGREEMENT .............................................. 33 3.1 Conditions Precedent to the Initial Advance .......................... 33 3.2 Conditions Precedent to all Advances ................................. 36 3.3 Conditions Subsequent ................................................ 37 3.4 Term ................................................................. 37 3.5 Effect of Termination ................................................ 37 3.6 Early Termination by Borrower ........................................ 38 3.7 Termination Upon Event of Default .................................... 38 4. CREATION OF SECURITY INTEREST .............................................. 38 4.1 Grants of Security Interests ......................................... 38 4.2 Negotiable Collateral ................................................ 39 4.3 Collection of Accounts, General Intangibles, and Negotiable Collateral.......................................................... 40 4.4 Delivery of Additional Documentation Required ........................ 40 4.5 Power of Attorney .................................................... 40 4.6 Right to Inspect ..................................................... 41 4.7 Control Agreements ................................................... 41 5. REPRESENTATIONS AND WARRANTIES ............................................. 41
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5.1 No Encumbrances ...................................................... 41 5.2 Eligible Accounts .................................................... 41 5.3 [intentionally omitted] .............................................. 42 5.4 Equipment ............................................................ 42 5.5 Location of Inventory and Equipment .................................. 42 5.6 Inventory Records .................................................... 42 5.7 Location of Chief Executive Office; FEIN ............................. 42 5.8 Due Organization and Qualification; Subsidiaries ..................... 42 5.9 Due Authorization; No Conflict ....................................... 43 5.10 Litigation ........................................................... 44 5.11 No Material Adverse Change ........................................... 44 5.12 No Fraudulent Transfer ............................................... 45 5.13 Employee Benefits .................................................... 45 5.14 Environmental Condition .............................................. 45 5.15 Brokerage Fees ....................................................... 45 5.16 Permits and other Intellectual Property .............................. 46 6. AFFIRMATIVE COVENANTS ...................................................... 46 6.1 Accounting System .................................................... 47 6.2 Collateral Reporting ................................................. 47 6.3 Financial Statements, Reports, Certificates .......................... 47 6.4 Tax Returns .......................................................... 49 6.5 Guarantor Reports .................................................... 49 6.6 Returns .............................................................. 49 6.7 Title to Equipment ................................................... 49 6.8 Maintenance of Equipment ............................................. 49 6.9 Taxes ................................................................ 49 6.10 Insurance ............................................................ 50 6.11 No Setoffs or Counterclaims .......................................... 51 6.12 Location of Inventory and Equipment .................................. 51 6.13 Compliance with Laws ................................................. 51 6.14 Employee Benefits .................................................... 52 6.15 Leases ............................................................... 52 6.16 Broker Commissions ................................................... 53 6.19 Copyright Registrations .............................................. 53 7. NEGATIVE COVENANTS ......................................................... 54 7.1 Indebtedness ......................................................... 54 7.2 Liens ................................................................ 54 7.3 Restrictions on Fundamental Changes .................................. 54 7.4 Disposal of Assets ................................................... 55 7.5 Change Name .......................................................... 55 7.6 Guarantee ............................................................ 55 7.7 Nature of Business ................................................... 55 7.8 Prepayments and Amendments ........................................... 55 7.9 Change of Control .................................................... 56
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7.10 [intentionally omitted] ......................................... 56 7.11 Distributions ................................................... 56 7.12 Accounting Methods .............................................. 56 7.13 Investments ..................................................... 56 7.14 Transactions with Affiliates .................................... 57 7.15 Suspension ...................................................... 57 7.16 [intentionally omitted] ......................................... 57 7.17 Use of Proceeds ................................................. 57 7.18 Change in Location of Chief Executive Office; Inventory and Equipment with Bailees .......................................... 57 7.19 No Prohibited Transactions Under ERISA .......................... 57 7.20 Financial Covenants ............................................. 58 7.21 Capital Expenditures ............................................ 60 7.22 Securities Accounts ............................................. 60 8. EVENTS OF DEFAULT ..................................................... 61 9. THE LENDER GROUP'S RIGHTS AND REMEDIES ................................ 63 9.1 Rights and Remedies ............................................. 63 9.2 Remedies Cumulative ............................................. 65 10. TAXES AND EXPENSES ..................................................... 65 11. WAIVERS; INDEMNIFICATION ............................................... 66 11.1 Demand; Protest; etc ............................................ 66 11.2 The Lender Group's Liability for Collateral ..................... 66 11.3 Indemnification ................................................. 66 12. NOTICES ................................................................ 67 13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER ............................. 68 14. DESTRUCTION OF BORROWER'S DOCUMENTS .................................... 69 15. ASSIGNMENTS AND PARTICIPATIONS; SUCCESSORS ............................. 69 15.1 Assignments and Participations .................................. 70 15.2 Successors ...................................................... 72 16. AMENDMENTS; WAIVERS .................................................... 72 16.1 Amendments and Waivers .......................................... 72 16.2 No Waivers; Cumulative Remedies ................................. 74 17. AGENT; THE LENDER GROUP ................................................ 74 17.1 Appointment and Authorization of Agent .......................... 74 17.2 Delegation of Duties ............................................ 75 17.3 Liability of Agent .............................................. 75
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17.4 Reliance by Agent ............................................... 76 17.5 Notice of Potential Default or Event of Default ................. 76 17.6 Credit Decision ................................................. 76 17.7 Costs and Expenses; Indemnification ............................. 77 17.8 Agent in Individual Capacity .................................... 78 17.9 Successor Agent ................................................. 78 17.10 Withholding Tax ................................................. 79 17.11 Collateral Matters .............................................. 80 17.12 Restrictions on Actions by Lenders; Sharing of Payments ......... 81 17.13 Agency for Perfection ........................................... 82 17.14 Payments by Agent to the Lenders ................................ 82 17.15 Concerning the Collateral and Related Loan Documents ............ 82 17.16 Field Audits and Examination Reports; Confidentiality; Disclaimers by Lenders; Other Reports and Information ........... 83 17.17 Several Obligations; No Liability ............................... 84 18. GENERAL PROVISIONS ..................................................... 85 18.1 Effectiveness ................................................... 85 18.2 Section Headings ................................................ 85 18.3 Interpretation .................................................. 85 18.4 Severability of Provisions ...................................... 85 18.5 Amendments in Writing ........................................... 85 18.6 Counterparts; Telefacsimile Execution ........................... 85 18.7 Revival and Reinstatement of Obligations ........................ 86 18.8 Integration ..................................................... 86 18.9 Certain Damages ................................................. 86
-iv- 6 SCHEDULES AND EXHIBITS Schedule C-1 Commitments Schedule N-1 Non-Material Subsidiaries Schedule P-1 Permitted Liens Schedule 5.8 Subsidiaries Schedule 5.10 Litigation Schedule 5.13 ERISA Benefit Plans Schedule 5.16 Permits and Intellectual Property Schedule 6.12 Location of Inventory and Equipment Schedule 7.1 Permitted Other Indebtedness Exhibit A-1 Form of Assignment and Acceptance Exhibit B-1 Business Plan Exhibit C-1 Form of Compliance Certificate Exhibit C-2 Form of Copyright Security Agreement Exhibit P-1 Form of Patent Security Agreement Exhibit T-1 Form of Trademark Security Agreement
-v- 7 LOAN AND SECURITY AGREEMENT THIS LOAN AND SECURITY AGREEMENT (THIS "AGREEMENT"), is entered into as of June 5, 1998, among the financial institutions listed on the signature pages hereof (such financial institutions, together with their respective successors and assigns, are referred to hereinafter each individually as a "Lender" and collectively as the "Lenders"), TRANSAMERICA BUSINESS CREDIT CORPORATION, a Delaware corporation, as agent for the Lenders ("Agent"), with a place of business located at 15260 Ventura Boulevard, Suite 1240, Sherman Oaks, California 91403, and AUREAL SEMICONDUCTOR INC., a Delaware corporation ("Borrower"), with its chief executive office located at 4245 Technology Drive, Fremont, California 94538. The parties agree as follows: 1. DEFINITIONS AND CONSTRUCTION. 1.1 DEFINITIONS. As used in this Agreement, the following terms shall have the following definitions: "Account Debtor" means any Person who is or who may become obligated under, with respect to, or on account of, an Account, General Intangible, or Negotiable Collateral. "Accounts" means all currently existing and hereafter arising accounts, contract rights, and all other forms of obligations owing to Borrower arising out of the sale, license, or lease of goods or General Intangibles or the rendition of services by Borrower, irrespective of whether earned by performance, and any and all credit insurance, guaranties, or security therefor. "Advances" means Tranche A Advances or Tranche B Advances, as the context requires. "Affiliate" means, as applied to any Person, any other Person who directly or indirectly controls, is controlled by, is under common control with or is a director or officer of such Person. For purposes of this definition, "control" means the possession, directly or indirectly, of the power to vote 5% or more of the securities having ordinary voting power for the election of directors or the direct or indirect power to direct the management and policies of a Person. "Agent" means TBCC, solely in its capacity as agent for the Lenders, and shall include any successor agent. -1- 8 "Agent Account" has the meaning set forth in Section 2.7. "Agent's Liens" means the Liens on the Collateral granted by Borrower to Agent for the benefit of the Lender Group under this Agreement and the other Loan Documents. "Agent-Related Persons" means Agent and any successor agent, together with their respective Affiliates, and the officers, directors, employees, counsel, agents, and attorneys-in-fact of such Persons and their Affiliates. "Agreement" has the meaning set forth in the preamble hereto. "Assignee" has the meaning set forth in Section 15.1. "Assignment and Acceptance" means an Assignment and Acceptance in the form of Exhibit A-1 attached hereto. "Authorized Person" means any officer or other employee of Borrower. "Availability" means the sum of the Tranche A Availability and the Tranche B Availability. "Average Unused Portion of Maximum Amount" means, as of any date of determination, (a) the Maximum Amount, less (b) the average Daily Balance of Advances that were outstanding during the immediately preceding month. "Bankruptcy Code" means the United States Bankruptcy Code (11 U.S.C. Section 101 et seq.), as amended, and any successor statute. "Benefit Plan" means a "defined benefit plan" (as defined in Section 3(35) of ERISA) for which Borrower, any Subsidiary of Borrower, or any ERISA Affiliate has been an "employer" (as defined in Section 3(5) of ERISA) within the past six years. "Books" means all of Borrower's books and records including: ledgers; records indicating, summarizing, or evidencing Borrower's properties or assets (including the Collateral) or liabilities; all information relating to Borrower's business operations or financial condition; and all computer programs, disk or tape files, printouts, runs, or other computer prepared information. "Borrower" has the meaning set forth in the preamble to this Agreement. -2- 9 "Borrowing" means a borrowing hereunder consisting of Advances made on the same day by the Lenders, or Agent on behalf thereof, to Borrower. "Borrowing Base" has the meaning set forth in Section 2.1(a). "Business Day" means any day that is not a Saturday, Sunday, or other day on which national banks are authorized or required to close. "Business Plan" means the business plan of Borrower for its fiscal year ending on or about December 31, 1998, in form and substance (including as to scope and underlying assumptions) satisfactory to the Lender Group in its sole and absolute discretion, a copy of which is attached hereto as Exhibit B-1. "Change of Control" shall be deemed to have occurred at such time as: (a) a "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of more than 30% of the total voting power of all classes of Stock then outstanding of Borrower entitled to vote in the election of directors; (b) the Existing Lenders and Appaloosa Management, as a group, shall fail to own, directly or indirectly, 40% or more of the total voting power of all classes of Stock then outstanding of Borrower entitled to vote in the election of directors; and (c) the current Chief Executive Officer of Borrower shall cease to be employed by Borrower in such capacity (other than by reason of death or disability); provided, however, that the cessation of such Person to be so employed shall not contribute toward a "Change of Control" under clause (c) if, within a period of 90 days after the first date of such cessation, the Board of Directors of Borrower appoints a successor to that Person reasonably satisfactory to the Required Lenders and such successor agrees to so serve in that position. "Closing Date" means the date of the making of the initial Advance (exclusive, however, of fees and other Lender Group Expenses charged to Borrower's Loan Account hereunder on or after the Effective Date). "Code" means the New York Uniform Commercial Code. "Collateral" means all right, title, or interest of Borrower with respect to each of the following: (a) the Accounts, (b) the Books, (c) the Equipment, -3- 10 (d) the General Intangibles, (e) the Inventory, (f) the Negotiable Collateral, (h) any money, or other assets of Borrower that now or hereafter come into the possession, custody, or control of any member of the Lender Group, and (i) the proceeds and products, whether tangible or intangible, of any of the foregoing, including proceeds of insurance covering any or all of the Collateral, and any and all Accounts, the Books, Equipment, General Intangibles, Inventory, Negotiable Collateral, Real Property, money, deposit accounts, or other tangible or intangible property resulting from the sale, exchange, collection, or other disposition of any of the foregoing, or any portion thereof or interest therein, and the proceeds thereof. "Collateral Access Agreement" means a landlord waiver or consent, mortgagee waiver or consent, bailee letter, or a similar acknowledgement agreement of any warehouseman, processor, lessor, consignee, or other Person in possession of, having a Lien upon, or having rights or interests in the Equipment or Inventory, in each case, in form and substance satisfactory to Agent. "Collections" means all cash, checks, notes, instruments, and other items of payment (including, insurance proceeds, proceeds of cash sales, rental proceeds, and tax refunds). "Commitment" means, at any time with respect to a Lender, the principal amount set forth beside such Lender's name under the heading "Commitment" on Schedule C-1 attached hereto or on the signature page of the Assignment and Acceptance pursuant to which such Lender became a Lender hereunder in accordance with the provisions of Section 15.1, as such Commitment may be adjusted from time to time in accordance with the provisions of Section 15.1, and "Commitments" means, collectively, the aggregate amount of the commitments of all of the Lenders. "Compliance Certificate" means a certificate substantially in the form of Exhibit C-1 and delivered by the chief accounting officer of Borrower to Agent. "Concentration Account" has the meaning set forth in Section 2.7. -4- 11 "Concentration Account Agreement" means that certain concentration account agreement, in form and substance satisfactory to Agent, among Borrower, Agent, and the Designated Account Bank. "Control Agreement" means a control agreement, in form and substance reasonably satisfactory to Agent, between Borrower, Agent, and the applicable securities intermediary with respect to the applicable Securities Account and related Investment Property. "copyright" shall have the meaning ascribed to such term in the United States Copyright Act of 1976, as amended, and includes unregistered copyrights. "Copyright Collateral" has the meaning ascribed to such term in the Copyright Security Agreement. "Copyright Security Agreement" means a Copyright Security Agreement, in the form of Exhibit C-2 attached hereto, dated as of even date herewith, between Borrower and Agent. "CRE" means Crystal River Engineering, Inc., a California corporation. "Daily Balance" means the amount of an Obligation owed at the end of a given day. "deems itself insecure" means, with respect to any Person, that such Person in good faith believes that the prospect of payment or performance is materially impaired. "Deposit Account Security Agreement" means a Deposit Account Security Agreement, by Borrower in favor of Agent, in form and substance satisfactory to the Lenders. "Designated Account" means account number 4277-152682 of Borrower maintained with Borrower's Designated Account Bank, or such other deposit account of Borrower (located within the United States) which has been designated, in writing and from time to time, by Borrower to Agent. "Designated Account Bank" means Wells Fargo Bank, National Association, whose office is located at 400 Hamilton Avenue, Palo Alto, California 94301, and whose ABA number is 121-000-248. -5- 12 "Dilution" means, in each case based upon the experience of the immediately prior 90 days, the result of dividing the Dollar amount of (a) bad debt write-downs, discounts, advertising, returns, promotions, credits, or other dilution with respect to the Accounts, by (b) Borrower's Collections (excluding extraordinary items) plus the Dollar amount of clause (a). "Dilution Reserve" means, as of any date of determination, an amount sufficient to reduce the advance rate against Eligible Accounts hereunder by one percentage point for each percentage point by which Dilution is in excess of 5%. "Dollars or $" means United States dollars. "Early Termination Premium" has the meaning set forth in Section 3.6. "EBITDA" means, with respect to any fiscal period, the sum of Borrower's net earnings (or loss) before interest expense, taxes, amortization, and depreciation for such period as determined in accordance with GAAP. "Effective Date" means June 5, 1998. "Eligible Accounts" means those Accounts (including Foreign Accounts) created by Borrower in the ordinary course of business, that arise out of Borrower's sale of goods, license of General Intangibles, or rendition of services, that strictly comply with each and all of the representations and warranties respecting Accounts made by Borrower to Agent in the Loan Documents, and that are and at all times continue to be acceptable to Agent in all respects as determined by Agent in good faith; provided, however, that standards of eligibility may be fixed and revised from time to time by Agent in Agent's good faith (as defined in the Code) business judgment. Eligible Accounts shall not include the following: (a) (i) in the case of Media Tech, (y) Accounts that such Account Debtor has failed to pay within 30 days of due date, or (z) Accounts with selling terms of more than 120 days; and (ii) in the case of any other Account Debtor, (y) Accounts that such other Account Debtor has failed to pay within 90 days of invoice date, or (z) Accounts with selling terms of more than 60 days; (b) Accounts owed by an Account Debtor or its Affiliates where 50% or more of all Accounts owed by that Account Debtor (or its Affiliates) are deemed ineligible under clause (a) above; (c) Accounts with respect to which the Account Debtor is an employee, Affiliate, or agent of Borrower; -6- 13 (d) Accounts with respect to which goods are placed on consignment, guaranteed sale, sale or return, sale on approval, bill and hold, or other terms by reason of which the payment by the Account Debtor may be conditional; (e) Accounts that are not payable in Dollars or with respect to which the Account Debtor is the government of any foreign country or sovereign state, or of any state, province, municipality, or other political subdivision thereof, or of any department, agency, public corporation, or other instrumentality thereof; (f) Accounts with respect to which the Account Debtor is either (i) the United States or any department, agency, or instrumentality of the United States (exclusive, however, of Accounts with respect to which Borrower has complied, to the satisfaction of Agent, with the Assignment of Claims Act, 31 U.S.C. Section 3727), or (ii) any State of the United States (exclusive, however, of Accounts owed by any State that does not have a statutory counterpart to the Assignment of Claims Act); (g) Accounts with respect to which the Account Debtor is a creditor of Borrower, has or has asserted a right of setoff, has disputed its liability, or has made any claim with respect to the Account, in each case, to the extent of such setoff, disputed liability, or claim; (h) from and after the date 9 months following the Effective Date, Accounts with respect to an Account Debtor whose total obligations owing to Borrower exceed the lesser of (i) 35% of all Eligible Accounts, and (ii) $5,000,000, in each case, to the extent of the obligations owing by such Account Debtor in excess of such percentage or amount, as the case may be; provided, however, that, with respect to any Account Debtor as to which Borrower requests in writing an increase in the foregoing percentage, the Lenders agree to consider such request in their reasonable (from the perspective of a secured lender) discretion; (i) Accounts with respect to which the Account Debtor is or reasonably could be expected to become subject to any Insolvency Proceeding, or becomes insolvent, or goes out of business; (j) Accounts the collection of which Agent, in its reasonable credit judgment, believes to be doubtful by reason of the Account Debtor's financial condition; (k) Accounts with respect to which the goods giving rise to such Account have not been shipped and billed to the Account Debtor, the services giving rise to such Account have not been performed and accepted by the Account Debtor, or the Account otherwise does not represent a final sale; -7- 14 (l) Accounts with respect to which the Account Debtor is located in the states of New Jersey, Minnesota, Indiana, or West Virginia (or any other state that requires a creditor to file a Business Activity Report or similar document in order to bring suit or otherwise enforce its remedies against such Account Debtor in the courts or through any judicial process of such state), unless Borrower has qualified to do business in New Jersey, Minnesota, Indiana, West Virginia, or such other states, or has filed a Notice of Business Activities Report with the applicable division of taxation, the department of revenue, or with such other state offices, as appropriate, for the then-current year, or is exempt from such filing requirement; and (m) Accounts that represent progress payments or other advance billings that are due prior to the completion of performance by Borrower of the subject contract for goods or services. "Eligible Transferee" means: (a) a commercial bank organized under the laws of the United States, or any state thereof, and having total assets in excess of $100,000,000; (b) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development or a political subdivision of any such country, and having total assets in excess of $100,000,000; provided that such bank is acting through a branch or agency located in the United States; (c) a finance company, insurance company or other financial institution or fund that is engaged in making, purchasing or otherwise investing in commercial loans in the ordinary course of its business and having total assets in excess of $50,000,000; (d) any Affiliate (other than individuals) of a pre-existing Lender; (e) so long as no Event of Default has occurred and is continuing, any other Person approved by Agent and Borrower; and (f) during the continuation of an Event of Default, any other Person approved by Agent. "Equipment" means all of Borrower's present and hereafter acquired machinery, machine tools, motors, equipment, furniture, furnishings, fixtures, vehicles (including motor vehicles and trailers), tools, parts, goods (other than consumer goods, farm products, or Inventory), wherever located, including, (a) any interest of Borrower in any of the foregoing, and (b) all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing. "ERISA" means the Employee Retirement Income Security Act of 1974, 29 U.S.C. Sections 1000 et seq., amendments thereto, successor statutes, and regulations or guidance promulgated thereunder. "ERISA Affiliate" means (a) any corporation subject to ERISA whose employees are treated as employed by the same employer as the employees of Borrower under IRC Section 414(b), (b) any trade or business subject to ERISA whose employees are treated as employed by the same employer as the employees of -8- 15 Borrower under IRC Section 414(c), (c) solely for purposes of Section 302 of ERISA and Section 412 of the IRC, any organization subject to ERISA that is a member of an affiliated service group of which Borrower is a member under IRC Section 414(m), or (d) solely for purposes of Section 302 of ERISA and Section 412 of the IRC, any party subject to ERISA that is a party to an arrangement with Borrower and whose employees are aggregated with the employees of Borrower under IRC Section 414(o). "ERISA Event" means (a) a Reportable Event with respect to any Benefit Plan or Multiemployer Plan, (b) the withdrawal of Borrower, any of its Subsidiaries or ERISA Affiliates from a Benefit Plan during a plan year in which it was a "substantial employer" (as defined in Section 4001(a)(2) of ERISA), (c) the providing of notice of intent to terminate a Benefit Plan in a distress termination (as described in Section 4041(c) of ERISA), (d) the institution by the PBGC of proceedings to terminate a Benefit Plan or Multiemployer Plan, (e) any event or condition (i) that provides a basis under Section 4042(a)(1), (2), or (3) of ERISA for the termination of, or the appointment of a trustee to administer, any Benefit Plan or Multiemployer Plan, or (ii) that may result in termination of a Multiemployer Plan pursuant to Section 4041A of ERISA, (f) the partial or complete withdrawal within the meaning of Sections 4203 and 4205 of ERISA, of Borrower, any of its Subsidiaries or ERISA Affiliates from a Multiemployer Plan, or (g) providing any security to any Plan under Section 401(a)(29) of the IRC by Borrower or its Subsidiaries or any of their ERISA Affiliates. "Event of Default" has the meaning set forth in Section 8. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and any successor statute thereto. "Exempt Copyright" means any Incipient Copyright or any Obsolete Copyright. "Existing Debt Conversion Documentation" means, collectively and with respect to any Person, (a) written evidence, in form and substance reasonably satisfactory to each Lender, confirming that all Indebtedness owed by Borrower to such Person immediately prior to the Effective Date shall have been, as of the Effective Date, either cancelled by such Person or converted by such Person into an equity capital contribution to Borrower, and that all Liens (if any) existing in favor of such Person in and to the properties or assets of Borrower shall have been terminated, and (b) a written explanation, in form and substance satisfactory to each Lender, of the tax consequences to Borrower of the cancellation or conversion of such Indebtedness. "Existing Lender" means, individually and collectively, TCW Special Credits Trust, TCW Special Credits Fund IIIb, TCW Special Credits (as -9- 16 investment manager of Delaware State Employees Retirement Fund), and B III Capital Partners, L.P., and TCW Special Credits as agent for the foregoing Persons. "FEIN" means Federal Employer Identification Number. "Foreign Accounts" means Accounts with respect to which the Account Debtor (i) does not maintain its chief executive office in the United States, or (ii) is not organized under the laws of the United States or any State thereof. "Foreign Accounts Reserve" means, as of any date of determination, a reserve in an amount equal to 2% of all outstanding Foreign Accounts of Borrower constituting Eligible Accounts. "Funding Date" means the date on which a Borrowing occurs. "GAAP" means generally accepted accounting principles as in effect from time to time in the United States, consistently applied. "General Intangibles" means all of Borrower's present and future general intangibles and other personal property (including contract rights, rights arising under common law, statutes, or regulations, choses or things in action, goodwill, Permits, patents, trade names, trademarks, servicemarks, copyrights, blueprints, drawings, purchase orders, customer lists, monies due or recoverable from pension funds, route lists, rights to payment and other rights under any royalty or licensing agreements, infringement claims, computer programs, information contained on computer disks or tapes, literature, reports, catalogs, deposit accounts, insurance premium rebates, tax refunds, and tax refund claims), other than goods, Accounts, and Negotiable Collateral. "Governing Documents" means, with respect to any Person, the certificate or articles of incorporation, by-laws, or other organizational or governing documents of such Person. "Governmental Authority" means any nation or government, any state, province, or other political subdivision thereof, any central bank (or similar monetary or regulatory authority) thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through Stock or capital ownership or otherwise, by any of the foregoing. "Hazardous Materials" means (a) substances that are defined or listed in, or otherwise classified pursuant to, any applicable laws or regulations as "hazardous substances," "hazardous materials," "hazardous wastes," "toxic substances," or any other formulation intended to define, list, or classify substances by -10- 17 reason of deleterious properties such as ignitability, corrosivity, reactivity, carcinogenicity, reproductive toxicity, or "EP toxicity", (b) oil, petroleum, or petroleum derived substances, natural gas, natural gas liquids, synthetic gas, drilling fluids, produced waters, and other wastes associated with the exploration, development, or production of crude oil, natural gas, or geothermal resources, (c) any flammable substances or explosives or any radioactive materials, and (d) asbestos in any form or electrical equipment that contains any oil or dielectric fluid containing levels of polychlorinated biphenyls in excess of 50 parts per million. "Incipient Copyright" means any copyright that: (a) relates to software of Borrower under development (whether in the form of a new product, a new version of a pre-existing product, an upgrade, add-on, or modification to a pre-existing product, or otherwise) that has not yet become a completed product, version, upgrade, add-on, or modification which is ready to be marketed by or on behalf of Borrower or which in fact is being marketed by or on behalf of Borrower; and (b) is not the subject of licenses thereof or other dispositions by Borrower giving rise to Accounts. "Indebtedness" means: (a) all obligations of Borrower for borrowed money, (b) all obligations of Borrower evidenced by bonds, debentures, notes, or other similar instruments and all reimbursement or other obligations of Borrower in respect of letters of credit, bankers acceptances, interest rate swaps, or other financial products, (c) all obligations of Borrower under capital leases, (d) all obligations or liabilities of others secured by a Lien on any property or asset of Borrower, irrespective of whether such obligation or liability is assumed, and (e) any obligation of Borrower guaranteeing or intended to guarantee (whether guaranteed, endorsed, co-made, discounted, or sold with recourse to Borrower) any indebtedness, lease, dividend, letter of credit, or other obligation of any other Person. "Indemnified Liabilities" has the meaning set forth in Section 11.3. "Indemnified Person" has the meaning set forth in Section 11.3. "Insolvency Proceeding" means any proceeding commenced by or against any Person under any provision of the Bankruptcy Code or under any other bankruptcy or insolvency law, assignments for the benefit of creditors, formal or informal moratoria, compositions, extensions generally with creditors, or proceedings seeking reorganization, arrangement, or other similar relief. "Intangible Assets" means, with respect to any Person, that portion of the book value of all of such Person's assets that would be treated as intangibles under GAAP. "Intellectual Property" has the meaning ascribed thereto in Section 5.16. -11- 18 "Inventory" means all present and future inventory in which Borrower has any interest, including goods held for sale or lease or to be furnished under a contract of service and all of Borrower's present and future raw materials, work in process, finished goods, and packing and shipping materials, wherever located. "Investment Property" means "investment property" as that term is defined in Section 9-115 of the Code. "IP Collateral" means, individually and collectively, the Copyright Collateral, the Patent Collateral, and the Trademark Collateral. "IP Collections" means all Collections received by Agent on account of the IP Collateral. "IP Collateral Secured Tranche A Claims" has the meaning ascribed thereto in Section 4.1(b). "IP Collateral Secured Tranche B Claims" has the meaning ascribed thereto in Section 4.1(d). "IRC" means the Internal Revenue Code of 1986, as amended, and the regulations thereunder. "Legal Requirements" means all applicable international, foreign, federal, state, and local laws, judgments, decrees, orders, statutes, ordinances, rules, regulations, or Permits. "Lender" and "Lenders" have the respective meanings set forth in the preamble to this Agreement, and shall include any other Person made a party to this Agreement in accordance with the provisions of Section 15.1 hereof. "Lender Group" means, individually and collectively, each of the individual Lenders and Agent. "Lender Group Expenses" means all: costs or expenses (including taxes, and insurance premiums) required to be paid by Borrower under any of the Loan Documents that are paid or incurred by the Lender Group; fees or charges paid or incurred by the Lender Group in connection with the Lender Group's transactions with Borrower, including, fees or charges for photocopying, notarization, couriers and messengers, telecommunication, public record searches (including tax lien, litigation, and UCC (or equivalent) searches and including searches with the patent and trademark office, the copyright office, or the department of motor vehicles), filing, recording, publication, appraisal (including periodic Collateral appraisals), real estate surveys, real -12- 19 estate title policies and endorsements, and environmental audits; costs and expenses incurred by Agent in the disbursement of funds to Borrower (by wire transfer or otherwise); charges paid or incurred by Agent resulting from the dishonor of checks; costs and expenses paid or incurred by the Lender Group to correct any default or enforce any provision of the Loan Documents, or in gaining possession of, maintaining, handling, preserving, storing, shipping, selling, preparing for sale, or advertising to sell the Collateral, or any portion thereof, irrespective of whether a sale is consummated; costs and expenses paid or incurred by Agent in examining the Books; costs and expenses of third party claims or any other suit paid or incurred by the Lender Group in enforcing or defending the Loan Documents or in connection with the transactions contemplated by the Loan Documents or the Lender Group's relationship with Borrower (or any of its Subsidiaries party to one or more Loan Documents); and the Lender Group's reasonable attorneys fees and expenses incurred in advising, structuring, drafting, reviewing, administering, amending, terminating, enforcing (including attorneys fees and expenses incurred in connection with a "workout," a "restructuring," or an Insolvency Proceeding concerning Borrower), defending, or concerning the Loan Documents, irrespective of whether suit is brought. Without limiting the generality of the foregoing, Lender Group Expenses shall include, upon the occurrence and during the continuation of an Event of Default, all fees, costs, and expenses of the Lender Group incurred in connection with retaining D-Side Advisors or other similar consultant acceptable to the Lender Group. "Lender-Related Persons" means, with respect to any Lender, such Lender, together with such Lender's Affiliates, and the officers, directors, employees, counsel, agents, and attorneys-in-fact of such Lender and such Lender's Affiliates. "Lien" means any interest in property securing an obligation owed to, or a claim by, any Person other than the owner of the property, whether such interest shall be based on the common law, statute, or contract, whether such interest shall be recorded or perfected, and whether such interest shall be contingent upon the occurrence of some future event or events or the existence of some future circumstance or circumstances, including the lien or security interest arising from a mortgage, deed of trust, encumbrance, pledge, hypothecation, assignment, deposit arrangement, security agreement, adverse claim or charge, conditional sale or trust receipt, or from a lease, consignment, or bailment for security purposes and also including reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases, and other title exceptions and encumbrances affecting Real Property. "Loan Account" has the meaning set forth in Section 2.10. "Loan Documents" means this Agreement, the Concentration Account Agreement, the Copyright Security Agreement, the Patent Security Agreement, the Trademark Security Agreement, the Stock Pledge Agreement, the -13- 20 Deposit Account Security Agreement, the Warrants, any note or notes executed by Borrower and payable to the Lender Group, and any other agreement entered into, now or in the future, in connection with this Agreement. "Material Adverse Change" means (a) a material adverse change in the business, prospects, operations, results of operations, assets, liabilities or condition (financial or otherwise) of Borrower, (b) the material impairment of the ability of Borrower to perform its obligations under the Loan Documents to which it is a party or of the Lender Group to enforce the Obligations or realize upon the Collateral, (c) a material adverse effect on the value of the Collateral or the amount that the Lender Group would be likely to receive (after giving consideration to delays in payment and costs of enforcement) in the liquidation of the Collateral, or (d) a material impairment of the priority of the Agent's Liens with respect to the Collateral. "Maturity Date" has the meaning set forth in Section 3.4. "Maximum Amount" means the sum of the Maximum Tranche A Amount and the Maximum Tranche B Amount. "Maximum Tranche A Amount" means $32,500,000. "Maximum Tranche B Amount" means $7,500,000. "Multiemployer Plan" means a "multiemployer plan" (as defined in Section 4001(a)(3) of ERISA) to which Borrower, any of its Subsidiaries, or any ERISA Affiliate has contributed, or was obligated to contribute, within the past six years. "Negotiable Collateral" means all of a Person's present and future letters of credit, notes, drafts, instruments, Investment Property, documents, personal property leases (wherein such Person is the lessor), chattel paper, and the Books relating to any of the foregoing. "Non-Material Subsidiary" means any Subsidiary identified on Schedule N-1 attached hereto. "Obligations" means all loans, Advances, debts, principal, interest (including any interest that, but for the provisions of the Bankruptcy Code, would have accrued), premiums (including Early Termination Premiums), liabilities (including all amounts charged to Borrower's Loan Account pursuant hereto), obligations, fees, charges, costs, or Lender Group Expenses (including any fees or expenses that, but for the provisions of the Bankruptcy Code, would have accrued), lease payments, guaranties, covenants, and duties owing by Borrower to the Lender Group of any kind and description (whether pursuant to or evidenced by the Loan Documents or pursuant -14- 21 to any other agreement between the Lender Group and Borrower, and irrespective of whether for the payment of money), whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, and including any debt, liability, or obligation owing from Borrower to others that the Lender Group may have obtained by assignment or otherwise, and further including all interest not paid when due and all Lender Group Expenses that Borrower is required to pay or reimburse by the Loan Documents, by law, or otherwise. "Obsolete Copyright" means any copyright that relates to software of Borrower that: (a) is no longer sold or marketed by Borrower; (b) is not generating any material amount of Accounts or revenues of Borrower; or (c) does not have a material fair market value. "Other Collateral Secured Tranche A Claims" has the meaning ascribed thereto in Section 4.1(a). "Other Collateral Secured Tranche B Claims" has the meaning ascribed thereto in Section 4.1(c). "Other Collections" means all Collections received by Agent that do not constitute IP Collections. "Overadvance" has the meaning set forth in Section 2.5. "Participant" has the meaning set forth in Section 15.1(e). "Patent Collateral" has the meaning ascribed to such term in the Patent Security Agreement. "Patent Security Agreement" means a Patent Security Agreement, in the form of Exhibit P-1 attached hereto, dated as of even date herewith, between Borrower and Agent. "PBGC" means the Pension Benefit Guaranty Corporation as defined in Title IV of ERISA, or any successor thereto. "Permits" of a Person shall mean all rights, franchises, permits, authorities, licenses, certificates of approval or authorizations, including licenses and other authorizations issuable by a Governmental Authority, which pursuant to applicable Legal Requirements are necessary to permit such Person lawfully to conduct and operate its business as currently conducted and to own and use its assets. "Permitted Disposition" means (a) the sale, exchange, or other disposition, free and clear of Agent's security interest (other than its security interest -15- 22 in the proceeds of such sale, exchange, or other disposition), of any Inventory in the ordinary course of Borrower's business as currently conducted, (b) the nonexclusive license, free and clear of Agent's security interest (other than its security interest in the proceeds of such license), of any General Intangible in the ordinary course of Borrower's business, (c) Permitted Exclusive Licenses, free and clear of Agent's security interest (other than its security interest in the proceeds of such license), of any General Intangible constituting IP Collateral, in the ordinary course of Borrower's business, (d) the sale, exchange, or other disposition of Borrower's Equipment that is substantially worn, damaged, or obsolete in the ordinary course of business, and (e) so long as no Event of Default has occurred and is continuing or would result therefrom, the sale, exchange, or other disposition, free and clear of Agent's security interest (other than its security interest in the proceeds of such sale, exchange, or other disposition), of other assets of Borrower not in the ordinary course of Borrower's business that do not exceed, on a book value basis, $250,000 in the aggregate in any fiscal year. "Permitted Exclusive License" means, with respect to any General Intangible constituting IP Collateral, the license by Borrower to a licensee of such General Intangible on an exclusive basis but reasonably limited in time or place of effect, so long as: (i) the Lender Group has received from Borrower not less than 10 Business Days prior written notice of the proposed license, together with all materials required hereunder in connection with such proposed license; (ii) Borrower has delivered to the Lender Group (y) written details of the scope and material terms of such license, the value of such license, and the projected impact of such license on Borrower's business, and (z) all other materials or information reasonably and promptly requested by the Lender Group Lender in connection with such proposed license; and (iii) the Required Lenders have not delivered to Borrower their written objection to such proposed license within 10 Business Days following the receipt of all items described in the foregoing clauses (i) and (ii). "Permitted Liens" means (a) Liens held by Agent for the benefit of the Lender Group, (b) Liens for unpaid taxes that either (i) are not yet due and payable or (ii) are the subject of Permitted Protests, (c) Liens set forth on Schedule P-1, (d) the interests of lessors under operating leases and purchase money Liens of lessors under capital leases and lenders under other financing agreements to the extent that the acquisition or lease of the underlying asset is permitted under Section 7.21 and so long as the Lien only attaches to the asset purchased, acquired, or financed under such financing agreement and only secures the purchase price (and reasonably related costs) of the asset, (e) Liens arising by operation of law in favor of warehousemen, landlords, carriers, mechanics, materialmen, laborers, or suppliers, incurred in the ordinary course of business of Borrower and not in connection