Document:

EXHIBIT 10.15

 

SUBORDINATION AND INTERCREDITOR AGREEMENT

 

THIS SUBORDINATION AND INTERCREDITOR AGREEMENT (this “Agreement”) is entered into as of May 7, 2012, by and among HUDSON BAY MASTER FUND LTD., a Cayman Islands company, as collateral agent (the “First Lien Collateral Agent”) for the buyers party to the Senior Credit Agreement, (the “Senior Lenders”), COMVEST CAPITAL II, L.P.,  a Delaware limited partnership (the “Subordinated Creditor”), and DIGITAL DOMAIN MEDIA GROUP, INC., a Florida corporation (the “Company”).

 

R E C I T A L S

 

A.            The Company, First Lien Collateral Agent and Senior Lenders have entered into that certain Securities Purchase Agreement of even date herewith (as the same may be amended, supplemented, replaced, refinanced, or otherwise modified from time to time to the extent permitted hereunder, the “Senior Credit Agreement”) pursuant to which, among other things, Senior Lenders have agreed, subject to the terms and conditions set forth in the Senior Credit Agreement, to make certain loans and financial accommodations to the Company.  The First Lien Collateral Agent has also entered into that certain Guaranty of even date herewith (the “First Lien Guaranty”) with the Guarantors, pursuant to which the Guarantors have, among other things, guaranteed the repayment of the Senior Debt.  Pursuant to (i) that certain Security And Pledge Agreement of even date herewith entered into by and among the Company, the Guarantors (other than Digital Domain Productions (Vancouver) Ltd.), and First Lien Collateral Agent (the “First Lien Security And Pledge Agreement”), (ii) that certain Canadian Security And Pledge Agreement of even date herewith entered into by and among the Company, Digital Domain Productions (Vancouver) Ltd, and First Lien Collateral Agent (the “First Lien Canadian Security And Pledge Agreement”), and (iii) certain real property mortgages, all of the Company’s and Guarantors’ obligations to First Lien Collateral Agent and the Senior Lenders under the Senior Debt Documents are secured by liens on and security interests in all of the real and personal property of the Company and Guarantors (the “Collateral”).

 

B.            The Company and Subordinated Creditor have entered into that certain Debt Exchange Agreement of even date herewith (as the same may be amended, supplemented, replaced, refinanced or otherwise modified from time to time to the extent permitted hereunder, the “Subordinated Credit Agreement”) pursuant to which, among other things, Subordinated Creditor has agreed, subject to the terms and conditions set forth in the Subordinated Credit Agreement, to exchange and continue certain loans and financial accommodations to the Company.  Subordinated Creditor has also entered into that certain Guaranty of even date herewith (the “Subordinated Guaranty”) with the Guarantors, pursuant to which the Guarantors have, among other things, guaranteed the repayment of the Subordinated Debt.  Pursuant to (i) that certain Security And Pledge Agreement of even date herewith entered into by and among the Company, the Guarantors (other than Digital Domain Productions (Vancouver) Ltd.), and Subordinated Creditor (the “Subordinated Security And Pledge Agreement”), (ii) that certain Canadian Security And Pledge Agreement of even date herewith entered into by and among the Company, Digital Domain Productions (Vancouver) Ltd, and Subordinated Creditor (the “Subordinated Canadian Security And Pledge Agreement”), and (iii) certain real

 

 

property mortgages, all of the Company’s and Guarantors’ obligations to Subordinated Creditor under the Subordinated Debt Documents are secured by liens on and security interests in the Collateral.

 

C.            As an inducement to and as one of the conditions precedent to the agreement of First Lien Collateral Agent and Senior Lenders to consummate the transactions contemplated by the Senior Credit Agreement, First Lien Collateral Agent and Senior Lenders have required the execution and delivery of this Agreement by Subordinated Creditor and the Company in order to set forth the relative rights and priorities of First Lien Collateral Agent, Senior Lenders and Subordinated Creditor under the Senior Debt Documents and the Subordinated Debt Documents.

 

NOW, THEREFORE, in order to induce First Lien Collateral Agent and Senior Lenders to consummate the transactions contemplated by the Senior Credit Agreement, and for other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, the parties hereto hereby agree as follows:

 

1.            Definitions. The following terms shall have the following meanings in this Agreement:

 

“Approved Funds Flow” shall mean that certain Paydown Letter executed by Subordinated Creditor of even date herewith.

 

“Bankruptcy Code” shall mean Title 11 of the United States Code, as amended from time to time and any successor statute and all rules and regulations promulgated thereunder.

 

“Collateral” shall have the meaning set forth in the Recitals of this Agreement.

 

“Distribution” means, with respect to any indebtedness or obligation: (a) any payment or distribution by any Person of cash, securities or other property, by set-off or otherwise, on account of such indebtedness or obligation; or (b) any redemption, purchase or other acquisition of such indebtedness or obligation by any Person; provided, however, that in no case for the purposes of this Agreement shall a “Distribution” include any of the items described in clauses (a) and (b) above with respect to (x) any Stock received in connection with a Permitted Stock Conversion or (y) any other Stock held at any time by Subordinated Creditor.

 

“Enforcement Action” shall mean (a) to take from or for the account of the Company or any Guarantor, by set-off or in any other manner, the whole or any part of any monies which may now or hereafter be owing by the Company or any Guarantor, (b) to sue for payment of, or to initiate or participate with others in any suit, action or proceeding (including without limitation, any Proceeding) against the Company or any Guarantor to (i) enforce payment of or to collect the whole or any part of the Subordinated Debt or (ii) commence judicial enforcement of any of the rights and remedies under the Subordinated Debt Documents or applicable law with respect to the Subordinated Debt, (c) to accelerate the Subordinated Debt, (d) to exercise any put option or to cause the Company or any Guarantor to honor any redemption or mandatory prepayment obligation under any Subordinated Debt Document, (e) to notify account

 

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debtors or directly collect accounts receivable or other payment rights of the Company or any Guarantor, or (f) take any action under the provisions of any state or federal law, including, without limitation, the Uniform Commercial Code, or under any contract or agreement (including, without limitation, any of the Subordinated Debt Documents), to enforce, foreclose upon, take possession of or sell any property or assets of the Company or any Guarantor including, without limitation, any of the Collateral.  For the sake of clarity, the foregoing shall not restrict the Subordinated Creditor from (x) converting of all or any portion of the Subordinated Debt in a Permitted Stock Conversion or (y) taking any action to enforce its rights as a holder of Stock or with respect to any interests pertaining to any Stock rights (including without limitation registration rights, conversion rights and anti-dilution rights).

 

“Existing Senior Debt Documents” shall mean, collectively and as may be amended, supplemented, replaced, refinanced, or otherwise modified from time to time in accordance with this Agreement: (a) the Senior Credit Agreement; (b) those certain Senior Secured Convertible Notes of even date herewith executed by the Company in favor of each of the Senior Lenders; (c) the First Lien Security And Pledge Agreement; (d) the First Lien Canadian Security And Pledge Agreement; (e) the First Lien Guaranty; and (f) the other “Transaction Documents,” as that term is defined in the Senior Credit Agreement, including, without limitation, all agreements, documents and instruments executed to effectuate any extension of indebtedness to the Company or any of its Subsidiaries by First Lien Collateral Agent or any Senior Lender in any Proceeding.