with the borrowing of money, and which Liens either (i) are for sums not yet due and payable, or (ii) are the subject of Permitted Protests, (f) Liens arising from deposits made in connection with obtaining worker's compensation or other unemployment insurance, (g) Liens or -16- 23 deposits to secure performance of bids, tenders, or leases (to the extent permitted under this Agreement), incurred in the ordinary course of business of Borrower and not in connection with the borrowing of money, (h) Liens arising by reason of security for surety or appeal bonds in the ordinary course of business of Borrower, (i) Liens of or resulting from any judgment or award that reasonably could not be expected to result in a Material Adverse Change and as to which the time for the appeal or petition for rehearing of which has not yet expired, or in respect of which Borrower is in good faith prosecuting an appeal or proceeding for a review and in respect of which a stay of execution pending such appeal or proceeding for review has been secured, (j) with respect to any Real Property, easements, rights of way, zoning and similar covenants and restrictions, and similar encumbrances that customarily exist on properties of Persons engaged in similar activities and similarly situated and that in any event do not materially interfere with or impair the use or operation of the Collateral by Borrower or the value of any of the Agent's Liens thereon or therein for the benefit of the Lender Group, or materially interfere with the ordinary conduct of the business of Borrower, and (k) the rights of licensees relative to licenses of Borrower's General Intangibles, to the extent such licenses qualify as Permitted Dispositions. "Permitted Protest" means the right of Borrower to protest any Lien other than any such Lien that secures the Obligations, tax (other than payroll taxes or taxes that are the subject of a United States federal tax lien), or rental payment, provided that (a) a reserve with respect to such obligation is established on the books of Borrower in accordance with GAAP, (b) any such protest is instituted and diligently prosecuted by Borrower in good faith, and (c) Agent is satisfied that, while any such protest is pending, there will be no impairment of the enforceability, validity, or priority of any of the Agent's Liens in and to the Collateral. "Person" means and includes natural persons, corporations, limited liability companies, limited partnerships, general partnerships, limited liability partnerships, joint ventures, trusts, land trusts, business trusts, or other organizations, irrespective of whether they are legal entities, and governments and agencies and political subdivisions thereof. "Plan" means any employee benefit plan, program, or arrangement maintained or contributed to by Borrower or with respect to which it may incur liability. "Potential Default" means an event, condition, or default that, with the giving of notice, the passage of time, or both, would be an Event of Default. "Pro Rata Share" means: (a) with respect to a Lender's obligation to make Tranche A Advances and receive payments of interest and principal with respect thereto, the percentage obtained by dividing (i) such Lender's Commitment to make Tranche A Advances, as set forth on Schedule C-1, by (ii) all such Commitments -17- 24 of all Lenders to make Tranche A Advances, as set forth on Schedule C-1; (b) with respect to a Lender's obligation to make Tranche B Advances and receive payments of interest and principal with respect thereto, the percentage obtained by dividing (i) such Lender's Commitment to make Tranche B Advances, as set forth on Schedule C-1, by (ii) all such Commitments of all Lenders to make Tranche B Advances, as set forth on Schedule C-1; and (c) with respect to all other matters (including the indemnification obligations arising under Section 17.7), the percentage obtained by dividing (i) such Lender's aggregate Commitments to make Advances, as set forth on Schedule C-1, by (ii) the aggregate Commitments of all Lenders to make Advances, as set forth on Schedule C-1; provided, however, that, in each case, in the event the Commitments have been terminated, Pro Rata Share shall be determined according to the Commitments in effect immediately prior to such termination and otherwise as set forth above. "Real Property" means any estates or interests in real property now owned or hereafter acquired by Borrower. "Reference Rate" means, as of any date of determination, the higher of (a) the highest of the respective variable rates of interest, per annum, most recently announced by Citibank, NA (or any successor thereto), First National Bank of Chicago (or any successor thereto), and Bank of America National Trust and Savings Association, (or any successor thereto), as such financial institution's "base rate" or "prime rate" (as the case may be), irrespective of whether such announced rate is the best rate available from such financial institution, and (b) the published annualized rate for 90 day dealer commercial paper that appears in the "Money Rates" section of the Wall Street Journal. "Reportable Event" means any of the events described in Section 4043(c) of ERISA or the regulations thereunder other than a Reportable Event as to which the provision of 30 days notice to the PBGC is waived under applicable regulations. "Required Lenders" means, at any time, Lenders whose Pro Rata Shares aggregate 66.67% or more of the Commitments, or, if the Commitments have been terminated, 66.67% of the Obligations then outstanding. "Retiree Health Plan" means an "employee welfare benefit plan" within the meaning of Section 3(1) of ERISA that provides benefits to individuals after termination of their employment, other than as required by Section 601 of ERISA. "Revolving Facility Usage" means, as of any date of determination, the sum of (a) the aggregate amount of Tranche A Advances outstanding, plus (b) the aggregate amount of Tranche B Advances outstanding. -18- 25 "SEC" means the United States Securities and Exchange Commission and any successor Federal agency having similar powers. "Securities Account" means a "securities account" as that term is defined in Section 8-501 of the Code. "Settlement Date" has the meaning set forth in Section 2.3(c)(ii). "Solvent" means, with respect to any Person on a particular date, that on such date (a) at fair valuations, all of the properties and assets of such Person are greater than the sum of the debts, including contingent liabilities, of such Person, (b) the present fair salable value of the properties and assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person is able to realize upon its properties and assets and pay its debts and other liabilities, contingent obligations and other commitments as they mature in the normal course of business, (d) such Person does not intend to, and does not believe that it will, incur debts beyond such Person's ability to pay as such debts mature, and (e) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person's properties and assets would constitute unreasonably small capital after giving due consideration to the prevailing practices in the industry in which such Person is engaged. In computing the amount of contingent liabilities at any time, it is intended that such liabilities will be computed at the amount that, in light of all the facts and circumstances existing at such time, represents the amount that reasonably can be expected to become an actual or matured liability. "Stock" means all shares, options, warrants, interests, participations, or other equivalents (regardless of how designated) of or in a corporation or equivalent entity, whether voting or nonvoting, including common stock, preferred stock, or any other "equity security" (as such term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated by the SEC under the Exchange Act). "Stock Pledge Agreement" means a stock pledge agreement, in form and substance satisfactory to each Lender, executed and delivered by Borrower to Agent with respect to the pledge of the capital Stock of each of Borrower's Subsidiaries. "Subsidiary" of a Person means a corporation, partnership, limited liability company, or other entity in which that Person directly or indirectly owns or controls the shares of Stock or other ownership interests having ordinary voting power to elect a majority of the board of directors (or appoint other comparable managers) of such corporation, partnership, limited liability company, or other entity. -19- 26 "Tangible Net Worth" means, as of any date of determination, the difference of (a) Borrower's total stockholder's equity, minus (b) the sum of: (i) all Intangible Assets of Borrower, (ii) all of Borrower's prepaid expenses, and (iii) all amounts due to Borrower from Affiliates. "TBCC" means Transamerica Business Credit Corporation, a Delaware corporation. "Trademark Collateral" has the meaning ascribed to such term in the Trademark Security Agreement. "Trademark Security Agreement" means a Trademark Security Agreement, in the form of Exhibit T-1 attached hereto, dated as of even date herewith, between Borrower and Agent. "Tranche A Advances" has the meaning set forth in Section 2.1. "Tranche A Availability" means the amount that Borrower is entitled to borrow as Tranche A Advances under Section 2.1, such amount being the difference derived when (a) the aggregate principal amount of Tranche A Advances then outstanding (including any amounts that the Lender Group may have paid for the account of Borrower pursuant to any of the Loan Documents and that are reimbursed by Borrower by being charged to the Loan Account as Tranche A Advances) is subtracted from (b) the lesser of (i) the Maximum Tranche A Amount, or (ii) the Borrowing Base. "Tranche B Advances" has the meaning set forth in Section 2.2. "Tranche B Availability" means the amount that Borrower is entitled to borrow as Tranche B Advances under Section 2.2, such amount being the difference derived when (a) the aggregate principal amount of Tranche B Advances then outstanding (including any amounts that the Lender Group may have paid for the account of Borrower pursuant to any of the Loan Documents and that are reimbursed by Borrower by being charged to the Loan Account as Tranche B Advances) is subtracted from (b) the Maximum Tranche B Amount. "Voidable Transfer" has the meaning set forth in Section 15.8. "Year 2000 Compliant" means, with regard to any Person, that all software in goods produced or sold by, or utilized by and material to the business operations or financial condition of, such entity are able to interpret and manipulate data on and involving all calendar dates correctly and without causing any abnormal ending scenario, including in relation to dates in and after the Year 2000. -20- 27 "Warrants" means those certain common stock purchase warrants issued and delivered to Agent for the ratable benefit of the Lenders (in accordance with their Pro Rata Shares) by Borrower, in form and substance satisfactory to Agent and each Lender, on the Effective Date for the purchase of 1,350,000 shares of Borrower's common stock, $0.001 par value, having the powers, preferences, and rights, and the qualifications, limitations, or restrictions set forth in Borrower's Governing Documents. 1.2 ACCOUNTING TERMS. All accounting terms not specifically defined herein shall be construed in accordance with GAAP. When used herein, the term "financial statements" shall include the notes and schedules thereto. Whenever the term "Borrower" is used in respect of a financial covenant or a related definition, it shall be understood to mean Borrower on a consolidated basis unless the context clearly requires otherwise. 1.3 CODE. Any terms used in this Agreement that are defined in the Code shall be construed and defined as set forth in the Code unless otherwise defined herein. 1.4 CONSTRUCTION. Unless the context of this Agreement or any other Loan Document clearly requires otherwise, references to the plural include the singular, references to the singular include the plural, the term "including" is not limiting, and the term "or" has, except where otherwise indicated, the inclusive meaning represented by the phrase "and/or." The words "hereof," "herein," "hereby," "hereunder," and similar terms in this Agreement or any other Loan Document refer to this Agreement or any other Loan Documents, as the case may be, as a whole and not to any particular provision of this Agreement or such other Loan Document, as the case may be. An Event of Default shall "continue" or be "continuing" until such Event of Default has been waived in writing by Agent. Section, subsection, clause, schedule, and exhibit references herein are to this Agreement unless otherwise specified. Any reference in this Agreement or in the Loan Documents to this Agreement or any of the Loan Documents shall include all alterations, amendments, changes, extensions, modifications, renewals, replacements, substitutions, joinders, and supplements, thereto and thereof, as applicable. 1.5 SCHEDULES AND EXHIBITS. All of the schedules and exhibits attached to this Agreement shall be deemed incorporated herein by reference. -21- 28 2. LOAN AND TERMS OF PAYMENT. 2.1 REVOLVING TRANCHE A ADVANCES. (a) Subject to the terms and conditions of this Agreement and during the term of this Agreement, each Lender agrees to make advances ("Tranche A Advances") to Borrower in an amount at any one time outstanding not to exceed such Lender's Pro Rata Share of an amount equal to the lesser of (i) the Maximum Tranche A Amount, or (ii) the Borrowing Base. For purposes of this Agreement, "Borrowing Base", as of any date of determination, shall mean 80% of Eligible Accounts (net of the Foreign Accounts Reserve), less the amount, if any, of the Dilution Reserve. (b) The Lenders shall have no obligation to make further Tranche A Advances hereunder to the extent they would cause (i) the outstanding aggregate amount of Tranche A Advances to exceed the lesser of the Borrowing Base and the Maximum Tranche A Amount, or (ii) the outstanding Obligations to exceed the Maximum Amount. (c) Amounts borrowed pursuant to this Section 2.1 may be repaid and, subject to the terms and conditions of this Agreement, reborrowed at any time during the term of this Agreement. (d) Anything to the contrary in Section 2.1 notwithstanding, Agent may, in its good faith (as defined in the Code) business judgment, create reserves against the Borrowing Base. 2.2 REVOLVING TRANCHE B ADVANCES. (a) Subject to the terms and conditions of this Agreement and during the term of this Agreement, each Lender agrees to make advances ("Tranche B Advances") to Borrower in an amount at any one time outstanding not to exceed such Lender's Pro Rata Share of an amount equal to the Maximum Tranche B Amount. (b) The Lenders shall have no obligation to make further Tranche B Advances hereunder to the extent they would cause (i) the outstanding aggregate amount of Tranche B Advances to exceed the Maximum Tranche B Amount, or (ii) the outstanding Obligations to exceed the Maximum Amount. (c) Amounts borrowed pursuant to this Section 2.2 may be repaid and, subject to the terms and conditions of this Agreement, reborrowed at any time during the term of this Agreement. -22- 29 2.3 BORROWING PROCEDURES AND SETTLEMENTS. (a) Procedure for Borrowing. Each Borrowing shall be made upon Borrower's irrevocable request therefor delivered to Agent (which notice must be received by Agent no later than 10:00 a.m. (California time) on the Business Day immediately preceding the requested Funding Date) specifying (i) the amount and type of Loans constituting such Borrowing, and (ii) the requested Funding Date, which shall be a Business Day. (b) Disbursement of Funds. Agent may, on behalf of the Lenders, disburse funds to Borrower for Loans requested. Each Lender shall reimburse Agent on demand for all funds disbursed on its behalf by Agent, or if Agent so requests, each Lender will remit to Agent its Pro Rata Share of any Loan before Agent disburses same to Borrower. If Agent elects to require that each Lender make funds available to Agent, prior to a disbursement by Agent to Borrower, Agent shall advise each Lender by telephone or telecopy of the amount of such Lender's Pro Rata Share of the Loan requested by Borrower no later than 1:00 p.m. (California Time) on the Business Day immediately preceding the requested Funding Date applicable thereto, and each such Lender shall pay Agent such Lender's Pro Rata Share of such requested Loan, in same day funds, by wire transfer to Agent's account on such Funding Date. If any Lender fails to pay the amount of its Pro Rata Share within 1 Business Day after Agent's demand, Agent shall promptly notify Borrower, and Borrower shall immediately repay such amount to Agent. Any repayment required pursuant to this Section 2.3(b) shall be without premium or penalty. Nothing in this Section 2.3(b) or elsewhere in this Agreement or the other Loan Documents, including the provisions of Section 2.3(c), shall be deemed to require Agent to advance funds on behalf of any Lender or to relieve any Lender from its obligation to fulfill its Commitments hereunder or to prejudice any rights that Agent or Borrower may have against any Lender as a result of any default by such Lender hereunder. (c) Settlements. (i) The Revolving Facility Usage may fluctuate from day to day through Agent's disbursement of funds to, and receipt of funds from, Borrower. In order to minimize the frequency of transfers of funds between Agent and each Lender notwithstanding terms to the contrary set forth herein, Advances and payments will be settled among Agent and Lenders according to the procedures described in this Section 2.3(c). These procedures notwithstanding, each Lender's obligation to fund its portion of any Advances made by Agent to Borrower will commence on the date such Advances are made by Agent. Such payments will be made by such Lender without set-off, counterclaim or reduction of any kind. (ii) On the 2nd Business Day of each week, or more frequently (including daily), if Agent so elects (each such day being a "Settlement -23- 30 Date"), Agent will advise each Lender by telephone or telecopy of the amount of each such Lender's Pro Rata Share of the Revolving Facility Usage as of the close of business of the 2nd Business Day immediately preceding the Settlement Date. In the event that payments are necessary to adjust such Lender's actual Pro Rata Share of the Revolving Facility Usage as of any Settlement Date to equal the amount of such Lender's required Pro Rata Share of the Revolving Facility Usage, the party from which such payment is due will pay the other, in same day funds, by wire transfer to the other's account not later than 1:00 p.m. (California time) on the Business Day immediately following the Settlement Date. (d) Availability of Lender's Pro Rata Share. (i) Unless Agent shall have received notice from a Lender prior to a Funding Date that such Lender will not make available its Pro Rata Share of an Advance requested by Borrower, Agent may assume that such Lender has made such amount available to Agent on the Business Day following the next Settlement Date. If a Lender has not in fact made its Pro Rata Share available to the Agent on such date, then such Lender and Borrower severally agree to pay, without duplication, to Agent forthwith on demand such amount without set-off, counterclaim or deduction of any kind, together with interest thereon, for each day from and including the date such amount was to have been made available to Agent by such Lender to but excluding the date of payment to Agent, at (a) in the case of such Lender, the Federal Funds Effective Rate for up to the first 3 days and thereafter at the interest rate applicable hereunder to such Advances, or (b) in the case of Borrower, the interest rate applicable under this Agreement with respect to such Loan. Until any such amount is paid to Agent, Agent shall not be obligated to submit to such Lender any payment made by Borrower to Agent with respect to any Loan or any fees or other payments with respect thereto. (ii) Nothing contained in this Section 2.3(d) will be deemed to relieve a Lender of its obligation to fulfill its commitments or to prejudice any rights Agent or Borrower may have against such Lender as a result of any such default by such Lender under this Agreement. (e) Return of Payments (i) If Agent pays an amount to a Lender under this Agreement in the belief or expectation that a related payment has been or will be received by Agent from Borrower and such related payment is not received by Agent, then Agent will be entitled to recover such amount from such Lender without set-off, counterclaim or deduction of any kind together with interest thereon, for each day from and including the date such amount is made available by Agent to such Lender to but excluding the date of repayment to Agent, at the Federal Funds Effective Rate, and such payment to such Lender shall be deemed to not have been made. -24- 31 (ii) If Agent determines at any time that any amount received by Agent under this Agreement must be returned to Borrower or paid to any other person pursuant to any requirement at law, court order or otherwise, then, notwithstanding any other term or condition of this Agreement, Agent will not be required to distribute any portion thereof to any Lender. In addition, each Lender will repay to Agent on demand any portion of such amount that Agent has distributed to such Lender, together with interest at such rate, if any, as Agent is required to pay to Borrower or such other Person, without set-off, counterclaim or deduction of any kind. (f) Lenders' Failure to Perform. It is understood that (i) no Lender shall be responsible for any failure by any other Lender to perform its obligation to make any Advances hereunder, nor shall any Commitment of any Lender be increased or decreased as a result of any failure by any other Lender to perform its obligation to make any Advances hereunder, and (ii) no failure by any Lender to perform its obligation to make any Advances hereunder shall excuse any other Lender from its obligation to make any Advances hereunder. (g) Effect of Bankruptcy. If a case is commenced by or against Borrower under the U.S. Bankruptcy Code, or other statute providing for debtor relief, then, unless otherwise agreed by all Lenders, the Lender Group shall not make additional loans or provide additional financial accommodations under the Loan Documents to Borrower as debtor or debtor-in-possession, or to any trustee for Borrower, nor consent to the use of cash collateral (provided that the Loan Account shall continue to be charged, to the fullest extent permitted by law, for accruing interest, fees, and Lender Group Expenses). 2.4 PAYMENTS. (a) Payments by Borrower. (i) All payments to be made by Borrower shall be made without set-off, recoupment, deduction, or counterclaim, except as otherwise required by law. Except as otherwise expressly provided herein, all payments by Borrower shall be made to Agent for the account of the Lenders at Agent's address set forth in Section 12, and shall be made in immediately available funds, no later than 11:00 a.m. (California time) on the date specified herein. Any payment received by Agent later than 11:00 a.m. (California time), at the option of Agent, shall be deemed to have been received on the following Business Day and any applicable interest or fee shall continue to accrue until such following Business Day. (ii) Whenever any payment is due on a day other than a Business Day, such payment shall be made on the following Business Day, and such extension of time shall in such case be included in the computation of interest or fees, as the case may be. -25- 32 (iii) Unless Agent receives notice from Borrower prior to the date on which any payment is due to the Lenders that Borrower will not make such payment in full as and when required, Agent may assume that Borrower has made such payment in full to Agent on such date in immediately available funds and Agent may (but shall not be so required), in reliance upon such assumption, distribute to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent Borrower has not made such payment in full to Agent, each Lender shall repay to Agent on demand such amount distributed to such Lender, together with interest thereon for each day from the date such amount is distributed to such Lender until the date repaid at the Reference Rate for up to the first 3 days and thereafter at the interest rate applicable hereunder to such Advances. (b) Apportionment, Application, and Reversal of Payments. (i) All payments shall be remitted to Agent. So long as no Event of Default has occurred and is continuing, except with respect to defaulting Lenders, all Collections shall be applied: first, to pay any fees or expense reimbursements then due to Agent from Borrower; second, to pay any fees or expense reimbursements then due to the Lenders from Borrower; third, to pay interest due in respect of all Advances; fourth, to pay the outstanding principal of Tranche A Advances; fifth, to pay the outstanding principal of Tranche B Advances; and sixth, ratably to pay any other Obligations due to Agent or any Lender by Borrower. (ii) Upon the occurrence and during the continuation of an Event of Default: (y) except as otherwise provided with respect to defaulting Lenders, all IP Collections shall be applied: first, to pay any fees, or expense reimbursements then due to Agent from Borrower; second, to pay any fees or expense reimbursements then due to the Lenders from Borrower; third, to pay interest due in respect of all Advances; fourth, to pay the outstanding principal of Tranche B Advances; fifth, to pay the outstanding principal of Tranche A Advances; and sixth, ratably to pay any other Obligations due to Agent or any Lender by Borrower. (z) except as otherwise provided with respect to defaulting Lenders, all Other Collections shall be applied: first, to pay any fees, or expense reimbursements then due to Agent from Borrower; second, to pay any fees or expense reimbursements then due to the Lenders from Borrower; third, to pay interest due in respect of all Advances; fourth, to pay the outstanding principal of Tranche A Advances; fifth, to pay the outstanding principal of Tranche B Advances; and sixth, ratably to pay any other Obligations due to Agent or any Lender by Borrower. -26- 33 (iii) All IP Collections or Other Collections applied pursuant to subsections (i) or (ii) above shall, within each category of application, be apportioned ratably among those Lenders having a Pro Rata Share of the Tranche A Advances or of the Tranche B Advances, as applicable, to which such amounts are to be applied and payments of the fees (other than fees designated for Agent's sole and separate account) shall, as applicable, be apportioned ratably among the Lenders. (iv) For purposes of the foregoing subsections (i) and (ii), the Lenders agree for their mutual benefit and not for the benefit of Borrower or any third Person, that in the event of the sale of all or substantially all of the assets of Borrower (or any division thereof) or the capital Stock of Borrower, the net cash proceeds of such sale shall be apportioned as follows: (y) an amount equal to the value of the IP Collateral that is being transferred in connection with such sale (or that are held by Borrower in connection with sale of the capital Stock of Borrower) shall be deemed to be IP Collections; and (z) the balance shall be deemed to be Other Collections. (v) For purposes of the foregoing, "payment in full" with respect to interest shall include interest accrued after the commencement of any Insolvency Proceeding irrespective of whether a claim for such interest is allowable in such Insolvency Proceeding. 2.5 OVERADVANCES. If, at any time or for any reason, the amount of Obligations pursuant to Sections 2.1 and 2.2 is greater than either the Dollar or percentage limitations set forth in Sections 2.1 or 2.2 (an "Overadvance"), Borrower immediately shall pay to Agent, in cash, the amount of such excess, which amount shall be used by Agent to reduce the Obligations in accordance with the priority set forth in Section 2.4(b). 2.6 INTEREST: RATES, PAYMENTS, AND CALCULATIONS. (a) Interest Rate. Except as provided in clause (c) below, (i) all Obligations (except for Tranche B Advances) shall bear interest at a per annum rate of 3 percentage points above the Reference Rate and (ii) all Tranche B Advances shall bear interest at a rate of 5 percentage points above the Reference Rate; provided, however, that, effective on the date that the Lender Group receives Borrower's audited financial statements for its fiscal year ending on or about December 31, 1998 (such date of receipt, the "Interest Reduction Evaluation Date"), each of the respective foregoing rates of interest automatically shall be decreased by 1 percentage point per annum if: (x) no Potential Default exists on the Interest Reduction Evaluation Date that, but for the passage of the applicable grace period (if any) under the Loan Documents, would constitute an Event of Default; (y) no Event of Default exists on the Interest Reduction Evaluation Date that has not been waived in writing by the Lender Group in its sole discretion within 10 days following the Interest Reduction -27- 34 Evaluation Date (provided that any such waiver shall be solely for purposes of this Section 2.6(a) and shall not impair the ability of the Lender Group to exercise any other right or remedy of the Lender Group following the occurrence of an Event of Default); and (z) Borrower's audited financial statements for such fiscal year ended on or about December 31, 1998 indicate that Borrower has achieved, with respect to each of the projected financial performance levels of Borrower relative to Tangible Net Worth, EBITDA, and gross revenues, respectively set forth in the Business Plan for such fiscal year, not less than 90% of the applicable projected levels. (b) [intentionally omitted] (c) Default Rate. Upon the occurrence and during the continuation of an Event of Default, all Obligations shall bear interest at a per annum rate equal to 3 percentage points above the applicable per annum rate set forth in Section 2.6(a). (d) Minimum Interest. (i) In no event shall the rate of interest chargeable under Section 2.6(a) for any day be less than 9% per annum. To the extent that interest accrued hereunder at the rate set forth in such section would be less than the foregoing minimum daily rate, the interest rate chargeable hereunder for such day automatically shall be deemed increased to the minimum rate. (ii) In no event shall the amount of interest accrued and payable hereunder be less than $500,000 per year (or portion thereof). To the extent that interest accrued hereunder at the rate set forth herein (including the minimum interest rate) would be less than the foregoing minimum amount, the interest rate chargeable hereunder for the period in question automatically shall be deemed increased to that rate that would result in the minimum amount of interest being accrued and payable hereunder. Without limiting the generality of the foregoing, if the aggregate amount of interest accrued hereunder at the rate set forth herein (including the minimum interest rate) (y) during the period commencing on the Effective Date and ending on the earlier to occur of the first anniversary of the Effective Date and the date of termination of this Agreement is less than $500,000 (such date, the "First Interest Make-Whole Date"), then Borrower shall pay to Agent for the ratable benefit of the Lender Group the amount of such shortfall on the First Interest Make-Whole Date, and (z) during the period commencing on the first anniversary of the Effective Date and ending on the earlier to occur of the second anniversary of the Effective Date and the date of termination of this Agreement is less than $500,000 (such date, the "Second Interest Make-Whole Date"), then Borrower shall pay to Agent for the ratable benefit of the Lender Group the amount of such shortfall on the Second Interest Make-Whole Date; provided, however, that, if Borrower terminates this Agreement in accordance with Section 3.6, no Event of Default exists at the time of such termination, and the date of such termination is a date other than any anniversary of the Effective Date, then (1) the $500,000 minimum interest amount otherwise applicable for the period in question shall be pro-rated through such date of termination, and (2) the amount by which the actual amount of -28- 35 interest accrued hereunder at the rate set forth herein (including the minimum interest rate) during such shortened period in question is less than the pro-rated portion of $500,000 shall be payable by Borrower to Agent for the ratable benefit of the Lender Group on such date of termination. (e) Payments. Interest payable hereunder shall be due and payable, in arrears, on the first day of each month during the term hereof. Borrower hereby authorizes Agent, at its option, without prior notice to Borrower, to charge such interest, all Lender Group Expenses (as and when incurred), the fees and charges provided for in Section 2.11 (as and when accrued or incurred), and all installments or other payments due under any Loan Document to Borrower's Loan Account, first, as Tranche A Advances, until Tranche A Availability equals zero, and, thereafter, as Tranche B Advances. All amounts so charged to Borrower's Loan Account thereafter shall accrue interest at the rate then applicable to Advances hereunder. Any interest not paid when due shall be compounded and shall thereafter accrue interest at the rate then applicable to Advances hereunder. (f) Computation. The Reference Rate as of the date of this Agreement is 8.5% per annum. In the event the Reference Rate is changed from time to time hereafter, the rates of interest provided for in Section 2.6(a) and Section 2.6(c) automatically and immediately shall be increased or decreased by an amount equal to such change in the Reference Rate. All interest and fees chargeable under the Loan Documents shall be computed on the basis of a 360 day year for the actual number of days elapsed. (g) Intent to Limit Charges to Maximum Lawful Rate. In no event shall the interest rates payable under this Agreement, plus any other amounts paid in connection herewith, exceed the highest rate permissible under any law that a court of competent jurisdiction shall, in a final determination, deem applicable. Borrower and the Lender Group in executing and delivering this Agreement, intend legally to agree upon the rate or rates of interest and manner of payment stated within it; provided, however, that, anything contained herein to the contrary notwithstanding, if said rate or rates of interest or manner of payment exceeds the maximum allowable under applicable law, then, ipso facto as of the date of this Agreement, Borrower is and shall be liable only for the payment of such maximum as allowed by law, and payment received from Borrower in excess of such legal maximum, whenever received, shall be applied to reduce the principal balance of the Obligations to the extent of such excess. 2.7 COLLECTION OF ACCOUNTS. Borrower shall at all times maintain a concentration account (the "Concentration Account") at the Designated Account Bank and promptly deposit all Collections received by Borrower from any source immediately upon receipt into the Concentration Account. Borrower, Agent, and the Designated Account Bank shall enter into the Concentration Account Agreement. -29- 36 Borrower agrees that all Collections and other amounts received by Borrower from any Account Debtor or any other source immediately upon receipt shall be deposited into the Concentration Account. Neither the Concentration Account Agreement nor the arrangement contemplated thereby shall be modified by Borrower without the prior written consent of Agent. Upon the terms and subject to the conditions set forth in the Concentration Account Agreement, all amounts received in the Concentration Account shall be wired each Business Day into an account (the "Agent Account") maintained by Agent at a depositary selected by Agent. Upon the occurrence and during the continuation of an Event of Default or if Agent deems itself insecure with respect to Agent's good faith belief or suspicion that Borrower has engaged in defalcation, intentional misrepresentation, or fraud, Agent shall have the right to require Borrower to establish, and thereafter maintain, lockbox arrangements satisfactory to Agent in respect of the Collections and to instruct all Account Debtors with respect to the Accounts, General Intangibles, and Negotiable Collateral of Borrower to remit all Collections in respect thereof to such lockboxes. 2.8 CREDITING PAYMENTS; APPLICATION OF COLLECTIONS. The receipt of any Collections by Agent (whether from transfers to Agent by the Designated Account Bank pursuant to the Concentration Account Agreement or otherwise) immediately shall be applied provisionally to reduce the Obligations outstanding under the Loan Documents to zero and the excess, if any, shall be transferred to the Designated Account. The application of such Collections (or the proceeds thereof) to the Obligations shall not be considered a payment on account unless such Collection item is a wire transfer of immediately available federal funds and is made to the Agent Account or unless and until such Collection item is honored when presented for payment. From and after the Effective Date, Agent on behalf of the Lender Group shall be entitled to charge Borrower for 3 Business Days of `clearance' or `float' at the rate set forth in Section 2.6(a)(i) or Section 2.6(c)(i), as applicable, on all Collections that are received by Agent (regardless of whether forwarded by the Designated Account Bank to Agent, whether provisionally applied to reduce the Obligations under the Loan Documents, or otherwise). This across-the-board 3 Business Day clearance or float charge on all Collections is acknowledged by the parties to constitute an integral aspect of the pricing of the Lender Group's financing of Borrower, and shall apply irrespective of the characterization of whether receipts are owned by Borrower or the Lender Group, and whether or not there are any outstanding Advances, the effect of such clearance or float charge being the equivalent of charging 3 Business Days of interest on such Collections. Should any Collection item not be honored when presented for payment, then Borrower shall be deemed not to have made such payment, and interest shall be recalculated accordingly. Anything to the contrary contained herein notwithstanding, any Collection item shall be deemed received by Agent only if it is received into the Agent Account on a Business Day on or before 11:00 a.m. (California time). If any Collection item is received into the Agent Account on a non-Business Day or after (11:00 a.m. California time) on a Business Day, it shall be deemed to have been received by Agent as of the opening of business -30- 37 on the immediately following Business Day. The economic benefit of the 3 Business Day clearance or float charge provided for in this Section 2.8 is for the ratable benefit of the Lenders in accordance with their Pro Rata Shares. 2.9 DESIGNATED ACCOUNT. Agent and the Lenders are authorized to make the Advances under this Agreement based upon telephonic or other instructions received from anyone purporting to be an Authorized Person, or without instructions if pursuant to Section 2.6(e). Borrower agrees to establish and maintain the Designated Account with the Designated Account Bank for the purpose of receiving the proceeds of the Advances requested by Borrower and made by Agent or the Lenders hereunder. Unless otherwise agreed by Agent and Borrower, any Advance requested by Borrower and made hereunder shall be made to the Designated Account. 2.10 MAINTENANCE OF LOAN ACCOUNT; STATEMENTS OF OBLIGATIONS. Agent shall maintain an account on its books in the name of Borrower (the "Loan Account") on which Borrower will be charged with all Advances made by Agent or the Lenders to Borrower or for Borrower's account, including, accrued interest, Lender Group Expenses, and any other payment Obligations of Borrower. In accordance with Section 2.8, the Loan Account will be credited with all payments received by Agent from Borrower or for Borrower's account, including all amounts received in the Agent Account from the Concentration Account. On a monthly basis, Agent shall render statements regarding the Loan Account to Borrower (with copies to each Lender), including principal, interest, fees, and including an itemization of all charges and expenses constituting Lender Group Expenses owing, and such statements shall be conclusively presumed to be correct and accurate and constitute an account stated between Borrower and the Lender Group unless, within 30 days after receipt thereof by Borrower (or any Lender), Borrower (or any Lender) shall deliver to Agent written objection thereto describing the error or errors contained in any such statements. 2.11 FEES. Borrower shall pay to Agent for the ratable benefit of the Lender Group (in accordance with the Lenders' respective Pro Rata Shares), except as otherwise indicated, the following fees: (a) Origination Fee. On the Effective Date, an origination fee of $600,000. (b) Supplemental Origination Fee. A one-time supplemental origination fee in the amount of $200,000, such fee to be fully earned on the Effective Date and due and payable on the first anniversary of the Effective Date or such earlier date (if any) on which this Agreement is terminated. (c) Unused Line Fee. On the first day of each month during the term of this Agreement, an unused line fee in an amount equal to 0.5% per annum times the Average Unused Portion of the Maximum Amount. -31- 38 (d) [intentionally omitted] (e) Financial Examination, Documentation, and Appraisal Fees. For the sole and separate accounts of Agent and each Lender that exercises its rights under Section 4.6 hereof: (i) a separate fee of $600 per day per examiner, plus out-of-pocket expenses for each financial analysis and examination (i.e., audits) of Borrower performed by the respective personnel employed by Agent or any such Lender; provided, however, that, if during any one-year period ending on each anniversary of the Effective Date there has not occurred an Event of Default, Borrower will not be charged for more than 3 such audits in that one-year period; (ii) a separate appraisal fee of $1,500 per day per appraiser, plus out-of-pocket expenses for each appraisal of the Collateral performed by the respective personnel employed by Agent or any such Lender; and (iii) the actual charges paid or incurred by Agent or any such Lender if it elects to employ the services of one or more third Persons to perform such financial analyses and examinations (i.e., audits) of Borrower or to appraise the Collateral. (f) Loan Servicing Fee. For the sole and separate account of Agent, on the first day of each month during the term of this Agreement, a loan servicing fee in an amount equal to $3,000 per month. 2.12 TAXES. (a) Any and all payments by the Borrower hereunder to or for the benefit of any Lender or the Agent shall be made free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings and penalties, interests and all other liabilities with respect thereto ("Taxes"), excluding, (i) in the case of each such Lender or the Agent, taxes imposed on its net income (including, without limitation, any taxes imposed on branch profits) and franchise taxes imposed on it by the jurisdiction under the laws of which such Lender or the Agent (as the case may be) is organized or any political subdivision thereof, (ii) in the case of each Lender, taxes imposed on its net income (including, without limitation, any taxes imposed on branch profits), and franchise taxes imposed on it, by the jurisdiction of such Lender's applicable lending office or any political subdivision thereof, (iii) in the case of each such Lender and the Agent, any Taxes that are in effect and that would apply to a payment to such Lender or Agent, as applicable, as of the Effective Date, and (iv) if any Person acquires any interest in this Agreement pursuant to the provisions hereof (any such Person being referred to as a "Tax Transferee"), any Taxes to the extent that they are in effect and would apply to a payment to such Tax Transferee as of the date of the acquisition of such interest (all such nonexcluded Taxes being hereinafter referred to as "Covered Taxes"). If the Borrower shall be required by law to deduct any Covered Taxes from or in respect of any sum payable hereunder, (A) the sum payable shall be increased as may be necessary so that after making all required deductions of Covered Taxes (including deductions of Covered Taxes applicable to additional sums payable under this Section 2.12) such Lender, the Agent or such Tax Transferee, as the case may be, receives an amount equal to the sum it would have received had no such deductions been made, -32- 39 (B) the Borrower shall make such deductions and (C) the Borrower shall pay the full amount so deducted to the relevant taxation authority or other authority in accordance with applicable law. (b) In addition, the Borrower agrees to pay any present or future stamp, documentary, excise, privilege, intangible or similar levies that arise at any time or from time to time (i) from any payment made under any and all Loan Documents, (ii) from the transfer of the rights of the Lender under any Loan Documents to any transferee, or (iii) from the execution or delivery by the Borrower of, or from the filing or recording or maintenance of, or otherwise with respect to the exercise by the Agent or the Lenders of their rights under, any and all Loan Documents (hereinafter referred to as "Other Taxes"). (c) The Borrower will indemnify each Lender, the Agent, and any Tax Transferee for the full amount of (i) Covered Taxes imposed on or with respect to amounts payable hereunder, (ii) Other Taxes, and (iii) any Taxes (other than Covered Taxes imposed by any jurisdiction on amounts payable under this Section 2.12) paid by such Lender or the Agent or such Tax Transferee, as the case may be, and any liability (including penalties, interest and reasonable expenses) arising solely therefrom or with respect thereto. Payment of this indemnification shall be made within 15 days from the date such Lender or the Agent or Tax Transferee makes written demand therefor to the Borrower certifying and setting forth in reasonable detail the calculation thereof as to the amount and type of such Taxes. Any such certificate submitted by the Lender or Agent or Tax Transferee in good faith to the Borrower shall, absent manifest or demonstrable error, be final, conclusive and binding on all parties. (d) Within 30 days after the date of any payment of Covered Taxes or Other Taxes, the Borrower will furnish to the Agent the original or a certified copy of a receipt evidencing payment thereof. 3. CONDITIONS; TERM OF AGREEMENT. 