 

“Guarantors” shall mean: (a) D2 Software, Inc., a Delaware corporation; (b) DDH Land Holdings, LLC, a Florida limited liability company; (c) DDH Land Holdings II, LLC, a Florida limited liability company; (d) Digital Domain, a Delaware corporation; (e) Digital Domain Institute, Inc., a Florida corporation; (f) Digital Domain International, Inc., a Florida corporation; (g) Digital Domain Productions, Inc., a Delaware corporation; (h) Digital Domain Stereo Group, Inc., a Florida corporation; (i) Digital Domain Tactical, Inc., a Florida corporation; (j) Mothership Media, Inc., a California corporation; (k) Tradition Studios, Inc., a Florida corporation; (l) Digital Domain Productions (Vancouver) Ltd.; and (m) any other Person that becomes a “Guarantor,” as that term is defined in the First Lien Guaranty, under the First Guaranty after the date hereof and thereby guarantees the Senior Debt and/or the Subordinated Debt.

 

“Paid In Full” or “Payment In Full” shall mean that: (a) all Senior Debt has been  paid in cash in full; (b) all commitments to lend under the Senior Debt Documents have been terminated, and no Person has any further right to obtain any loans or other extensions of credit under the Senior Debt Documents relating to such Senior Debt; and (c) any costs, expenses and contingent indemnification obligations which are not yet due and payable but with respect to which a claim may reasonably be expected to be asserted under the Senior Debt Documents are backed by standby letters of credit (issued by a bank, and in form and substance, acceptable to the First Lien Collateral Agent) or cash collateralized (which Company irrevocably agrees to do, or cause to be done, at the time that the items described in the foregoing clauses (a) and (b) have occurred), in each case reasonably required  and in each case in an amount reasonably estimated by the First Lien

 

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Collateral Agent under the Senior Debt to be the amount of costs, expenses and contingent indemnification obligations that may become due and payable.

 

“Permitted Refinancing” shall mean any refinancing of the Senior Debt under the Existing Senior Debt Documents provided that the financing documentation entered into by the Company and any Guarantor in connection with such Permitted Refinancing constitute Refinancing Senior Debt Documents.

 

“Permitted Stock Conversion” shall mean any Stock received by Subordinated Creditor in connection with any conversion of all or any portion of the Subordinated Debt into Stock in accordance with the Subordinated Debt Documents.

 

“Permitted Subordinated Debt Payments” means: (a) regularly scheduled payments of interest, but solely if paid in kind, (ii) default interest, but solely if paid in kind, (iii) payments in cash of Subordinated Debt Costs and Expenses and other fees due as of the date hereof (including, without limitation, items that are due as a deposit for anticipated post-close work), but solely in the amount set forth in the Approved Funds Flow; (iv) payments in cash of Subordinated Debt Costs and Expenses coming due after the date hereof, but solely to the extent that the aggregate amount of such Subordinated Debt Costs and Expenses do not exceed $150,000 in the aggregate in any calendar year; and (v) payments, but solely if paid in kind, of other amounts from time to time owing under the Subordinated Debt Documents.

 

“Person” means any natural person, corporation, general or limited partnership, limited liability company, firm, trust, association, government, governmental agency or other entity, whether acting in an individual, fiduciary or other capacity.

 

“Proceeding” shall mean any voluntary or involuntary insolvency, bankruptcy, receivership, custodianship, liquidation, dissolution, reorganization, assignment for the benefit of creditors, appointment of a custodian, receiver, trustee or other officer with similar powers or any other proceeding for the liquidation, dissolution or other winding up of a Person.

 

“Refinancing Senior Debt Documents” shall mean any financing documentation which replaces the Existing Senior Debt Documents and pursuant to which the Senior Debt under the Existing Senior Debt Documents is refinanced, as such financing documentation may be amended, supplemented, replaced, refinanced or otherwise modified from time to time in compliance with this Agreement, but specifically excluding any such financing documentation to the extent that it contains provisions violating Section 3.1 hereof.

 

“Reorganization Subordinated Securities”  shall mean any debt or equity securities of Company or any other Person that are distributed to Subordinated Creditor in respect of the Subordinated Debt owing to such Subordinated Creditor pursuant to a confirmed plan of reorganization or adjustment and that: (a) are subordinated in right of payment to the Senior Debt (or any debt or equity securities issued in substitution of all

 

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or any portion of the Senior Debt) to at least the same extent as the Subordinated Debt is subordinated to the Senior Debt pursuant to this Agreement; (b) do not have the benefit of any obligation of any Person (whether as issuer, guarantor or otherwise) unless the Senior Debt has at least the same benefit of the obligation of such Person; and (c) do not have any terms, and are not subject to or entitled to the benefit of any agreement or instrument that has terms, that are more burdensome to the issuer of or other obligor on such debt or equity securities than are the terms of the Senior Debt.

 

“Senior Credit Agreement” shall have meaning set forth in the Recitals of this Agreement.

 

“Senior Debt” shall mean all of the obligations, liabilities, and indebtedness of every nature of the Company or any Guarantor from time to time owed to First Lien Collateral Agent or any Senior Lender under the Senior Debt Documents, including, without limitation, the principal amount of all debts, claims and indebtedness, accrued and unpaid interest and all fees, costs and expenses, whether primary, secondary, direct, contingent, fixed or otherwise, heretofore, now and from time to time hereafter owing, due or payable, whether before or after the filing of a Proceeding under the Bankruptcy Code together with: (a) any amendments, modifications, renewals or extensions thereof to the extent not prohibited by the terms of this Agreement; and (b) any interest accruing thereon after the commencement of a Proceeding, without regard to whether or not such interest is an allowed claim; provided, however, that in no case for purposes of this Agreement shall “Senior Debt” include any of the foregoing with respect to any Stock held at any time by the First Lien Collateral Agent or any Senior Lender.  Senior Debt shall be considered to be outstanding whenever any loan commitment under the Senior Debt Documents is outstanding.

 

“Senior Debt Documents” shall mean the Existing Senior Debt Documents and, after any refinancing of the Senior Debt under the Existing Senior Debt Documents, the Refinancing Senior Debt Documents.

 

“Senior Default” shall mean any “Event of Default” under the Senior Debt Documents, or any condition or event that, after notice or lapse of time or both, would constitute such an Event of Default if that condition or event were not cured or removed within any applicable grace or cure period set forth therein.

 

“Senior Lenders” shall mean the holders of the Senior Debt.

 

“Stock” shall mean (a) all shares of common stock of the Company, and (b) all warrants and other equity interests.

 

“Subordinated Credit Agreement” shall have the meaning set forth in the Recitals of this Agreement.

 

“Subordinated Debt” shall mean shall all of the obligations, liabilities, and indebtedness of every nature of the Company or any Guarantor from time to time owed to Subordinated Creditor under the Subordinated Debt Documents, including, without

 

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limitation, the principal amount of all debts, claims and indebtedness, accrued and unpaid interest and all fees, costs and expenses, whether primary, secondary, direct, contingent, fixed or otherwise, heretofore, now and from time to time hereafter owing, due or payable, whether before or after the filing of a Proceeding under the Bankruptcy Code together with: (a) any amendments, modifications, renewals or extensions thereof to the extent not prohibited by the terms of this Agreement; and (b) any interest accruing thereon after the commencement of a Proceeding, without regard to whether or not such interest is an allowed claim; provided, however, that in no case for purposes of this Agreement shall “Subordinated Debt” include any of the foregoing with respect to (x) any Stock received in connection with a Permitted Stock Conversion or (y) any other Stock held at any time by Subordinated Creditor.