3.1 CONDITIONS PRECEDENT TO THE INITIAL ADVANCE. The obligation of the Lender Group (or any member thereof) to make the initial Advance is subject to the fulfillment, to the satisfaction of each of the Lenders and their respective counsel, of each of the following conditions on or before the Closing Date (or such other date as expressly specified below): (a) the Closing Date shall occur on or before August 31, 1998; (b) Agent shall have received all financing statements and fixture filings required by the Lender Group, duly executed by Borrower, and Agent -33- 40 shall have received searches reflecting the filing of all such financing statements and fixture filings; (c) Agent shall have received each of the following documents, in form and substance satisfactory to each of the Lenders, duly executed, and each such document shall be in full force and effect, in each case, on or before the Effective Date (or such later date, if any, expressly specified below with respect to such document): (1) the Concentration Account Agreement; (2) the Existing Debt Conversion Documentation in respect of not less than $36,500,000 of Indebtedness owed by Borrower as of the date immediately preceding the Effective Date (including all such Indebtedness owed by Borrower to each Existing Lender), together with UCC termination statements and other documentation evidencing the termination by each such Existing Lender of its Liens (if any) in and to the properties and assets of Borrower; (3) the Copyright Security Agreement; (4) the Patent Security Agreement; (5) the Trademark Security Agreement; (6) the Stock Pledge Agreement, together with the shares of Stock of CRE, as well as Stock powers with respect thereto endorsed in blank; (7) the Deposit Account Security Agreement; (8) the Warrants; (9) on or before the Closing Date, a Control Agreement relative to each Securities Account of Borrower in existence as of the Closing Date; (d) On or before the Effective Date, Agent shall have received a certificate from the Secretary of Borrower attesting to the resolutions of Borrower's Board of Directors authorizing its execution, delivery, and performance of this Agreement and the other Loan Documents to which Borrower is a party and authorizing specific officers of Borrower to execute the same; -34- 41 (e) On or before the Effective Date, Agent shall have received copies of Borrower's Governing Documents, as amended, modified, or supplemented to the Effective Date, certified by the Secretary of Borrower; (f) On or before the Effective Date, Agent shall have received a certificate of status with respect to Borrower, dated within 10 days of the Effective Date, such certificate to be issued by the appropriate officer of the jurisdiction of organization of Borrower, which certificate shall indicate that Borrower is in good standing in such jurisdiction; (g) On or before the Effective Date, Agent shall have received certificates of status with respect to Borrower, each dated within 15 days of the Effective Date, such certificates to be issued by the appropriate officer of the jurisdictions in which its failure to be duly qualified or licensed would constitute a Material Adverse Change, which certificates shall indicate that Borrower is in good standing in such jurisdictions; (h) On or before the Effective Date, Agent shall have received a certificate of insurance, together with the endorsements thereto, as are required by Section 6.10, the form and substance of which shall be satisfactory to each of the Lenders and their respective counsel; (i) Agent shall have received duly executed certificates of title with respect to that portion of the Collateral that is subject to certificates of title; (j) On or before the Effective Date, each Lender shall have received satisfactory evidence that CRE has duly transferred to Borrower all right, title, and interest of CRE in and to all material assets of CRE, including all Intellectual Property of CRE necessary for the operation of the business of Borrower and its Subsidiaries as currently conducted; (k) On or before the Effective Date, Agent shall have received an opinion of Borrower's counsel in form and substance satisfactory to each of the Lenders in its sole discretion; (l) each Lender and its counsel shall have had an opportunity to review the status of the Creative Technology, Ltd. litigation filed in the United States District Court for the Northern District of California as Case No. 98-0770 WHO, and the results of such review shall have been satisfactory to each Lender and its counsel in their sole discretion; (m) Borrower shall use best efforts to deliver to Agent, on or before the Closing Date, any and all certificates representing shares of Stock of all -35- 42 Subsidiaries other than CRE, as well as Stock powers with respect thereto endorsed in blank; (n) Agent shall have received not less than 5 Business Days, nor more than 10 Business Days, prior written notice from Borrower of Borrower's request for the initial Advance so that Agent may conduct and complete Agent's final pre-closing audit of Borrower satisfactory to Agent, including the calculation of the Availability; (o) [intentionally omitted] (p) On or before the Effective Date, Agent shall have received a certificate of the Chief Financial Officer of Borrower, in form and substance satisfactory to the Agent, attesting that, on a pro forma basis assuming the consummation of the transactions contemplated by this Agreement and the other Loan Documents, both before and after such consummation, Borrower shall not (i) be insolvent or rendered insolvent, (ii) be left with an unreasonably small capital with which to engage in its business, or (iii) have incurred debts beyond its ability to pay as such debts mature. (q) [intentionally omitted] (r) On or before the Effective Date, Agent and each Lender shall have received a copy of the Business Plan, certified by the Chief Financial Officer and Secretary of Borrower as being true, correct, and complete; (s) On or before the Effective Date, Agent shall have received satisfactory evidence that all tax returns required to be filed by Borrower have been timely filed and all taxes upon Borrower or its properties, assets, income, and franchises (including real property taxes and payroll taxes) have been paid prior to delinquency, except such taxes that are the subject of a Permitted Protest; and (t) all other documents and legal matters in connection with the transactions contemplated by this Agreement shall have been delivered, executed, or recorded and shall be in form and substance satisfactory to each Lender and its counsel. 3.2 CONDITIONS PRECEDENT TO ALL ADVANCES. The following shall be conditions precedent to all Advances hereunder: (a) the representations and warranties contained in this Agreement and the other Loan Documents shall be true and correct in all respects on and as of the date of such extension of credit, as though made on and as of such date -36- 43 (except to the extent that such representations and warranties relate solely to an earlier date); (b) no Potential Default or Event of Default (including under Section 8.3) shall have occurred and be continuing on the date of such extension of credit, nor shall either result from the making thereof; (c) no injunction, writ, restraining order, or other order of any nature prohibiting, directly or indirectly, the extending of such credit shall have been issued and remain in force by any governmental authority against Borrower, Agent, the Lender Group, or any of their Affiliates; and (d) the amount of the Revolving Facility Usage, after giving effect to the requested Advance, shall not exceed the Availability. 3.3 CONDITIONS SUBSEQUENT. As conditions subsequent, Borrower shall perform or cause to be performed each of the following, and the failure by Borrower to timely perform or cause to be performed any of the following shall constitute an Event of Default: (a) within 30 days following the Effective Date, deliver to Agent the certified copies of the policies of insurance, together with the endorsements thereto, as are required by Section 6.10, the form and substance of which shall be satisfactory to each Lender and its counsel. (b) within 10 days following the Closing Date, Agent shall have received satisfactory evidence that all existing copyrights of Borrower (other than Exempt Copyrights) that are capable of being registered pursuant to Section 6(a) of the Copyright Security Agreement have been registered with the United States Copyright Office, and that all such copyrights and any proceeds thereof are specifically encumbered by the Copyright Security Agreement. 3.4 TERM. This Agreement shall become effective upon the Effective Date and shall continue in full force and effect for a term ending on the second anniversary of the Effective Date (the "Maturity Date"), unless sooner terminated pursuant to the terms hereof. The foregoing notwithstanding, the Lender Group shall have the right to terminate its obligations under this Agreement immediately and without notice upon the occurrence and during the continuation of an Event of Default. 3.5 EFFECT OF TERMINATION. On the date of termination of this Agreement, all Obligations immediately shall become due and payable without notice or demand. No termination of this Agreement, however, shall relieve or discharge Borrower of Borrower's duties, Obligations, or covenants hereunder or under the other Loan Documents, and Agent's security interests in the Collateral, for the benefit of the -37- 44 Lender Group, shall remain in effect until all Obligations have been fully and finally discharged and the Lender Group's obligations to provide additional credit hereunder have been terminated. 3.6 EARLY TERMINATION BY BORROWER. Borrower has the option, at any time upon 90 days prior written notice to Agent, to terminate this Agreement by paying to Agent, for the ratable benefit of the Lender Group, in cash, the Obligations, in full, together with a premium (the "Early Termination Premium") equal to $250,000. 3.7 TERMINATION UPON EVENT OF DEFAULT. If the Lender Group terminates this Agreement upon the occurrence of an Event of Default that intentionally is caused by Borrower for the purpose, in the Required Lenders' reasonable judgment, of avoiding payment of the Early Termination Premium provided in Section 3.6, in view of the impracticability and extreme difficulty of ascertaining actual damages and by mutual agreement of the parties as to a reasonable calculation of the Lender Group's lost profits as a result thereof, Borrower shall pay to Agent, for the ratable benefit of the Lender Group, upon the effective date of such termination, a premium in an amount equal to the Early Termination Premium. The Early Termination Premium shall be presumed to be the amount of damages sustained by the Lender Group as the result of the early termination and Borrower agrees that it is reasonable under the circumstances currently existing. The Early Termination Premium provided for in this Section 3.7 shall be deemed included in the Obligations. 4. CREATION OF SECURITY INTEREST. 4.1 GRANTS OF SECURITY INTERESTS. (a) Borrower hereby grants to Agent, for the ratable benefit of the Lender Group, continuing Liens on all right, title, and interest of Borrower in and to all currently existing and hereafter acquired or arising Collateral (other than the IP Collateral) in order to secure prompt repayment of any and all Obligations (other than the Tranche B Advances) and in order to secure prompt performance by Borrower of each of its covenants and duties under the Loan Documents (other than with respect to the Tranche B Advances). The secured claims of the Lender Group with respect to the portions of the Obligations and the Collateral described in this subsection (a) are referred to herein as the "Other Collateral Secured Tranche A Claims." (b) Borrower hereby grants to Agent, for the ratable benefit of the Lender Group, continuing Liens on all right, title, and interest of Borrower in and to all currently existing and hereafter acquired or arising IP Collateral in order to secure prompt repayment of any and all Obligations (other than the Tranche B Advances) and in order to secure prompt performance by Borrower of each of its covenants and duties under the Loan Documents (other than with respect to the -38- 45 Tranche B Advances). The secured claims of the Lender Group with respect to the portions of the Obligations and the Collateral described in this subsection (b) are referred to herein as the "IP Collateral Secured Tranche A Claims." (c) Borrower hereby grants to Agent, for the ratable benefit of the Lender Group, continuing Liens on all right, title, and interest of Borrower in and to all currently existing and hereafter acquired or arising Collateral (other than the IP Collateral) in order to secure prompt repayment of any and all Tranche B Advances and in order to secure prompt performance by Borrower of each of its covenants and duties under the Loan Documents with respect to the Tranche B Advances. The secured claims of the Lender Group with respect to the portions of the Obligations and the Collateral described in this subsection (c) are referred to herein as the "Other Collateral Secured Tranche B Claims." (d) Borrower hereby grants to Agent, for the ratable benefit of the Lender Group, continuing Liens on all right, title, and interest of Borrower in and to all currently existing and hereafter acquired or arising IP Collateral in order to secure prompt repayment of any and all Tranche B Advances and in order to secure prompt performance by Borrower of each of its covenants and duties under the Loan Documents with respect to the Tranche B Advances. The secured claims of the Lender Group with respect to the portions of the Obligations and the Collateral described in this subsection (d) are referred to herein as the "IP Collateral Secured Tranche B Claims." (e) The Agent's Liens on the Collateral shall attach to all Collateral without further act on the part of the Lender Group or Borrower. Anything contained in this Agreement or any other Loan Document to the contrary notwithstanding, except for Permitted Dispositions, Borrower has no authority, express or implied, to dispose of any item or portion of the Collateral. (f) Subject to Section 2.4(b): (i) the Agent's Liens on the Collateral (other than the IP Collateral) securing the Other Collateral Secured Tranche A Claims shall be senior in Lien priority to the Agent's Liens on the Collateral (other than the IP Collateral) securing the Other Collateral Secured Tranche B Claims; and (ii) the Agent's Liens on the IP Collateral securing the IP Collateral Secured Tranche B Claims shall be senior in Lien priority to the Agent's Liens on the IP Collateral securing the IP Collateral Secured Tranche A Claims. 4.2 NEGOTIABLE COLLATERAL. In the event that any Collateral, including proceeds, is evidenced by or consists of Negotiable Collateral (other than originals of letters of credit), Borrower promptly shall endorse and deliver physical possession of -39- 46 such Negotiable Collateral to Agent. Upon the reasonable (from the perspective of a secured lender) request of Agent therefor, Borrower promptly shall endorse and deliver physical possession of any Negotiable Collateral evidenced by or consisting of originals of letter of credit. 4.3 COLLECTION OF ACCOUNTS, GENERAL INTANGIBLES, AND NEGOTIABLE COLLATERAL. At any time after the occurrence and during the continuation of an Event of Default, Agent or Agent's designee may (a) notify customers or Account Debtors that the Accounts, General Intangibles, or Negotiable Collateral have been assigned to Agent for the benefit of the Lender Group, or that Agent, for the benefit of the Lender Group, has a security interest therein and (b) collect the Accounts, General Intangibles, and Negotiable Collateral directly and charge the collection costs and expenses to the Loan Account. Borrower agrees that it will hold in trust for the Lender Group, as the Lender Group's trustee, any Collections that it receives and immediately will deliver said Collections to Agent in their original form as received by Borrower. 4.4 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. At any time upon the request of Agent, Borrower shall execute and deliver to Agent all financing statements, collateral assignments, continuation financing statements, fixture filings, security agreements, pledges, assignments, mortgages, leasehold mortgages, deeds of trust, leasehold deeds of trust, endorsements of certificates of title, applications for title, affidavits, reports, notices, schedules of accounts, letters of authority, and all other documents that Agent reasonably may request, in form satisfactory to Agent, to perfect and continue perfected the Agent's Liens on the Collateral (whether now owned or hereafter arising or acquired), and in order to consummate fully all of the transactions contemplated hereby and under the other the Loan Documents. 4.5 POWER OF ATTORNEY. Borrower hereby irrevocably makes, constitutes, and appoints Agent (and any of Agent's officers, employees, or agents designated by Agent) as Borrower's true and lawful attorney, with power to (a) if Borrower refuses to, or fails timely to execute and deliver any of the documents described in Section 4.4, sign the name of Borrower on any of the documents described in Section 4.4, (b) at any time that an Event of Default has occurred and is continuing, sign Borrower's name on any invoice or bill of lading relating to any Account, drafts against Account Debtors, schedules and assignments of Accounts, verifications of Accounts, and notices to Account Debtors, (c) send requests for verification of Accounts (provided that such requests shall not be made in the name of any member of the Lender Group), (d) endorse Borrower's name on any Collection item that may come into the Lender Group's possession, (e) at any time that an Event of Default has occurred and is continuing, notify the post office authorities to change the address for delivery of Borrower's mail to an address designated by Agent, to receive and open all mail addressed to Borrower, and to retain all mail relating to the Collateral and forward all other mail to Borrower, (f) at any time that an Event of Default has occurred and is continuing, make, settle, and adjust all claims under Borrower's -40- 47 policies of insurance and make all determinations and decisions with respect to such policies of insurance (other than decisions with respect to reduction or termination of coverage), and (g) at any time that an Event of Default has occurred and is continuing, settle and adjust disputes and claims respecting the Accounts directly with Account Debtors, for amounts and upon terms that Agent determines to be reasonable, and Agent may cause to be executed and delivered any documents and releases that Agent determines to be necessary. The appointment of Agent as Borrower's attorney, and each and every one of Agent's rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully and finally repaid and performed and the Lender Groups' obligations to extend credit hereunder are terminated. 4.6 RIGHT TO INSPECT. Agent and each Lender (through any of their respective officers, employees, or agents) shall have the right, from time to time hereafter during normal business hours to inspect the Books and to check, test, and appraise the Collateral in order to verify Borrower's financial condition or the amount, quality, value, condition of, or any other matter relating to, the Collateral. 4.7 CONTROL AGREEMENTS. Borrower agrees that it will not transfer assets out of any Securities Accounts other than as permitted under Section 7.22 and, if to another securities intermediary, unless each of Borrower, Agent, and the substitute securities intermediary have entered into a Control Agreement. No arrangement contemplated hereby or by any Control Agreement in respect of any Securities Accounts or other investment property shall be modified by Borrower without the prior written consent of Agent. Upon the occurrence and during the continuance of an Event of Default, Agent may notify any securities intermediary to liquidate or transfer the applicable Securities Account or any related investment property maintained or held thereby and remit the proceeds thereof to the Agent Account. 5. REPRESENTATIONS AND WARRANTIES. In order to induce the Lender Group to enter into this Agreement, Borrower makes the following representations and warranties to the Lender Group which shall be true, correct, and complete in all respects as of the date hereof, and shall be true, correct, and complete in all respects as of the Effective Date, and at and as of the date of the making of each Advance made thereafter, as though made on and as of the date of the making of such Advance (except to the extent that such representations and warranties relate solely to an earlier date) and such representations and warranties shall survive the execution and delivery of this Agreement: 5.1 NO ENCUMBRANCES. Borrower has good and indefeasible title to the Collateral, free and clear of Liens except for Permitted Liens. 5.2 ELIGIBLE ACCOUNTS. The Eligible Accounts are bona fide existing obligations created by the sale and delivery of Inventory, the license of General -41- 48 Intangibles, or the rendition of services to Account Debtors in the ordinary course of Borrower's business, unconditionally owed to Borrower without defenses, disputes, offsets, counterclaims, or rights of return or cancellation. The property giving rise to such Eligible Accounts has been delivered to the Account Debtor, or to the Account Debtor's agent for immediate shipment to and unconditional acceptance by the Account Debtor. Borrower has not received notice of actual or imminent bankruptcy, insolvency, or material impairment of the financial condition of any Account Debtor regarding any Eligible Account. 5.3 [INTENTIONALLY OMITTED] 5.4 EQUIPMENT. All of the Equipment is used or held for use in Borrower's business and is fit for such purposes. 5.5 LOCATION OF INVENTORY AND EQUIPMENT. The Inventory and Equipment are not stored with a bailee, warehouseman, or similar party (except with respect to a non-material quantity and value of trade show booth Equipment identified on Schedule 6.12) and are located only at the locations identified on Schedule 6.12 or otherwise permitted by Section 6.12. 5.6 INVENTORY RECORDS. Borrower keeps correct and accurate records itemizing and describing the kind, type, quality, and quantity of the Inventory, and Borrower's cost therefor. 5.7 LOCATION OF CHIEF EXECUTIVE OFFICE; FEIN. The chief executive office of Borrower is located at the address indicated in the preamble to this Agreement and Borrower's FEIN is 943117385. 5.8 DUE ORGANIZATION AND QUALIFICATION; SUBSIDIARIES. (a) Borrower is duly organized and existing and in good standing under the laws of the jurisdiction of its incorporation and qualified and licensed to do business in, and in good standing in, any state where the failure to be so licensed or qualified reasonably could be expected to constitute a Material Adverse Change. (b) Set forth on Schedule 5.8, is a complete and accurate description of the authorized capital Stock of Borrower, by class, and, as of the Effective Date, a description of the number of shares of each such class that are issued and outstanding and the number of such shares that are held in Borrower's treasury. All such outstanding shares have been validly issued and, as of the Effective Date, are fully paid, nonassessable shares free of contractual preemptive rights. The issuance and sale of all such shares have been in compliance with all applicable federal and state securities laws. Other than as described on Schedule 5.8, as of the Effective Date, -42- 49 there are no subscriptions, options, warrants, or calls relating to any shares of Borrower's capital Stock, including any right of conversion or exchange under any outstanding security or other instrument. Borrower is not subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of its capital Stock or any security convertible into or exchangeable for any of its capital Stock. (c) Set forth on Schedule 5.8, is a complete and accurate list of Borrower's direct and indirect Subsidiaries, showing: (i) the jurisdiction of their incorporation; (ii) the number of shares of each class of common and preferred Stock authorized for each of such Subsidiaries; and (iii) the number and the percentage of the outstanding shares of each such class owned directly or indirectly by Borrower. All of the outstanding capital Stock of each such Subsidiary has been validly issued and is fully paid and non-assessable. (d) Except as set forth on Schedule 5.8, no capital Stock (or any securities, instruments, warrants, options, purchase rights, conversion or exchange rights, calls, commitments or claims of any character convertible into or exercisable for capital Stock) of any direct or indirect Subsidiary of Borrower is subject to the issuance of any security, instrument, warrant, option, purchase right, conversion or exchange right, call, commitment or claim of any right, title, or interest therein or thereto. (e) Each Non-Material Subsidiary (i) does not individually own any property or assets with a book value in excess of $200,000 or, together with all other Non-Material Subsidiaries, own any property or assets with a book value in excess of $500,000 in the aggregate, (ii) does not currently engage in any material business activity, and (iii) does not intend in the future to engage in any material business activity. 5.9 DUE AUTHORIZATION; NO CONFLICT. (a) The execution, delivery, and performance by Borrower of this Agreement and the Loan Documents to which it is a party have been duly authorized by all necessary corporate action. (b) The execution, delivery, and performance by Borrower of this Agreement and the Loan Documents to which it is a party do not and will not (i) violate any provision of federal, state, or local law or regulation (including Regulations G, T, U, and X of the Federal Reserve Board) applicable to Borrower, the Governing Documents of Borrower, or any order, judgment, or decree of any court or other Governmental Authority binding on Borrower, (ii) conflict with, result in a breach of, or constitute (with due notice or lapse of time or both) a default under any material contractual obligation or material lease of Borrower, (iii) result in or require -43- 50 the creation or imposition of any Lien of any nature whatsoever upon any properties or assets of Borrower, other than Permitted Liens, or (iv) require any approval of stockholders or any approval or consent of any Person under any material contractual obligation of Borrower. (c) Other than the taking of any action expressly required under this Agreement and the other Loan Documents, the execution, delivery, and performance by Borrower of this Agreement and the other Loan Documents to which Borrower is a party do not and will not require any registration with, consent, or approval of, or notice to, or other action with or by, any federal, state, foreign, or other Governmental Authority or other Person. (d) This Agreement and the other Loan Documents to which Borrower is a party, and all other documents contemplated hereby and thereby, when executed and delivered by Borrower, will be the legally valid and binding obligations of Borrower, enforceable against Borrower in accordance with their respective terms, except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or limiting creditors' rights generally. (e) The Agent's Liens granted by Borrower to Agent, for the benefit of the Lender Group, in and to its properties and assets pursuant to this Agreement and the other Loan Documents are validly created, perfected (except to the extent: (i) the Lender Group has failed to file or continue any required UCC-1 financing statements; (ii) the Lender Group does not have in its possession or control the original of any letter of credit issued to Borrower; or (iii) by the terms of this Agreement, registrations and filings with respect to the IP Collateral are not yet required), and first priority Liens, subject only to Permitted Liens. 5.10 LITIGATION. There are no actions or proceedings pending by or against Borrower before any court or administrative agency and Borrower does not have knowledge or belief of any pending or threatened litigation, governmental investigations, or claims, complaints, actions, or prosecutions involving Borrower or any guarantor of the Obligations, except for: (a) ongoing collection matters in which Borrower is the plaintiff; (b) matters disclosed on Schedule 5.10; and (c) matters arising after the date hereof that, if decided adversely to Borrower, reasonably could not be expected to result in a Material Adverse Change. 5.11 NO MATERIAL ADVERSE CHANGE. All financial statements relating to Borrower or any guarantor of the Obligations that have been delivered by Borrower to the Lender Group have been prepared in accordance with GAAP (except, in the case of unaudited financial statements, for the lack of footnotes and being subject to year-end audit adjustments) and fairly present Borrower's (or such guarantor's, as applicable) financial condition as of the date thereof and Borrower's results of -44- 51 operations for the period then ended. There has not been a Material Adverse Change with respect to Borrower (or such guarantor, as applicable) since the date of the latest financial statements submitted to the Lender Group on or before the Effective Date. 5.12 NO FRAUDULENT TRANSFER. (a) Borrower is Solvent. (b) No transfer of property is being made by Borrower and no obligation is being incurred by Borrower in connection with the transactions contemplated by this Agreement or the other Loan Documents with the intent to hinder, delay, or defraud either present or future creditors of Borrower. 5.13 EMPLOYEE BENEFITS. None of Borrower, any of its Subsidiaries, or any of their ERISA Affiliates maintains or contributes to any Benefit Plan, other than those listed on Schedule 5.13. Borrower, each of its Subsidiaries and each ERISA Affiliate have satisfied the minimum funding standards of ERISA and the IRC with respect to each Benefit Plan to which it is obligated to contribute. No ERISA Event has occurred nor has any other event occurred that may result in an ERISA Event that reasonably could be expected to result in a Material Adverse Change. None of Borrower or its Subsidiaries, any ERISA Affiliate, or any fiduciary of any Plan is subject to any direct or indirect liability with respect to any Plan under any applicable law, treaty, rule, regulation, or agreement. None of Borrower or its Subsidiaries or any ERISA Affiliate is required to provide security to any Plan under Section 401(a)(29) of the IRC. 5.14 ENVIRONMENTAL CONDITION. None of Borrower's properties or assets has ever been used by Borrower or, to the best of Borrower's knowledge, by previous owners or operators in the disposal of, or to produce, store, handle, treat, release, or transport, any Hazardous Materials, other than in material compliance with applicable laws. None of Borrower's properties or assets has ever been designated or identified in any manner pursuant to any environmental protection statute as a Hazardous Materials disposal site, or a candidate for closure pursuant to any environmental protection statute. No Lien arising under any environmental protection statute has attached to any revenues or to any real or personal property owned or operated by Borrower. Borrower has not received a summons, citation, notice, or directive from the Environmental Protection Agency or any other federal or state governmental agency concerning any action or omission by Borrower resulting in the releasing or disposing of Hazardous Materials into the environment. 5.15 BROKERAGE FEES. No brokerage commission or finders fees has or shall be incurred or payable in connection with or as a result of Borrower's obtaining financing from the Lender Group under this Agreement, and Borrower has -45- 52 not utilized the services of any broker or finder in connection with Borrower's obtaining financing from the Lender Group under this Agreement. 5.16 PERMITS AND OTHER INTELLECTUAL PROPERTY. Except as set forth in Schedule 5.16: (a) Borrower owns or possesses adequate licenses or other rights to use all Permits, patents, patent applications, trademarks, trademark applications, service marks, service mark applications, trade names, copyrights, trade secrets and know-how (collectively, the "Intellectual Property") that are necessary for the operation of its business as currently conducted; (b) no claim is pending or threatened to the effect that Borrower infringes upon, or conflicts with, the asserted rights of any other Person under any Intellectual Property, and to the best of Borrower's knowledge there is no basis for any such claim (whether pending or threatened); (c) no claim is pending or threatened to the effect that any such Intellectual Property owned or licensed by Borrower, or in which Borrower otherwise has the right to use is invalid or unenforceable by Borrower, and to the best of Borrower's knowledge there is not basis for any such claim (whether or not pending or threatened); and (d) CRE does not own or possess any Intellectual Property necessary for the operation of the business of Borrower and its Subsidiaries as currently conducted. 5.17 YEAR 2000 COMPLIANCE. (a) On the basis of a comprehensive inventory, review and assessment currently being undertaken by Borrower of Borrower's computer applications utilized by Borrower or contained in products produced or sold by Borrower, and upon inquiry made of Borrower's material suppliers and vendors, Borrower's management is of the considered view that Borrower, its products, and all such suppliers and vendors will be Year 2000 Compliant before October 1, 1999. (b) Borrower (i) has undertaken a detailed inventory, review and assessment of all areas within its business and operations that could be adversely affected by the failure of Borrower or its products to be Year 2000 Compliant on a timely basis, (ii) is developing a detail plan and timeline for becoming Year 2000 Compliant on a timely basis, and (iii) to date, is implementing that plan in accordance with that timetable in all material respects. Borrower reasonably anticipates that it will be Year 2000 Compliant on a timely basis. 6. AFFIRMATIVE COVENANTS. Borrower covenants and agrees that, so long as any credit hereunder shall be available and until full and final payment of the Obligations, and unless the Lender Group shall otherwise consent in writing, Borrower shall do all of the following: -46- 53 6.1 ACCOUNTING SYSTEM. Maintain a standard and modern system of accounting that enables Borrower to produce financial statements in accordance with GAAP, and maintain records pertaining to the Collateral that contain information as from time to time may be requested by Agent. Borrower also shall keep a modern inventory reporting system that shows all additions, sales, claims, returns, and allowances with respect to the Inventory. 6.2 COLLATERAL REPORTING. Provide Agent with the following documents at the following times in form satisfactory to Agent: (a) on the first business day of each week, a sales journal (including reporting relative to product shipments to each customer), Collections report, and credit register since the last such schedule and a calculation of the Borrowing Base as of such date, (b) on a monthly basis and, in any event, by no later than the 10th day of each month during the term of this Agreement, (i) a detailed calculation of the Borrowing Base, and (ii) a detailed aging, by total, of the Accounts, together with a reconciliation to the detailed calculation of the Borrowing Base previously provided to Agent, (c) on a monthly basis and, in any event, by no later than the 10th day of each month during the term of this Agreement, a summary aging, by vendor, of Borrower's accounts payable and any book overdraft, (d) [intentionally omitted], (e) on a weekly basis, notice of all returns, disputes, or claims, (f) upon request, copies of invoices in connection with the Accounts, customer statements, credit memos, remittance advices and reports, deposit slips, shipping and delivery documents in connection with the Accounts and for Inventory and Equipment acquired by Borrower, purchase orders and invoices, (g) on a monthly basis, a detailed list of Borrower's customers, (h) on a quarterly basis, an update relative to the status of the Creative Technology, Ltd. litigation filed in the United States District Court for the Northern District of California as Case No. 98-0770 WHO; and (i) such other reports as to the Collateral or the financial condition of Borrower as Agent may request from time to time. Original sales invoices evidencing daily sales shall be mailed by Borrower to each Account Debtor and, at Agent's direction, the invoices shall indicate on their face that the Account has been assigned to the Lender Group and that all payments are to be made directly to Agent for the benefit of the Lender Group. In addition, Borrower promptly shall deliver to Agent and each Lender written reports on material developments relative to the Creative Technology, Ltd. litigation filed in the United States District Court for the Northern District of California as Case No. 98-0770 WHO. 6.3 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. Deliver to Agent, with copies to each Lender: (a) as soon as available, but in any event within 30 days after the end of each month during each of Borrower's fiscal years, a company prepared balance sheet, income statement, and statement of cash flow covering Borrower's operations during such period; and (b) as soon as available, but in any event within 90 days after the end of each of Borrower's fiscal years, financial statements of Borrower for each such fiscal year, audited by independent certified public accountants reasonably acceptable to Agent and certified, without any -47- 54 qualifications, by such accountants to have been prepared in accordance with GAAP. Such audited financial statements shall include a balance sheet, profit and loss statement, and statement of cash flow and, if prepared, such accountants' letter to management. If Borrower is a parent company of one or more Subsidiaries, or Affiliates, or is a Subsidiary or Affiliate of another company, then, in addition to the financial statements referred to above, Borrower agrees to deliver financial statements prepared on a consolidating basis so as to present Borrower and each such related entity separately, and on a consolidated basis. Together with the above, Borrower also shall deliver to Agent, with copies to each Lender, Borrower's Form 10-Q Quarterly Reports, Form 10-K Annual Reports, and Form 8-K Current Reports, and any other filings made by Borrower with the SEC, if any, as soon as the same are filed, or any other information that is provided by Borrower to its shareholders, and any other report reasonably requested by the Lender Group relating to the financial condition of Borrower. Each month, together with the financial statements provided pursuant to Section 6.3(a), Borrower shall deliver to Agent, with copies to each Lender, a certificate signed by its chief financial officer to the effect that: (i) all financial statements delivered or caused to be delivered to any one or more members of the Lender Group hereunder have been prepared in accordance with GAAP (except, in the case of unaudited financial statements, for the lack of footnotes and being subject to year-end audit adjustments) and fairly present the financial condition of Borrower, (ii) the representations and warranties of Borrower contained in this Agreement and the other Loan Documents are true and correct in all material respects on and as of the date of such certificate, as though made on and as of such date (except to the extent that such representations and warranties relate solely to an earlier date), (iii) for each month that also is the date on which a financial covenant in Section 7.20 is to be tested, a Compliance Certificate demonstrating in reasonable detail compliance at the end of such period with the applicable financial covenants contained in Section 7.20, and (iv) on the date of delivery of such certificate to Agent there does not exist any condition or event that constitutes a Potential Default or Event of Default (or, in the case of clauses (i), (ii), or (iii), to the extent of any non-compliance, describing such non-compliance as to which he or she may have knowledge and what action Borrower has taken, is taking, or proposes to take with respect thereto). Borrower shall have issued written instructions to its independent certified public accountants authorizing them to communicate with Agent and to release to Agent whatever financial information concerning Borrower that Agent may request. Borrower hereby irrevocably authorizes and directs all auditors, accountants, or other third parties to deliver to Agent, at Borrower's expense, copies of Borrower's financial statements, papers related thereto, and other accounting records of any nature in their possession, and to disclose to Agent any information they may have regarding Borrower's business affairs and financial conditions. -48- 55 6.4 TAX RETURNS. Deliver to Agent copies of each of Borrower's future federal income tax returns, and any amendments thereto, within 30 days of the filing thereof with the Internal Revenue Service. 6.5 GUARANTOR REPORTS. Cause any guarantor of any of the Obligations to deliver its annual financial statements at the time when Borrower provides its audited financial statements to Agent and copies of all federal income tax returns as soon as the same are available and in any event no later than 30 days after the same are required to be filed by law. 6.6 RETURNS. Cause returns and allowances, if any, as between Borrower and its Account Debtors to be on the same basis and in accordance with the usual customary practices of Borrower, as they exist at the time of the execution and delivery of this Agreement. If, at a time when no Event of Default has occurred and is continuing, any Account Debtor returns any Inventory to Borrower, Borrower promptly shall determine the reason for such return and, if Borrower accepts such return, issue a credit memorandum (with a copy to be sent to Agent together with copies of all other such credit memoranda issued during the same week) in the appropriate amount to such Account Debtor. If, at a time when an Event of Default has occurred and is continuing, any Account Debtor returns any Inventory to Borrower, Borrower promptly shall determine the reason for such return and, if Agent consents (which consent shall not be unreasonably withheld), issue a credit memorandum (with a copy to be sent to Agent concurrently) in the appropriate amount to such Account Debtor. The foregoing to the contrary notwithstanding, Borrower promptly shall send a copy of any such credit memorandum issued relative to any return with a value in excess of $50,000. 6.7 TITLE TO EQUIPMENT. Upon Agent's request, Borrower promptly shall deliver to Agent, properly endorsed, any and all evidences of ownership of, certificates of title, or applications for title to any items of Equipment. 6.8 MAINTENANCE OF EQUIPMENT. Maintain the Equipment in good operating condition and repair (ordinary wear and tear excepted), and make all necessary replacements thereto so that the value and operating efficiency thereof shall at all times be maintained and preserved. Other than those items of Equipment that constitute fixtures on the Effective Date, Borrower shall not permit any item of Equipment to become a fixture to real estate or an accession to other property, and such Equipment shall at all times remain personal property. 6.9 TAXES. (a) Cause all assessments and taxes, whether real, personal, or otherwise, due or payable by, or imposed, levied, or assessed against Borrower or any of its property or assets to be paid in full, before delinquency or before the expiration -49- 56 of any extension period, except to the extent that the validity of such assessment or tax (other than payroll taxes or taxes that are the subject of a United States federal tax lien) shall be the subject of a Permitted Protest. (b) Make due and timely payment or deposit of all such federal, state, and local taxes, assessments, or contributions required of it by law, and will execute and deliver to Agent, on demand, appropriate certificates attesting to the payment thereof or deposit with respect thereto. (c) Make timely payment or deposit of all tax payments and withholding taxes required of it by applicable laws, including those laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal income taxes, and will, upon request, furnish Agent with proof satisfactory to Agent indicating that Borrower has made such payments or deposits. 6.10 INSURANCE. (a) At its expense, keep the Personal Property Collateral insured against loss or damage by fire, theft, explosion, sprinklers, and all other hazards and risks, and in such amounts, as are ordinarily insured against by other owners in similar businesses. Borrower also shall maintain business interruption, public liability, product liability, and property damage insurance relating to Borrower's ownership and use of the Personal Property Collateral, as well as insurance against larceny, embezzlement, and criminal misappropriation. (b) All such policies of insurance shall be in such form, with such companies, and in such amounts as may be reasonably satisfactory to Agent. All insurance required herein shall be written by companies which have a Best's rating of A for capital and X for financial stability. All hazard insurance and such other insurance as Agent shall specify, shall contain a Form 438BFU (NS) lenders loss payable endorsement, or an equivalent endorsement satisfactory to Agent, showing Agent as sole loss payee thereof, and shall contain a waiver of warranties. Every policy of insurance referred to in this Section 6.10 shall contain an agreement by the insurer that it will not cancel such policy except after 30 days prior written notice to Agent and that any loss payable thereunder shall be payable notwithstanding any act or negligence of Borrower or the Lender Group which might, absent such agreement, result in a forfeiture of all or a part of such insurance payment and notwithstanding any foreclosure or other action or proceeding taken by the Lender Group pursuant to the Loan Documents upon the happening of an Event of Default. Borrower shall deliver to Agent certified copies of such policies of insurance and evidence of the payment of all premiums therefor. (c) Original policies or certificates thereof satisfactory to Agent evidencing such insurance shall be delivered to Agent at least 30 days prior to the -50- 57 expiration of the existing or preceding policies. Borrower shall give Agent prompt notice of any loss covered by such insurance, and Agent shall have the right to adjust any loss. Agent shall have the exclusive right to adjust all losses payable under any such insurance policies without any liability to Borrower whatsoever in respect of such adjustments. Any monies received as payment for any loss under any insurance policy including the insurance policies mentioned above, shall be paid over to Agent to be applied at the option of the Required Lenders either to the prepayment of the Obligations without premium, in such order or manner as Agent may elect, or shall be disbursed to Borrower under stage payment terms satisfactory to Agent for application to the cost of repairs, replacements, or restorations. All repairs, replacements, or restorations shall be effected with reasonable promptness and shall be of a value at least equal to the value of the items or property destroyed prior to such damage or destruction. Upon the occurrence of an Event of Default, the Lender Group shall have the right to apply all prepaid premiums to the payment of the Obligations in such order or form as Agent shall determine. (d) Borrower shall not take out separate insurance concurrent in form or contributing in the event of loss with that required to be maintained under this Section 6.10, unless Agent is included thereon as named insured with the loss payable to Agent under a standard 438BFU (NS) lenders loss payable endorsement, or its local equivalent. Borrower immediately shall notify Agent whenever such separate insurance is taken out, specifying the insurer thereunder and full particulars as to the policies evidencing the same, and originals of such policies immediately shall be provided to Agent. 6.11 NO SETOFFS OR COUNTERCLAIMS. Make payments hereunder and under the other Loan Documents by or on behalf of Borrower without setoff or counterclaim and free and clear of, and without deduction or withholding for or on account of, any federal, state, or local taxes. 6.12 LOCATION OF INVENTORY AND EQUIPMENT. Keep the Inventory and Equipment only at the locations identified on Schedule 6.12; provided, however, that Borrower may amend Schedule 6.12 so long as (a) such amendment occurs by written notice to Agent not less than 15 days prior to the date on which the Inventory or Equipment is moved to such new location, and (b) with respect to Inventory or Equipment to be located within the United States, Borrower provides any financing statements or fixture filings necessary or advisable to perfect and continue perfected the Agent's Liens thereon. 