 

“Subordinated Debt Costs and Expenses” means reasonable out-of-pocket fees, costs and expenses (including, without limitation, attorneys’ fees) and indemnities payable by the Company or any Guarantor to Subordinated Creditor accruing prior to, on or after the date hereof pursuant to the terms of this Agreement or the Subordinated Debt Documents as in effect on the date of this Agreement or as amended, supplemented, replaced, refinanced, or otherwise modified in accordance with the terms of this Agreement.

 

“Subordinated Debt Default” shall mean a default in the payment of the Subordinated Debt or in the performance of any term, covenant or condition contained in the Subordinated Debt Documents or any other occurrence permitting Subordinated Creditor to accelerate the payment of, or put or cause the redemption of, all or any portion of the Subordinated Debt or any Subordinated Debt Document.

 

“Subordinated Debt Documents” shall mean, collectively and as may be amended, supplemented, or otherwise modified from time to time in accordance with this Agreement: (a) the Subordinated Credit Agreement; (b) the Subordinated Note; (c) the Subordinated Guaranty; (d) the Subordinated Pledge And Security Agreement; (e) the Subordinated Canadian Pledge And Security Agreement; (f) all UCC financing statements currently on file listing Comvest Capital II, L.P. as the secured party and the Company or any Guarantor (or any predecessor of the Company or any Guarantor) as the debtor, including, without limitation, such UCC financing statements listed on Exhibit 1 hereto; and (g) all intellectual property filings currently on file with the United Stated Patent and Trademark Office and the United States Copyright Office listing the Company or any Guarantor (or any predecessor of the Company or any Guarantor) as the registered owner of such intellectual property and Comvest Capital II, L.P. as having a security interest in such intellectual property, including without limitation, such filings listed on Exhibit 2 hereto; and (h) all other agreements, documents and instruments executed from time pursuant to the foregoing.

 

“Subordinated Note” shall mean that certain Secured Convertible Note of even date herewith executed by the Company in favor of Subordinated Creditor.

 

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“Subsidiaries” shall mean: (a) D2 Software, Inc., a Delaware corporation; (b) DDH Land Holdings, LLC, a Florida limited liability company; (c) DDH Land Holdings II, LLC, a Florida limited liability company; (d) Digital Domain, a Delaware corporation; (e) Digital Domain Institute, Inc., a Florida corporation; (f) Digital Domain International, Inc., a Florida corporation; (g) Digital Domain Productions, Inc., a Delaware corporation; (h) Digital Domain Stereo Group, Inc., a Florida corporation; (i) Digital Domain Tactical, Inc., a Florida corporation; (j) Mothership Media, Inc., a California corporation; (k) Tradition Studios, Inc., a Florida corporation; (l) Digital Domain Productions (Vancouver) Ltd.; and (m) any other Person that becomes a Subsidiary, as that term is defined in the Senior Credit Agreement (as in effect on the date hereof), after the date hereof, that is directly or indirectly controlled by the Company.

 

2.             Subordination.

 

2.1.           Subordination of Subordinated Debt to Senior Debt.  The Company covenants and agrees, and Subordinated Creditor by its acceptance of the Subordinated Debt Documents (whether upon original issue or upon transfer or assignment) likewise covenants and agrees, notwithstanding anything to the contrary contained in any of the Subordinated Debt Documents, that the payment of any and all of the Subordinated Debt shall be subordinate and subject in right and time of payment, to the extent and in the manner hereinafter set forth, to the prior Payment in Full of all Senior Debt.  Each holder of Senior Debt, whether now outstanding or hereafter created, incurred, assumed or guaranteed, shall be deemed to have acquired Senior Debt in reliance upon the provisions contained in this Agreement.

 

2.2.           Liquidation, Dissolution, Bankruptcy In the event of any Proceeding involving the Company or any of the Subsidiaries of the Company:

 

(a)           All Senior Debt shall first be Paid In Full before any Distribution (other than (i) Permitted Subordinated Debt Payments or (ii) a distribution of Reorganization Subordinated Securities if Subordinated Creditor and First Lien Collateral Agent shall have entered into such supplements to or modifications to this Agreement as First Lien Collateral Agent may request to reflect the continued subordination of the Reorganization Subordinated Securities to the Senior Debt (or notes or other securities issued in substitution of all or a portion thereof) to the same extent as provided herein), whether in cash, securities or other property, shall be made to Subordinated Creditor on account of any Subordinated Debt.

 

(b)           Any Distribution (other than (i) Permitted Subordinated Debt Payments or (ii) a distribution of Reorganization Subordinated Securities if Subordinated Creditor and First Lien Collateral Agent shall have entered into such supplements to or modifications to this Agreement as First Lien Collateral Agent may request to reflect the continued subordination of the Reorganization Subordinated Securities to the Senior Debt (or notes or other securities issued in substitution of all or a portion thereof) to the same extent as provided herein), whether in cash, securities or other property which would otherwise, but for the terms hereof, be payable or deliverable in respect of the Subordinated Debt shall be paid or delivered directly to First Lien Collateral Agent (to be held and/or

 

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applied by First Lien Collateral Agent in accordance with the terms of the Senior Debt Documents) until all Senior Debt is Paid In Full. Subordinated Creditor irrevocably authorizes, empowers and directs any debtor, debtor in possession, receiver, trustee, liquidator, custodian, conservator or other Person having authority, to pay or otherwise deliver all such Distributions to First Lien Collateral Agent. Subordinated Creditor also irrevocably authorizes and empowers First Lien Collateral Agent, in the name of Subordinated Creditor, to demand, sue for, collect and receive any and all such Distributions.

 

(c)           Subordinated Creditor agrees not to initiate, prosecute or participate in any claim, action or other proceeding challenging the enforceability, validity, perfection or priority of the Senior Debt or any liens and security interests securing the Senior Debt.

 

(d)           Subordinated Creditor agrees that First Lien Collateral Agent and Senior Lenders may consent to the use of cash collateral or provide financing to the Company or any of the Subsidiaries on such terms and conditions and in such amounts as First Lien Collateral Agent and Senior Lenders, in their sole discretion, may decide and, in connection therewith, the Company and any of its Subsidiaries may grant to First Lien Collateral Agent and Senior Lenders liens and security interests upon all of the property of the Company and any of the Subsidiaries, which liens and security interests: (i) shall secure payment of all Senior Debt (whether such Senior Debt arose prior to the commencement of any Proceeding or at any time thereafter) and all other financing provided by Senior Lenders during the Proceeding; and (ii) shall be superior in priority to the liens and security interests, if any, in favor of Subordinated Creditor on the property of the Company, and Subordinated Creditor agrees not to object to any of the foregoing so long as Subordinated Creditor maintains its liens against the Collateral in accordance with and subject to the terms of this Agreement.  Subordinated Creditor agrees that it will not seek to provide financing to the Company or any of its Subsidiaries, object to or oppose a sale or other disposition of any property securing all of any part of the Senior Debt free and clear of security interests, liens or other claims of Subordinated Creditor under Section 363 of the Bankruptcy Code or any other provision of the Bankruptcy Code if First Lien Collateral Agent and Senior Lenders have consented to such sale or disposition so long as: (x) the liens of Subordinated Creditor attach to the proceeds thereof (subject to the terms of this Agreement); and (y) the proceeds of such sale are applied to the permanent repayment of the Senior Debt in accordance with the terms of the Senior Debt Documents, or propose, seek and/or support confirmation of a plan to which First Lien Collateral Agent and Senior Lenders have not consented in writing.  Notwithstanding anything to the contrary set forth herein, Subordinated Creditor may: (1) in any Proceeding commenced by or against the Company or any Guarantor, file a claim or statement of interest with respect to the Subordinated Debt and vote such claim in a manner not inconsistent with this Agreement; (2) inspect and appraise the Collateral and receive from the Company, or any Guarantor, any reports concerning the Collateral, in accordance with the Subordinated Debt Documents; and (3) file any necessary responsive or defensive pleadings, not in contravention of any provisions of this Agreement, in opposition to any motion, claim, adversary proceeding or other pleadings made by any

 

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Person which object to or otherwise seek the disallowance of the claims of Subordinated Creditor.

 

(e)           Subordinated Creditor agrees not to assert any right it may have to “adequate protection” of Subordinated Creditor’s interest in any of the Collateral in any Proceeding (other than to seek replacement liens subordinated to any liens of the First Lien Collateral Agent and the Senior Lenders pursuant to this Agreement) and Subordinated Creditor agrees that it will not seek to have the automatic stay lifted with respect to the Company or any Collateral without the prior written consent of First Lien Collateral Agent. Subordinated Creditor waives any claim it may now or hereafter have arising out of First Lien Collateral Agent’s or Senior Lenders’ election, in any Proceeding instituted under the Bankruptcy Code, of the application of Section 1111(b)(2) of the Bankruptcy Code, and/or any borrowing or grant of a security interest under Section 364 of the Bankruptcy Code by the Company and/or any Guarantor, as debtor(s) in possession. Subordinated Creditor further agrees that it will not seek to participate or participate on any creditor’s committee without First Lien Collateral Agent’s prior written consent.

 

(f)            Subordinated Creditor agrees that if it fails file to a proof of claim with respect to the Subordinated Debt 10 days before the expiration of the time to file any such proof of claim, the First Lien Collateral Agent may file such proof of claim on behalf of the Subordinated Creditor, but in no instance may the First Lien Collateral Agent vote such claim; provided, however, that First Lien Collateral Agent shall have no obligation to file any such proof of claim.

 

(g)           The Senior Debt shall continue to be treated as Senior Debt and the provisions of this Agreement shall continue to govern the relative rights and priorities of Senior Lenders and Subordinated Creditor even if all or part of the Senior Debt or the security interests securing the Senior Debt are subordinated, set aside, avoided, invalidated or disallowed in connection with any such Proceeding, and this Agreement shall be reinstated if at any time any payment of any of the Senior Debt is rescinded or must otherwise be returned by any holder of Senior Debt or any representative of such holder.

 

2.3.           Subordinated Debt Payment Restrictions.  Notwithstanding the terms of the Subordinated Debt Documents, the Company hereby agrees that it may not make, directly or indirectly, and Subordinated Creditor hereby agrees that it will not accept, any Distribution from the Company or any Guarantor until the Senior Debt is Paid In Full other than, subject to the terms of Section 2.2 of this Agreement, Permitted Subordinated Debt Payments3.1

 

2.4.           Subordinated Debt Standstill Provisions  Until the Senior Debt is Paid In Full, Subordinated Creditor shall not, without the prior written consent of First Lien Collateral Agent, take any Enforcement Action with respect to the Subordinated Debt.  Notwithstanding the foregoing Subordinated Creditor may (a) file proofs of claim against (i) the Company in any Proceeding involving the Company and (ii) any Guarantor in any Proceeding involving such Guarantor and (b) take non-monetary actions solely to the extent necessary to avoid the

 

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expiration of any statute of limitations.  Any Distributions (other than Permitted Subordinated Debt Payments) or other proceeds of any Enforcement Action obtained by Subordinated Creditor in violation of this Agreement shall in any event be held in trust by it for the benefit of First Lien Collateral Agent and Senior Lenders and promptly be paid or delivered to First Lien Collateral Agent for the benefit of Senior Lenders in the form received until all Senior Debt is Paid In Full.

 

2.5.           Incorrect Payment  If any Distribution on account of the Subordinated Debt not permitted to be made by the Company or accepted by Subordinated Creditor under this Agreement is made and received by Subordinated Creditor, such Distribution shall not be commingled with any of the assets of Subordinated Creditor, shall be held in trust by Subordinated Creditor for the benefit of First Lien Collateral Agent and Senior Lenders and shall be promptly paid over to First Lien Collateral Agent for application (in accordance with the Senior Debt Documents) to the payment of the Senior Debt then remaining unpaid, until all of the Senior Debt is Paid In Full.

 

2.6.           Subordination of Liens and Security Interests; Agreement Not to Contest; Agreement to Release Liens.  Until the Senior Debt has been Paid In Full all liens and security interests of Subordinated Creditor in any of the Collateral shall be and hereby are subordinated for all purposes and in all respects to the liens and security interests of First Lien Collateral Agent and Senior Lenders in the Collateral, regardless of the time, manner or order of perfection of any such liens and security interests.  Subordinated Creditor agrees that it will not at any time contest the validity, perfection, priority or enforceability of the Senior Debt, the Senior Debt Documents, or the liens and security interests of First Lien Collateral Agent and Senior Lenders in the Collateral securing the Senior Debt. In the event that First Lien Collateral Agent or Senior Lenders release or agree to release any of their liens or security interests in the Collateral in connection with the sale or other disposition thereof or any of the Collateral or any of the Collateral is sold, disposed of, or retained pursuant to a foreclosure or similar action, or any other sale or disposition that is permitted by the Subordinated Debt Documents, Subordinated Creditor shall promptly deliver (and execute as appropriate) to First Lien Collateral Agent such termination statements and releases as First Lien Collateral Agent shall reasonably request to effect the termination or release of any liens and security interests of Subordinated Creditor in such Collateral; provided that the liens of Subordinated Creditor shall attach to the proceeds of such sale (subject to the terms of this Agreement) and such proceeds shall be applied to permanently repay the Senior Debt in accordance with the terms of the Senior Debt Documents. In addition, in the event and solely to the extent that the First Lien Collateral Agent releases its mortgage securing the Senior Debt provided under the Mortgage, Assignment and Leases of Rents and Security Agreement dated as of the date hereof among DDH Land Holdings, LLC and DDH Loan Holdings II, LLC, as mortgagors, and First Lien Collateral Agent, as mortgagee (together with any mortgage that replaces such Mortgage), pursuant to Section 6 of such Mortgage (or any substantially similar successor provision thereof), then Subordinated Creditor shall release its mortgage securing the Subordinated Debt provided under the Mortgage, Assignment and Leases of Rents and Security Agreement dated as of the date hereof among DDH Land Holdings, LLC and DDH Loan Holdings II, LLC, as mortgagors, and Subordinated Creditor, as mortgagee (or any mortgage that replaces such Mortgage), pursuant to Section 6 of such Mortgage (or any substantially similar successor provision thereof). In furtherance of the foregoing, Subordinated Creditor hereby irrevocably appoints First Lien Collateral Agent its

 

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attorney-in-fact, with full authority in the place and stead of Subordinated Creditor and in the name of Subordinated Creditor or otherwise, to deliver (and execute as appropriate) any document or instrument which Subordinated Creditor may be required to deliver pursuant to this Section 2.6 in the event that Subordinated Creditor fails to timely deliver such document or instrument under this this Section 2.6.