6.13 COMPLIANCE WITH LAWS. Comply with the requirements of all applicable laws, rules, regulations, and orders of any governmental authority, including the Fair Labor Standards Act and the Americans With Disabilities Act, other than laws, rules, regulations, and orders the non-compliance with which, individually or in the -51- 58 aggregate, would not result in and reasonably could not be expected to result in a Material Adverse Change. 6.14 EMPLOYEE BENEFITS. (a) Cause to be delivered to Agent: (i) promptly, and in any event within 10 Business Days after Borrower or any of its Subsidiaries knows or has reason to know that an ERISA Event has occurred that reasonably could be expected to result in a Material Adverse Change, a written statement of the chief financial officer of Borrower describing such ERISA Event and any action that is being taking with respect thereto by Borrower, any such Subsidiary or ERISA Affiliate, and any action taken or threatened by the IRS, Department of Labor, or PBGC. Borrower or such Subsidiary, as applicable, shall be deemed to know all facts known by the administrator of any Benefit Plan of which it is the plan sponsor, (ii) promptly, and in any event within 3 Business Days after the filing thereof with the IRS, a copy of each funding waiver request filed with respect to any Benefit Plan and all communications received by Borrower, any of its Subsidiaries or, to the knowledge of Borrower, any ERISA Affiliate with respect to such request, and (iii) promptly, and in any event within 3 Business Days after receipt by Borrower, any of its Subsidiaries or, to the knowledge of Borrower, any ERISA Affiliate, of the PBGC's intention to terminate a Benefit Plan or to have a trustee appointed to administer a Benefit Plan, copies of each such notice. (b) Cause to be delivered to Agent, upon Agent's request, each of the following: (i) a copy of each Plan (or, where any such plan is not in writing, complete description thereof) (and if applicable, related trust agreements or other funding instruments) and all amendments thereto, all written interpretations thereof and written descriptions thereof that have been distributed to employees or former employees of Borrower or its Subsidiaries; (ii) the most recent determination letter issued by the IRS with respect to each Benefit Plan; (iii) for the three most recent plan years, annual reports on Form 5500 Series required to be filed with any governmental agency for each Benefit Plan; (iv) all actuarial reports prepared for the last three plan years for each Benefit Plan; (v) a listing of all Multiemployer Plans, with the aggregate amount of the most recent annual contributions required to be made by Borrower or any ERISA Affiliate to each such plan and copies of the collective bargaining agreements requiring such contributions; (vi) any information that has been provided to Borrower or any ERISA Affiliate regarding withdrawal liability under any Multiemployer Plan; and (vii) the aggregate amount of the most recent annual payments made to former employees of Borrower or its Subsidiaries under any Retiree Health Plan. 6.15 LEASES. Pay when due all rents and other amounts payable under any leases to which Borrower is a party or by which Borrower's properties and assets are bound, unless such payments are the subject of a Permitted Protest. To the extent -52- 59 that Borrower fails timely to make payment of such rents and other amounts payable when due under its leases, Agent shall be entitled, in its discretion, to reserve an amount equal to such unpaid amounts against the Borrowing Base. 6.16 BROKER COMMISSIONS. Pay any and all brokerage commission or finders fees incurred or payable in connection with or as a result of Borrower's obtaining financing from the Lender Group under this Agreement. 6.17 YEAR 2000 COMPLIANCE. Borrower will be Year 2000 Compliant by October 1, 1999. 6.18 SUBSIDIARIES OTHER THAN NON-MATERIAL SUBSIDIARIES. Borrower shall cause each of its Subsidiaries, other than Non-Material Subsidiaries, to execute and deliver to Agent a guaranty and all financing statements, collateral assignments, continuation financing statements, fixture filings, security agreements, pledges, assignments, mortgages, leasehold mortgages, deeds of trust, leasehold deeds of trust, endorsements of certificates of title, applications for title, affidavits, reports, notices, schedules of accounts, letters of authority, and all other documents that Agent reasonably may request, in each case in form and substance satisfactory to Agent, in order to guaranty the Obligations and to grant and maintain perfected Liens in favor of Agent for the benefit of the Lender Group on all or substantially all of the property and assets of such Subsidiary. 6.19 COPYRIGHT REGISTRATIONS. No less frequently than quarterly, unless Agent in Agent's sole discretion agrees otherwise, Borrower shall (a) cause all copyrights generated by Borrower (other than Exempt Copyrights) that are not already the subject of a registration with the United States Copyright Office (or an application therefor diligently prosecuted) to be registered with the United States Copyright Office in a manner sufficient to impart constructive notice of Borrower's ownership thereof, and (b) cause to be prepared, executed, and delivered to Agent, with sufficient time to permit Agent to record no later than the last Business Day within 10 days following the date that such copyrights have been registered or an application for registration has been filed, a Copyright Security Agreement or supplemental schedules to the Copyright Security Agreement reflecting the security interest of Agent on behalf of the Lender Group in such new copyrights (other than Exempt Copyrights, which, although subject to the security interest of Agent on behalf of the Lender Group, shall not be required to be registered until such time, if any, as they cease to be Incipient Copyrights), which supplemental schedules shall be in form and content suitable for registration with the United States Copyright Office so as to give constructive notice, when so registered, of the transfer by Borrower to Agent on behalf of the Lender Group of a security interest in such copyrights. -53- 60 7. NEGATIVE COVENANTS. Borrower covenants and agrees that, so long as any credit hereunder shall be available and until full and final payment of the Obligations, Borrower will not do, and will not permit any of its Subsidiaries to do, any of the following without the Lender Group's prior written consent: 7.1 INDEBTEDNESS. Create, incur, assume, permit, guarantee, or otherwise become or remain, directly or indirectly, liable with respect to any Indebtedness, except (without duplication): (a) Indebtedness evidenced by this Agreement; (b) Indebtedness set forth on Schedule 7.1; (c) Indebtedness secured by Permitted Liens; (d) unsecured capital expenditure Indebtedness to the extent permitted under Section 7.21; and (e) refinancings, renewals, or extensions of Indebtedness permitted under clauses (b), (c), and (d) of this Section 7.1 (and continuance or renewal of any Permitted Liens associated therewith) so long as: (i) the terms and conditions of such refinancings, renewals, or extensions do not materially impair the prospects of repayment of the Obligations by Borrower, (ii) the net cash proceeds of such refinancings, renewals, or extensions do not result in an increase in the aggregate principal amount of the Indebtedness so refinanced, renewed, or extended, (iii) such refinancings, renewals, refundings, or extensions do not result in a shortening of the average weighted maturity of the Indebtedness so refinanced, renewed, or extended, and (iv) to the extent that Indebtedness that is refinanced was subordinated in right of payment to the Obligations, then the subordination terms and conditions of the refinancing Indebtedness must be at least as favorable to the Lender Group as those applicable to the refinanced Indebtedness. 7.2 LIENS. Create, incur, assume, or permit to exist, directly or indirectly, any Lien on or with respect to any of its property or assets, of any kind, whether now owned or hereafter acquired, or any income or profits therefrom, except for Permitted Liens (including Liens that are replacements of Permitted Liens to the extent that the original Indebtedness is refinanced under Section 7.1(e) and so long as the replacement Liens only encumber those assets or property that secured the original Indebtedness). 7.3 RESTRICTIONS ON FUNDAMENTAL CHANGES. -54- 61 (a) Enter into any merger, consolidation, reorganization, or recapitalization, or reclassify its capital Stock. (b) Liquidate, wind up, or dissolve itself (or suffer any liquidation or dissolution). (c) Convey, sell, assign, lease, transfer, or otherwise dispose of, in one transaction or a series of transactions, all or any substantial part of its property or assets. (d) Cause, suffer, or permit any Non-Material Subsidiary to (i) engage in any material business activity, (ii) individually own any property or assets with a book value in excess of $200,000, or (iii) together with all other Non-Material Subsidiaries, own any property or assets with a book value in excess of $500,000 in the aggregate. 7.4 DISPOSAL OF ASSETS. Except for Permitted Dispositions, sell, lease, assign, transfer, or otherwise dispose of any of its properties or assets. 7.5 CHANGE NAME. Change Borrower's name, FEIN, corporate structure (within the meaning of Section 9-402(7) of the Code), or identity, or add any new fictitious name, in each case, without providing 30 days prior written notification thereof to Agent and so long as, at the time of such written notification, Borrower provides any financing statements or fixture filings necessary to perfect and continue perfected the Agent's Liens. 7.6 GUARANTEE. Guarantee or otherwise become in any way liable with respect to the obligations of any third Person except by endorsement of instruments or items of payment for deposit to the account of Borrower or which are transmitted or turned over to Agent. 7.7 NATURE OF BUSINESS. Make any change in the principal nature of Borrower's business of providing audio technology for the personal computer (PC) and consumer electronics markets. 7.8 PREPAYMENTS AND AMENDMENTS. (a) Except in connection with a refinancing permitted by Section 7.1(d), prepay, redeem, retire, defease, purchase, or otherwise acquire any Indebtedness owing to any third Person, other than the Obligations in accordance with this Agreement, and (b) Directly or indirectly, amend, modify, alter, increase, or change any of the terms or conditions of any agreement, instrument, document, -55- 62 indenture, or other writing evidencing or concerning the convertible preferred Stock of Borrower in any way materially adverse to the interests of Borrower or the Lender Group. 7.9 CHANGE OF CONTROL. Cause, permit, or suffer, directly or indirectly, any Change of Control. 7.10 [INTENTIONALLY OMITTED] 7.11 DISTRIBUTIONS. Make any distribution or declare or pay any dividends (in cash or other property, other than capital Stock) on, or purchase, acquire, redeem, or retire any of Borrower's capital Stock, of any class, whether now or hereafter outstanding; provided, however, that Borrower may (a) repurchase the capital Stock of Borrower held by former employees of Borrower substantially contemporaneously with their cessation of employment with Borrower and not exceeding in the aggregate $500,000 (provided that the cash portion of the consideration paid by Borrower for repurchases of such Stock issued under Borrower's employee stock option plans in the ordinary course shall not be subject to such Dollar limitation to the extent that such cash portion does not exceed the amount of cash received by Borrower for the purchase by such employees of such Stock) in any consecutive 12 month period, or (b) repurchase the capital Stock of Borrower using the net issuance proceeds of a new common Stock offering (or a new offering of preferred Stock having terms, rights, and preferences acceptable to the Required Lenders in their sole discretion) consummated substantially contemporaneously with such repurchase. 7.12 ACCOUNTING METHODS. Modify or change its method of accounting or enter into, modify, or terminate any agreement currently existing, or at any time hereafter entered into with any third party accounting firm or service bureau for the preparation or storage of Borrower's accounting records without said accounting firm or service bureau agreeing to provide Agent information regarding the Collateral or Borrower's financial condition. Borrower waives the right to assert a confidential relationship, if any, it may have with any accounting firm or service bureau in connection with any information requested by Agent pursuant to or in accordance with this Agreement, and agrees that Agent may contact directly any such accounting firm or service bureau in order to obtain such information. 7.13 INVESTMENTS. Directly or indirectly make, acquire, or incur any liabilities or expenditures (including contingent obligations) for or in connection with (a) the acquisition of the securities (whether debt or equity) of, or other interests in, a Person, (b) loans, advances, capital contributions, or transfers of property to a Person, or (c) the acquisition of all or substantially all of the properties or assets of a Person. -56- 63 7.14 TRANSACTIONS WITH AFFILIATES. Directly or indirectly enter into or permit to exist any material transaction with any Affiliate of Borrower except for transactions that are in the ordinary course of Borrower's business, upon fair and reasonable terms, that are fully disclosed to Agent, and that are no less favorable to Borrower than would be obtained in an arm's length transaction with a non-Affiliate. 7.15 SUSPENSION. Suspend or go out of a substantial portion of its business. 7.16 [INTENTIONALLY OMITTED]. 7.17 USE OF PROCEEDS. Use the proceeds of the Advances made hereunder for any purpose other than (a) on the Effective Date, to pay transactional fees, costs, and expenses incurred in connection with this Agreement, and (b) thereafter, consistent with the terms and conditions hereof, for general working capital purposes. 7.18 CHANGE IN LOCATION OF CHIEF EXECUTIVE OFFICE; INVENTORY AND EQUIPMENT WITH BAILEES. Relocate its chief executive office to a new location without providing 30 days prior written notification thereof to Agent and so long as, at the time of such written notification, Borrower provides any financing statements or fixture filings necessary to perfect and continue perfected the Agent's Liens and also provides to Agent a Collateral Access Agreement with respect to such new location. The Inventory and Equipment shall not at any time now or hereafter be stored with a bailee, warehouseman, or similar party without Agent's prior written consent. 7.19 NO PROHIBITED TRANSACTIONS UNDER ERISA. Directly or indirectly: (a) engage, or permit any Subsidiary of Borrower to engage, in any prohibited transaction which is reasonably likely to result in a civil penalty or excise tax described in Sections 406 of ERISA or 4975 of the IRC for which a statutory or class exemption is not available or a private exemption has not been previously obtained from the Department of Labor; (b) permit to exist with respect to any Benefit Plan any accumulated funding deficiency (as defined in Sections 302 of ERISA and 412 of the IRC), whether or not waived; (c) fail, or permit any Subsidiary of Borrower to fail, to pay timely required contributions or annual installments due with respect to any waived funding deficiency to any Benefit Plan; -57- 64 (d) terminate, or permit any Subsidiary of Borrower to terminate, any Benefit Plan where such event would result in any liability of Borrower, any of its Subsidiaries or any ERISA Affiliate under Title IV of ERISA; (e) fail, or permit any Subsidiary of Borrower to fail, to make any required contribution or payment to any Multiemployer Plan; (f) fail, or permit any Subsidiary of Borrower to fail, to pay any required installment or any other payment required under Section 412 of the IRC on or before the due date for such installment or other payment; (g) amend, or permit any Subsidiary of Borrower to amend, a Plan resulting in an increase in current liability for the plan year such that either of Borrower, any Subsidiary of Borrower or any ERISA Affiliate is required to provide security to such Plan under Section 401(a)(29) of the IRC; or (h) withdraw, or permit any Subsidiary of Borrower to withdraw, from any Multiemployer Plan where such withdrawal is reasonably likely to result in any liability of any such entity under Title IV of ERISA; which, individually or in the aggregate, results in or reasonably would be expected to result in a claim against or liability of Borrower, any of its Subsidiaries or any ERISA Affiliate in excess of $200,000. 7.20 FINANCIAL COVENANTS. Fail to: (a) Tangible Net Worth. Maintain Tangible Net Worth of not less than the amount shown below for the date corresponding thereto:
- -------------------------------------------------------------------------------- Date Minimum Tangible Net Worth - -------------------------------------------------------------------------------- the end of the fiscal quarter ending on or about $3,000,000 June 30, 1998 - -------------------------------------------------------------------------------- the end of the fiscal quarter ending on or about $2,000,000 September 30, 1998 - -------------------------------------------------------------------------------- the end of the fiscal quarter ending on or about $2,400,000 December 31, 1998 - -------------------------------------------------------------------------------- the end of the fiscal quarter ending on or about $3,000,000 March 31, 1999 - -------------------------------------------------------------------------------- the end of the fiscal quarter ending on or about $3,500,000 June 30, 1999 - --------------------------------------------------------------------------------
-58- 65
- -------------------------------------------------------------------------------- Date Minimum Tangible Net Worth - -------------------------------------------------------------------------------- the end of the fiscal quarter ending on or about $4,500,000 September 30, 1999 - -------------------------------------------------------------------------------- the end of the fiscal quarter ending on or about $6,500,000 December 31, 1999 - -------------------------------------------------------------------------------- the end of the fiscal quarter ending on or about $6,500,000 March 31, 2000 - --------------------------------------------------------------------------------
(b) Profitability. Achieve EBITDA of not less than the amount shown below for the period corresponding thereto (amounts in brackets ($) are negative):
- -------------------------------------------------------------------------------- Period Minimum EBITDA - -------------------------------------------------------------------------------- the fiscal quarter ending on or about June 30, 1998 ($4,500,000) - -------------------------------------------------------------------------------- the fiscal quarter ending on or about September 30, ($2,800,000) 1998 - -------------------------------------------------------------------------------- the fiscal quarter ending on or about December 31, 1998 ($500,000) - -------------------------------------------------------------------------------- the fiscal quarter ending on or about March 31, 1999 $-0- - -------------------------------------------------------------------------------- the fiscal quarter ending on or about June 30, 1999 $500,000 - -------------------------------------------------------------------------------- the fiscal quarter ending on or about September 30, $1,000,000 1999 - -------------------------------------------------------------------------------- the fiscal quarter ending on or about December 31, 1999 $2,000,000 - -------------------------------------------------------------------------------- the fiscal quarter ending on or about March 31, 2000 $2,000,000 - --------------------------------------------------------------------------------
(c) Total Revenues. Achieve total revenues, determined in accordance with GAAP on a basis consistent with past practice, of not less than the amount shown below for the period corresponding thereto: -59- 66
- -------------------------------------------------------------------------------- Period Minimum Total Revenue - -------------------------------------------------------------------------------- the fiscal quarter ending on or about June 30, 1998 $3,236,000 - -------------------------------------------------------------------------------- the fiscal quarter ending on or about September 30, $7,040,000 1998 - -------------------------------------------------------------------------------- the fiscal quarter ending on or about December 31, 1998 $10,800,000 - -------------------------------------------------------------------------------- the fiscal quarter ending on or about March 31, 1999 $13,280,000 - -------------------------------------------------------------------------------- the fiscal quarter ending on or about June 30, 1999 $14,280,000 - -------------------------------------------------------------------------------- the fiscal quarter ending on or about September 30, $16,640,000 1999 - -------------------------------------------------------------------------------- the fiscal quarter ending on or about December 31, 1999 $20,200,000 - -------------------------------------------------------------------------------- the fiscal quarter ending on or about March 31, 2000 $20,200,000 - --------------------------------------------------------------------------------
7.21 CAPITAL EXPENDITURES. Make capital expenditures in excess of: (a) $3,500,000 during the fiscal year ending on or about December 31, 1998; (b) $1,200,000 during the fiscal year ending on or about December 31, 1999; or (c) $1,000,000 during the period commencing on the first day immediately following the end of the fiscal year ending on or about December 31, 1999 and ending on the Maturity Date. 7.22 SECURITIES ACCOUNTS. Borrower shall not establish or maintain any Securities Account unless Agent shall have received a Control Agreement, duly executed and in full force and effect, in respect of such Securities Account. Borrower agrees that it will not transfer assets out of any Securities Accounts; provided, however, that, so long as no Event of Default has occurred and is continuing or would result therefrom, Borrower may (a) use such assets to the extent permitted by this Agreement, or (b) sell or trade such assets in the ordinary course so long as the proceeds of such sales or trades are deposited in the Concentration Account or a Securities Account in respect of which Agent has received a Control Agreement duly executed and in full force and effect. -60- 67 8. EVENTS OF DEFAULT. Any one or more of the following events shall constitute an event of default (each, an "Event of Default") under this Agreement: 8.1 If Borrower fails to pay when due and payable or when declared due and payable, any portion of the Obligations (whether of principal, interest (including any interest which, but for the provisions of the Bankruptcy Code, would have accrued on such amounts), fees and charges due the Lender Group, reimbursement of Lender Group Expenses, or other amounts constituting Obligations); 8.2 (a) If Borrower fails or neglects to perform, keep, or observe any term, provision, condition, covenant, or agreement contained in Sections 6.1 (Accounting System), 6.2 (Collateral Reporting), 6.3 (Financial Statements, Reports, Certificates), 6.4 (Tax Returns), 6.12 (Location of Inventory, etc.), 6.13 (Compliance with Laws), or 6.14 (Employee Benefits) of this Agreement and such failure continues for a period of 10 Business Days; (b) If Borrower fails or neglects to perform, keep, or observe any term, provision, condition, covenant, or agreement contained in Sections 6.6 (Returns), or 6.15 (Leases) of this Agreement and such failure continues for a period of 15 Business Days; or (c) If Borrower fails or neglects to perform, keep, or observe any other term, provision, condition, covenant, or agreement contained in this Agreement, or in any of the other Loan Documents (giving effect to any grace periods or required notices, if any, expressly provided for in such Loan Documents), in each case, other than any such term, provision, condition, covenant, or agreement that is the subject of another provision of this Section 8, in which event such other provision of this Section 8 shall govern); 8.3 If there is a Material Adverse Change; 8.4 If any material portion of Borrower's properties or assets is attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes into the possession of any third Person; 8.5 If an Insolvency Proceeding is commenced by Borrower; 8.6 If an Insolvency Proceeding is commenced against Borrower and any of the following events occur: (a) Borrower consents to the institution of the Insolvency Proceeding against it; (b) the petition commencing the Insolvency Proceeding is not timely controverted; (c) the petition commencing the Insolvency Proceeding is not dismissed within 45 calendar days of the date of the filing thereof; provided, however, that, during the pendency of such period, Agent, TBCC, and any other member of the Lender Group shall be relieved of its obligation to extend credit hereunder; (d) an interim trustee is appointed to take possession of all or a substantial portion of the properties or assets of, or to operate all or any substantial portion of the -61- 68 business of, Borrower; or (e) an order for relief shall have been issued or entered therein; 8.7 If Borrower is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs; without limiting the generality of the foregoing, an Event of Default shall occur under this Section 8.7 if an injunction or other equitable relief is granted in favor of Creative Technology, Ltd. and adverse to Borrower in connection with the litigation filed in the United States District Court for the Northern District of California as Case No. 98-0770 WHO; 8.8 If a notice of Lien, levy, or assessment is filed of record with respect to any of Borrower's properties or assets by the United States Government, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or governmental agency, or if any taxes or debts owing at any time hereafter to any one or more of such entities becomes a Lien, whether choate or otherwise, upon any of Borrower's properties or assets and the same is not paid on the payment date thereof; 8.9 If a judgment or other claim becomes a Lien or encumbrance upon any material portion of Borrower's properties or assets and the same is not released, discharged, bonded against, or stayed pending appeal before the earlier of 30 days of the date it first arises or 5 days of the date when such property or asset is subject to being forfeited by Borrower; provided, however, that, during such period, Agent shall be entitled to establish a reserve against the Borrowing Base in an aggregate amount sufficient to discharge such Lien or encumbrance and any and all penalties or interest payable in connection therewith; 8.10 If there is a default in any material agreement to which Borrower is a party with one or more third Persons and such default (a) occurs at the final maturity of the obligations thereunder, or (b) results in a right by such third Person(s), irrespective of whether exercised, to accelerate the maturity of Borrower's obligations thereunder, to terminate such agreement, or to refuse to renew such agreement pursuant to an automatic renewal right therein; 8.11 If Borrower makes any payment on account of Indebtedness that has been contractually subordinated in right of payment to the payment of the Obligations, except to the extent such payment is permitted by the terms of the subordination provisions applicable to such Indebtedness; or 8.12 If any material misstatement or misrepresentation exists in any warranty, representation, statement, or report when made or deemed made to the Lender Group by Borrower or any officer, employee, agent, or director of Borrower, or if any such warranty or representation is withdrawn. -62- 69 9. THE LENDER GROUP'S RIGHTS AND REMEDIES. 9.1 RIGHTS AND REMEDIES. Upon the occurrence, and during the continuation, of an Event of Default, the Required Lenders (at their election but without notice of their election and without demand) may, except to the extent otherwise expressly provided or required below, authorize and instruct Agent to do any one or more of the following on behalf of the Lender Group (and Agent, acting upon the instructions of the Required Lenders, shall do the same on behalf of the Lender Group), all of which are authorized by Borrower: (a) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable; (b) Cease advancing money or extending credit to or for the benefit of Borrower under this Agreement, under any of the other Loan Documents, or under any other agreement between Borrower and the Lender Group; (c) Terminate this Agreement and any of the other Loan Documents as to any future liability or obligation of the Lender Group, but without affecting Agent's rights and security interests, for the benefit of the Lender Group, in the Collateral and without affecting the Obligations; (d) Settle or adjust disputes and claims directly with Account Debtors for amounts and upon terms which Agent considers advisable, and in such cases, Agent will credit Borrower's Loan Account with only the net amounts received by Agent in payment of such disputed Accounts after deducting all Lender Group Expenses incurred or expended in connection therewith; (e) Cause Borrower to hold all returned Inventory in trust for the Lender Group, segregate all returned Inventory from all other property of Borrower or in Borrower's possession and conspicuously label said returned Inventory as the property of the Lender Group; (f) Without notice to or demand upon Borrower or any guarantor, make such payments and do such acts as Agent considers necessary or reasonable to protect its security interests in the Collateral. Borrower agrees to assemble the Personal Property Collateral if Agent so requires, and to make the Personal Property Collateral available to Agent as Agent may designate. Borrower authorizes Agent to enter the premises where the Personal Property Collateral is located, to take and maintain possession of the Personal Property Collateral, or any part of it, and to pay, purchase, contest, or compromise any encumbrance, charge, or Lien that in Agent's determination appears to conflict with the Agent's Liens and to pay all expenses incurred in connection therewith. With respect to any of Borrower's -63- 70 owned or leased premises, Borrower hereby grants Agent a license to enter into possession of such premises and to occupy the same, without charge, for up to 120 days in order to exercise any of the Lender Group's rights or remedies provided herein, at law, in equity, or otherwise; (g) Without notice to Borrower (such notice being expressly waived), and without constituting a retention of any collateral in satisfaction of an obligation (within the meaning of Section 9-505 of the Code), set off and apply to the Obligations any and all (i) balances and deposits of Borrower held by the Lender Group (including any amounts received in the Concentration Account), or (ii) indebtedness at any time owing to or for the credit or the account of Borrower held by the Lender Group; (h) Hold, as cash collateral, any and all balances and deposits of Borrower held by the Lender Group, and any amounts received in the Concentration Account, to secure the full and final repayment of all of the Obligations; (i) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Personal Property Collateral. Borrower hereby grants to Agent a license or other right to use, without charge, Borrower's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Personal Property Collateral, in completing production of, advertising for sale, and selling any Personal Property Collateral and Borrower's rights under all licenses and all franchise agreements shall inure to the Lender Group's benefit; (j) Sell the Personal Property Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including Borrower's premises) as Agent determines is commercially reasonable. It is not necessary that the Personal Property Collateral be present at any such sale; (k) Agent shall give notice of the disposition of the Personal Property Collateral as follows: (A) Agent shall give Borrower and each holder of a security interest in the Personal Property Collateral who has filed with Agent a written request for notice, a notice in writing of the time and place of public sale, or, if the sale is a private sale or some other disposition other than a public sale is to be made of the Personal Property Collateral, then the time on or after which the private sale or other disposition is to be made; -64- 71 (B) The notice shall be personally delivered or mailed, postage prepaid, to Borrower as provided in Section 12, at least 10 days before the date fixed for the sale, or at least 10 days before the date on or after which the private sale or other disposition is to be made; no notice needs to be given prior to the disposition of any portion of the Personal Property Collateral that is perishable or threatens to decline speedily in value or that is of a type customarily sold on a recognized market. Notice to Persons other than Borrower claiming an interest in the Personal Property Collateral shall be sent to such addresses as they have furnished to Agent; (C) If the sale is to be a public sale, Agent also shall give notice of the time and place by publishing a notice one time at least 10 days before the date of the sale in a newspaper of general circulation in the county in which the sale is to be held; (l) The Lender Group may credit bid and purchase at any public sale; (m) The Lender Group shall have all other rights and remedies available to it at law or in equity pursuant to any other Loan Documents; and (n) Any deficiency that exists after disposition of the Personal Property Collateral as provided above will be paid immediately by Borrower. Any excess will be returned, without interest and subject to the rights of third Persons, by Agent to Borrower. 9.2 REMEDIES CUMULATIVE. The rights and remedies of the Lender Group under this Agreement, the other Loan Documents, and all other agreements shall be cumulative. The Lender Group shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. No exercise by the Lender Group of one right or remedy shall be deemed an election, and no waiver by the Lender Group of any Event of Default shall be deemed a continuing waiver. No delay by the Lender Group shall constitute a waiver, election, or acquiescence by it. 10. TAXES AND EXPENSES. If Borrower fails to pay any monies (whether taxes, assessments, insurance premiums, or, in the case of leased properties or assets, rents or other amounts payable under such leases) due to third Persons, or fails to make any deposits or furnish any required proof of payment or deposit, all as required under the terms of this Agreement, then, to the extent that Agent determines that such failure by Borrower could result in a Material Adverse Change, in its discretion and without prior notice to Borrower, Agent may do any or all of the following: (a) make payment of -65- 72 the same or any part thereof; (b) set up such reserves in Borrower's Loan Account as Agent deems necessary to protect the Lender Group from the exposure created by such failure; or (c) obtain and maintain insurance policies of the type described in Section 6.10, and take any action with respect to such policies as Agent deems prudent. Any such amounts paid by Agent shall constitute Lender Group Expenses. Any such payments made by Agent shall not constitute an agreement by the Lender Group to make similar payments in the future or a waiver by the Lender Group of any Event of Default under this Agreement. Agent need not inquire as to, or contest the validity of, any such expense, tax, or Lien and the receipt of the usual official notice for the payment thereof shall be conclusive evidence that the same was validly due and owing. 11. WAIVERS; INDEMNIFICATION. 11.1 DEMAND; PROTEST; ETC. Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees at any time held by the Lender Group on which Borrower may in any way be liable. 11.2 THE LENDER GROUP'S LIABILITY FOR COLLATERAL. Borrower hereby agrees that: (a) so long as the Lender Group complies with its obligations, if any, under Section 9-207 of the Code, the Lender Group shall not in any way or manner be liable or responsible for: (i) the safekeeping of the Collateral; (ii) any loss or damage thereto occurring or arising in any manner or fashion from any cause; (iii) any diminution in the value thereof; or (iv) any act or default of any carrier, warehouseman, bailee, forwarding agency, or other Person; and (b) all risk of loss, damage, or destruction of the Collateral shall be borne by Borrower. 11.3 INDEMNIFICATION. Borrower shall pay, indemnify, defend, and hold the Agent-Related Persons, the Lender-Related Persons with respect to each Lender, each Participant, and each of their respective officers, directors, employees, counsel, agents, and attorneys-in-fact (each, an "Indemnified Person") harmless (to the fullest extent permitted by law) from and against any and all liabilities, losses, obligations, claims, demands, suits, actions, investigations, proceedings, judgments, penalties, and damages, and all reasonable attorneys fees and disbursements and other costs and expenses actually incurred in connection therewith (as and when they are incurred and irrespective of whether suit is brought), at any time asserted against, imposed upon, or incurred by any of them in connection with or as a result of or related to the execution, delivery, enforcement, performance, and administration of this Agreement and any other Loan Documents or the transactions contemplated herein, and with respect to any investigation, litigation, or proceeding related to this Agreement, any other Loan Document, or the use of the proceeds of the credit provided hereunder (irrespective of whether any Indemnified Person is a party thereto), or any act, omission, event or circumstance in any manner related thereto (all the foregoing, -66- 73 collectively, the "Indemnified Liabilities"). Borrower shall have no obligation to any Indemnified Person under this Section 11.3 with respect to any Indemnified Liability that a court of competent jurisdiction finally determines to have resulted from the gross negligence or willful misconduct of such Indemnified Person. This provision shall survive the termination of this Agreement and the repayment of the other Obligations. 12. NOTICES. Unless otherwise provided in this Agreement, all notices or demands by any party relating to this Agreement or any other Loan Document shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by registered or certified mail (postage prepaid, return receipt requested), overnight courier, or telefacsimile to the relevant party at its address set forth below: IF TO BORROWER: AUREAL SEMICONDUCTOR INC. 4245 Technology Drive Fremont, California 94538 Attn: Vice President - Finance Fax No. 510.252.4491 WITH COPIES TO: GRAY CARY WARE & FREIDENRICH LLP 400 Hamilton Avenue Palo Alto, California 94301-1825 Attn: Craig Tighe, Esq. Fax No. 650.327.3699 IF TO AGENT OR TBCC: TRANSAMERICA BUSINESS CREDIT CORPORATION 15260 Ventura Boulevard Suite 1240 Sherman Oaks, California 91403 Attn: Mr. Ian Schnider Fax No. 818.995.3214 WITH COPIES TO: LUSKIN, STERN & EISLER LLP 330 Madison Avenue New York, New York 10017 Attn: Michael Barocas, Esq. Fax No. 212.293.2705 -67- 74 AND TO: TRANSAMERICA BUSINESS CREDIT CORPORATION 76 Batterson Park Road Farmington, Connecticut 06032 Attn: Legal Department Fax No. 860.677.6766 IF TO GSCP: GOLDMAN SACHS CREDIT PARTNERS L.P. 85 Broad Street New York, New York 10004 Attn: Mr. Craig F. Noell Fax No. 212.902.3757 WITH COPIES TO: BROBECK, PHLEGER & HARRISON LLP 550 South Hope Street Los Angeles, California 90071 Attn: John Francis Hilson, Esq. Fax No. 213.745.3345 The parties hereto may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to all other parties. All notices or demands sent in accordance with this Section 12, other than notices by the Lender Group in connection with Sections 9-504 or 9-505 of the Code, shall be deemed received on the earlier of the date of actual receipt or 3 days after the deposit thereof in the mail. Borrower acknowledges and agrees that notices sent by the Lender Group in connection with Sections 9-504 or 9-505 of the Code shall be deemed sent when deposited in the mail or personally delivered, or, where permitted by law, transmitted telefacsimile or other similar method set forth above. 13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER. THE VALIDITY OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS (UNLESS EXPRESSLY PROVIDED TO THE CONTRARY IN ANOTHER LOAN DOCUMENT IN RESPECT OF SUCH OTHER LOAN DOCUMENT), THE CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF, AND THE RIGHTS OF THE PARTIES HERETO AND THERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER OR THEREUNDER OR RELATED HERETO OR THERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. -68- 75 THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE TRIED AND LITIGATED ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF NEW YORK, STATE OF NEW YORK, PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT THE REQUIRED LENDERS' OPTION, IN THE COURTS OF ANY JURISDICTION WHERE THE REQUIRED LENDERS ELECT TO BRING SUCH ACTION OR WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND. BORROWER AND THE LENDER GROUP WAIVE, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 13. BORROWER AND THE LENDER GROUP HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. BORROWER AND THE LENDER GROUP REPRESENT THAT EACH HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 14. DESTRUCTION OF BORROWER'S DOCUMENTS. All documents, schedules, invoices, agings, or other papers delivered to any one or more members of the Lender Group may be destroyed or otherwise disposed of by such member of the Lender Group 4 months after they are delivered to or received by such member of the Lender Group, unless Borrower requests, in writing, the return of said documents, schedules, or other papers and makes arrangements, at Borrower's expense, for their return. -69- 76 15. ASSIGNMENTS AND PARTICIPATIONS; SUCCESSORS. 15.1 ASSIGNMENTS AND PARTICIPATIONS. (a) Any Lender may, with the written consent of Agent, assign and delegate to one or more assignees (each an "Assignee") all, or any ratable part of all, of the Obligations, the Commitments and the other rights and obligations of such Lender hereunder and under the other Loan Documents, in a minimum amount of $5,000,000; provided, however, that Borrower and Agent may continue to deal solely and directly with such Lender in connection with the interest so assigned to an Assignee until (i) written notice of such assignment, together with payment instructions, addresses and related information with respect to the Assignee, shall have been given to Borrower and Agent by such Lender and the Assignee; (ii) such Lender and its Assignee shall have delivered to Borrower and Agent an Assignment and Acceptance; and (iii) the assignor Lender or Assignee has paid to Agent for Agent's sole and separate account a processing fee in the amount of $3,500. Anything contained herein to the contrary notwithstanding, the consent of Agent: (y) shall not be required if such assignment is in connection with any merger, consolidation, sale, transfer, or other disposition of all or any substantial portion of the business or loan portfolio of such Lender; and (z) shall not be unreasonably withheld, conditioned, or delayed in connection with any assignment and delegation by a Lender to any Eligible Transferee. (b) From and after the date that Agent notifies the assignor Lender that it has received an executed Assignment and Acceptance and payment of the above-referenced processing fee, (i) the Assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, shall have the rights and obligations of a Lender under the Loan Documents, and (ii) the assignor Lender shall, to the extent that rights and obligations hereunder and under the other Loan Documents have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights (except with respect to Section 11.3 hereof) and be released from its obligations under this Agreement (and in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement and the other Loan Documents, such Lender shall cease to be a party hereto and thereto), and such assignment shall effect a novation between Borrower and the Assignee. (c) By executing and delivering an Assignment and Acceptance, the assigning Lender thereunder and the Assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (1) other than as provided in such Assignment and Acceptance, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, -70- 77 validity, enforceability, genuineness, sufficiency or value of this Agreement or any other Loan Document furnished pursuant hereto; (2) such assigning Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition of Borrower or the performance or observance by Borrower of any of its obligations under this Agreement or any other Loan Document furnished pursuant hereto; (3) such Assignee confirms that it has received a copy of this Agreement, together with such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (4) such Assignee will, independently and without reliance upon Agent, such assigning Lender or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (5) such Assignee appoints and authorizes Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to Agent by the terms hereof, together with such powers as are reasonably incidental thereto; and (6) such Assignee agrees that it will perform in accordance with their terms all of the obligations which by the terms of this Agreement are required to be performed by it as a Lender. (d) Immediately upon the satisfaction of the conditions set forth in Section 15.1(a)(i), (ii), and (iii), this Agreement shall be deemed to be amended to the extent, but only to the extent, necessary to reflect the addition of the Assignee and the resulting adjustment of the Commitments arising therefrom. The Commitment allocated to each Assignee shall reduce such Commitments of the assigning Lender pro tanto. (e) Any Lender may at any time, with the written consent of Agent, sell to one or more commercial banks, financial institutions, or other Persons not Affiliates of such Lender (a "Participant") participating interests in the Obligations, the Commitment, and the other rights and interests of that Lender (the "originating Lender") hereunder and under the other Loan Documents (provided that no written consent of Agent shall be required in connection with any sale of any such participating interests by a Lender to an Eligible Transferee); provided, however, that (i) the originating Lender's obligations under this Agreement shall remain unchanged, (ii) the originating Lender shall remain solely responsible for the performance of such obligations, (iii) Borrower and Agent shall continue to deal solely and directly with the originating Lender in connection with the originating Lender's rights and obligations under this Agreement and the other Loan Documents, (iv) no Lender shall transfer or grant any participating interest under which the Participant has the sole and exclusive right to approve any amendment to, or any consent or waiver with respect to, this Agreement or any other Loan Document, except to the extent such amendment to, or consent or waiver with respect to this Agreement or of any other Loan Document would (A) extend the final maturity date of the Obligations hereunder in which such Participant is participating; (B) reduce the interest rate applicable to the Obligations hereunder in which such Participant is participating; (C) release all or a material -71- 78 portion of the Collateral or guaranties (except to the extent expressly provided herein or in any of the Loan Documents) supporting the Obligations hereunder in which such Participant is participating; (D) postpone the payment of, or reduce the amount of, the interest or fees payable to such Participant through such Lender; or (E) change the amount or due dates of scheduled principal repayments or prepayments or premiums; and (v) all amounts payable by Borrower hereunder shall be determined as if such Lender had not sold such participation; except that, if amounts outstanding under this Agreement are due and unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall be deemed to have the right of set-off in respect of its participating interest in amounts owing under this Agreement to the same extent as if the amount of its participating interest were owing directly to it as a Lender under this Agreement. The rights of any Participant only shall be derivative through the originating Lender with whom such Participant participates and no Participant shall have any direct rights as to the other Lenders, Agent, Borrower, the Collections, the Collateral, or otherwise in respect of the Obligations. No Participant shall have the right to participate directly in the making of decisions by the Lenders among themselves. (f) In connection with any such assignment or participation or proposed assignment or participation, a Lender may disclose all documents and information which it now or hereafter may have relating to Borrower or Borrower's business. (g) Any other provision in this Agreement notwithstanding, any Lender may at any time create a security interest in, or pledge, all or any portion of its rights under and interest in this Agreement in favor of any Federal Reserve Bank in accordance with Regulation A of the Federal Reserve Bank or U.S. Treasury Regulation 31 CFR Section 203.14, and such Federal Reserve Bank may enforce such pledge or security interest in any manner permitted under applicable law. 15.2 SUCCESSORS. This Agreement shall bind and inure to the benefit of the respective successors and assigns of each of the parties; provided, however, that Borrower may not assign this Agreement or any rights or duties hereunder without the Lenders' prior written consent and any prohibited assignment shall be absolutely void ab initio. No consent to assignment by the Lenders shall release Borrower from its Obligations. A Lender may assign this Agreement and the other Loan Documents and its rights and duties hereunder and thereunder pursuant to Section 15.1 hereof and, except as expressly required pursuant to Section 15.1 hereof, no consent or approval by Borrower is required in connection with any such assignment. 