 

2.7          Application of Proceeds from Sale or other Disposition of the Collateral.  In the event of any sale, transfer or other disposition (including a casualty loss or taking through eminent domain) of the Collateral in which Subordinated Creditor has a security interest, the proceeds resulting therefrom (including insurance proceeds) shall be applied in accordance with the terms of the Senior Debt Documents or as otherwise consented to by First Lien Collateral Agent and Senior Lenders until such time as the Senior Debt is Paid In Full.

 

2.8          Sale, Transfer or other Disposition of Subordinated Debt.

 

(a)          Subordinated Creditor shall not sell, assign, pledge, dispose of or otherwise transfer all or any portion of the Subordinated Debt or any Subordinated Debt Document (i) unless prior to the consummation of any such action, the transferee thereof shall execute and deliver to First Lien Collateral Agent an agreement substantially identical to this Agreement or a joinder hereto, providing for the continued subordination of the Subordinated Debt to the Senior Debt as provided herein and for the continued effectiveness of all of the rights of First Lien Collateral Agent and Senior Lenders arising under this Agreement; and (ii) unless, following the consummation of any such action, there shall be  no more than three holders of the Subordinated Debt or if there are more than three holders of the Subordinated Debt, such holders appoint an First Lien Collateral Agent to act on their behalf with respect to the obligations set forth in this Agreement.

 

(b)           Notwithstanding the failure of any transferee to execute or deliver an agreement substantially identical to this Agreement or a joinder agreement, the subordination effected hereby shall survive any sale, assignment, pledge, disposition or other transfer of all or any portion of the Subordinated Debt, and the terms of this Agreement shall be binding upon the successors and assigns of Subordinated Creditor, as provided in Section 12 of this Agreement.

 

2.9          Legends. Until the termination of this Agreement in accordance with Section 16 hereof, Subordinated Creditor will cause to be clearly, conspicuously and prominently inserted on the face of the each of the Subordinated Debt Documents, as well as any renewals or replacements thereof, the following legend:

 

“This instrument and the rights and obligations evidenced hereby and any security interests or other liens securing such obligations are subordinate in the manner and to the extent set forth in that certain Subordination And Intercreditor Agreement dated as of May 7, 2012 (as amended, restated or otherwise modified from time to time, the “Subordination Agreement”) among HUDSON BAY MASTER FUND LTD., as First Lien Collateral Agent (the “First Lien Collateral Agent”), COMVEST CAPITAL II, L.P. (the “Subordinated Creditor”), and

 

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DIGITAL DOMAIN MEDIA GROUP, INC. (the “Company”) to the indebtedness (including interest) owed by the Company, and the security interests and liens securing such indebtedness, pursuant to that certain Securities Purchase Agreement dated as of May 6, 2012 among the Company, First Lien Collateral Agent and the buyers from time to time party thereto, that certain Security And Pledge Agreement dated as of May 7, 2012 by and among the Company, First Lien Collateral Agent, and the grantors party thereto, that certain Canadian Security And Pledge Agreement dated as of May 7, 2012 by and among the Company, First Lien Collateral Agent, and the grantors party thereto, and various related documents, and to indebtedness refinancing the indebtedness under such documents as contemplated by the Subordination Agreement.  Each holder of this instrument, by its acceptance hereof, irrevocably agrees to be bound by the provisions of the Subordination Agreement.”

 

2.10        Other Collateral Matters.

 

(a)           Until the Senior Debt is Paid in Full, Subordinated Creditor shall take reasonable direction from First Lien Collateral Agent as to any Collateral in its possession or control, so long as (i) such direction would not, in Subordinated Creditor’s reasonable determination, result in any liability of Subordinated Creditor to any Person (or Subordinated Creditor receives indemnification from First Lien Collateral Agent and Senior Lenders with respect to any possible claim that is satisfactory to Subordinated Creditor) and (ii) Subordinated Creditor is reimbursed in cash by the Company (which the Company hereby agrees to do) or the First Lien Collateral Agent for all Subordinated Debt Costs and Expenses pertaining thereto.

 

(b)           Promptly after the Payment in Full of the Senior Debt, each of the First Lien Collateral Agent and the Senior Lenders shall deliver or assign control of the remainder of the Collateral, if any, in its possession or under its control to the Subordinated Creditor unless the Subordinated Debt shall have been paid in full or except as may otherwise be required by applicable law or court order.  First Lien Collateral Agent (on behalf of itself and the Senior Lenders), hereby appoints the Subordinated Creditor, and Subordinated Creditor hereby appoints First Lien Collateral Agent and Senior Lenders, as their respective agent and bailee for the purposes of perfecting such appointing party’s liens on any of the Collateral that is in the possession or control of such other party, and each party so appointed hereby accepts such appointment and, on behalf of itself and the other holders of the indebtedness such party represents, hereby acknowledges that it holds possession of or otherwise controls any such Collateral for the benefit of the appointing party; provided, that the party in the possession or control of any Collateral shall not have any duty or liability to protect or preserve any rights pertaining to any of the Collateral and, except for gross negligence or willful misconduct as determined pursuant to a final non-appealable order of a court of competent jurisdiction, each party on behalf of itself and the holders of the indebtedness it represents, hereby waives and releases such other party from, all such claims and liabilities arising pursuant to such other party’s role as agent and bailee with respect to the Collateral.

 

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(c)           Provided that Subordinated Creditor is reimbursed in cash by the Company (which the Company hereby agrees to do) or the First Lien Collateral Agent for all Subordinated Debt Costs and Expenses pertaining thereto, Subordinated Creditor agrees to take all reasonable actions which First Lien Collateral Agent deems, in its reasonable discretion, necessary to replace all deposit account control agreements in existence on the date hereof among Subordinated Creditor, as the secured creditor, the Company or any Guarantor, as the account holder, and the applicable depository bank, with new “four party” deposit account control agreements (among First Lien Collateral Agent, as the senior secured creditor, the Subordinated Creditor, as the junior secured creditor, the Company or any Guarantor, as the account holder, and the applicable depository bank), reasonably acceptable to each of the First Lien Collateral Agent and the Subordinated Creditor to, among other things, reflect that all “blockage” notices thereunder and payment direction notices may only be given by the First Lien Collateral Agent until the Senior Debt is Paid in Full and Subordinated Creditor may only give such “blockage” notices and payment direction notices thereunder after the Senior Debt is Paid in Full.