16. AMENDMENTS; WAIVERS. 16.1 AMENDMENTS AND WAIVERS. No amendment or waiver of any provision of this Agreement or any other Loan Document, and no consent with respect -72- 79 to any departure by Borrower therefrom, shall be effective unless the same shall be in writing and signed by the Required Lenders (or by Agent at the written request of the Required Lenders) and Borrower and then any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no such waiver, amendment, or consent shall, unless in writing and signed by all the Lenders and Borrower and acknowledged by Agent, do any of the following: (a) increase or extend the Commitment of any Lender; (b) postpone or delay any date fixed by this Agreement or any other Loan Document for any payment of principal, interest, fees or other amounts due to the Lenders (or any of them) hereunder or under any other Loan Document; (c) reduce the principal of, or the rate of interest specified herein on any Loan, or any fees or other amounts payable hereunder or under any other Loan Document; (d) change the percentage of the Commitments that is required for the Lenders or any of them to take any action hereunder; (f) amend this Section or any provision of the Agreement providing for consent or other action by all Lenders; (g) release Collateral other than as permitted by Section 17.11; (j) subordinate any of the Obligations in favor of any obligations owing by Borrower to any Person other than the Lender Group; (h) change the definition of "Required Lenders"; (i) release Borrower from any Obligation for the payment of money; or (j) amend any of the provisions of Article 17. and, provided further, however, that no amendment, waiver or consent shall, unless in writing and signed by Agent, affect the rights or duties of Agent under this Agreement or any other Loan Document. The foregoing notwithstanding, any amendment, modification, waiver, consent, termination, or release of or with respect to any provision of this Agreement or any other Loan Document that relates only to the relationship of the Lender Group among themselves, and that does not affect the -73- 80 rights or obligations of Borrower, shall not require consent by or the agreement of Borrower. 16.2 NO WAIVERS; CUMULATIVE REMEDIES. No failure by Agent or any Lender to exercise any right, remedy, or option under this Agreement, any other Loan Document, or any present or future supplement hereto or thereto, or in any other agreement between or among Borrower and Agent or any Lender, or delay by Agent or any Lender in exercising the same, will operate as a waiver thereof. No waiver by Agent or any Lender will be effective unless it is in writing, and then only to the extent specifically stated. No waiver by Agent or the Lenders on any occasion shall affect or diminish Agent's and each Lender's rights thereafter to require strict performance by Borrower of any provision of this Agreement. Agent's and each Lender's rights under this Agreement and the other Loan Documents will be cumulative and not exclusive of any other right or remedy which Agent or any Lender may have. 17. AGENT; THE LENDER GROUP. 17.1 APPOINTMENT AND AUTHORIZATION OF AGENT. Subject to Section 17.9, each Lender hereby irrevocably designates and appoints TBCC as its agent under this Agreement and the other Loan Documents and each Lender hereby irrevocably authorizes Agent to take such action on its behalf under the provisions of this Agreement and each other Loan Document and to exercise such powers and perform such duties as are expressly delegated to it by the terms of this Agreement or any other Loan Document, together with such powers as are reasonably incidental thereto. Agent agrees to act as such on the express conditions contained in this Article 17. The provisions of this Article 17 are solely for the benefit of Agent and the Lenders, and Borrower shall have no rights as a third party beneficiary of any of the provisions contained herein; provided, however, that certain of the provisions of Section 17.10 hereof also shall be for the benefit of Borrower. Any provision to the contrary contained elsewhere in this Agreement or in any other Loan Document notwithstanding, Agent shall not have any duties or responsibilities, except those expressly set forth herein, nor shall Agent have or be deemed to have any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against Agent; it being expressly understood and agreed that the use of the word "Agent" is for convenience only, that TBCC is merely the representative of the Lenders, and has only the contractual duties set forth herein. Except as expressly otherwise provided in this Agreement, Agent shall have and may use its sole discretion with respect to exercising or refraining from exercising any discretionary rights or taking or refraining from taking any actions which Agent is expressly entitled to take or assert under or pursuant to this Agreement and the other Loan Documents. Without limiting the generality of the foregoing, or of any other provision of the Loan Documents that provides rights or powers to Agent, Lenders -74- 81 agree that Agent shall have the right to exercise the following powers as long as this Agreement remains in effect: (a) maintain, in accordance with its customary business practices, ledgers and records reflecting the status of the Advances, the Collateral, the Collections, and related matters; (b) execute or file any and all financing or similar statements or notices, amendments, renewals, supplements, documents, instruments, proofs of claim, notices and other written agreements with respect to the Loan Documents; (c) make Advances, for itself or on behalf of Lenders as provided in the Loan Documents; (d) exclusively receive, apply, and distribute the Collections as provided in the Loan Documents; (e) open and maintain such bank accounts and lock boxes as Agent deems necessary and appropriate in accordance with the Loan Documents for the foregoing purposes with respect to the Collateral and the Collections; (f) perform, exercise, and enforce any and all other rights and remedies of the Lender Group with respect to Borrower, the Obligations, the Collateral, the Collections, or otherwise related to any of same as provided in the Loan Documents; and (g) incur and pay such Lender Group Expenses as Agent may deem necessary or appropriate for the performance and fulfillment of its functions and powers pursuant to the Loan Documents. 17.2 DELEGATION OF DUTIES. Except as otherwise provided in this section, Agent may execute any of its duties under this Agreement or any other Loan Document by or through agents, employees or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. Agent shall not be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects as long as such selection was made in compliance with this section and without gross negligence or willful misconduct. 17.3 LIABILITY OF AGENT. None of the Agent-Related Persons shall (i) be liable for any action taken or omitted to be taken by any of them under or in connection with this Agreement or any other Loan Document or the transactions contemplated hereby (except for its own gross negligence or willful misconduct), or (ii) be responsible in any manner to any of the Lenders for any recital, statement, representation or warranty made by Borrower or any Subsidiary or Affiliate of Borrower, or any officer or director thereof, contained in this Agreement or in any other Loan Document, or in any certificate, report, statement or other document referred to or provided for in, or received by Agent under or in connection with, this Agreement or any other Loan Document, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document, or for any failure of Borrower or any other party to any Loan Document to perform its obligations hereunder or thereunder. No Agent-Related Person shall be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of Borrower or any of Borrower's Subsidiaries or Affiliates. -75- 82 17.4 RELIANCE BY AGENT. Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone message, statement or other document or conversation believed by it to be genuine and correct and to have been signed, sent, or made by the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to Borrower or counsel to any Lender), independent accountants and other experts selected by Agent. Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless it shall first receive such advice or concurrence of the Lenders as it deems appropriate and until such instructions are received, Agent shall act, or refrain from acting, as it deems advisable. If Agent so requests, it shall first be indemnified to its reasonable satisfaction by Lenders against any and all liability and expense that may be incurred by it by reason of taking or continuing to take any such action. Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement or any other Loan Document in accordance with a request or consent of the Lenders and such request and any action taken or failure to act pursuant thereto shall be binding upon all of the Lenders. 17.5 NOTICE OF POTENTIAL DEFAULT OR EVENT OF DEFAULT. Agent shall not be deemed to have knowledge or notice of the occurrence of any Potential Default or Event of Default, except with respect to defaults in the payment of principal, interest, fees, and expenses required to be paid to Agent for the account of the Lenders, except with respect to Events of Default of which Agent has actual knowledge, unless Agent shall have received written notice from a Lender or Borrower referring to this Agreement, describing such Potential Default or Event of Default, and stating that such notice is a "notice of default." Agent promptly will notify the Lenders of its receipt of any such notice or of any Event of Default of which Agent has actual knowledge. If any Lender obtains actual knowledge of any Event of Default, such Lender promptly shall notify the other Lenders and Agent of such Event of Default. Each Lender shall be solely responsible for giving any notices to its Participants, if any. Subject to Section 17.4, Agent shall take such action with respect to such Potential Default or Event of Default as may be requested by the Required Lenders in accordance with Section 9; provided, however, that unless and until Agent has received any such request, Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Potential Default or Event of Default as it shall deem advisable. 17.6 CREDIT DECISION. Each Lender acknowledges that none of the Agent-Related Persons has made any representation or warranty to it, and that no act by Agent hereinafter taken, including any review of the affairs of Borrower and its Subsidiaries or Affiliates, shall be deemed to constitute any representation or warranty by any Agent-Related Person to any Lender. Each Lender represents to Agent that it has, independently and without reliance upon any Agent-Related Person and based on such documents and information as it has deemed appropriate, made its own appraisal -76- 83 of and investigation into the business, prospects, operations, property, financial and other condition and creditworthiness of Borrower and any other Person (other than the Lender Group) party to a Loan Document, and all applicable bank regulatory laws relating to the transactions contemplated hereby, and made its own decision to enter into this Agreement and to extend credit to Borrower. Each Lender also represents that it will, independently and without reliance upon any Agent-Related Person and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and creditworthiness of Borrower and any other Person (other than the Lender Group) party to a Loan Document. Except for notices, reports and other documents expressly herein required to be furnished to the Lenders by Agent, Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, prospects, operations, property, financial and other condition or creditworthiness of Borrower and any other Person party to a Loan Document that may come into the possession of any of the Agent-Related Persons. 17.7 COSTS AND EXPENSES; INDEMNIFICATION. Agent may incur and pay Lender Group Expenses to the extent Agent deems reasonably necessary or appropriate for the performance and fulfillment of its functions, powers, and obligations pursuant to the Loan Documents, including without limiting the generality of the foregoing, court costs, reasonable attorneys fees and expenses, costs of collection by outside collection agencies and auctioneer fees and costs of security guards or insurance premiums paid to maintain the Collateral, whether or not Borrower is obligated to reimburse Agent or Lenders for such expenses pursuant to the Loan Agreement or otherwise. Agent is authorized and directed to deduct and retain sufficient amounts from Collections to reimburse Agent for such out-of-pocket costs and expenses prior to the distribution of any amounts to Lenders. In the event Agent is not reimbursed for such costs and expenses from Collections, each Lender hereby agrees that it is and shall be obligated to pay to or reimburse Agent for the amount of such Lender's Pro Rata Share thereof. Whether or not the transactions contemplated hereby are consummated, the Lenders agree to indemnify upon demand the Agent-Related Persons (to the extent not reimbursed by or on behalf of Borrower and without limiting the obligation of Borrower to do so), according to their Pro Rata Shares, from and against any and all Indemnified Liabilities at the time of the occurrence of the event giving rise to such indemnity; provided, however, that no Lender shall be liable for the payment to the Agent-Related Persons of any portion of such Indemnified Liabilities resulting solely from such Person's gross negligence or willful misconduct. Without limitation of the foregoing, each Lender shall reimburse Agent upon demand for its ratable share of any costs or out-of-pocket expenses (including attorneys fees and expenses) incurred by Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal -77- 84 proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, any other Loan Document, or any document contemplated by or referred to herein, to the extent that Agent is not reimbursed for such expenses by or on behalf of Borrower. The undertaking in this section shall survive the payment of all Obligations hereunder and the resignation or replacement of Agent. 17.8 AGENT IN INDIVIDUAL CAPACITY. TBCC and its Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in and generally engage in any kind of banking, trust, financial advisory, underwriting or other business with Borrower and its Subsidiaries and Affiliates and any other Person (other than the Lender Group) party to any Loan Documents as though TBCC were not Agent hereunder and without notice to or consent of the Lenders. The Lenders acknowledge that, pursuant to such activities, TBCC or its Affiliates may receive information regarding Borrower or its Affiliates and any other Person (other than the Lender Group) party to any Loan Documents that is subject to confidentiality obligations in favor of Borrower or such other Person and that prohibit the disclosure of such information to the Lenders, and the Lenders acknowledge that, in such circumstances (and in the absence of a waiver of such confidentiality obligations, which waiver Agent will use its reasonable best efforts to obtain), Agent shall be under no obligation to provide such information to them. With respect to the TBCC Loans and Agent Advances, TBCC shall have the same rights and powers under this Agreement as any other Lender and may exercise the same as though it were not Agent, and the terms "Lender" and "Lenders" include TBCC in its individual capacity. 17.9 SUCCESSOR AGENT. Agent may resign as Agent upon 30 days notice to the Lenders. If Agent resigns under this Agreement, the Required Lenders shall appoint a successor Agent for the Lenders. If no successor Agent is appointed prior to the effective date of the resignation of Agent, Agent may appoint, after consulting with the Lenders, a successor Agent. If Agent has materially breached or failed to perform any material provision of this Agreement or of applicable law, the Required Lenders may agree in writing to remove and replace Agent with a successor Agent from among the Lenders. In any such event, upon the acceptance of its appointment as successor Agent hereunder, such successor Agent shall succeed to all the rights, powers and duties of the retiring Agent and the term "Agent" shall mean such successor Agent and the retiring Agent's appointment, powers and duties as Agent shall be terminated. After any retiring Agent's resignation hereunder as Agent, the provisions of this Section 17 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. If no successor Agent has accepted appointment as Agent by the date which is 30 days following a retiring Agent's notice of resignation, the retiring Agent's resignation shall nevertheless thereupon become effective and the Lenders shall perform all of the duties of Agent hereunder until such time, if any, as the Lenders appoint a successor Agent as provided for above. -78- 85 17.10 WITHHOLDING TAX. (a) If any Lender is a "foreign corporation, partnership or trust" within the meaning of the IRC and such Lender claims exemption from, or a reduction of, U.S. withholding tax under Sections 1441 or 1442 of the IRC, such Lender agrees with and in favor of Agent and Borrower, to deliver to Agent and Borrower: (i) if such Lender claims an exemption from, or a reduction of, withholding tax under a United States tax treaty, properly completed IRS Forms 1001 and W-8 before the payment of any interest in the first calendar year and before the payment of any interest in each third succeeding calendar year during which interest may be paid under this Agreement; (ii) if such Lender claims that interest paid under this Agreement is exempt from United States withholding tax because it is effectively connected with a United States trade or business of such Lender, two properly completed and executed copies of IRS Form 4224 before the payment of any interest is due in the first taxable year of such Lender and in each succeeding taxable year of such Lender during which interest may be paid under this Agreement, and IRS Form W-9; and (iii) such other form or forms as may be required under the IRC or other laws of the United States as a condition to exemption from, or reduction of, United States withholding tax. Such Lender agrees promptly to notify Agent and Borrower of any change in circumstances which would modify or render invalid any claimed exemption or reduction. (b) If any Lender claims exemption from, or reduction of, withholding tax under a United States tax treaty by providing IRS Form 1001 and such Lender sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations of Borrower to such Lender, such Lender agrees to notify Agent of the percentage amount in which it is no longer the beneficial owner of Obligations of Borrower to such Lender. To the extent of such percentage amount, Agent will treat such Lender's IRS Form 1001 as no longer valid. (c) If any Lender claiming exemption from United States withholding tax by filing IRS Form 4224 with Agent sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations of Borrower to such Lender, such Lender agrees to undertake sole responsibility for complying with the withholding tax requirements imposed by Sections 1441 and 1442 of the IRC. (d) If any Lender is entitled to a reduction in the applicable withholding tax, Agent may withhold from any interest payment to such Lender an -79- 86 amount equivalent to the applicable withholding tax after taking into account such reduction. If the forms or other documentation required by subsection (a) of this Section are not delivered to Agent, then Agent may withhold from any interest payment to such Lender not providing such forms or other documentation an amount equivalent to the applicable withholding tax. (e) If the IRS or any other Governmental Authority of the United States or other jurisdiction asserts a claim that Agent did not properly withhold tax from amounts paid to or for the account of any Lender (because the appropriate form was not delivered, was not properly executed, or because such Lender failed to notify Agent of a change in circumstances which rendered the exemption from, or reduction of, withholding tax ineffective, or for any other reason) such Lender shall indemnify Agent fully for all amounts paid, directly or indirectly, by Agent as tax or otherwise, including penalties and interest, and including any taxes imposed by any jurisdiction on the amounts payable to Agent under this Section, together with all costs and expenses (including attorneys fees and expenses). The obligation of the Lenders under this subsection shall survive the payment of all Obligations and the resignation or replacement of Agent. 17.11 COLLATERAL MATTERS. (a) The Lenders hereby irrevocably authorize Agent, at its option and in its sole discretion, to release any Lien on any Collateral (i) upon the termination of the Commitments and payment and satisfaction in full by Borrower of all Obligations; (ii) constituting property being sold or disposed of if a release is required or desirable in connection therewith and if Borrower certifies to Agent that the sale or disposition is permitted under Section 7 of this Agreement or the other Loan Documents (and Agent may rely conclusively on any such certificate, without further inquiry); (iii) constituting property in which Borrower owned no interest at the time the security interest was granted or at any time thereafter; or (iv) constituting property leased to Borrower under a lease that has expired or is terminated in a transaction permitted under this Agreement. Except as provided above, Agent will not execute and deliver a release of any Lien on any Collateral without the prior written authorization of (y) if the release is of all or substantially all of the Collateral, of all of the Lenders, or (z) otherwise, all of the Lenders. Upon request by Agent or Borrower at any time, the Lenders will confirm in writing Agent's authority to release any such Liens on particular types or items of Collateral pursuant to this Section 17.11; provided, however, that (1) Agent shall not be required to execute any document necessary to evidence such release on terms that, in Agent's opinion, would expose Agent to liability or create any obligation or entail any consequence other than the release of such Lien without recourse, representation, or warranty, and (2) such release shall not in any manner discharge, affect, or impair the Obligations or any Liens (other than those expressly being released) upon (or obligations of Borrower in respect of) all -80- 87 interests retained by Borrower, including, the proceeds of any sale, all of which shall continue to constitute part of the Collateral. (c) Agent shall have no obligation whatsoever to any of the Lenders to assure that the Collateral exists or is owned by Borrower or is cared for, protected, or insured or has been encumbered, or that the Agent's Liens have been properly or sufficiently or lawfully created, perfected, protected, or enforced or are entitled to any particular priority, or to exercise at all or in any particular manner or under any duty of care, disclosure or fidelity, or to continue exercising, any of the rights, authorities and powers granted or available to Agent pursuant to any of the Loan Documents, it being understood and agreed that in respect of the Collateral, or any act, omission or event related thereto, subject to the terms and conditions contained herein, Agent may act in any manner it may deem appropriate, in its sole discretion given Agent's own interest in the Collateral in its capacity as one of the Lenders and that Agent shall have no other duty or liability whatsoever to any Lender as to any of the foregoing, except as otherwise provided herein. 17.12 RESTRICTIONS ON ACTIONS BY LENDERS; SHARING OF PAYMENTS. (a) Each of the Lenders agrees that it shall not, without the express consent of Agent, and that it shall, to the extent it is lawfully entitled to do so, upon the request of Agent, set off against the Obligations, any amounts owing by such Lender to Borrower or any accounts of Borrower now or hereafter maintained with such Lender. Each of the Lenders further agrees that it shall not, unless specifically requested to do so by Agent, take or cause to be taken any action, including, the commencement of any legal or equitable proceedings, to foreclose any Lien on, or otherwise enforce any security interest in, any of the Collateral the purpose of which is, or could be, to give such Lender any preference or priority against the other Lenders with respect to the Collateral. (b) Subject to Section 17.8, if, at any time or times any Lender shall receive (i) by payment, foreclosure, setoff or otherwise, any proceeds of Collateral or any payments with respect to the Obligations arising under, or relating to, this Agreement or the other Loan Documents, except for any such proceeds or payments received by such Lender from Agent pursuant to the terms of this Agreement, or (ii) payments from Agent in excess of such Lender's ratable portion of all such distributions by Agent, such Lender promptly shall (1) turn the same over to Agent, in kind, and with such endorsements as may be required to negotiate the same to Agent, or in same day funds, as applicable, for the account of all of the Lenders and for application to the Obligations in accordance with the applicable provisions of this Agreement, or (2) purchase, without recourse or warranty, an undivided interest and participation in the Obligations owed to the other Lenders so that such excess payment received shall be applied ratably as among the Lenders in accordance with their Pro Rata Shares; provided, however, that if all or part of such excess payment received by the purchasing party is thereafter recovered from it, those purchases of participations -81- 88 shall be rescinded in whole or in part, as applicable, and the applicable portion of the purchase price paid therefor shall be returned to such purchasing party, but without interest except to the extent that such purchasing party is required to pay interest in connection with the recovery of the excess payment. 17.13 AGENCY FOR PERFECTION. Agent and each Lender hereby appoints each other Lender as agent for the purpose of perfecting the Agent's Liens in assets which, in accordance with Article 9 of the UCC can be perfected only by possession. Should any Lender obtain possession of any such Collateral, such Lender shall notify Agent thereof, and, promptly upon Agent's request therefor shall deliver such Collateral to Agent or in accordance with Agent's instructions. 17.14 PAYMENTS BY AGENT TO THE LENDERS. All payments to be made by Agent to the Lenders shall be made by bank wire transfer or internal transfer of immediately available funds to: If to TBCC: First National Bank of Chicago Chicago, Illinois ABA # 071-000-013 Credit: Transamerica Business Credit Corporation Account No. 51-011-90 Ref: Aureal If to GSCP: Citibank N.A. New York, New York ABA # 021-000-089 Credit: GS Credit Partners L.P. Account No. 40717188 Attn: Tracy McCaffrey Ref: Aureal or pursuant to such other wire transfer instructions as each party may designate for itself by written notice to Agent. Concurrently with each such payment, Agent shall identify whether such payment (or any portion thereof) represents principal, premium or interest on revolving advances or otherwise. 17.15 CONCERNING THE COLLATERAL AND RELATED LOAN DOCUMENTS. Each member of the Lender Group authorizes and directs Agent to enter into this Agreement and the other Loan Documents relating to the Collateral, for the benefit of the Lender Group. Each member of the Lender Group agrees that any action taken by Agent or all Lenders, as applicable, in accordance with the terms of this Agreement or the other Loan Documents relating to the Collateral and the exercise by Agent or all Lenders, -82- 89 as applicable, of their respective powers set forth therein or herein, together with such other powers that are reasonably incidental thereto, shall be binding upon all of the Lenders. 17.16 FIELD AUDITS AND EXAMINATION REPORTS; CONFIDENTIALITY; DISCLAIMERS BY LENDERS; OTHER REPORTS AND INFORMATION. By signing this Agreement, each Lender: (a) is deemed to have requested that Agent furnish such Lender, promptly after it becomes available, a copy of each field audit or examination report (each a "Report" and collectively, "Reports") prepared by Agent or by any Lender accompanying Agent on any such field audit or examination, and Agent, and, if applicable, any other Lender that prepares any such Report, shall so furnish each Lender with such Reports; (b) expressly agrees and acknowledges that none of TBCC, GSCP, Agent, or, if applicable, any other Lender (i) makes any representation or warranty as to the accuracy of any Report, or (ii) shall be liable for any information contained in any Report; (c) expressly agrees and acknowledges that the Reports are not comprehensive audits or examinations, that Agent, any Lender, or any other party performing any audit or examination will inspect only specific information regarding Borrower and will rely significantly upon Borrower's books and records, as well as on representations of Borrower's personnel; (d) agrees to keep all Reports and other material, non-public information regarding Borrower and its Subsidiaries and their operations, assets, and existing and contemplated business plans in a confidential manner; it being understood and agreed by Borrower that in any event such Lender may make disclosures: (i) to counsel for and other advisors, accountants, and auditors to such Lender; (ii) reasonably required by any bona fide potential or actual Assignee, transferee, or Participant in connection with any contemplated or actual assignment or transfer by such Lender of an interest herein or any participation interest in such Lender's rights hereunder, provided, however, that by any such disclosure under this clause (ii), such Assignee, transferee, or Participant shall be bound by the provisions of this Section 17.16(d); (iii) of information that has become public by disclosures made by Persons other than such Lender, its Affiliates, assignees, transferees, or participants; (iv) as required or requested by any court, governmental or administrative agency, pursuant to any subpoena or other legal process, or by any law, statute, regulation, or court order; provided, however, that, unless prohibited by applicable law, statute, regulation, or court order, such Lender shall notify Borrower of any request by any court, governmental or administrative agency, or pursuant to any subpoena or other legal process for disclosure of any such non-public material information concurrent with, or -83- 90 where practicable, prior to the disclosure thereof; or (v) in connection with the enforcement of Agent's Liens on the Collateral; and (e) without limiting the generality of any other indemnification provision contained in this Agreement, agrees: (i) to hold Agent and any such other Lender preparing a Report harmless from any action the indemnifying Lender may take or conclusion the indemnifying Lender may reach or draw from any Report in connection with any loans or other credit accommodations that the indemnifying Lender has made or may make to Borrower, or the indemnifying Lender's participation in, or the indemnifying Lender's purchase of, a loan or loans of Borrower; and (ii) to pay and protect, and indemnify, defend and hold Agent and any such other Lender preparing a Report harmless from and against, the claims, actions, proceedings, damages, costs, expenses and other amounts (including, attorney costs) incurred by Agent and any such other Lender preparing a Report as the direct or indirect result of any third parties who might obtain all or part of any Report through the indemnifying Lender. In addition to the foregoing: (x) Any Lender may from time to time request of Agent in writing that Agent provide to such Lender a copy of any report or document provided by Borrower to Agent which has not been contemporaneously provided by Borrower to such Lender, and, upon receipt of such request, Agent shall provide a copy of same to such Lender promptly upon receipt thereof from Borrower; (y) To the extent that Agent is entitled, under any provision of the Loan Documents, to request additional reports or information from Borrower, any Lender may, from time to time, reasonably request Agent to exercise such right as specified in such Lender's notice to Agent, whereupon Agent promptly shall request of Borrower the additional reports or information specified by such Lender, and, upon receipt thereof from Borrower, Agent promptly shall provide a copy of same to such Lender; and (z) Any time that Agent renders to Borrower a statement regarding the Loan Account, Agent shall send a copy of such statement to each Lender. 17.17 SEVERAL OBLIGATIONS; NO LIABILITY. Notwithstanding that certain of the Loan Documents now or hereafter may have been or will be executed only by or in favor of Agent in its capacity as such, and not by or in favor of the Lenders, any and all obligations on the part of Agent (if any) to make any credit available hereunder shall constitute the several (and not joint) obligations of the respective Lenders on a ratable basis, according to their respective Commitments, to make an amount of such credit not to exceed, in principal amount, at any one time outstanding, the amount of their respective Commitments. Nothing contained herein shall confer upon any Lender any interest in, or subject any Lender to any liability for, or in respect of, the business, assets, profits, losses, or liabilities of any other Lender. Each Lender shall be solely responsible for notifying its Participants of any matters relating to the Loan Documents to the extent any such notice may be required, and no Lender shall have any -84- 91 obligation, duty, or liability to any Participant of any other Lender. Except as provided in Section 17.7, no member of the Lender Group shall have any liability for the acts of any other member of the Lender Group. No Lender shall be responsible to Borrower or any other Person for any failure by any other Lender to fulfill its obligations to make credit available hereunder, nor to advance for it or on its behalf in connection with its Commitment, nor to take any other action on its behalf hereunder or in connection with the financing contemplated herein. 18. GENERAL PROVISIONS. 18.1 EFFECTIVENESS. This Agreement shall be binding and deemed effective when executed by Borrower and each member of the Lender Group whose signature is provided for on the signature pages hereof. 18.2 SECTION HEADINGS. Headings and numbers have been set forth herein for convenience only. Unless the contrary is compelled by the context, everything contained in each section applies equally to this entire Agreement. 18.3 INTERPRETATION. Neither this Agreement nor any uncertainty or ambiguity herein shall be construed or resolved against the Lender Group or Borrower, whether under any rule of construction or otherwise. On the contrary, this Agreement has been reviewed by all parties and shall be construed and interpreted according to the ordinary meaning of the words used so as to fairly accomplish the purposes and intentions of all parties hereto. 18.4 SEVERABILITY OF PROVISIONS. Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision. 18.5 AMENDMENTS IN WRITING. This Agreement can only be amended by a writing signed by Agent, the requisite Lenders, and Borrower. 18.6 COUNTERPARTS; TELEFACSIMILE EXECUTION. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement. Delivery of an executed counterpart of this Agreement by telefacsimile shall be equally as effective as delivery of an original executed counterpart of this Agreement. Any party delivering an executed counterpart of this Agreement by telefacsimile also shall deliver an original executed counterpart of this Agreement but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Agreement. The foregoing shall apply to each other Loan Document mutatis mutandis. -85- 92 18.7 REVIVAL AND REINSTATEMENT OF OBLIGATIONS. If the incurrence or payment of the Obligations by Borrower or any guarantor of the Obligations or the transfer by either or both of such parties to the Lender Group of any property of either or both of such parties should for any reason subsequently be declared to be void or voidable under any state or federal law relating to creditors' rights, including provisions of the Bankruptcy Code relating to fraudulent conveyances, preferences, and other voidable or recoverable payments of money or transfers of property (collectively, a "Voidable Transfer"), and if the Lender Group is required to repay or restore, in whole or in part, any such Voidable Transfer, or elects to do so upon the reasonable advice of its counsel, then, as to any such Voidable Transfer, or the amount thereof that the Lender Group is required or elects to repay or restore, and as to all reasonable costs, expenses, and attorneys fees of the Lender Group related thereto, the liability of Borrower or such guarantor automatically shall be revived, reinstated, and restored and shall exist as though such Voidable Transfer had never been made. 18.8 INTEGRATION. This Agreement, together with the other Loan Documents, reflects the entire understanding of the parties with respect to the transactions contemplated hereby and shall not be contradicted or qualified by any other agreement, oral or written, before the date hereof. 18.9 CERTAIN DAMAGES. BORROWER HEREBY EXPRESSLY AGREES THAT IN NO EVENT WILL ANY MEMBER OF THE LENDER GROUP BE LIABLE FOR ANY SPECIAL, CONSEQUENTIAL, INCIDENTAL, INDIRECT OR PUNITIVE DAMAGES, WHETHER ANY CLAIM IS BASED ON CONTRACT OR TORT, WHETHER THE LIKELIHOOD OF SUCH DAMAGES WAS KNOWN TO ANY MEMBER OF THE LENDER GROUP AND REGARDLESS OF THE FORM OF THE CLAIM OR ACTION, INCLUDING ANY CLAIM OR ACTION ALLEGING FAILURE TO EXERCISE REASONABLE CARE OR FAILURE TO ACT IN GOOD FAITH; PROVIDED, HOWEVER, THAT, IF AND TO THE EXTENT THAT A MEMBER OF THE LENDER GROUP HAS ENGAGED IN ANY GROSS NEGLIGENCE OR WILLFUL MISCONDUCT RELATIVE TO THE LOAN DOCUMENTS THIS SECTION 18.9 SHALL NOT APPLY TO SUCH MEMBER OF THE LENDER GROUP TO THE EXTENT OF SUCH GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. -86- 93 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered as of the date first above written. AUREAL SEMICONDUCTOR INC., a Delaware corporation By:___________________________________ Title:_________________________________ TRANSAMERICA BUSINESS CREDIT CORPORATION, a Delaware corporation, as Agent and a Lender By:___________________________________ Title:_________________________________ GOLDMAN SACHS CREDIT PARTNERS L.P., a Bermuda limited partnership By:___________________________________ Title: Authorized Signatory S-1 EX-4.11 6 FORM OF WARRANT 1 EXHIBIT 4.11 [FORM OF WARRANT] THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE THERE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS, AND MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED UNLESS THERE IS (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT RELATED THERETO, (ii) AN OPINION OF COUNSEL FOR THE HOLDER, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED, (iii) RECEIPT OF A NO-ACTION LETTER(S) FROM THE APPROPRIATE GOVERNMENTAL AUTHORITY(IES), OR (iv) UNLESS PURSUANT TO AN EXEMPTION THEREFROM UNDER RULE 144 OF SUCH ACT. AUREAL SEMICONDUCTOR INC. WARRANT TO PURCHASE [#] SHARES OF COMMON STOCK (this "WARRANT") AUREAL SEMICONDUCTOR INC., a Delaware corporation (the "COMPANY"), hereby certifies that, for value received, [HOLDER], a [ENTITY] ("HOLDER"), or registered assigns, is the registered holder of warrants (the "WARRANTS") to subscribe for and purchase [NUMBER (#)] shares of the fully paid and nonassessable Common Stock (as adjusted pursuant to Section 4 hereof, the "WARRANT SHARES") of the Company, at a purchase price per share equal to Two and 156/1000 Dollars ($2.156)(such price, as adjusted pursuant to Section 4 hereof, the "WARRANT PRICE"), subject to the provisions and upon the terms and conditions hereinafter set forth. As used herein, (a) the term "COMMON STOCK" shall mean the Company's presently authorized Common Stock, par value $.001 per share, and any stock into or for which such Common Stock may hereafter be converted or exchanged, (b) the term "DATE OF Grant" shall mean June 5, 1998, and (c) the term "OTHER WARRANTS" shall mean any warrant issued upon transfer or partial exercise of this Warrant. The term "WARRANT" as used herein shall be deemed to include Other Warrants unless the context hereof or thereof clearly requires otherwise. The Warrants evidenced by this Warrant Certificate are a portion of a series of like warrants (collectively, the "SERIES WARRANTS") exercisable for the purchase of an aggregate of One Million Three Hundred Fifty Thousand (1,350,000) of the Company's Common Stock (the "SERIES WARRANT SHARES") that are evidenced by certificates of like tenor (the "SERIES WARRANT CERTIFICATES") that have been issued pursuant to that certain Loan and Security Agreement dated as of June 5, 1998 (the "LOAN AGREEMENT"), by and among the Company, TransAmerica Business Credit Corporation and Goldman Sachs Credit Partners, L.P. 1. Term. The purchase right represented by this Warrant is exercisable, in whole or in part, at any time and from time to time from the Date of Grant through and including 1 2 the earlier of (a) the consummation of (i) any merger or consolidation of the Company with or into another entity (other than a wholly-owned subsidiary of the Company) where (A) the Company is not the surviving entity or (B) the Company is the surviving entity but fifty percent (50%) or more of the capital stock of the Company after such transaction is held by persons other than holders of the Company's capital stock prior to such transaction, or (ii) any sale, lease, exchange or other disposition of all or substantially all of the assets of the Company (any such event, a "SALE") and (b) the close of business on June 5, 2003 (the "EXPIRATION DATE"); provided, however, that in the event that any portion of this Warrant is unexercised as of the Expiration Date, the terms of Section 2(b), below, shall apply. 2. Exercise. a. Method of Exercise; Payment; Issuance of New Warrant. Subject to Section 1 hereof, the purchase right represented by this Warrant may be exercised by the holder hereof, in whole or in part and from time to time, by the surrender of this Warrant (with the notice of exercise form attached hereto as Exhibit A duly executed) at the principal office of the Company and by the payment to the Company of an amount equal to the then applicable Warrant Price multiplied by the number of Warrant Shares then being purchased. The person or persons in whose name(s) any certificate(s) representing shares of Common Stock shall be issuable upon exercise of this Warrant shall be deemed to have become the holder(s) of record of, and shall be treated for all purposes as the record holder(s) of, the shares represented thereby (and such shares shall be deemed to have been issued) immediately prior to the close of business on the date or dates upon which this Warrant is exercised. In the event of any exercise of the rights represented by this Warrant, certificates for the shares of Common Stock so purchased shall be delivered to the holder hereof as soon as possible and in any event within thirty (30) days after such exercise and, unless this Warrant has been fully exercised (including without limitation, exercise pursuant to Section 2(b) below), a new Warrant representing the portion of the Warrant Shares, if any, with respect to which this Warrant shall not then have been exercised shall also be issued to the holder hereof as soon as possible and in any event within such thirty (30)-day period. b. Automatic Exercise. In the event that any portion of this Warrant is unexercised as of the Expiration Date, this Warrant shall be deemed to have been exercised automatically immediately prior to the close of business on the Expiration Date (or, in the event that the Expiration Date is not a business day, the immediately preceding business day), or, if the Expiration Date is due to a Sale, immediately prior to the consummation of such Sale (the "AUTOMATIC EXERCISE DATE") and the person entitled to receive the shares of Common Stock issuable upon such exercise shall be treated for all purposes as the holder of record of such Warrant Shares as of the close of business, or, in the event of a Sale, as of immediately prior to the consummation of the Sale, on such Automatic Exercise Date. This Warrant shall be deemed to be surrendered to the Company on the Automatic Exercise Date, by virtue of this Section 2(b) and without any action by the holder of this Warrant or any other person, and payment to the Company of the then applicable Warrant Price multiplied by the number of Warrant Shares then being purchased shall be deemed to be made pursuant to the terms of Section 10.2 below (without payment by the holder of any exercise price or any cash or other consideration). As promptly as practicable on or after the Automatic Exercise Date and in any event within thirty (30) days thereafter, the Company at its expense shall issue and deliver to the person or persons entitled to receive the same a certificate or certificates for the number of Warrant Shares issuable upon such 2 3 exercise. 3. Stock Fully Paid; Reservation of Shares. All Warrant Shares that may be issued upon the exercise of the rights represented by this Warrant will, upon issuance pursuant to the terms and conditions herein, be fully paid and nonassessable, and free from all taxes, liens, charges, and pre-emptive rights with respect to the issue thereof. The Company shall pay all transfer taxes, if any, attributable to the issuance of the Warrant Shares upon the exercise of this Warrant. During the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized, and reserved for the purpose of the issue upon exercise of the purchase rights evidenced by this Warrant, a sufficient number of shares of its Common Stock to provide for the exercise of the rights represented by this Warrant. 4. Adjustment of Warrant Price and Number of Shares. The number and kind of securities purchasable upon the exercise of this Warrant and the Warrant Price shall be subject to adjustment from time to time upon the occurrence of certain events, as follows: a. Adjustment for Initial Errors. The Company hereby acknowledges that the One Million Three Hundred Fifty Thousand (1,350,000) Series Warrant Shares constituting the initial number of securities purchasable upon the exercise of the Series Warrants was based upon the Company's representations as to the amount of outstanding Common Stock (on a fully diluted basis) on the Date of Grant, as set forth on Schedule 5.8 to the Loan Agreement ("SCHEDULE 5.8"). If for any reason it shall hereafter be determined by the holder of any outstanding Warrant that the actual amount of Common Stock outstanding as of the Date of Grant (on a fully diluted basis) differs from that set forth on Schedule 5.8, then the holder may notify the Company of such determination and the Company shall forthwith reissue all of the Series Warrants with an appropriate proportional adjustment in said number to be effective from the Date of Grant, provided that such adjustment shall be made only if it results in an increase to the number of Warrant Shares hereunder. b. Reclassification. In case of any reclassification, change or conversion of securities of the class issuable upon exercise of this Warrant (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), the Company shall duly execute and deliver to the holder of this Warrant a new Warrant (in form and substance satisfactory to the holder of this Warrant), so that the holder of this Warrant shall have the right to receive, at a total purchase price not to exceed that payable upon the exercise of the unexercised portion of this Warrant, and in lieu of the shares of Common Stock theretofore issuable upon exercise of this Warrant, the kind and amount of shares of stock, other securities, money and property receivable upon such reclassification, change or conversion by a holder of the number of shares of Common Stock then purchasable under this Warrant. Such new Warrant shall provide for adjustments that shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 4. The provisions of this Section 4(b) shall similarly apply to successive reclassification, changes and conversions. c. Subdivision or Combination of Shares. If the Company at any time while this Warrant remains outstanding and unexpired shall subdivide or combine its outstanding shares of Common Stock, the Warrant Price shall be proportionately decreased in the case of a subdivision or increased in the case of a combination, effective at the close of business on the 3 4 date the subdivision or combination becomes effective. d. Stock Dividends and Other Distributions. If the Company at any time while this Warrant is outstanding and unexpired shall (i) pay a dividend with respect to Common Stock payable in Common Stock, or (ii) make any other distribution with respect to Common Stock (except any distribution specifically provided for in the foregoing Section 4(b) and Section 4(c)) of Common Stock, then the Warrant Price shall be adjusted, from and after the date of determination of stockholders entitled to receive such dividend or distribution, to that price determined by multiplying the Warrant Price in effect immediately prior to such date of determination by a fraction (i) the numerator of which shall be the total number of shares of Common Stock outstanding immediately prior to such dividend or distribution, and (ii) the denominator of which shall be the total number of shares of Common Stock outstanding immediately after such dividend or distribution. e. Rights Offerings. In case the Company shall, at any time after the Date of Grant, issue rights, options or warrants to any person or persons who are at the time of such issuance the holders of equity securities of the Company, entitling them to subscribe for or purchase shares of Common Stock (or securities convertible or exchangeable into Common Stock) at a price per share of Common Stock as determined in accordance with Section 4(i) below (or having a conversion or exchange price per share of Common Stock if a security convertible or exchangeable into Common Stock) less than the fair market value per share of Common Stock on the record date for such issuance (or the date of issuance, if there is no record date), the Warrant Price to be in effect on and after such record date (or issuance date, as the case may be) shall be determined by multiplying the Warrant Price in effect immediately prior to such record date (or issuance date, as the case may be) by a fraction (i) the numerator of which shall be the number of shares of Common Stock outstanding on such record date (or issuance date, as the case may be) plus the number of shares of Common Stock which the aggregate offering price of the total number of shares of such Common Stock so to be offered (or the aggregate initial exchange or conversion price of the exchangeable or convertible securities so to be offered) would purchase at such fair market value on such record date (or issuance date, as the case may be) and (ii) the denominator of which shall be the number of shares of Common Stock outstanding on such record date (or issuance date, as the case may be) plus the number of additional shares of Common Stock to be offered for subscription or purchase (or into which the convertible securities to be offered are initially exchangeable or convertible). In case such subscription price may be paid in part or in whole in a form other than cash, the fair market value of such consideration shall be determined by the Board of Directors of the Company in good faith as set forth in a duly adopted board resolution certified by the Company's Secretary or Assistant Secretary, provided, that in the event the Board of Directors is unable to make such a determination or holders of at least fifty-one percent (51%) of the Warrant Shares issuable under outstanding Warrants disagree in writing with such determination, then the fair market value of such consideration shall be determined in the same manner as a Valuation under Section 4(i) below. Such adjustment shall be made successively whenever such an issuance occurs; and in the event that such rights, options, warrants, or convertible or exchangeable securities are not so issued or expire or cease to be convertible or exchangeable before they are exercised, converted, or exchanged (as the case may be), then the Warrant Price shall again be adjusted to be the Warrant Price that would then be in effect if such issuance had not occurred, but such subsequent adjustment shall not affect the number of Warrant Shares issued upon any exercise of this Warrant prior to the date such subsequent adjustment is made. 4 5 f. Special Distributions. In case the Company shall fix a record date for the making of a distribution to all holders of shares of Common Stock (including any such distribution made in connection with a consolidation or merger in which the Company is the surviving corporation) or evidences of indebtedness or assets (other than dividends and distributions referred to in Section 4(c) and Section 4(d) above and other than cash dividends) or of subscription rights, options, warrants, or exchangeable or convertible securities containing the right to subscribe for or purchase shares of any class of equity securities of the Company (excluding those referred to in Section 4(e) above), the Warrant Price to be in effect on and after such record date shall be adjusted by multiplying the Warrant Price in effect immediately prior to such record date by a fraction (i) the numerator of which shall be the fair market value per share of Common Stock on such record date, less the fair value (as determined by the Board of Directors of the Company in good faith as set forth in a duly adopted board resolution certified by the Company's Secretary or Assistant Secretary) of the portion of the assets or evidences of indebtedness so to be distributed or of such subscription rights, options, warrants, or exchangeable or convertible securities applicable to one (1) share of the Common Stock outstanding as of such record date, provided, that in the event the Board of Directors is unable to make such a determination or holders of at least fifty-one percent (51%) of the Warrant Shares issuable under outstanding Warrants disagree in writing with such determination, then the fair value of such consideration shall be determined in the same manner as a Valuation under Section 4(i) below, and (ii) the denominator of which shall be such fair market value per share of Common Stock. Such adjustment shall be made successively whenever such a record date is fixed; and in the event that such distribution is not so made, the Warrant Price shall again be adjusted to be the Warrant Price which would then be in effect if such record date had not been fixed, but such subsequent adjustment shall not affect the number of Warrant Shares issued upon any exercise of this Warrant prior to the date such subsequent adjustment was made. g. Other Issuances of Securities. In case the Company or any subsidiary shall, at any time after the Date of Grant, issue shares of Common Stock, or rights, options, warrants or convertible or exchangeable securities containing the right to subscribe for or purchase shares of Common Stock (excluding (i) shares, rights, options, warrants, or convertible or exchangeable securities described in Section 11(f) or Section 11(g) hereof outstanding on the Date of Grant, or issued in any of the transactions described in Section 4(c), 4(d), 4(e) or 4(f) above, (ii) shares issued upon the exercise of such rights, options or warrants or upon conversion or exchange of such convertible or exchangeable securities, (iii) the Series Warrants and any shares issued upon exercise thereof, (iv) shares issued on conversion or exchange of, as dividends on, or otherwise in respect of the Company's 8% Series B Convertible Preferred Stock as constituted on the Date of Grant, (v) up to One Thousand Five Hundred (1,500) shares of the Company's Series C Preferred Stock as constituted on the Date of Grant issued on or before the thirtieth day after the Date of Grant (the "SERIES C SHARES"), (vi) shares issued upon conversion or exchange of, as dividends on, or otherwise in respect of the Series C Shares and (vii) up to Eleven Million Seven Hundred Ninety Four Thousand Two Hundred Forty Four (11,794,244) shares of Common Stock issued or issuable to directors, officers, employees or consultants of the Company or any subsidiary in connection with their service as directors, officers, employees or consultants pursuant to any stock grant, stock option, warrant or other right (the "EMPLOYEE SHARES")), at a price per share of Common Stock (determined in the case of such rights, options, warrants, or convertible or exchangeable securities by dividing (x) the total amount receivable by the Company in consideration of the sale and issuance of such rights, 5 6 options, warrants, or convertible or exchangeable securities, plus the total minimum consideration payable to the Company upon exercise, conversion, or exchange thereof by (y) the total maximum number of shares of Common Stock covered by such rights, options, warrants, or convertible or exchangeable securities) lower than the fair market value per share of Common Stock (determined in accordance with Section 4(i) below) on the date the Company fixes the offering price of such shares, rights, options, warrants, or convertible or exchangeable securities, then the Warrant Price shall be adjusted so that it shall equal the price determined by multiplying the Warrant Price in effect immediately prior thereto by a fraction (i) the numerator of which shall be the sum of (A) the number of shares of Common Stock outstanding immediately prior to such sale and issuance plus (B) the number of shares of Common Stock which the aggregate consideration received (determined as provided below) for such sale or issuance would purchase at such fair market value per share, and (ii) the denominator of which shall be the total number of shares of Common Stock outstanding immediately after such sale and issuance. Such adjustment shall be made successively whenever such an issuance is made. For the purposes of such adjustment, the maximum number of shares of Common Stock which the holder of any such rights, options, warrants or convertible or exchangeable securities shall be entitled to subscribe for or purchase shall be deemed to be issued and outstanding as of the date of such sale and issuance and the consideration received by the Company therefor shall be deemed to be the consideration received by the Company for such rights, options, warrants, or convertible or exchangeable securities, plus the minimum consideration or premium stated in such rights, options, warrants, or convertible or exchangeable securities to be paid for the shares of Common Stock covered thereby. In case the Company shall sell and issue shares of Common Stock, or rights, options, warrants, or convertible or exchangeable securities containing the right to subscribe for or purchase shares of Common Stock for a consideration consisting, in whole or in part, of property other than cash or its equivalent, then in determining the price per share of Common Stock and the consideration received by the Company for purposes of the first sentence of this Section 4(g), the Board of Directors of the Company shall determine, in good faith, the fair value of said property, and such determination shall be described in a duly adopted board resolution certified by the Company's Secretary or Assistant Secretary, provided, that in the event the Board of Directors is unable to make such a determination or holders of at least fifty-one percent (51%) of the Warrant Shares issuable under outstanding Warrants disagree in writing with such determination, then the fair value of such consideration shall be determined in the same manner as a Valuation under Section 4(i) below. In case the Company shall sell and issue rights, options, warrants, or convertible or exchangeable securities containing the right to subscribe for or purchase shares of Common Stock together with one (1) or more other securities as a part of a unit at a price per unit, then in determining the price per share of Common Stock and the consideration received by the Company for purposes of the first sentence of this Section 4(g), the Board of Directors of the Company shall determine, in good faith, which determination shall be described in a duly adopted board resolution certified by the Company's Secretary or Assistant Secretary, the fair value of the rights, options, warrants, or convertible or exchangeable securities then being sold as part of such unit, provided, that in the event the Board of Directors is unable to make such a determination or holders of at least fifty-one percent (51%) of the Warrant Shares issuable under outstanding Warrants disagree in writing with such determination, then the fair value of such consideration shall be determined in the same manner as a Valuation under Section 4(i) below. Such adjustment shall be made successively whenever such an issuance occurs, and in the event that such rights, options, warrants, or convertible or exchangeable securities expire or cease to be convertible or exchangeable before they are exercised, converted, or exchanged (as the case may be), then the Warrant Price shall again be adjusted to the Warrant Price 6 7 that would then be in effect if such sale and issuance had not occurred, but such subsequent adjustment shall not affect the number of Warrant Shares issued upon any exercise of the Warrant prior to the date such subsequent adjustment is made. h. Adjustment of Number of Shares. Upon each adjustment in the Warrant Price, the number of Warrant Shares purchasable hereunder shall be adjusted, to the nearest whole share, to the product obtained by multiplying the number of Warrant Shares purchasable immediately prior to such adjustment in the Warrant Price by a fraction, the numerator of which shall be the Warrant Price immediately prior to such adjustment and the denominator of which shall be the Warrant Price immediately thereafter. i. Determination of Fair Market Value. For purposes of this Section 4, "FAIR MARKET VALUE" of a share of Common Stock as of a particular date (the "DETERMINATION DATE") shall mean (i) if shares of Common Stock are traded on a national securities exchange (an "EXCHANGE"), the weighted average of the closing prices of a share of the Common Stock of the Company on the last five (5) trading days prior to the Determination Date reported on such Exchange as reported in The Wall Street Journal, (ii) if shares of Common Stock are not traded on an Exchange but trade in the over-the-counter market and such shares are quoted on the National Association of Securities Dealers Automated Quotations System ("NASDAQ"), (A) the average of the last sale prices reported on NASDAQ or (B) if such shares are an issue for which last sale prices are not reported on NASDAQ, the average of the closing bid and ask prices, in each case on the last five (5) trading days (or if the relevant price or quotation did not exist on any of such days, the relevant price or quotation on the next preceding business day on which there was such a price or quotation) prior to the Determination Date as reported in The Wall Street Journal, or (iii) if no price can be determined on the basis of the above methods of valuation, then the judgment of valuation shall be determined in good faith by the Board of Directors of the Company, which determination shall be described in a duly adopted board resolution certified by the Company's Secretary or Assistant Secretary. If the Board of Directors of the Company is unable to determine any Valuation (as defined below), or if the holders of at least fifty-one percent (51%) of all of the Warrant Shares issuable under outstanding Warrants (collectively, the "REQUESTING HOLDERS") disagree with the Board's determination of any Valuation by written notice delivered to the Company within five (5) business days after the determination thereof by the Board of Directors of the Company is communicated to holders of the Warrants affected thereby, which notice specifies a majority-in-interest of the Requesting Holders' determination of such Valuation, then the Company and a majority-in-interest of the Requesting Holders shall select a mutually acceptable investment banking firm of national reputation which has not had a material relationship with the Company or any officer of the Company within the preceding two (2) years, which shall determine such Valuation. Such investment banking firm's determination of such Valuation shall be final, binding and conclusive on the Company and the holders of all of the Warrants issued hereunder and then outstanding. If the Board of Directors of the Company was unable to determine such Valuation, all costs and fees of such investment banking firm shall be borne by the Company. If the Requesting Holders disagreed with the Board's determination of such Valuation, the party whose determination of such Valuation differed from the Valuation determined by such investment banking firm by the greatest amount shall bear all costs and fees of such investment banking firm. For purposes of this Section 4(i), the term "Valuation" shall mean the determination, to be made initially by the Board of Directors of the Company, of the fair market value per share of Common Stock pursuant to clause (iii) above. 7 8 5. Notice of Adjustments. Whenever the Warrant Price or the number of Warrant Shares purchasable hereunder shall be adjusted pursuant to Section 4 hereof, the Company shall make a certificate signed by its chief financial officer setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated, and the Warrant Price and the number of Warrant Shares purchasable hereunder after giving effect to such adjustment, which shall be mailed (without regard to Section 14 hereof, by first class mail, postage prepaid) to the holder of this Warrant. 6. Fractional Shares. No fractional shares of Common Stock will be issued in connection with any exercise hereunder, but in lieu of such fractional shares the Company shall make a cash payment therefor based on the fair market value (as determined in accordance with Section 4(i) above) of a share of Common Stock on the date of exercise. 7. Compliance with Securities Act; Disposition of Warrant or Warrant Shares. a. Compliance with Securities Act. The holder of this Warrant, by acceptance hereof, agrees that this Warrant and the shares of Common Stock to be issued upon exercise hereof are being acquired for investment and that such holder will not offer, sell or otherwise dispose of this Warrant, or any shares of Common Stock to be issued upon exercise hereof except under circumstances which will not result in a violation of the Securities Act of 1933, as amended (the "ACT"). Upon exercise of this Warrant, the holder hereof shall confirm in writing, by executing the form attached as Schedule 1 to Exhibit A hereto, that the shares of Common Stock so purchased are being acquired for investment and not with a view toward distribution or resale. This Warrant and all shares of Common Stock issued upon exercise of this Warrant (unless registered under the Act) shall be stamped or imprinted with a legend in substantially the following form: "THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. NO SALE OR DISPOSITION MAY BE EFFECTED WITHOUT (i) AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO, (ii) AN OPINION OF COUNSEL FOR THE HOLDER, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED, (iii) RECEIPT OF A NO-ACTION LETTER(S) FROM THE APPROPRIATE GOVERNMENTAL AUTHORITY(IES), OR (iv) OTHERWISE COMPLYING WITH THE PROVISIONS OF SECTION 7 OF THE WARRANT UNDER WHICH THESE SECURITIES WERE ISSUED DIRECTLY OR INDIRECTLY." In addition, in connection with the issuance of this Warrant, the holder specifically represents to the Company by acceptance of this Warrant as follows: (1) The holder is aware of the Company's business affairs and financial condition, and has acquired information about the Company sufficient to reach an informed and knowledgeable decision to acquire this Warrant. The holder is acquiring this Warrant for its own account for investment purposes only and not with a view to, or for the 8 9 resale in connection with, any "distribution" thereof for purposes of the Act. (2) The holder understands that this Warrant and the Warrant Shares have not been registered under the Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of the holder's investment intent as expressed herein. In this connection, the holder understands that, in the view of the Securities and Exchange Commission (the "SEC"), the statutory basis for such exemption may be unavailable if the holder's representation was predicated solely upon a present intention to hold the Warrant and the Warrant Shares for the minimum capital gains period specified under applicable tax laws, for a deferred sale, for or until an increase or decrease in the market price of the Warrant and the Warrant Shares, or for a period of one (1) year or any other fixed period in the future. (3) The holder further understands that this Warrant and the Warrant Shares must be held indefinitely unless subsequently registered under the Act and any applicable state securities laws, or unless exemptions from registration are otherwise available. (4) The holder is aware of the provisions of Rule 144 and 144A, promulgated under the Act, which, in substance, permit limited public resale of "restricted securities" acquired, directly or indirectly, from the issuer thereof (or from an affiliate of such issuer), in a non-public offering subject to the satisfaction of certain conditions, if applicable, including, among other things: the availability of certain public information about the Company, the resale occurring not less than one (1) year after the party has purchased and paid for the securities to be sold; the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934, as amended) and the amount of securities being sold during any three-month period not exceeding the specified limitations stated therein. (5) The holder further understands that at the time it wishes to sell this Warrant and the Warrant Shares there may be no public market upon which to make such a sale, and that, even if such a public market then exists, the Company may not be satisfying the current public information requirements of Rule 144 and 144A, and that, in such event, the holder may be precluded from selling this Warrant and the Warrant Shares under Rule 144 and 144A even if the one (1)-year minimum holding period had been satisfied. (6) The holder further understands that in the event all of the requirements of Rule 144 and 144A are not satisfied, registration under the Act, compliance with Regulation A, or some other registration exemption will be required; and that, notwithstanding the fact that Rule 144 and 144A is not exclusive, the Staff of the SEC has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rule 144 and 144A will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk. b. Disposition of Warrant or Warrant Shares. With respect to any offer, sale or other disposition of this Warrant, or any Warrant Shares acquired pursuant to the exercise of this Warrant prior to registration of such Warrant or Warrant Shares, the holder hereof and each subsequent holder of this Warrant agrees to give written notice to the Company 9 10 prior thereto, describing briefly the manner thereof, together with a written opinion of such holder's counsel, if reasonably requested by the Company, to the effect that such offer, sale or other disposition may be effected without registration or qualification (under the Act as then in effect or any federal or state law then in effect) of this Warrant or such Warrant Shares and indicating whether or not under the Act certificates for this Warrant or such Warrant Shares to be sold or otherwise disposed of require any restrictive legend as to applicable restrictions on transferability in order to ensure compliance with applicable law. Promptly upon receiving such written notice and reasonably satisfactory opinion, if so requested, the Company, as promptly as practicable, shall notify such holder that such holder may sell or otherwise dispose of this Warrant or such Warrant Shares, all in accordance with the terms of the notice delivered to the Company. If a determination has been made pursuant to this Section 7(b) that the opinion of counsel for the holder is not reasonably satisfactory to the Company, the Company shall so notify the holder promptly after such determination has been made. The foregoing notwithstanding, this Warrant or such Warrant Shares may, as to such federal laws, be offered, sold or otherwise disposed of in accordance with Rule 144 and 144A under the Act, provided that the Company shall have been furnished with such information as the Company may reasonably request to provide a reasonable assurance that the provisions of Rule 144 and 144A have been satisfied. Each certificate representing this Warrant or the Warrant Shares thus transferred (except a transfer pursuant to Rule 144) shall bear a legend as to the applicable restrictions on transferability in order to ensure compliance with such laws, unless in the aforesaid opinion of counsel for the holder, such legend is not required in order to ensure compliance with such laws. The Company may issue stop transfer instructions to its transfer agent or, if acting as its own transfer agent, the Company may stop transfer on its corporate books, in connection with such restrictions. 8. Rights as Stockholders; Information. No holder of this Warrant, as such, shall be entitled to vote or receive dividends or be deemed the holder of Common Stock or any other securities of the Company which may at any time be issuable on the exercise hereof for any purpose, nor shall anything contained herein be construed to confer upon the holder of this Warrant, as such, any of the rights of a stockholder of the Company or any right to vote for the election of the directors or upon any matter submitted to stockholders at any meeting thereof, or to receive notice of meetings, or to receive dividends or subscription rights or otherwise until this Warrant shall have been exercised and the Warrant Shares purchasable upon the exercise hereof shall have become deliverable, as provided herein. The foregoing notwithstanding, the Company will transmit to the holder of this Warrant such information, documents and reports as are generally distributed to the holders of any class or series of the securities of the Company concurrently with the distribution thereof to the stockholders. 10 11 9. Registration Rights. 9.1 Demand Registration Rights. a. Shelf Registration. The Company covenants and agrees that at any time after receipt of a written request (a "SHELF REGISTRATION REQUEST") from the holder(s) of the Series Warrants and/or the Series Warrant Shares (collectively, the "SECURITYHOLDERS") constituting at least thirty seven and one half percent (37.5%) of the Series Warrant Shares (determined on an as-exercised basis) to have the Company register the Series Warrant Shares for sale on a continuous basis pursuant to Rule 415 under the Act, then the Company shall: (i) promptly deliver written notice (the "SHELF REGISTRATION Notice") to all other Securityholders of the Company's receipt of the Shelf Registration Request; (ii) file with the SEC a registration statement on Form S-3 or any successor form or registration to such form, or, if the Company is ineligible for Form S-3, Form S-1 or any successor form of registration to such form, for an offering to be made on a continuous basis pursuant to Rule 415 (the "SHELF REGISTRATION STATEMENT") covering all of the outstanding Series Warrant Shares (determined on an as-exercised basis)(the "REGISTRABLE SECURITIES"), within forty-five (45) days of delivery of the Shelf Registration Request, (iii) shall use its best efforts to cause such registration statement to be declared effective within ninety (90) days of delivery of the Shelf Registration Notice and (iv) shall use its best efforts, including but not limited to the filing of any and all supplements and amendments to the Shelf Registration Statement required under applicable rules, regulations or instructions or reasonably requested by the holders of a majority of the shares then registered under the Shelf Registration Statement, to keep the Shelf Registration Statement effective under the Act until all of the Series Warrant Shares so registered have been sold, subject to Section 9.3(b) below and applicable law. 11 12 b. Other Demand Registrations. The Company covenants and agrees that in the event that it fails to file and cause to become effective a Shelf Registration Statement covering all of the Registrable Securities within one hundred eighty (180) days after delivery of a Shelf Registration Request, or if it fails to keep such Shelf Registration Statement continuously effective until all of the Registrable Securities are sold (subject to Section 9.3(b) hereof), then at any time after receipt of a written request (a "DEMAND REGISTRATION REQUEST") from Securityholders holding at least thirty seven and one half percent (37.5%) of the Registrable Securities stating that such Securityholders desire and intend to have the Company register all or a portion of the Registrable Securities held by them on Form S-3, or any successor form of registration to such form, or, if the Company is ineligible therefore, Form S-1, or any successor form of registration to such form, the Company shall give notice (the "REGISTRATION NOTICE") to all of the Securityholders within thirty (30) days of the Company's receipt of such registration request, the Company shall cause to be included in such registration all Registrable Securities requested to be included therein by any such Securityholder within fifteen (15) days after such Registration Notice is effective (subject to the provisions of the final sentence of this Section 9.1(a)). After such fifteen (15)-day period, the Company shall file as promptly as practicable a registration statement and use its reasonable best efforts to cause such registration statement to become effective under the Act and remain effective for six (6) months or such shorter period as may be required if all such Registrable Securities covered by such registration statement are sold prior to the expiration of such six (6)-month period; provided, however, that the Company shall not be obligated to effect any such registration pursuant to this Section 9.1(b) after the Company has effected two (2) such registrations pursuant to this Section 9.1. For purposes of this Section 9, a registration shall not be deemed to have been effected unless a registration statement including at least eighty-five percent (85%) of the Registrable Shares requested to be included therein has been declared effective and, subject to Section 9.3(b) hereof, remained effective for a period of six (6) months (or such shorter period as is permitted in the second sentence of this Section 9.1(b)). The foregoing notwithstanding, in the event of an underwritten offering pursuant to this Section 9.1(b), if the managing underwriter of such offering shall advise the Securityholders in writing that, in its opinion, the distribution of a specified portion of the securities requested to be included in the registration would materially adversely affect the distribution of such securities by increasing the aggregate amount of the offering in excess of the maximum amount of securities which such managing underwriter believes can reasonably be sold in the contemplated distribution, then the securities to be included in the registration shall be included in the following order: (i) first, pro rata among all of the Registrable Securities requested to be included therein by the Securityholders according to the number of Registrable Securities requested to be included by each such Securityholder requesting inclusion therein, and (ii) second, such other securities requested to be included therein by the Company and the holders of such other securities, pro rata among the Company and the holders of such other securities according to the number of securities requested to be included by the Company and each such holder requesting inclusion therein. For purposes of this Section 9.1(b), the Securityholders who have requested registration of Common Stock to be acquired upon the exercise of Warrants not theretofore exercised shall furnish the Company with an undertaking that they or the underwriters or other persons to whom such Warrants will be transferred have undertaken to exercise such Warrants and to sell, transfer or otherwise dispose of the Shares received upon exercise of such Warrants in such registration. 9.2 Incidental Registration 12 13 a. The Company covenants and agrees with the Securityholders that in the event that the Company proposes after the Date of Grant to file a registration statement under the Act with respect to any of its equity securities (other than pursuant to registration statements on Form S-4 or Form S-8 or any successor or similar forms), whether or not for its own account, then the Company shall give written notice of such proposed filing to all Securityholders promptly (and in any event at least twenty (20) days before the anticipated filing date). Such notice shall offer to such Securityholders, together with others who have similar rights, the opportunity to include in such registration statement such number of Registrable Securities as they may request (other than Registrable Securities already registered pursuant to a Shelf Registration Statement). The Company shall direct and use its reasonable best efforts to cause the managing underwriter of a proposed underwritten offering (unless the offering is an underwritten offering of a class of the Company's equity securities other than Common Stock and the managing underwriter has advised the Company in writing that, in its opinion, the inclusion in such offering of Common Stock would materially adversely affect the distribution of such offering) to permit the holders of Registrable Securities requested to be included in the registration to include such Registrable Securities in the proposed offering and the Company shall use its reasonable best efforts to include such Registrable Securities in such proposed offering on the same terms and conditions as any similar securities of the Company included therein. If the offering of which the Company gives notice is a public offering involving an underwriter, the right of a Securityholder to registration pursuant to this Section 9.2 shall be conditioned upon such Securityholder's participation in such underwriting and the inclusion of the Registrable Securities to be sold by such Securityholder in the underwriting. All Securityholders proposing to distribute Registrable Securities through such underwriting shall enter into an underwriting agreement in customary form with the representative of the underwriter or underwriters. The foregoing notwithstanding, in the case of a firm commitment offering on underwriting terms appropriate for such a transaction, other than a registration requested by Securityholders pursuant to Section 9.1, if any such managing underwriter of recognized standing shall advise the Company and the Securityholders in writing that, in its opinion, the distribution of all or a specified portion of the Registrable Securities requested to be included in the registration concurrently with the securities being registered by the Company would materially adversely affect the distribution of such securities by increasing the aggregate amount of the offering in excess of the maximum amount of securities which such managing underwriter believes can reasonably be sold in the contemplated distribution, then the securities to be included in a registration which is a primary underwritten offering on behalf of the Company shall be included in the following order: (i) first, the securities the Company proposes to include therein, (ii) second, Registrable Securities pro rata and (iii) third, such other securities requested to be included, pro rata among the holders of such other securities according to the number of securities requested to be included by each such holder requesting inclusion therein. b. In the event that a holder or holders of the Company's securities (other than a Securityholder or Securityholders) requests, pursuant to rights granted to such holder or holders, that the Company file a registration statement for the public offering of securities and the Company and the other holders of the Company's securities (including the Securityholders) who have rights to be included in such registration, request to be included in such registration and the managing underwriter of such offering shall advise the Company and the holders requesting inclusion in the offering that, in its opinion, the distribution of a specified portion of the securities requested to be included in the registration would materially adversely affect the distribution of such securities by increasing the aggregate amount of the offering in 13 14 excess of the maximum amount of securities which such managing underwriter believes can reasonably be sold in the contemplated distribution then, the securities to be included in the registration shall be included in the following order: (i) first, all of the securities requested to be included therein by the holder or holders making the initial request for the registration, (ii) second, Registrable Securities and (iii) third, such other securities requested to be included therein by the Company and the holders of such other securities, pro rata among the Company and the holders of such other securities according to the number of securities requested to be included by the Company and each such holder requesting inclusion therein. For purposes of this Section 9.2(b), the Company agrees to request for inclusion in the registration only that number of securities that the Company intends, in good faith, to sell, if all such securities so requested by the Company were permitted to be included by the managing underwriter in such registration and sold pursuant thereto. 9.3 Company's Obligations a. In connection with the registration of Registrable Securities on behalf of the holders thereof (such Securityholders being referred to herein as "Sellers") in accordance with Section 9.1 or Section 9.2 above, and in addition to its other obligations under this Section 9, the Company agrees to: (i) with respect to any registration pursuant to Section 9.1(a) or 9.1(b), prepare and file with the Commission a registration statement on the form specified in such section, with respect to the Registrable Securities to be registered pursuant to such section, and to use its best efforts to cause such registration statement to become and remain effective as provided in such section; (ii) enter into a cross-indemnity agreement, in customary form, with each underwriter, if any, and each Seller; (iii) subject to the provisions of Section 9.1 and Section 9.2 regarding reductions in Registrable Securities to be included in a registration, include in the registration statement filed with the SEC, the Registrable Securities for which requests for registration have been made (or, in the case of a registration under Section 9.1(a), all such Registrable Securities); and promptly after filing of such a registration statement or prospectus or any amendments or supplements thereto, the Company shall furnish to each Seller copies of all such documents filed including, if requested, documents incorporated by reference in the registration statement; and notify each Seller of any stop order issued or threatened by the SEC and use its best efforts to prevent the entry of such stop order or to remove it if entered; (iv) prepare and file with the SEC such amendments of and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective (A) with respect to a registration statement under Section 9.1(b) or Section 9.2, for a period of six (6) months or such shorter period as may be required if all such Registrable Securities covered by such registration statement are sold prior to the expiration of such period or (B) with respect to a Shelf Registration Statement, until all the Registrable Securities covered by such registration statement are sold, and to otherwise comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement during such period in accordance with the intended 14 15 methods of disposition by the Sellers set forth in such registration statement; (v) furnish to each Seller and each underwriter, if any, without charge, such number of copies of the registration statement, each amendment and supplement thereto (in each case including all exhibits thereto), the prospectus included in such registration statement (including each preliminary prospectus) and such other documents as such Seller may reasonably request in order to facilitate the disposition of the Registrable Securities proposed to be sold by such Seller; (vi) use its reasonable best efforts to register or qualify such Registrable Securities under such other securities or Blue Sky laws of such jurisdictions as any Seller or any such underwriter reasonably requests in writing and keep such registrations or qualifications in effect for so long as such registration statement remains in effect and do any and all acts and things which may be reasonably necessary or advisable to enable such Seller to consummate the disposition in such jurisdictions of the Registrable Securities owned by such Seller; provided, however, that the Company shall not be required to (A) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this Subsection 9.3(a)(vi), or (B) consent to general service of process in any such jurisdiction; (vii) notify each Seller, at any time when a prospectus relating to such Seller's Registrable Securities is required to be delivered under the Act, of the occurrence of any event as a result of which the prospectus included in such registration statement contains an untrue statement of a material fact or omits to state any material fact necessary to make the statements therein not misleading, and as soon as practicable prepare a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading; (viii) cause all such Registrable Securities to be listed on any Exchange or NASDAQ on which similar securities issued by the Company are then listed; (ix) provide a transfer agent, registrar and CUSIP number for all such Registrable Securities not later than the effective date of such registration statement; (x) enter into such customary agreements (including an underwriting agreement in customary form) and take all such other actions that the Sellers or the underwriters, if any, reasonably request in order to expedite or facilitate the disposition of such Registrable Securities; (xi) make available for inspection by the Sellers and their counsel, any underwriter participating in any disposition pursuant to such registration statement, and any counsel retained by any such underwriter, all pertinent financial and other information and corporate documents of the Company, and cause the Company's officers, directors and employees to supply all information reasonably requested by any such Seller, underwriter or counsel in connection with such registration statement; (xii) with respect to any underwritten offering, use its 15 16 reasonable best efforts to obtain a "cold comfort" letter from the Company's independent public accountants in customary form and covering such matters of the type customarily covered by "cold comfort" letters as the Sellers or any underwriter may reasonably request; (xiii) with respect to an underwritten offering, obtain an opinion of counsel to the Company, addressed to the Sellers and any underwriter, in customary form and including such matters as are customarily covered by such opinions in underwritten registered offerings of equity securities as the Sellers or any underwriter may reasonably request, such opinion to be reasonably satisfactory in form and substance to each Seller; and (xiv) otherwise use its best efforts to comply with all applicable rules and regulations of the SEC, and make available to its securityholders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve (12) months subsequent to the effective date of the registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Act and Rule 158 thereunder. b. Any other provisions of this Section 9 notwithstanding, upon receipt by the Securityholders of a written notice signed by the chief executive officer or chief financial officer of the Company to the effect set forth below, the Company shall not be obligated during a reasonable period of time (not to exceed ninety (90) days) thereafter (i) to effect any registrations pursuant to this Section 9 or (ii) with respect to an effective Shelf Registration Statement, may suspend the effectiveness of such registration statement, at any time at which, in the Company's reasonable judgment, (i) there is a development involving the Company or any of its affiliates which is material but which has not yet been publicly disclosed or (ii) sales pursuant to the registration statement would materially and adversely affect an underwritten public offering for the account of the Company or any other material financing project or a proposed or pending material merger or other material acquisition or material business combination or material disposition of the Company's assets, to which the Company or any of its affiliates is, or is expected to be, a party. In the event a registration is postponed in accordance with this Section 9.3(b), (x) the Company must (unless otherwise instructed by those holders who requested such registration) file the requested registration within nine (9) months from the date the Company first received the request of the holders, (y) the Company may not defer the filing of a requested registration or suspend the effectiveness of a Shelf Registration Statement pursuant to this Section 9.3(b) more than once in any eighteen (18)-month period, and (z) there shall be added to any period during which the Company is obligated to keep a registration effective the number of days for which the registration was postponed pursuant to this Section 9.3(b). c. The Company may require that each Seller, as a condition to registering his, her or its Registrable Securities pursuant hereto, furnish the Company with such information regarding the distribution of the Registrable Securities proposed to be sold by such Seller as the Company may from time to time reasonably request in writing. d. Each Seller agrees that, upon receipt of any notice from the Company of the occurrence of any event of the kind described in Section 9.3(a)(vii) above, such Seller shall forthwith discontinue disposition of Registrable Securities pursuant to the registration statement covering such Registrable Securities until such Seller's receipt of copies of the supplemented or amended prospectus contemplated by Section 9.3(a)(vii) above and, if so directed by the Company, such Seller will deliver to the Company (at the Company's expense) all 16 17 copies, other than permanent file copies in such Seller's possession, of the prospectus covering such Registrable Securities current at the time of receipt of such notice. In the event the Company shall give any such notice, the period mentioned in Section 9.3(a)(iv) above shall be extended by the number of days during the period from and including the date of giving of such notice to and including the date when each Seller shall have received the copies of the supplemented or amended prospectus contemplated by Section 9.3(a)(vii) above. e. The Company shall not file or permit the filing of any registration or comparable statement which refers to any Seller by name or otherwise as the Seller of any securities of the Company unless such reference to such Seller is specifically required by the Act or any similar federal statute then in force. 