 

2.11  Deemed Cure of Subordinated Debt Default.  In the event that at a given time there exists a Parallel Default Scenario (as defined below), then upon First Lien Collateral Agent delivering its written waiver of the Senior Default to both the Company and the Subordinated Creditor, the Subordinated Debt Default (solely with respect to the event, omission or failure to act that served as a basis for the Parallel Default Scenario) shall be deemed to be automatically waived by the Subordinated Creditor.  Notwithstanding the foregoing, it is acknowledged and agreed that (x) to the extent that any the Senior Lenders or the First Lien Collateral Agent receives any Waiver Consideration (as defined below) in connection with the waiver of the Senior Default, then the First Lien Collateral Agent must disclose such consideration to Subordinated Creditor and Subordinated Creditor shall not be deemed to have waived the corresponding Subordinated Debt Default unless and until Subordinator Creditor receives the same (in the case of cash or other property (and in which case First Lien Collateral Agent expressly acknowledges that such cash or property may be received and retained by the Subordinated Creditor notwithstanding the other provisions of this Agreement)) or substantially similar (in the case of concessions or other favorable terms added to the Senior Debt Documents) Waiver Consideration, and (y) until such time as Subordinated Creditor is deemed to waive the Subordinated Debt Default under the Parallel Default Scenario, it shall, notwithstanding anything contained in this Agreement to the contrary, be permitted to charge a default rate of interest under the terms of the Subordinated Note (with such default interest accruing under the Subordinated Note).

 

“Parallel Default Scenario” shall mean a scenario where the same event, omission or failure to act by the Company or any Guarantor simultaneously results in both a Senior Default (other than a cross default with respect to the Subordinated Debt Documents) and a Subordinated Debt Default; provided that no Parallel Default Scenario shall be deemed to apply hereunder in the event that (I) the Subordinated Debt Default arises under subsections (i), (ii), (iii) (provided however that such clause (iii) shall not be deemed to be so excluded solely with respect to clause

 

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(z) of Section 13 of the Subordinated Note), (iv), (v), (vi) (but without affecting Section 34 of the Subordinated Note), (vii), (ix), (x) or (xi) of Section 4(a) of the Subordinated Note, or if the Subordinated Debt Default arises with respect to Section 15(a) of the Subordinated Note,  (II) the event, omission or failure to act by the Company, any Guarantor or any other applicable Person disproportionately adversely affects the Subordinated Creditor as compared to the Senior Lenders, (III) the event, omission or failure pertains to any Stock or Stock rights, or (IV) the Subordinated Debt Default arises as a result of fraud, willful or criminal misconduct, or the intentional breach by the Company, any Guarantor or any other applicable Person.

 

“Waiver Consideration” shall mean any consideration provided by the Company, any Guarantor or any other Person to the First Lien Collateral Agent and/or any Senior Lender as inducement for the waiver of a Senior Default, whether represented by (x) cash, equity or other tangible or intangible property or (y) new or amended terms in the Senior Debt Documents or in any newly-created agreement.

 

3.            Modifications.

 

3.1          Modifications to Senior Debt Documents. Senior Lenders may at any time and from time to time without the consent of or notice to Subordinated Creditor, without incurring liability to Subordinated Creditor and without impairing or releasing the obligations of Subordinated Creditor under this Agreement, change the manner or place of payment or extend the time of payment of or renew or alter any of the terms of the Senior Debt, or amend or modify in any manner the Senior Debt Documents; provided that neither the First Lien Collateral Agent nor the Senior Lenders shall amend or modify the Senior Debt Documents to (a) increase the principal amount of the Senior Debt (other than as a result to payment in kind payments) by more than $5,000,000 in the aggregate (without giving effect to any payments made thereon), (b) extend the final maturity of the Senior Debt (as set forth in the Senior Debt Documents in effect on the date hereof) by more than one year; (c) shorten the scheduled amortization of any portion of the Senior  Debt (as set forth in the Senior Debt Documents in effect on the date hereof); or (d) subordinate the Senior Debt to any other indebtedness of the Company or any Guarantor.

 

3.2          Modifications to Subordinated Debt Documents. Until the Senior Debt has been Paid In Full, and notwithstanding anything to the contrary contained in the Subordinated Debt Documents, Subordinated Creditor shall not, without the prior written consent of First Lien Collateral Agent, agree to any amendment, modification or supplement to the Subordinated Debt Documents the effect of which is to: (a) increase the maximum principal amount of the Subordinated Debt or rate of interest (or cash pay rate of interest) on any of the Subordinated Debt, other than as a result of payment in kind payments and payment in kind default interest; (b) shorten the dates upon which payments of principal or interest on the Subordinated Debt are due; (c) make more restrictive or add any event of default or any covenant with respect to the Subordinated Debt (other than like kind changes that are made to the Senior Debt Documents); (d) make more onerous upon the Company or any Guarantor any conversion, redemption or prepayment provisions of the Subordinated Debt, or enhance the rights of the Subordinated Creditor or any other holder of the Subordinated Debt with respect to any such provisions; (e) alter the subordination provisions with respect to the Subordinated Debt; or (f) take or perfect any other liens or security interests in any assets of the Company or any Guarantor, unless First

 

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Lien Collateral Agent has or is offered a lien or security interest in such assets which is senior to such lien or security interest and governed by the terms of this Agreement; or (g) change or amend any other term of the Subordinated Debt Documents if such change or amendment would result in a Senior Default, materially increase the obligations of the Company or any Guarantor or confer additional material rights on Subordinated Creditor or any other holder of the Subordinated Debt, in a manner adverse to the Company, any Guarantor, any Guarantor of the Subordinated Debt, or any of the Senior Lenders. (in each case other than like kind changes that are made to the Senior Debt Documents).  The Company hereby agrees to offer to First Lien Collateral Agent, or cause to be granted to First Lien Collateral Agent, liens on or security interests in any real or personal property of the Company or any Guarantor that are granted to the Subordinated Creditor.

 

4.            Waiver of Certain Rights by Subordinated Creditor.

 

4.1          Marshaling. Subordinated Creditor hereby waives any rights it may have under applicable law to assert the doctrine of marshaling or to otherwise require First Lien Collateral Agent or Senior Lenders to marshal any property of the Company or any Guarantor for the benefit of Subordinated Creditor.

 

4.2          Rights Relating to First Lien Collateral Agent’s Actions with respect to the Collateral. Subordinated Creditor hereby waives, to the extent permitted by applicable law and except as otherwise expressly provided herein, any rights which it may have to enjoin or otherwise obtain a judicial or administrative order preventing First Lien Collateral Agent or Senior Lenders from taking, or refraining from taking, any action with respect to all or any part of the Collateral. Without limitation of the foregoing, except as otherwise expressly provided herein, Subordinated Creditor hereby agrees: (a) that it has no right to direct or object to the manner in which First Lien Collateral Agent and Lenders apply the proceeds of the Collateral resulting from the exercise by First Lien Collateral Agent and Senior Lenders of rights and remedies under the Senior Debt Documents to the Senior Debt; and (b) except to the extent set forth in Section 2.10 of this Agreement, that First Lien Collateral Agent has not assumed any obligation to act as the First Lien Collateral Agent for Subordinated Creditor with respect to the Collateral.  The First Lien Collateral Agent shall have the exclusive right to enforce rights and exercise remedies with respect to the Collateral until the Senior Debt is Paid In Full.  In exercising rights and remedies with respect to the Collateral, the First Lien Collateral Agent and Senior Lenders may enforce the provisions of the Senior Debt Documents and exercise remedies thereunder, all in such order and in such manner as it or they may determine in the exercise of its or their sole business judgment. Such exercise and enforcement shall include, without limitation, the rights to sell or otherwise dispose of Collateral, to incur expenses in connection with such sale or disposition and to exercise all the rights and remedies of a secured lender under the Uniform Commercial Code of any applicable jurisdiction.  In conducting any public or private sale under the Uniform Commercial Code, the First Lien Collateral Agent shall give the Subordinated Creditor such notice of such sale as may be required by the applicable Uniform Commercial Code; provided, however, that 10 days’ notice shall be deemed to be commercially reasonable notice.