9.4 All expenses incident to the Company's performance of or compliance with this Warrant, including without limitation all registration and filing fees, fees and expenses relating to filings with any Exchange, fees and expenses of compliance with securities or Blue Sky laws in jurisdictions reasonably requested by any Seller or underwriter pursuant to Section 9.3(a)(vi) (including reasonable fees and disbursements of counsel in connection with Blue Sky qualifications of the Registrable Securities), all word processing, duplicating and printing expenses, messenger and delivery expenses, fees and disbursements of counsel for the Company and one (1) counsel for the Sellers, independent public accountants (including the expenses of any special audit or "cold comfort" letters required by or incident to such performance) and underwriters (excluding discounts, commissions or fees of underwriters, selling brokers, dealer managers or similar securities industry professionals attributable to the securities being registered, which discounts, commissions or fees with respect to any Seller's respective shares shall be paid by such Seller, and legal expenses of any person other than the Company and the Sellers, but including liability insurance if the Company so desires), all the Company's internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit, the expense of any liability insurance (if the Company determines to obtain such insurance) and the fees and expenses incurred in connection with the listing of the securities to be registered on any Exchange and/or NASDAQ on which such securities issued by the Company are then listed, the reasonable fees and expenses of any special experts (including attorneys) retained by the Company (if it so desires) in connection with such registration and fees and expenses of other persons retained by the Company (all such expenses being herein called "REGISTRATION EXPENSES"), shall be borne by the Company. 9.5 In connection with the preparation and filing of each registration statement under the Act pursuant to this Section 9, the Company shall give the Sellers under such registration statement, their underwriters, if any, and their respective counsel and accountants, the opportunity to participate in the preparation of such registration statement, each prospectus included therein or filed with the SEC, and each amendment thereof or supplement thereto, and will give each of them such access to its books and records and such opportunities to discuss the business of the Company with its officers and the independent public accountants who have certified its financial statements as shall be necessary, in the opinion of such Sellers' and such underwriters' respective counsel, to conduct a reasonable investigation within the meaning of the Act. 17 18 9.6 Indemnification a. In the event of any registration of any securities of the Company under the Act, the Company shall, and hereby does, indemnify and hold harmless in the case of any registration statement filed pursuant to Section 9.1 or Section 9.2, the Seller of any Registrable Securities covered by such registration statement, its directors, officers, employees and agents, each other person who participates as an underwriter in the offering or sale of such Registrable Securities and each other person, if any, who controls such Seller or any such underwriter within the meaning of the Act against any losses, claims, damages, or liabilities (or actions or proceedings whether commenced or threatened in respect thereof), joint or several, to which such Seller or any such director or officer or employee or agent or underwriter or controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages, or liabilities (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such Registrable Securities were registered under the Act, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Company shall reimburse such Seller and each such director, officer, employee, agent, underwriter and controlling person for any legal or any other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, liability, action, or proceeding; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding, whether commenced or threatened in respect thereof), or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, any such preliminary prospectus, final prospectus, summary prospectus, amendment, or supplement in reliance upon and in conformity with written information furnished to the Company by such Seller for the express purpose of use in the preparation thereof and, provided, further, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding, whether commenced or threatened, in respect thereof), or expense arises out of such person's failure to send or give a copy of the final prospectus, as the same may be then supplemented or amended, within the time required by the Act to the person asserting an untrue statement or alleged untrue statement or omission or alleged omission if such statement or omission was corrected in such final prospectus. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Seller or any such director, officer, employee, agent, underwriter or controlling person and shall survive the transfer of such Registrable Securities by such Seller. b. In the event that the Company includes any Registrable Securities of a prospective Seller in any registration statement filed pursuant to Section 9.3, such prospective Seller shall, and hereby does, indemnify and hold harmless the Company, its directors, officers, employees and agents, each other person who participates as an underwriter in the offering or sale of such Registrable Securities and each other person, if any, who controls the Company or any such underwriter within the meaning of the Act against any losses, claims, damages, or liabilities (or actions or proceedings whether commenced or threatened in respect thereof), joint or several, to which the Company or any such director or officer or employee or underwriter or controlling person may become subject under the Act or otherwise, insofar as 18 19 such losses, claims, damages, or liabilities (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such Registrable Securities were registered under the Act, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and such prospective Seller shall reimburse the Company and any such director, officer, employee, agent, underwriter or controlling person for any legal or any other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, liability, action, or proceeding if, and only if, such statement or alleged statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company through an instrument duly executed by such Seller specifically stating that it is for use in the preparation of such registration statement, preliminary prospectus, final prospectus, summary prospectus, amendment, or supplement. In no event shall the liability of any Seller hereunder be greater in amount than the dollar amount of the proceeds received by such Seller upon the sale of the Registrable Securities giving rise to such indemnification obligation. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Company or any such director, officer, employee, agent, underwriter or controlling person and shall survive the transfer of such Registrable Securities by such Seller. c. The Company shall be entitled to receive indemnities from underwriters, selling brokers, dealer managers, and similar securities industry professionals participating in the distribution to the same extent as provided above with respect to information so furnished in writing by such persons specifically for inclusion in any prospectus or registration statement. d. Promptly after receipt by an indemnified party of notice of the commencement of any action or proceeding involving a claim referred to in this Section 9.6, such indemnified party shall, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action; provided, however, that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under the preceding subdivisions of this Section 9.6, except to the extent that the indemnifying party is actually prejudiced by such failure to give notice. In case any such action is brought against an indemnified party, unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist in respect of such claim, the indemnifying party shall be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified, to the extent that the indemnifying party may wish, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof other than reasonable costs of investigation. If, in the indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist in respect of such claim, the indemnified party may assume the defense of such claim, jointly with any other indemnified party that reasonably determines such conflict of interest to exist, and the indemnifying party shall be liable to such indemnified parties for the reasonable legal fees and expenses of one counsel for all such indemnified parties and for 19 20 other expenses reasonably incurred in connection with the defense thereof incurred by the indemnified party. No indemnifying party shall, without the consent of the indemnified party, consent to entry of any judgment or enter into any settlement of any such action which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability, or a covenant not to sue, in respect of such claim or litigation. No indemnified party shall consent to entry of any judgment or enter into any settlement of any such action the defense of which has been assumed by an indemnifying party without the consent of such indemnifying party. e. Indemnification and contribution similar to that specified in this Section 9.6 (with appropriate modifications) shall be given by the Company and each Seller with respect to any required registration or other qualification of Registrable Securities under any Federal or state law or regulation of any governmental authority, other than the Act. f. The indemnification required by this Section 9.6 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or expense, loss, damage or liability is incurred. g. If the indemnification provided for in this Section 9.6 from the indemnifying party is unavailable to an indemnified party hereunder in respect of any losses, claims, damages, liabilities, or expenses referred to herein, then the 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 losses, claims, damages, liabilities, or expenses in such proportion as is appropriate to reflect the relative fault of the indemnifying party and indemnified party in connection with the actions which resulted in such losses, claims, damages, liabilities, or expenses, 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 to state a material fact, has been 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. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities, and expenses referred to above shall be deemed to include any legal or other fees or expenses reasonably incurred by such party in connection with any investigation or proceeding. In no event shall the liability of any Seller hereunder be greater in amount than the dollar amount of the proceeds received by such Seller upon the sale of the Registrable Securities giving rise to such contribution obligation. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 9.6(g) were determined by pro rata allocation or by any other method of allocation which does not take into account the equitable considerations referred to in this Section 9.6(g). No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person or entity who was not guilty of such fraudulent misrepresentation. 9.7 Market Stand-Off Agreement. If requested by the managing underwriter of an offering for which securities of such Securityholder have been registered, a Securityholder shall not sell or otherwise transfer or dispose of any Registrable Securities held by such Securityholder (other than those included in the registration) during such period following the effective date of such registration as is usual and customary at such time in similar public 20 21 offerings of similar securities, so long as the officers, directors and all holders of two percent (2%) or more of the Common Stock of the Company are also required to so withhold their shares for such period. The obligations described in this Section 9.7 shall not apply to offerings pursuant to a registration statement on Form S-4 or Form S-8 or any successor or similar form. 9.8 Assignment of Rights; Termination. This rights granted under this Section 9 may be assigned to the transferee of any of the Registrable Securities and will terminate on the five (5) year anniversary of the Expiration Date. 10. Additional Rights. 10.1 Notice of Sale. In the event that the Company undertakes to effect a Sale, the Company will use its best efforts to provide to the holder at least thirty (30) days notice of the terms and conditions of the proposed transaction. The Company will cooperate with the holder in consummating the sale of this Warrant in connection with any such transaction. 10.2 Right to Convert Warrant into Common Stock; Net Issuance. a. Right to Convert. In addition to and without limiting the rights of the holder under the terms of this Warrant, the holder shall have the right to convert this Warrant or any portion thereof (the "CONVERSION RIGHT") into shares of Common Stock as provided in this Section 10.2 at any time or from time to time during the term of this Warrant. Upon exercise of the Conversion Right with respect to all or a specified portion of shares subject to this Warrant (the "CONVERTED WARRANT SHARES"), the Company shall deliver to the holder (without payment by the holder of any exercise price or any cash or other consideration) that number of shares of fully paid and nonassessable Common Stock equal to the quotient obtained by dividing (i) the value of this Warrant (or the specified portion hereof) on the Conversion Date (as defined in Section 10.2(b) hereof), which value shall be equal to (A) the aggregate fair market value of the Converted Warrant Shares issuable upon exercise of this Warrant (or the specified portion hereof) on the Conversion Date less (B) the aggregate Warrant Price of the Converted Warrant Shares immediately prior to the exercise of the Conversion Right by (ii) the fair market value of one (1) share of Common Stock on the Conversion Date. 21 22 Expressed as a formula, such conversion shall be computed as follows: X= A - B ----- Y Where: X = the number of shares of Common Stock that may be issued to holder Y = the fair market value (FMV) of one (1) share of Common Stock A = the aggregate FMV (i.e., FMV x Converted Warrant Shares) B = the aggregate Warrant Price (i.e., Converted Warrant Shares x Warrant Price) No fractional shares shall be issuable upon exercise of the Conversion Right, and, if the number of shares to be issued determined in accordance with the foregoing formula is other than a whole number, the Company shall pay to the holder an amount in cash equal to the fair market value of the resulting fractional share on the Conversion Date. For purposes of Section 9 of this Warrant, shares issued pursuant to the Conversion Right shall be treated as if they were issued upon the exercise of this Warrant. b. Method of Exercise. The Conversion Right may be exercised by the holder by the surrender of this Warrant at the principal office of the Company together with a written statement specifying that the holder thereby intends to exercise the Conversion Right and indicating the number of shares subject to this Warrant which are being surrendered (referred to in Section 10.2(a) hereof as the Converted Warrant Shares) in exercise of the Conversion Right. Such conversion shall be effective upon receipt by the Company of this Warrant together with the aforesaid written statement, or on such later date as is specified therein (the "CONVERSION DATE"). Certificates for the shares issuable upon exercise of the Conversion Right and, if applicable, a new warrant evidencing the balance of the shares remaining subject to this Warrant, shall be issued as of the Conversion Date and shall be delivered to the holder within thirty (30) days following the Conversion Date. c. Determination of Fair Market Value. For purposes of this Section 10.2, "fair market value" of a share of Common Stock shall have the meaning set forth in Section 4(i) above. 11. Representations and Warranties. The Company represents and warrants to the holder of this Warrant as follows: a. This Warrant has been duly authorized and executed by the Company and is a valid and binding obligation of the Company enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and the rules of law or principles at equity governing specific performance, injunctive relief and other equitable remedies; 22 23 b. The Warrant Shares have been duly authorized and reserved for issuance by the Company and, when issued in accordance with the terms hereof, will be validly issued, fully paid and nonassessable; c. The rights, preferences, privileges and restrictions granted to or imposed upon the Common Stock and the holders thereof are as set forth in the certificate of incorporation of the Company, as amended to the Date of Grant (as so amended, the "Charter"), a true and complete copy of which has been delivered to the original holder of this Warrant; d. The execution and delivery of this Warrant are not, and the issuance of the Warrant Shares upon exercise of this Warrant in accordance with the terms hereof will not be, inconsistent with the Charter or by-laws of the Company, do not and will not contravene, in any material respect, any governmental rule or regulation, judgment or order applicable to the Company, and do not and will not conflict with or contravene any provision of, or constitute a default under, any indenture, mortgage, contract or other instrument of which the Company is a party or by which it is bound or require the consent or approval of, the giving of notice to, the registration or filing with or the taking of any action in respect of or by, any Federal, state or local government authority or agency or other person, except for the filing of notices pursuant to federal and state securities laws, which filings will be effected by the time required thereby; e. There are no actions, suits, audits, investigations or proceedings pending or, to the knowledge of the Company, threatened against the Company in any court or before any governmental commission, board or authority which, if adversely determined, will have a material adverse effect on the ability of the Company to perform its obligations under this Warrant; f. The authorized capital stock of the Company and the capital stock issued and outstanding, or reserved for issuance, are as set forth on Schedule 5.8. All of the outstanding shares have been validly issued and are fully paid, nonassessable shares free of preemptive rights; g. Except as set forth on Schedule 5.8, there are no subscriptions, rights, options, warrants, or calls relating to any shares of the Company's capital stock, including any right of conversion or exchange under any outstanding security or other instrument; and h. The Company is not subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of its capital stock or any security convertible into or exchangeable for any of its capital stock. 12. Modification and Waiver. This Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. 13. Notices. Unless otherwise specifically provided herein, all communications under this Warrant shall be in writing and shall be deemed to have been duly given (i) on the date of service if served personally on the party to whom notice is to be given, (ii) on the day of transmission if sent by facsimile transmission to the number given below, and 23 24 telephonic confirmation of receipt is obtained promptly after completion of transmission, (iii) on the day after delivery to Federal Express or similar overnight courier, or (iv) on the fifth day after mailing, if mailed to the party to whom notice is to be given, by first class mail, registered or certified, postage prepaid, and properly addressed, return receipt requested, to each such holder at its address as shown on the books of the Company or to the Company at the address indicated therefor on the signature page of this Warrant. Any party hereto may change its address for purposes of this Section 13 by giving the other party written notice of the new address in the manner set forth herein. 14. Binding Effect on Successors. This Warrant shall be binding upon any corporation succeeding the Company by merger, consolidation or acquisition of all or substantially all of the Company's assets, and all of the obligations of the Company relating to the Common Stock issuable upon the exercise or conversion of this Warrant shall survive the exercise, conversion and termination of this Warrant and all of the covenants and agreements of the Company shall inure to the benefit of the successors and assigns of the holder hereof. The Company will, at the time of the exercise or conversion of this Warrant, in whole or in part, upon request of the holder hereof but at the Company's expense, acknowledge in writing its continuing obligation to the holder hereof in respect of any rights to which the holder hereof shall continue to be entitled after such exercise or conversion in accordance with this Warrant; provided, that the failure of the holder hereof to make any such request shall not affect the continuing obligation of the Company to the holder hereof in respect of such rights. 15. Lost Warrants or Stock Certificates. The Company covenants to the holder hereof that, upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant or any stock certificate and, in the case of any loss, theft or destruction, upon receipt of an executed lost securities bond or indemnity reasonably satisfactory to the Company, or in the case of any such mutilation upon surrender and cancellation of such Warrant or stock certificate, the Company will make and deliver a new Warrant or stock certificate, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant or stock certificate. 16. Descriptive Headings. The descriptive headings of the several paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. 17. Governing Law. This Warrant shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of New York. 18. Survival of Representations, Warranties and Agreements. All representations and warranties of the Company and the holder hereof contained herein shall survive the Date of Grant, the exercise or conversion of this Warrant (or any part hereof) or the termination or expiration of rights hereunder, and in addition, the Registration Rights contained in Section 9 above shall survive the exercise of this Warrant. All agreements of the Company and the holder hereof contained herein shall survive indefinitely until, by their respective terms, they are no longer operative. 19. Remedies. In case any one (1) or more of the covenants and agreements contained in this Warrant shall have been breached, the holders hereof (in the case of a breach by 24 25 the Company), or the Company (in the case of a breach by a holder), may proceed to protect and enforce their or its rights either by suit in equity and/or by action at law, including, but not limited to, an action for damages as a result of any such breach and/or an action for specific performance of any such covenant or agreement contained in this Warrant. 20. Acceptance. Receipt of this Warrant by the holder hereof shall constitute acceptance of and agreement to the foregoing terms and conditions. 21. No Impairment of Rights. The Company will not, by amendment of its Charter or through any other means, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holder of this Warrant against material impairment. [Signature page follows.] 25 26 IN WITNESS WHEREOF, the Company has caused this Warrant to be executed on its behalf by one of its officers thereunto duly authorized. AUREAL SEMICONDUCTOR INC. By: ----------------------------- Title: -------------------------- Address: 4245 Technology Drive Fremont, California 94538 Dated: as of June 5, 1998 27 EXHIBIT A NOTICE OF EXERCISE To: AUREAL SEMICONDUCTOR INC. 1. The undersigned hereby elects to purchase ________ shares of Common Stock of AUREAL SEMICONDUCTOR INC. pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price of such shares in full. 2. Please issue a certificate or certificates representing said shares in the name of the undersigned or in such other name or names as are specified below: --------------------- (Name) --------------------- --------------------- (Address) 3. The undersigned represents that the aforesaid shares are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such shares. In support thereof, the undesigned has executed an Investment Representation Statement attached hereto as Schedule 1. --------------------- (Signature) - --------------- (Date) 28 Schedule 1 INVESTMENT REPRESENTATION STATEMENT Purchaser: Company: AUREAL SEMICONDUCTOR INC. Security: Common Stock Amount: Date: In connection with the purchase of the above-listed securities (the "REGISTRABLE SECURITIES"), the undersigned (the "PURCHASER") represents to the Company as follows: (a) The Purchaser is aware of the Company's business affairs and financial condition, and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Registrable Securities. The Purchaser is purchasing the Registrable Securities for its own account for investment purposes only and not with a view to, or for the resale in connection with, any "distribution" thereof for purposes of the Registrable Securities Act of 1933, as amended (the "ACT"). (b) The Purchaser understands that the Registrable Securities have not been registered under the Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of the Purchaser's investment intent as expressed herein. In this connection, the Purchaser understands that, in the view of the Registrable Securities and Exchange Commission ("SEC"), the statutory basis for such exemption may be unavailable if the Purchaser's representation was predicated solely upon a present intention to hold these Registrable Securities for the minimum capital gains period specified under applicable tax laws, for a deferred sale, for or until an increase or decrease in the market price of the Registrable Securities, or for a period of one year or any other fixed period in the future. (c) The Purchaser further understands that the Registrable Securities must be held indefinitely unless subsequently registered under the Act or unless an exemption from registration is otherwise available. In addition, the Purchaser understands that the certificate evidencing the Registrable Securities will be imprinted with the legend referred to in the Warrant under which the Registrable Securities are being purchased. 29 (d) The Purchaser is aware of the provisions of Rule 144 and 144A, promulgated under the Act, which, in substance, permit limited public resale of "restricted securities" acquired, directly or indirectly, from the issuer thereof (or from an affiliate of such issuer), in a non-public offering subject to the satisfaction of certain conditions, if applicable, including, among other things: The availability of certain public information about the Company, the resale occurring not less than one (1) year after the party has purchased and paid for the securities to be sold; the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Registrable Securities Exchange Act of 1934, as amended) and the amount of securities being sold during any three-month period not exceeding the specified limitations stated therein. (e) The Purchaser further understands that at the time it wishes to sell the Registrable Securities there may be no public market upon which to make such a sale, and that, even if such a public market then exists, the Company may not be satisfying the current public information requirements of Rule 144 and 144A, and that, in such event, the Purchaser may be precluded from selling the Registrable Securities under Rule 144 and 144A even if the one-year minimum holding period had been satisfied. (f) The Purchaser further understands that in the event all of the requirements of Rule 144 and 144A are not satisfied, registration under the Act, compliance with Regulation A, or some other registration exemption will be required; and that, notwithstanding the fact that Rule 144 is not exclusive, the Staff of the SEC has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rule 144 will have a substantial burden or proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk. Purchaser: -------------------------- Date: --------------------- EX-4.12 7 8% SERIES B CONVERTIBLE PREFERRED STOCK 1 Exhibit 4.12 AUREAL SEMICONDUCTOR INC. 8% SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT THIS 8% SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT is made as of June 5, 1998, by and among AUREAL SEMICONDUCTOR INC., a Delaware corporation (the "Company"), and the purchasers set forth on the Schedule of Purchasers attached hereto as Exhibit A (the "Purchasers"). WHEREAS, the Purchasers, as either an original lender or assignee of an original lender, and the Company are parties to the Second Amended and Restated Loan Agreement dated August 7, 1997, as amended by the First Amendment to Second Amended and Restated Loan Agreement dated as of May 6, 1998 (the "Loan Agreement"), pursuant to which, among other things, the Purchasers increased the amount of the revolving credit facility to up to $31.5 million, have fully funded the Tranche A and B commitment of the revolving credit facility (such outstanding Tranche A and B, hereinafter the "Outstanding Debt"); WHEREAS, the Purchasers are the record and beneficial owners of the Outstanding Debt under the Loan Agreement in the amounts set forth on Exhibit A; and WHEREAS, the Purchasers seek to convert the Outstanding Debt into equity of the Company upon the terms set forth herein. NOW, THEREFORE, in consideration of the mutual promises, covenants and conditions hereinafter set forth, the parties hereby agree as follows: 1. Sale of Stock. Subject to the terms and conditions hereof, the Company will issue and sell to each Purchaser, and each Purchaser will purchase from the Company, at a Closing (as defined below), the number of shares of 8% Series B Convertible Preferred Stock of the Company (the "Series B Stock") set forth opposite each Purchaser's name on Exhibit A. In consideration for each share of Series B Stock, each Purchaser shall agree to cancel eight hundred dollars ($800.00) of the Outstanding Debt owed by the Company to such Purchaser. In connection with the foregoing transactions, the Company acknowledges that the participation interests in the Tranche B Commitment (as such term is defined in the Loan Agreement) in the amount of $4.5 million has been, immediately prior hereto, elevated to an assignment. 2. Closing Date; Delivery. 2.1 Closing Date. The closing of the purchase and sale of the Series B Stock (the "Closing") shall be held on June 5, 1998 (the "Closing Date"), at the offices of Gray Cary Ware & Freidenrich LLP, 400 Hamilton Avenue, Palo Alto, California 94301-1825. 1 2 2.2 Delivery. Subject to the terms of this Agreement, at the Closing the Company will deliver to the Purchasers the stock certificates representing the Series B Stock to be purchased by the Purchasers from the Company, against cancellation of the Outstanding Debt owed by the Company to each Purchaser. 3. Representations and Warranties of the Company. Except as set forth in Exhibit B attached hereto, the Company hereby represents and warrants to the Purchasers as follows: 3.1 Organization and Standing; Certificate of Incorporation and Bylaws. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to carry on its business as now conducted and as proposed to be conducted. The Company is presently qualified, licensed or domesticated as a foreign corporation or partnership in all jurisdictions in which the failure to be so qualified, licensed or domesticated would result in material adverse consequences to the Company or its business. 3.2 Corporate Power. The Company has all requisite legal and corporate power to enter into this Agreement and all other agreements contemplated hereby, to sell the Series B Stock hereunder, and to carry out and perform its obligations under the terms of this Agreement and all other agreements contemplated hereby. This Agreement and all other agreements contemplated hereby are valid and binding obligations of the Company, except as the same may be limited by bankruptcy, insolvency, fraudulent conveyance, moratorium, usury, reorganization, and other laws of general application affecting the enforcement of creditors' rights. 3.3 Capitalization. The authorized capital stock of the Company is 100,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock. As of March 27, 1998, there were issued and outstanding 42,082,938 shares of the Company's Common Stock and 500 shares of the Company's Series A Preferred Stock ("Series A Stock"). All such issued and outstanding shares have been duly authorized and validly issued, are fully paid and non-assessable and were issued in compliance with all applicable state and federal laws concerning the issuance of securities. The Company maintains stock option plans and has issued stock options and warrants as noted below: (a) Shares of Common Stock reserved for issuance pursuant to exercise of current or future outstanding options under the Company's 1995 Stock Option Plan and 1994 Stock Option Plan (collectively, the "Plans") issued to employees or consultants to the Company: 9,594,975; (b) Shares of Common Stock reserved for issuance pursuant to exercise of current or future outstanding options under the Crystal River Engineering, Inc. Stock Option Plan: 1,999,269; 2 3 (c) Shares of Common Stock reserved for issuance pursuant to exercise of current or future outstanding options under the Company's Outside Director Stock Option Plan: 200,000; (d) Shares of Common Stock reserved for issuance pursuant to exercise of warrants to be issued to certain lenders in connection with the expansion and restructuring of the Company's debt and extension thereof through March 31, 2000: 3,150,000; (e) Shares of Common Stock reserved for issuance pursuant to exercise of an outstanding warrant to Hambrecht & Quist: 50,000; (f) Shares of Common Stock reserved for issuance pursuant to exercise of outstanding warrants issued by the Company to purchasers of units on August 6, 1997: 955,000; and (g) Shares of Common Stock reserved for issuance pursuant to exercise of outstanding warrants to Swartz Investments, LLC: 140,000. Other than the above noted reserved shares and the Common Stock to be reserved for issuance upon conversion of the Series A Stock and the Series B Stock, there are no outstanding rights, options, warrants, conversion rights or agreements for the purchase or acquisition from the Company of any shares of its capital stock. The Company is not a party or subject to any agreement or understanding between any persons or entities which affects or relates to the voting or giving of written consents with respect to any securities or by any director of the Company. 3.4 Authorization. (a) All corporate, federal and state action on the part of the Company, its officers, directors and stockholders necessary for the sale and issuance of the Series B Stock, and the Common Stock issuable upon conversion of the Series B Stock pursuant hereto and the performance of the Company's obligations hereunder or contemplated hereby has been taken or will be taken prior to the Closing. (b) The Series B Stock, when issued in compliance with the provisions of this Agreement, and the Common Stock issuable upon conversion of the Series B Stock, as provided for in the Certificate of Designation (the "Certificate of Designation"), a form of which is attached hereto as Exhibit C, will be validly issued, fully paid and nonassessable, and will be free of any liens or encumbrances; provided, however, that the Series B Stock and the Common Stock issuable upon conversion thereof may be subject to restrictions on transfer under state and/or federal securities laws as set forth herein, and as may be required by future changes in such laws. (c) No person has any right of first refusal or any preemptive rights in connection with the issuance of the Series B Stock or the Common Stock issuable upon conversion of the Series B Stock. 3 4 3.5 Patents, Trademarks, etc. Except as set forth in Exhibit B, the Company owns and possesses or is licensed under all patents, patent applications, licenses, trademarks, trade names, brand names, inventions, processes, formulae and copyrights necessary for the operation of the business of the Company as now conducted and as proposed to be conducted with no known infringement of or conflict with the rights of others. Except as contemplated in this Agreement, there are no outstanding options, licenses, or agreements of any kind relating to the foregoing, nor is the Company bound by or a party to any other options, licenses or agreements of any kind with respect to the patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information, proprietary rights and processes of any other person or entity. Except as disclosed in the Company's Annual Report on Form 10-K for the period ended December 28, 1997 (the "10-K"), the Company has not received any communications alleging that it has violated or, by conducting its business as proposed, would violate any of the patents, trademarks, service marks, trade names, copyrights or trade secrets or other proprietary rights of any other person or entity. The Company is not aware that any of its employees are obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with the use of his or her best efforts to promote the interests of the Company or that would conflict with the Company's business as proposed to be conducted or that would prevent any such employee from assigning inventions to the Company. Neither the execution nor delivery of this Agreement, nor the carrying on of the Company's business as proposed, will, to the best of the Company's knowledge, conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, any contract, covenant or instrument under which any of such employees is now obligated. The Company does not believe that it is or will be necessary for the Company to utilize any inventions of any of its employees (or people it currently intends to hire) made prior to their employment by the Company. 3.6 Compliance with Other Instruments, None Burdensome, etc. The Company is not in violation of any term of its Certificate of Incorporation or Bylaws, nor is the Company in violation in any material respect of any mortgage, indenture, contract, agreement, instrument, judgment or decree, and to the best of the Company's knowledge, the Company is not in violation of any order, statute, rule or regulation applicable to the Company, including by not limited to the Securities Exchange Act of 1934 and the reporting obligations of the issuer with respect to Rule 144 under the Securities Act. The execution, delivery and performance of and compliance with this Agreement and the other agreements contemplated hereby, and the issuance and sale of the Series B Stock (and the issuance of the Common Stock issuable upon conversion of the Series B Stock) pursuant hereto, will not result in (a) any such violation, or (b) be in conflict with or constitute a default under any such term or (c) result in the creation of any mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of the Company pursuant to any such term. In addition, the execution, delivery and performance of and compliance with this Agreement and the other agreements contemplated hereby, and the issuance and sale of the Series B Stock pursuant hereto, will not result in a violation of any law, statute or regulation applicable to the Company, including Section 203 of the Delaware General Corporation Law. 4 5 3.7 Employees. Each officer and key employee of the Company has executed an Employee Proprietary and Confidential Information Agreement. The Company, after reasonable investigation, is not aware that any of its employees are in violation thereof, and the Company will use its best efforts to prevent any such violation. 3.8 Litigation, etc. Except as set forth on Exhibit B, there are no actions, proceedings or investigations pending against the Company or its officers, directors, or stockholders, or to the best of the Company's knowledge, against employees or consultants of the Company (or, to the best of the Company's knowledge, any basis therefor or threat thereof): (1) which might result in (a) any material adverse change in the business, prospects, conditions, affairs or operations of the Company, or in any of their properties or assets, or (b) any material impairment of the right or ability of the Company to carry on its business as now conducted or as proposed to be conducted, or (c) any material liability on the part of the Company; or (2) which questions the validity of this Agreement or any action taken or to be taken in connection herewith. The Company does not currently plan to initiate any litigation. 3.9 Governmental Consent, etc. No consent, approval or authorization of or designation, declaration or filing with any governmental authority or any other person on the part of the Company is required in connection with: (a) the valid execution and delivery of this Agreement; or (b) the offer, sale or issuance of the Series B Stock (or the Common Stock issuable upon conversion of the Series B Stock); or (c) the obtaining of the consents, permits and waivers specified in subsection 5.1(c) hereof; or (d) the consummation of any other transaction contemplated hereby; except, if required, filings or qualifications under the Securities Act of 1933, as amended (the "Securities Act") and California Corporate Securities Law of 1968, as amended (the "Law"), which filings or qualifications, if required, will have been timely filed or obtained. 3.10 Offering. In reliance on the representations and warranties of the Purchasers in Section 4 hereof, the offer, sale and issuance of the Series B Stock in conformity with the terms of this Agreement will not result in a violation of the requirements of Section 5 of the Securities Act or the qualification requirements of the Law. 3.11 Taxes. The Company has timely filed all tax returns that are required to have been filed with appropriate federal, state, county and local governmental agencies or instrumentalities. The Company has paid or established reserves for all income, franchise and other taxes due as reflected on said returns. There is no pending dispute with any taxing authority relating to any of such returns and the Company has no knowledge of any proposed liability for any tax to be imposed upon the properties or assets of the Company for which there is not an adequate reserve reflected in the Company's financial statements contained in the 10-K. 3.12 Registration Rights. Except pursuant to the Registration Rights Agreement, dated as of December 30, 1994, as amended (the "Rights Agreement"), by and among the Company, TCW Special Credits, a California general partnership as agent and nominee for the entities set forth on Schedule I to the Rights Agreement, Appaloosa Management L.P., as agent for the accounts listed on Schedule I to the Rights Agreement, the Copernicus Fund, L.P., 5 6 the Galileo Fund, L.P., and certain purchasers of the Company's Common Stock, and the Registration Rights Agreement dated March 6, 1998, among the Company, Swartz Investments, LLC and subscribers of the Company's Series A Stock, the Company is not obligated to register any of its presently outstanding securities which may hereafter be issued. 3.13 Disclosure. Neither this Agreement and the exhibits hereto, nor any of the other statements or certificates furnished or to be furnished to the Purchasers pursuant hereto or in connection with the transactions contemplated hereby, including the 10-K, contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements contained herein and therein not misleading in light of the circumstances under which such statements were made. 3.14 Compliance with Public Reporting Requirements. As of the Closing Date, the Company is in compliance in all material respects with the applicable requirements of the Exchange Act of 1934, as amended. 4. Representations, Warranties and Covenants of the Purchasers and Restrictions on Transfer Imposed by the Securities Act of 1933. 