 

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5.            Representations and Warranties.

 

5.1          Representations and Warranties of Subordinated Creditor.  Subordinated Creditor hereby represents and warrants to First Lien Collateral Agent and Senior Lenders that as of the date hereof: (a) Subordinated Creditor is a limited partnership  duly formed and validly existing under the laws of the State of Delaware; (b)  Subordinated Creditor has the power and authority to enter into, execute, deliver and carry out the terms of this Agreement, all of which have been duly authorized by all proper and necessary action; (c) the execution of this Agreement by Subordinated Creditor will not violate or conflict with the organizational documents of Subordinated Creditor, any material agreement binding upon Subordinated Creditor or any law, regulation or order or require any consent or approval which has not been obtained; (d) this Agreement is the legal, valid and binding obligation of Subordinated Creditor, enforceable against Subordinated Creditor in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally and by equitable principles; and (e) Subordinated Creditor is the sole owner, beneficially and of record, of the Subordinated Debt Documents and the Subordinated Debt.

 

5.2          Representations and Warranties of First Lien Collateral Agent.  First Lien Collateral Agent hereby represents and warrants to Subordinated Creditor that as of the date hereof: (a) First Lien Collateral Agent is a company  duly formed and validly existing under the laws of the Cayman Islands, (b) First Lien Collateral Agent has the power and authority to enter into, execute, deliver and carry out the terms of this Agreement (on behalf of First Lien Collateral Agent and each of the other Senior Lenders), all of which have been duly authorized by all proper and necessary action; (c) the execution of this Agreement by First Lien Collateral Agent will not violate or conflict with the organizational documents of First Lien Collateral Agent, any material agreement binding upon First Lien Collateral Agent or any law, regulation or order or require any consent or approval which has not been obtained; and (d) this Agreement is the legal, valid and binding obligation of First Lien Collateral Agent, enforceable against First Lien Collateral Agent in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally or by equitable principles.

 

6.            Subrogation.  Upon  the Payment in Full of all Senior Debt, Subordinated Creditor shall be subrogated to the rights of First Lien Collateral Agent and Senior Lenders to receive Distributions with respect to the Senior Debt until the Subordinated Debt is paid in full.  Subordinated Creditor agrees that in the event that all or any part of a payment made with respect to the Senior Debt is recovered from the holders of the Senior Debt in a Proceeding or otherwise, any Distribution received by Subordinated Creditor with respect to the Subordinated Debt at any time after the date of the payment that is so recovered, whether pursuant to the right of subrogation provided for in this Agreement or otherwise, shall be deemed to have been received by Subordinated Creditor in trust as property of the holders of the Senior Debt and Subordinated Creditor shall forthwith deliver the same to the First Lien Collateral Agent for the benefit of the Senior Lenders for application to the Senior Debt until the Senior Debt is Paid In Full. A Distribution made pursuant to this Agreement to First Lien Collateral Agent or Senior Lenders which otherwise would have been made to Subordinated Creditor is not, as among the Company, any Guarantor and Subordinated Creditor, a payment by the Company or any Guarantor to or on account of the Senior Debt.

 

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7.            Modification. Any modification or waiver of any provision of this Agreement, or any consent to any departure by any party from the terms hereof, shall not be effective in any event unless the same is in writing and signed by First Lien Collateral Agent (with the consent of the requisite Senior Lenders provided under the Senior Credit Agreement) and Subordinated Creditor, and then such modification, waiver or consent shall be effective only in the specific instance and for the specific purpose given. Any notice to or demand on any party hereto in any event not specifically required hereunder shall not entitle the party receiving such notice or demand to any other or further notice or demand in the same, similar or other circumstances unless specifically required hereunder.

 

8.            Further Assurances. Each party to this Agreement promptly will execute and deliver such further instruments and agreements and do such further acts and things as may be reasonably requested in writing by any other party hereto that may be necessary or desirable in order to effect fully the purposes of this Agreement.

 

9.            Notices. Unless otherwise specifically provided herein, any notice delivered under this Agreement shall be in writing addressed to the respective party as set forth below and may be personally served, sent by electronic transmission, or sent by overnight courier service or certified or registered United States mail and shall be deemed to have been given: (a) if delivered in person, when delivered; (b) if delivered by facsimile or other electronic transmission, on the date of transmission if transmitted on a business day before 4:00 p.m. (New York time) or, if not, on the next succeeding business day; (c) if delivered by overnight courier, one business day after delivery to such courier properly addressed; or (d) if by United States mail, four business days after deposit in the United States mail, postage prepaid and properly addressed.

 

Notices shall be addressed as follows:

 

If to Subordinated Creditor:

Robert O’Sullivan

Comvest Capital II, L.P.

525 Okeechobee Boulevard

Suite 1050

West Palm Beach, FL  33401

Facsimile: (561) 727-2100

 

With a copy to:

 

Jonathan Cooper

Goldberg Kohn Ltd.

55 East Monroe St.

Suite 3300

Chicago, IL  60603

Facsimile: (312) 332-2196

 

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If to the Company:

 

Chief Executive Officer

Digital Domain Media Group, Inc.

10250 SW Village Parkway

Port St. Lucie, FL  34987

Facsimile:    (772) 345-8114

 

With a copy to:

 

Brad Eavenson

Eavenson & Kairalla, P.L.

2000 PGA Boulevard

Suite 3200

Palm Beach Gardens, FL  33408

Facsimile:    (561) 626-1042

 

If to First Lien Collateral Agent or Senior Lenders:

 

Hudson Bay Master Fund Ltd.

777 Third Avenue, 30th Floor

New York, NY  10017

Attention:  Yoav Roth

 

With a copy to:

 

Michael M. Mezzacappa

Schulte Roth & Zabel LLP

919 Third Avenue

New York, NY  10022

 

Facsimile:    (212) 593-5955

 

or in any case, to such other address as the party addressed shall have previously designated by written notice to the serving party, given in accordance with this Section 9.

 

10.          Successors and Assigns; No Rights of the Company. This Agreement shall inure to the benefit of, and shall be binding upon, the respective successors and assigns of First Lien Collateral Agent, Senior Lenders, Subordinated Creditor and the Company. To the extent permitted under the Senior Debt Documents, Senior Lenders may, from time to time, without notice to Subordinated Creditor, assign or transfer any or all of the Senior Debt or any interest therein to any Person and, notwithstanding any such assignment or transfer, or any subsequent assignment or transfer, the Senior Debt shall, subject to the terms hereof, be and remain Senior Debt for purposes of this Agreement, and every permitted assignee or transferee of any of the

 

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Senior Debt or of any interest therein shall, to the extent of the interest of such permitted assignee or transferee in the Senior Debt, be entitled to rely upon and be the third party beneficiary of the subordination provided under this Agreement and shall be entitled to enforce the terms and provisions hereof to the same extent as if such assignee or transferee were initially a party hereto.  Although Company is a party to this Agreement, the Company shall have no rights under this Agreement and is not an intended beneficiary hereof.  The Company may not enforce any provision of this Agreement against any of the First Lien Collateral Agent, any Senior Lender or the Subordinated Creditor.