4.1 Representations, Warranties and Covenants by the Purchasers. Each Purchaser represents, warrants and covenants to the Company as follows: (a) The Series B Stock and the Common Stock issuable upon conversion of the Series B Stock (collectively, for purposes of this Section 4, the "Securities") to be received by the Purchaser will be acquired for investment for the Purchaser's own account, for investment and not with a view to, or for resale in connection with, any distribution or public offering thereof within the meaning of the Securities Act and the Law. The Purchaser has the full right, power and authority to enter into and perform this Agreement and all other agreements contemplated hereby, and this Agreement and all other agreements contemplated hereby constitute valid and binding obligations of the Purchaser. The Purchaser acknowledges and understands that the Securities must be held indefinitely unless the Securities are subsequently registered under the Securities Act and qualified under the Law or an exemption from such registration and such qualification is available. (b) The Purchaser will not sell, negotiate, pledge or otherwise dispose of any of the Securities (other than in conjunction with an effective registration statement for the Securities under the Securities Act or an exemption from registration under applicable federal securities laws). (c) The Purchaser has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of the Purchaser's prospective investment in the Securities. The Purchaser has the ability to bear the economic risks of the Purchaser's prospective investment. The Purchaser has been furnished with and has had access to such information as the Purchaser has considered necessary to make a determination as to the purchase of the Securities together with such additional information as is necessary to verify the 6 7 accuracy of the information supplied. The Purchaser is fully aware of (i) the highly speculative nature of the investment in the Securities; (ii) the financial hazards involved; (iii) the lack of liquidity of the Securities, and the restrictions on the transferability of the Securities; and (iv) the tax consequences of investment in the Securities. The Purchaser has had all questions which have been asked by the Purchaser satisfactorily answered by the Company. The Purchaser has not been offered the Series B Stock by any form of advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio, or any seminar or meeting whose attendees have been invited by any such media. 4.2 Legends. Each certificate or other instruments representing any of the Securities may be endorsed with the following legends: (a) THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE SALE IS MADE IN ACCORDANCE WITH RULE 144 UNDER THE ACT, OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT. (b) Any other legends required by the Law. The Company need not register a transfer of legended Securities, and may also instruct its transfer agent not to register the transfer of the Securities unless the conditions specified in each of the foregoing legends are satisfied. 4.3 Removal of Legend and Transfer Restrictions. Any legend endorsed on a certificate or other instrument pursuant to subsection 4.2(a) and 4.2(b) and the stop transfer instructions with respect to such legended securities shall be removed, and the Company shall issue a certificate without such legend to the holder of such securities if such securities are registered under the Securities Act and a prospectus meeting the requirements of Section 10 of the Securities Act is available or if such holder satisfies the requirements of Rule 144(k) and, where reasonably deemed necessary by the Company, the holder provides the Company with an opinion of counsel for such holder of the securities, reasonably satisfactory to the Company, to the effect that (i) such holder meets the requirements of Rule 144(k) or (ii) a public sale, transfer or assignment of such securities may be made without registration. 4.4 Rule 144. The Purchaser is aware of the adoption of Rule 144 by the Securities and Exchange Commission (the "SEC") promulgated under the Securities Act, which permits limited public resales of securities acquired in a nonpublic offering, subject to the satisfaction of certain conditions. The Purchaser understands that under Rule 144, the conditions 7 8 include, among other things: the availability, under certain conditions, of certain current public information about the issuer and the resale occurring not less than one year (with certain restrictions) after the party has purchased and paid for the securities to be sold. The Company covenants that (i) the Company will use its best efforts to comply with the current public information requirements of Rule 144(c)(1) under the Securities Act and (ii) at all such times as Rule 144 is available for use by the Purchaser, the Company will furnish the Purchaser upon request with all information within the possession of the Company required for the preparation and filing of Form 144. 5. Conditions to Closing. 5.1 Conditions to the Purchasers' Obligations. The obligation of the Purchasers to purchase the Series B Stock at the Closing is subject to the fulfillment to their satisfaction, on or prior to the Closing Date, of the following conditions, any of which may be waived in accordance with the provisions of subsection 6.1 hereof: (a) Representations and Warranties Correct; Performance of Obligations. The representations and warranties made by the Company in Section 3 hereof shall be true and correct when made, and shall be true and correct in all material respects on the Closing Date with the same force and effect as if they had been made on and as of said date. The Company's business and assets shall not have been adversely affected in any material way prior to the Closing Date. The Company shall have performed in all material respects all obligations and conditions herein required to be performed or observed by it on or prior to the Closing Date. (b) Opinion of Company's Counsel. Gray Cary Ware & Freidenrich LLP, counsel to the Company, shall have delivered an opinion addressed to the Purchasers, dated the Closing Date, substantially in the form as that attached hereto as Exhibit D. (c) Consents and Waivers. The Company shall have obtained in a timely fashion any and all consents, permits and waivers necessary or appropriate for consummation of the transactions contemplated by this Agreement. (d) Legal Investment. At the time of the Closing, the purchase of the Series B Stock hereunder shall be legally permitted by all laws and regulations to which the Purchasers and the Company are subject. (e) Compliance Certificate. The Company shall have delivered a Certificate, executed by the President and the Chief Financial Officer of the Company, dated the Closing Date, certifying to the fulfillment of the conditions specified in subsections (a), (c) and (d) of this Section 5.1. (f) Execution of Amendment to the Rights Agreement. The Company and the Purchasers shall have executed Amendment No. 4 to the Registration Rights Agreement dated December 30, 1994, in the form attached hereto as Exhibit E. 8 9 (g) Fairness Opinion. Houlihan Lokey Howard & Zukin ("HLHZ") shall have delivered an opinion to the Company regarding the fairness of the sale of the Series B Stock by the Company to the Purchasers, in a form reasonably satisfactory to the Purchasers and the Company. 5.2 Conditions to Obligations of the Company. The Company's obligation to sell and issue the Series B Stock at the Closing is subject to the fulfillment to the Company's satisfaction on or prior to the Closing Date of the following conditions, any of which may be waived by the Company in accordance with the provisions of subsection 6.1 hereof: (a) Representations and Warranties Correct. The representations and warranties made by the Purchasers in Section 4 hereof shall be true and correct when made, and shall be true and correct on the Closing Date with the same force and effect as if they had been made on and as of said date. (b) Consents and Waivers. Each of the Purchasers shall have obtained in a timely fashion any and all consents, permits and waivers necessary or appropriate for consummation of the transactions contemplated by this Agreement. (c) Outstanding Debt. The Company shall have received documentation regarding the cancellation the Outstanding Debt from the Purchasers prior to the Closing. (d) Release of Security Interests. The Purchasers shall have filed the appropriate UCC forms to release all of the Purchasers' liens on the Company's assets. (e) Fairness Opinion. HLHZ shall have delivered an opinion to the Company regarding the fairness of the sale of the Series B Stock by the Company to the Purchasers, in a form reasonably satisfactory to the Purchasers and the Company. (f) Satisfaction of Conditions. The conditions set forth in subsections (c) and (d) of Section 5.1 shall have been fulfilled. 6. Miscellaneous. 6.1 Waivers and Amendments. This Agreement or any provision hereof may be amended, waived, discharged or terminated only by a statement in writing signed by the party against which enforcement of the amendment, waiver, discharge or termination is sought. 6.2 Governing Law. This Agreement shall be governed in all respects by the laws of the State of California without regard to conflict of law principles. 6.3 Survival. The representations, warranties, covenants and agreements made herein shall survive the Closing of the transactions contemplated hereby, notwithstanding any investigation made by the Purchasers. All statements as to factual matters contained in any 9 10 certificate or other instrument delivered by or on behalf of the Company pursuant hereto or in connection with the transactions contemplated hereby shall be deemed to be representations and warranties by the Company hereunder as of the date of such certificate or instrument. 6.4 Successors and Assigns. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors and assigns of the parties hereto. 6.5 Entire Agreement. This Agreement and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and supersede all prior and contemporaneous agreements, understandings, negotiations and discussions, whether oral or written, of the parties with respect thereto. 6.6 Notices, etc. All notices and other communications required or permitted hereunder shall be in writing and shall be delivered personally or mailed by first class mail, postage prepaid, or via facsimile or TWX/Telex, addressed (a) if to the Purchasers at the address set forth on Exhibit A to this Agreement, or at such other address as the Purchasers shall have furnished to the Company in writing, or (b) if to the Company, at its address set forth at the beginning of this Agreement, or at such other address as the Company shall have furnished to the Purchasers in writing, with a copy of any said notice to be sent to Gray Cary Ware & Freidenrich LLP, 400 Hamilton Avenue, Palo Alto, California 94301-1825, Attention: James M. Koshland, Esq. Notices that are mailed shall be deemed received ten (10) days after deposit in the mail. In the event that the notice is sent by facsimile or TWX/Telex, notice shall be deemed to have been received when sent and confirmed as to receipt. 6.7 Severability. In case any provision of this Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions of this Agreement shall not in any way be affected or impaired thereby. 6.8 Expenses. The Company and the Purchasers shall each bear their own expenses and legal fees in connection with this Agreement and the transactions contemplated hereby. Notwithstanding the foregoing, the Company shall pay the reasonable legal fees and related costs of the Purchasers, up to an aggregate of $10,000. 6.9 Titles and Subtitles. The titles of the sections and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 6.10 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 10 11 6.11 Delays or Omissions. No delay or omission to exercise any right, power or remedy accruing to the Company or to the Purchasers shall impair any such right, power or remedy of the Company or the Purchasers, nor shall it be construed to be a waiver of any breach or default under this Agreement, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any delay or omission to exercise any right, power or remedy or any waiver of any single breach or default be deemed a waiver of any other right, power or remedy or breach or default theretofore or thereafter occurring. All remedies, either under this Agreement, or by law otherwise afforded to the Company or the Purchasers, shall be cumulative and not alternative. 6.12 Arbitration. Any controversy or claim arising out of or related to this Agreement or the breach thereof, shall be settled by binding arbitration in San Francisco, California in accordance with the Expedited Procedures (Rules 53-57) of the Commercial Arbitration Rules of the American Arbitration Association ("AAA"). A proceeding may be commenced upon written demand by the Company, any original Purchaser (as set forth on Exhibit A hereto) or Purchasers holding a majority of the Series B Stock. The arbitrator shall enter a judgment by default against any party which fails or refuses to appear in any properly noticed arbitration proceeding. The proceeding shall be conducted by one arbitrator. The arbitrator will be chosen by the parties from a list provided by the AAA, and if they are unable to agree within ten (10) days, the AAA shall select the arbitrator. The arbitrator must be an expert in securities law and financial transactions. The nonprevailing party in any arbitration shall pay all costs and expenses incurred by the prevailing party, including reasonable attorney fees and expenses. Each party submits irrevocably to the jurisdiction of any state court or United States District Court sitting in San Francisco, California for purposes of enforcement of any discovery order, judgment or award in connection with such arbitration. The award of the arbitrator shall be final and binding upon the parties and may be enforced in any court having jurisdiction. AUREAL SEMICONDUCTOR INC. By /s/ David J. Domeier ------------------------------- 11 12 COUNTERPART SIGNATURE PAGE TO 8% SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT DATED AS OF JUNE 5, 1998 "PURCHASER" TCW Special Credits, as agent and on behalf of the funds and accounts set forth on Schedule I, attached hereto By: TCW Asset Management Company Its: Managing General Partner By: /s/ Richard Masson ------------------------------- Its: Authorized Signatory ------------------------------- By: /s/ Kenneth Liang ------------------------------- Its: Authorized Signatory ------------------------------- B III Capital Partners, L.P. By: DDJ Capital III, LLC, its General Partner By: DDJ Capital Management, LLC, its Manager /s/ Daniel G. Harmetz ---------------------------------- Title: Member ---------------------------- 12 EX-4.13 8 CERTIFICAT OF DESIGNATION OF 8% SERIES B 1 EXHIBIT 4.13 CERTIFICATE OF DESIGNATION OF 8% SERIES B CONVERTIBLE PREFERRED STOCK FOR AUREAL SEMICONDUCTOR INC. AUREAL SEMICONDUCTOR INC., a Delaware corporation (the "Corporation"), pursuant to the provisions of Section 151 of the General Corporation Law of the State of Delaware, does hereby make this Certificate of Designation and does hereby state and certify that pursuant to the authority expressly vested in the Board of Directors of the Corporation by the Certificate of Incorporation of the Corporation, the Board of Directors duly adopted the following resolutions, which resolutions remain in full force and effect as of the date hereof: RESOLVED, that, pursuant to Article FOURTH of the Amended and Restated Certificate of Incorporation of the Corporation, the Board of Directors hereby authorizes the issuance of, and fixes the designation and preferences and relative, participating, optional, and other special rights, and qualifications, limitations and restrictions, of a series of Preferred Stock consisting of 60,000 shares, par value $0.001 per share, to be designated "8% Series B Convertible Preferred Stock" (the "Series B Stock"). RESOLVED, that each share of the Series B Stock shall rank equally in all aspects and shall be subject to the following terms and provisions: 1. Dividends. The holders of the Series B Stock (including shares received as dividends) shall be entitled to receive cumulative dividends, at a rate of eight percent (8%) of the Face Value (as defined below), payable, at the option of the Corporation, in cash or in shares of the Corporation's Series B Stock. The dividend on shares of Series B Stock shall be paid quarterly (each a "Dividend Payment Date") commencing three months after the date of the original issuance of the Series B Stock (the "Original Issue Date"), and shall be paid in preference and priority to any payment of any dividend on the Corporation's Series A Preferred Stock or Common Stock or any other class or series of equity security of the Corporation. The Face Value shall be One Thousand Dollars ($1,000.00) per share of Series B Stock. 2. Liquidation, Dissolution or Winding Up. 2.1. Treatment at Liquidation, Dissolution or Winding Up. In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, subject to the rights of series of Preferred Stock which may from time to time come into existence, the Corporation shall distribute or cause to be distributed (whether directly or indirectly through agreement by a purchaser) the amounts specified below: (a) The holders of shares of Series B Stock shall each be entitled to be paid, before any sums shall be paid or any assets distributed among the holders of the Corporation's Series A Preferred Stock and Common Stock or any other class or series of equity security of the Corporation, an amount equal to, for each share of Series B Stock, the Face Value plus all accrued but unpaid dividends (the "Series B Liquidation 2 Preference"). The Series B Stock will be senior to the Corporation's Series A Preferred Stock, Common Stock and any other class or series of equity security of the Corporation with respect to the Series B Liquidation Preference and the Series B Liquidation Preference will be paid in full prior to any payment of the liquidation preference on the Corporation's Series A Preferred Stock, Common Stock or any other class or series of equity security of the Corporation. (b) After payment of the Series B Liquidation Preference set forth in (a) above, the entire remaining assets and funds of the Corporation legally available for distribution shall be distributed among the holders of the Corporation's Series A Preferred Stock and Common Stock. 2.2. Treatment of Consolidations, Mergers, Tender Offers and Sales of Assets. A (a) consolidation or merger of the Corporation into or with another corporation as a result of which the holders of the Corporation's outstanding shares immediately before such consolidation or merger do not, immediately after such consolidation or merger, retain stock representing a majority of the voting power of the surviving corporation resulting from such consolidation or merger; (b) tender offer (as that term is defined and interpreted (including judicial and administrative interpretations) pursuant to Section 14 of the Securities Exchange Act of 1934, as amended) or agreements to sell shares, as a result of which the holders of the Corporation's outstanding shares immediately before such tender offer do not, immediately after such tender offer or such sales, retain stock representing a majority of the voting power of the surviving corporation resulting from such tender offer or such sales; or (c) sale of all or substantially all of the assets of the Corporation, shall each be regarded as a liquidation, dissolution or winding up of the affairs of the Corporation within the meaning of this Section 2 and shall create an obligation on behalf of the Corporation to pay, and a right on behalf of the holders of Series B Stock to receive, the Series B Liquidation Preference for each share of Series B Stock. 2.3. Distributions Other Than Cash. Whenever the distribution provided for in this Section 2 shall be payable in property other than cash, the value of such distribution shall be the fair market value of such property as determined in good faith by the Board of Directors. 3. Voting Power. The holders of shares of Series B Stock shall vote together with the Common Stock as though part of that class and shall be entitled to vote on all matters and shall be entitled to that number of votes equal to the largest number of whole shares of Common Stock into which such holder's shares of Series B Stock could be converted under Section 4 hereof, at the record date for the determination of shareholders entitled to vote on such matter or, if no such record date is established, at the date such vote is taken or any written consent of shareholders is solicited. The holders of shares of Series B Stock shall be entitled to vote as a separate class on any matter as to which such class would be entitled to vote under applicable law. -2- 3 4. Conversion Rights. 4.1. Optional Conversion. At any time, unless the Corporation has otherwise redeemed such shares of Series B Stock, the holders of shares of Series B Stock shall have the right to convert any and all shares of Series B Stock for such number of fully paid, validly issued and nonassessable shares (the "Common Shares") of Common Stock, par value $.001, of the Corporation, free and clear of any liens, claims or encumbrances, as determined as follows: the quotient of (i) the Series B Liquidation Preference Value of each share of Series B Stock through and including the Conversion Date times the number of shares of Series B Stock being converted divided by (ii) the Series B Conversion Price determined as hereinafter provided in effect on the Conversion Date (as defined below). 4.2. Automatic Conversion. Each share of Series B Stock shall be converted into Common Stock automatically in the manner provided in this Section 4 on the fifth anniversary of the Original Issue Date. 4.3. Exercise of Conversion Privilege and Procedure for Conversion. To exercise its conversion privilege, a holder of shares of Series B Stock shall surrender the certificate or certificates representing the shares being converted to the Corporation at its principal office, duly endorsed, and shall give written notice (the "Conversion Notice") to the Corporation at that office that such holder elects to convert such shares. As promptly as practicable after the Conversion Date (as defined below), the Corporation shall issue and shall deliver to the holder of shares of Series B Stock being converted, such certificate or certificates as it may request for the number of whole shares of Common Shares issuable upon the conversion of such Series B Stock in accordance with the provisions of this Section 4. Such conversion shall be deemed to have been effected immediately prior to the close of business on the date when such written notice required by Section 4.3 is received by the Corporation (a "Conversion Date"). At such time, the rights of the holder as holder of the converted shares of Series B Stock shall cease and the person or persons in whose name or names any certificate or certificates for Common Shares shall be issuable upon such conversion shall be deemed to have become the holder or holders of record of the shares of Common Stock represented thereby. 4.4. Determination of Conversion Price. Each share of Series B Stock may be converted into Common Shares according to the formula set forth in Section 4.1. The initial Series B Conversion Price shall be equal to Two Dollars and Fifty Cents ($2.50), subject to adjustment as provided for below. 4.5. Cash in Lieu of Fractional Shares. No fractional shares of Common Stock or scrip representing fractional shares shall be issued upon the conversion of shares of Series B Stock. Instead of any fractional shares of Common Stock which would otherwise be issuable upon conversion of shares of Series B Stock, the Corporation shall pay to the holder of converted shares of Series B Stock, as promptly as possible after the date of receipt of written notice from such holder, a cash payment in respect of such fractional shares in an amount equal to the same fraction of the market price per share of -3- 4 Common Stock (as determined in a reasonable manner prescribed by the Board of Directors) at the close of business on the Conversion Date. 4.6. Partial Conversion. In the event some but not all of the shares of Series B Stock represented by a certificate or certificates surrendered by a holder are converted, the Corporation shall execute and deliver to the holder a new certificate representing the number of shares of Series B Stock which were not converted. 4.7. Reservation of Common Stock. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of Series B Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Series B Stock, and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of Series B Stock, the Corporation shall take such corporate action as may be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. 4.8. Stock Splits, Dividends, Adjustments. (a) If the Corporation, at any time while the Series B Stock is outstanding, (i) shall pay a stock dividend or otherwise make a distribution or distributions on any equity securities (including investments or securities convertible into or exchangeable for such equity securities) in shares of Common Stock; (ii) subdivide outstanding Common Stock into a larger number of shares; or (iii) combine outstanding Common Stock into a smaller number of shares, then the Series B Conversion Price shall each be multiplied by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding before such event and the denominator of which shall be the number of shares of Common Stock outstanding after such event. Any adjustment made pursuant to this Section 4.8(a) 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. (b) If the Corporation, at any time while the Series B Stock is outstanding, shall distribute to all holders of Common Stock evidence of its indebtedness or assets or cash or rights or warrants to subscribe for or purchase any security, then in each such event provision shall be made so that the holders of Series B Stock shall receive upon conversion thereof, in addition to the number of shares of Common Stock receivable thereupon, the amount of indebtedness or assets or cash or rights or warrants they would have received had their Series B Stock being converted into Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the date of conversion, retained such securities receivable by them as aforesaid during such period, subject to all other adjustments called for during such period under this Section 4 with respect to the rights of the holders of the Series B Stock. -4- 5 (c) Whenever the Series B Conversion Price is adjusted pursuant to this Section 4.8 or Section 4.9 below, the Corporation shall promptly mail to each holder of the Series B Stock a notice setting forth the Series B Conversion Price, as applicable, after such adjustment and setting forth a brief statement of the facts requiring such adjustment. 4.9. Other Securities Offerings. If at any time the Corporation sells Common Stock or securities or options convertible into, exercisable for or exchangeable for, Common Stock (other than (i) options granted (and the shares of stock issuable upon exercise of such options) pursuant to the Corporation's employee, director or consultant stock options plans at a price equal to or greater than the fair market value of the Corporation's Common Stock, as determined by the Board of Directors), (ii) warrants or other securities issued (and the shares of stock issuable upon exercise of such warrants or other securities) at a price equal to or greater than the fair market value of the Corporation's Common Stock, as determined by the Board of Directors, (iii) in connection with the acquisition of all or part of another corporation by merger or other reorganization, or by the purchase of all or part of the assets of such other corporation), (iv) dividends issued to holders of Series B Stock as provided by Section 1 herein, (v) shares of Common Stock issued upon conversion of Series A Preferred Stock or (vi) up to $10,000,000 of shares of the Company's Series C Preferred Stock), at a price that is less than the effective Series B Conversion Price, then upon such issue or sale, the Corporation shall adjust the Series B Conversion Price (calculated to the nearest hundredth of a cent), as applicable, so that it equals the amount obtained by dividing: (a) an amount equal to the sum of (i) the number of shares of Common Stock outstanding, assuming that any outstanding and exercisable options, warrants and other rights to subscribe for Common Stock and all securities other than Preferred Stock are converted into Common Stock are converted into Common Stock and are deemed outstanding (the "Common Stock Outstanding"), immediately prior to such issue or sale multiplied by the then existing Series B Conversion Price, (ii) the number of shares of Common Stock issuable upon conversion of the Corporation's Preferred Stock outstanding immediately prior to such issue or sale, each multiplied by the then existing conversion price for that series of Preferred Stock, and (iii) an amount equal to the aggregate "consideration actually received" by the Corporation upon such issue or sale by (b) the sum of the number of shares of Common Stock Outstanding immediately after such issue or sale and the number of shares of Common Stock issuable upon conversion of the Series A and Series B Preferred Stock outstanding immediately after such issue or sale. (c) Consideration Actually Received. Except as otherwise as provided for in Section 4.9: (i) In the case of an issue or sale for cash of shares of Common Stock, the "consideration actually received" by the Corporation therefor shall be deemed to be the net amount of cash received, after deducting therefrom any commissions or expenses paid by the Corporation. -5- 6 (ii) In the case of the issuance (otherwise than upon conversion or exchange of obligations or shares of stock of the Corporation) of additional shares of Common Stock for a consideration other than cash or a consideration partly other than cash, the amount of the consideration other than cash received by the Corporation for such shares shall be deemed to be the value of such consideration as determined in good faith by the Board of Directors. (iii) In the case of the issuance by the Corporation in any manner of any rights to subscribe for or to purchase shares of Common Stock, or any options for the purchase of shares of Common Stock or stock convertible into Common Stock ("Stock Purchase Rights"), all shares of Common Stock or securities convertible into Common Stock ("Convertible Securities") to which the holders of such rights or options shall be entitled to subscribe for or purchase pursuant to such rights or options shall be deemed "outstanding" as of the date of the offering of such rights or the granting of such options, as the case may be, and the minimum aggregate consideration named in such rights or options for the shares of Common Stock or stock convertible into Common Stock covered thereby, plus the consideration, if any, received by the Corporation for such rights or options, or, in the case of such Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable upon the conversion or exchange thereof, in each case after deducting any accrued interest, dividends, or any expenses paid or incurred or any underwriting commissions or concessions paid or allowed by the Corporation, shall be deemed to be the "consideration actually received" by the Corporation (as of the date of the offering of such rights or the granting of such options, as the case may be) for the issuance of such shares. (iv) In the case of the issuance by the Corporation in any manner of any obligations or of any shares of stock of the Corporation that shall be convertible into or exchangeable for Common Stock, all shares of Common Stock issuable upon the conversion or exchange of such obligations or shares shall be deemed issued as of the date such obligations or shares are issued, and the amount of the "consideration actually received" by the Corporation for such additional shares of Common Stock shall be deemed to be the total of (X) the amount of consideration received by the Corporation upon the issuance of such obligations or shares, as the case may be, plus (Y) the minimum aggregate consideration, if any, other than such obligations or shares, receivable by the Corporation upon such conversion or exchange, except in adjustment of dividends. (v) In case any Stock Purchase Rights or Convertible Securities shall be issued or sold together with other securities or other assets of the Corporation, together comprising one integral transaction in which no specific consideration is allocated to the Stock Purchase Rights or Convertible Securities, such Stock Purchase Rights or Convertible Securities shall be deemed to have been issued without consideration. (vi) Except as provided in this Section 4.9, in case the Corporation shall declare a dividend or make any other distribution upon any stock of the Corporation (other than Common Stock) payable in either case in Common Stock, Convertible -6- 7 Securities or Stock Purchase Rights, such Common Stock, Convertible Securities or Stock Purchase Rights, as the case may be, issuable in payment of such dividend or distribution shall be deemed to have been issued or sold without consideration. (vii) The amount of the "consideration actually received" by the Corporation upon the issuance of any rights or options referred to in subsection (iii) above or upon the issuance of any obligations or shares which are convertible or exchangeable as described in subsection (iv) above, and the amount of the consideration, if any, other than such obligations or shares so convertible or exchangeable, receivable by the Corporation upon the exercise, conversion or exchange thereof shall be determined in the same manner provided in subsections (i) and (ii) above with respect to the consideration received by the Corporation in case of the issuance of additional shares of Common Stock; provided, however, that if such obligations or shares of stock so convertible or exchangeable are issued in payment or satisfaction of any dividend upon any stock of the Corporation other than Common Stock, the amount of the "consideration actually received" by the Corporation upon the original issuance of such obligations or shares of stock so convertible or exchangeable shall be deemed to be the value of such obligations or shares of stock, as of the date of the adoption of the resolution declaring such dividend, as determined by the Board of Directors at or as of that date. On the expiration of any rights or options referred to in subsection (iii), or the termination of any right of conversion or exchange referred to in subsection (iv), or any change in the number of shares of Common Stock deliverable upon exercise of such options or rights or upon conversion of or exchange of such convertible or exchangeable securities, the Series B Conversion Price then in effect shall forthwith be readjusted to such Series B Conversion Price as would have been obtained had the adjustments made upon the issuance of such option, right or convertible or exchangeable securities been made upon the basis of the delivery of only the number of shares of Common Stock actually delivered or to be delivered upon the exercise of such rights or options or upon the conversion or exchange of such securities. (vi) Merger, Consolidation or Sale of Assets. In case any shares of Common Stock, Convertible Securities, any warrants or Stock Purchase Rights shall be issued in connection with any merger or consolidation in which the Corporation is the surviving corporation, the amount of consideration therefor shall be deemed to be the appraised value (if any, or if no appraisal has been made, value as determined in good faith by the Board of Directors ("Fair Value")) of such portion of the assets and business of the non-surviving corporation as shall be attributable to such Common Stock, Convertible Securities or Stock Purchase Rights, as the case may be. In the event of any merger or consolidation of the Corporation in which the Corporation is not the surviving corporation or in the event of any sale of all or substantially all of the assets of the Corporation for stock or other securities of any corporation, the Corporation shall be deemed to have issued a number of shares of its Common Stock for stock or securities of the other corporation computed on the basis of the actual exchange ratio on which the transaction was predicated and for a consideration equal to the Fair Value on the date of such transaction of such stock or securities of the other corporation, and if any such calculation results in adjustment of the Conversion Price, the determination of the number of shares of Common Stock issuable upon conversion of the Series B Preferred Stock immediately prior to such merger, consolidation or sale, for the purposes of Section 4.8, shall be made after giving effect to such adjustment to the Conversion Price. -7- 8 5. Redemption. The Corporation shall have the right to redeem all or any portion of the Series B Stock then outstanding from the holders thereof, at any time upon thirty (30) days notice to the holder of Series B Stock, at a redemption price, to be paid in cash, equal to, for each share of Series B Stock, the Face Value on the date of such redemption plus all accrued but unpaid dividends (the "Series B Redemption Price"), provided, however, that the holder of such shares of Series B Stock has not elected to convert such shares, as provided by Section 4.1, herein prior to the Redemption Date (as defined below). The Corporation shall deliver the notice to each holder of record (at the close of business on the business day next preceding the day on which the notice is deposited in the mail) of the Series B Stock to be redeemed, at the address last shown on the records of the Corporation for such holder or given by the holder to this Corporation for the purpose of notice, or if no such address appears or is given, at the place where the principal executive office of this Corporation is located, and such notice shall notify such holder of the redemption to be effected, specify the number of shares such holder shall redeem, the date of the redemption (the "Redemption Date"), the place at which payment shall be obtained and call upon such holder to surrender to the Corporation, in the manner and at the place designated, his certificate or certificates representing the shares of Series B Stock to be redeemed (the "Redemption Notice"). On or after such Redemption Date, each holder of Series B Stock to be redeemed shall surrender to the Corporation the certificate or certificates representing such shares (other than those shares converted prior to the Redemption Date), in the manner and at the place designated in the Redemption Notice, and thereupon the applicable Redemption Price of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each such certificate shall be canceled. In the event that fewer than all the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. 6. Notices. The Corporation shall distribute to the holders of shares of Series B Stock copies of all notices, materials, annual and quarterly reports, proxy statements, information statements and any other documents distributed generally to the holders of shares of Common Stock of the Corporation, at such times and by such method as such documents are distributed to such holders of such Common Stock. 7. No Reissuance. No shares of Series B Stock acquired by the Corporation by reason of redemption, purchase, conversion or otherwise shall be reissued. RESOLVED, FURTHER, that the appropriate officers of the Corporation hereby are authorized to execute and acknowledge a certificate setting forth these resolution and to cause such certificate to be filed and recorded, all in accordance with the requirements of Section 151 of the General Corporation Law of the State of Delaware. -8- 9 IN WITNESS WHEREOF, the Corporation has caused this Certificate of Designation to be signed by its President, and attested by its Secretary, this 3rd day of June, 1998. AUREAL SEMICONDUCTOR INC. By: /s/ Kenneth A. Kokinakis ------------------------------- Kenneth A. Kokinakis, President Attested: By: /s/ Brendan O'Flaherty ------------------------------- Brendan R. O'Flaherty, Secretary EX-4.14 9 AMENDMENT NO. 4 TO REGISTRATION RIGHTS AGREEMENT 1 Exhibit 4.14 AMENDMENT NUMBER 4 TO REGISTRATION RIGHTS AGREEMENT THIS AMENDMENT NUMBER 4 (the "Amendment") to the Registration Rights Agreement dated as of December 30, 1994, as amended by Amendment Number 1 dated February 21, 1996, Amendment Number 2 dated June 10, 1996 and Amendment No. 3 dated August 6, 1997 (the "Rights Agreement"), is made as of June 5, 1998, by and among Aureal Semiconductor Inc., a Delaware corporation (the "Company"), TCW Special Credits, as agent and on behalf of the funds and accounts set forth on Schedule I hereto ("TCW Special Credits") and B III Capital Partners, L.P. ("B III"), and each as a purchaser of the Company's Convertible Series B Preferred Stock issued pursuant to the 8% Series B Convertible Preferred Stock Purchase Agreement dated June 5, 1998 (the "Series B Agreement"), by and between the Company, TCW Special Credits and B III (the "Series B Holders"), and the Prior Holders (as defined below). Unless specifically designated otherwise, the capitalized terms herein shall have the same meanings given them in the Rights Agreement. RECITALS A. The Company and TCW are parties to the Rights Agreement pursuant to which the Company granted certain registration rights for the benefit of TCW. B. The Company, TCW, Appaloosa, Copernicus, and Galileo (collectively, the "No. 1 Prior Holders") amended the Rights Agreement pursuant to Amendment Number 1 to Registration Rights Agreement dated February 21, 1996 to grant equal registration rights to all the No. 1 Prior Holders and to make each of the No. 1 Prior Holders a party to the Rights Agreement. C. The Company, the No. 1 Prior Holders and the purchasers set forth on Exhibit A to the Common Stock Purchase Agreement dated June 10, 1996, amended the Rights Agreement pursuant to Amendment Number 2 to Registration Rights Agreement dated June 10, 1996 (such purchasers and the No. 1 Prior Holders are collectively referred to herein as the "No. 2 Prior Holders") to grant equal registration rights to the No. 2 Prior Holders and to make each of the No. 2 Prior Holders a party to the Rights Agreement. D. The Company, the No. 1 Prior Holders, the No. 2 Prior Holders and the purchasers set forth on Exhibit A to the Unit Purchase Agreement dated August 6, 1997, amended the Rights Agreement pursuant to Amendment Number 3 to Registration Rights Agreement dated August 6, 1997 (such purchasers and the No. 1 Prior holders and No. 2 Prior Holders are collectively referred to herein as the "No. 3 Prior Holders") to grant equal registration rights to the No. 3 Prior Holders and to make each of the No. 3 Prior Holders a party to the Rights Agreement. E. The No. 1 Prior Holders, the No. 2 Prior Holders and the No. 3 Prior Holders are collectively referred to herein as the Prior Holders and are set forth on Schedule 1 hereto. 2 F. The Company and the Prior Holders now wish to amend the Rights Agreement, as amended, in order to grant equal registration rights to the Series B Holders and to make each of the Series B Holders a party to the Rights Agreement, as amended. AGREEMENT NOW THEREFORE, in consideration of the mutual promises, covenants and conditions hereinafter set forth, the parties hereto agree to amend certain provisions of the Rights Agreement as set forth below: 1. Section 1 of the Rights Agreement shall be amended to define the following terms as follows: Registrable Shares shall mean (i) all shares of New Common Stock originally issued to or purchased in the future by TCW, (ii) all shares of Common Stock issued to the Prior Holders pursuant to the Common Stock Purchase Agreements dated February 21, 1996, March 11, 1996 and June 10, 1996, by and among the Company and such Prior Holders, (iii) all shares of Common Stock issued pursuant to the Unit Purchase Agreement dated August 6, 1997 by and among the Company and such Prior Holders (the "Unit Purchase Agreement"), (iv) all Warrant Shares issued upon exercise of the Warrants (as defined in the Unit Purchase Agreement), (v) shares of Common Stock issuable upon exercise of warrants issued pursuant to the Second Amended and Restated Loan Agreement dated August 6, 1997 (the "Loan Agreement") between the Company and TCW (including 450,000 shares of Common Stock issuable upon exercise of warrants issued to B III Capital Partners as a participant under the Loan Agreement) and (vi) shares of Common Stock issuable upon conversion of the shares of the Company's Series B Preferred Stock issued to the Series B Holders pursuant to the Series B Agreement and Certificate of Designation for the Company's Series B Preferred Stock. As to any particular Registrable Shares, such shares shall cease to be Registrable Shares when (A) such shares shall have been transferred, new certificates for such shares not bearing a legend restricting further transfer shall have been delivered by the Company and subsequent disposition of such shares shall not require registration or qualification under the Securities Act or any similar state law then in force, or (B) such shares shall have ceased to be outstanding. 2. Section 4(a) of the Rights Agreement, as amended, shall be amended and restated in its entirety to provide as follows: (a) The Company has registered the Registrable Shares, other than those described in Section 1(vi) and certain of those described in Section 1(i) herein (collectively, the "Unregistered Registrable Shares"), on Form S-3 (No. 333-3870) (the "Initial Shelf Registration"). The Company will use its best efforts to include the Unregistered Registrable Shares in the Initial Shelf Registration. If not included in the Initial Shelf Registration within ninety (90) days after the Closing under the Series B Agreement, the Company will file a Subsequent Shelf Registration within ninety (90) days after the Closing under the Series B Agreement and will use its best efforts to have such Subsequent Shelf Registration declared effective by the SEC. The Company shall not permit any securities other than the Registrable 2 3 Shares to be included in the Initial Shelf Registration or any Subsequent Shelf Registration. The Company shall use its best efforts to keep the Initial Shelf Registration continuously effective under the Securities Act until (i) all Registrable Shares covered by the Initial Shelf Registration have been sold in the manner set forth and as contemplated in the Initial Shelf Registration or (ii) a Subsequent Shelf Registration covering all of the Registrable Shares has been declared effective under the Securities Act and the Registrable Shares covered thereby have been sold in the manner set forth and as contemplated in such Subsequent Shelf Registration (the "Effectiveness Period"). 3. Except as amended hereby, the Rights Agreement dated December 30, 1994, as amended on February 21, 1996, on June 10, 1996 and on August 6, 1997, remains in full force and effect. 4. By its signature hereto, each of the Series B Holder becomes a party to the Rights Agreement. 3 4 IN WITNESS WHEREOF, the parties have executed this Amendment Number 4 to the Registration Rights Agreement as of the day and year first above written. THE COMPANY: AUREAL SEMICONDUCTOR INC. By: /s/ David J. Domeier ------------------------------- Name: David J. Domeier Title: Vice President of Finance and Chief Financial Officer 5 COUNTERPART SIGNATURE PAGE TO AMENDMENT NUMBER 4 TO REGISTRATION RIGHTS AGREEMENT SERIES B and PRIOR HOLDERS: TCW Special Credits, as agent By TCW Asset Management Company By: /s/ Richard Masson ---------------------------- Name: Richard Masson ---------------------------- Title: Authorized Signatory ---------------------------- By: /s/ Kenneth Liang ---------------------------- Name: Kenneth Liang ---------------------------- Title: Authorized Signatory ---------------------------- THE COPERNICUS FUND, L.P. By: DDJ Copernicus, LLC, its General Partner By: /s/ Daniel G. Harmetz ---------------------------- Name: Daniel G. Harmetz ---------------------------- Title: Member ---------------------------- THE GALILEO FUND, L.P. By: /s/ Daniel G. Harmetz ---------------------------- Name: Daniel G. Harmetz ---------------------------- Title: Member ---------------------------- 6 SERIES B and PRIOR HOLDERS (Continued): B III CAPITAL PARTNERS, L.P. By: DDJ Capital III, LLC, its General Partner By: DDJ Capital Management, LLC, its Manager By: /s/ Daniel G. Harmetz ---------------------------- Name: Daniel G. Harmetz ---------------------------- Title: Member ---------------------------- -----END PRIVACY-ENHANCED MESSAGE-----