 

11.          Relative Rights. This Agreement shall define the relative rights of First Lien Collateral Agent, Senior Lenders and Subordinated Creditor. Nothing in this Agreement shall: (a) impair, as among the Company, First Lien Collateral Agent and Senior Lenders and as between the Company and Subordinated Creditor, the obligation of the Company with respect to the payment of the Senior Debt and the Subordinated Debt in accordance with their respective terms; or (b) affect the relative rights of First Lien Collateral Agent, Senior Lenders or Subordinated Creditor with respect to any other creditors of the Company.

 

12.          Conflict. In the event of any conflict between any term, covenant or condition of this Agreement and any term, covenant or condition of any of the Subordinated Debt Documents, the provisions of this Agreement shall control and govern.

 

13.          Headings. The paragraph headings used in this Agreement are for convenience only and shall not affect the interpretation of any of the provisions hereof.

 

14.          Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

 

15.          Severability. In the event that any provision of this Agreement is deemed to be invalid, illegal or unenforceable by reason of the operation of any law or by reason of the interpretation placed thereon by any court or governmental authority, the validity, legality and enforceability of the remaining provisions of this Agreement shall not in any way be affected or impaired thereby, and the affected provision shall be modified to the minimum extent permitted by law so as most fully to achieve the intention of this Agreement.

 

16.          Continuation of Subordination; Termination of Agreement. This Agreement shall remain in full force and effect until the Senior Debt is Paid In Full, after which this Agreement shall terminate without further action on the part of the parties hereto.  To the extent any payment of Senior Debt (whether by or on behalf of Company or any other Person, as proceeds of security or enforcement of any right of setoff or otherwise) is declared to be fraudulent or preferential, set aside or required to be paid to any receiver, trustee in any Proceeding, liquidating trustee, First Lien Collateral Agent, other similar person or any other Person under any Proceeding, receivership, fraudulent conveyance or similar law, or for any reason required to be returned or disgorged by First Lien Collateral Agent and/or any of the Senior Lenders to any Person, then, if such payment is recovered by, or paid over to, such receiver, trustee in

 

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bankruptcy, liquidating trustee, First Lien Collateral Agent, other similar person, or any other Person, the Senior Debt or part thereof originally intended to be satisfied shall be deemed to be reinstated and outstanding and this Agreement shall be reinstated and continue in full force and effect, in each case, as if such payment had not occurred.

 

17.          Non-Contravention.  Each of the First Lien Collateral Agent, on behalf of itself and the Senior Lenders, and Subordinated Creditor hereby covenants and agrees that it will not take any voluntary action, or avoid or seek to avoid, the observance or performance of any of the terms of this Agreement binding on such Person, and will at all times in good faith carry out all of the provisions of this Agreement.

 

18.          Applicable Law. This Agreement shall be governed by and shall be construed and enforced in accordance with the internal laws of the State of New York, without regard to conflicts of law principles.

 

19.          CONSENT TO JURISDICTION. EACH OF SUBORDINATED CREDITOR, FIRST LIEN COLLATERAL AGENT AND THE COMPANY HEREBY CONSENTS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE COUNTY OF NEW YORK, STATE OF NEW YORK AND IRREVOCABLY AGREES THAT ALL ACTIONS OR PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT SHALL BE LITIGATED IN SUCH COURTS. EACH OF SUBORDINATED CREDITOR, FIRST LIEN COLLATERAL AGENT AND THE COMPANY EXPRESSLY SUBMITS AND CONSENTS TO THE JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENS.  EACH OF SUBORDINATED CREDITOR, FIRST LIEN COLLATERAL AGENT AND THE COMPANY HEREBY WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS AND AGREES THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE UPON IT BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, ADDRESSED TO SUBORDINATED CREDITOR, THE FIRST LIEN COLLATERAL AGENT AND THE COMPANY AT THEIR RESPECTIVE ADDRESSES SET FORTH IN THIS AGREEMENT AND SERVICE SO MADE SHALL BE COMPLETE TEN (10) DAYS AFTER THE SAME HAS BEEN POSTED.

 

20.          WAIVER OF JURY TRIAL.  SUBORDINATED CREDITOR, THE COMPANY AND FIRST LIEN COLLATERAL AGENT HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT, ANY OF THE SUBORDINATED DEBT DOCUMENTS OR ANY OF THE SENIOR DEBT DOCUMENTS. EACH OF SUBORDINATED CREDITOR, THE COMPANY AND FIRST LIEN COLLATERAL AGENT ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH HAS RELIED ON THE WAIVER IN ENTERING INTO THIS AGREEMENT AND THE SENIOR DEBT DOCUMENTS AND THAT EACH WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS. EACH OF SUBORDINATED CREDITOR,

 

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THE COMPANY AND FIRST LIEN COLLATERAL AGENT WARRANTS AND REPRESENTS THAT EACH HAS HAD THE OPPORTUNITY OF REVIEWING THIS JURY WAIVER WITH LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS.

 

21.          Joinder.

 

(a)      In the event any Person issues or provides any Subordinated Debt or otherwise becomes a Subordinated Creditor under the Subordinated Debt Documents, such Person shall execute and deliver to First Lien Collateral Agent a joinder to this Agreement acceptable to First Lien Collateral Agent, in its reasonable discretion (a “Joinder”).

 

(b)      Notwithstanding the failure of any Person to execute or deliver a Joinder, the subordination effected hereby shall survive any sale, assignment, pledge, disposition or other transfer of all or any portion of the Subordinated Debt, and the terms of this Agreement shall be binding upon the Subordinated Creditors and their successors and assigns.

 

(Signature page follows)

 

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IN WITNESS WHEREOF, Subordinated Creditor, the Company and First Lien Collateral Agent have caused this Agreement to be executed as of the date first above written.

 

	
 
    	
HUDSON   BAY MASTER FUND LTD,
    
	
 
    	
as   First Lien Collateral Agent:
    
	
 
    	
 
    	
 
    
	
 
    	
By:
    	
/s/   Charles Winkler
    
	
 
    	
 
    	
 
    
	
 
    	
Its:
    	
Authorized   Signatory
    
	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    
	
 
    	
COMVEST   CAPITAL II, L.P.
    
	
 
    	
 
    	
 
    
	
 
    	
By:
    	
ComVest   Capital II Partners L.P.,
    
	
 
    	
 
    	
its   General Partner
    
	
 
    	
 
    	
 
    
	
 
    	
By:
    	
ComVest   Capital II Partners UGP, LLC
    
	
 
    	
 
    	
its   General Partner
    
	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    
	
 
    	
By:
    	
/s/   Robert O’Sullivan
    
	
 
    	
 
    	
 
    
	
 
    	
Its:
    	
Managing   Partner
    
	
 
    	
 
    	
 
    
	
 
    	
 
    
	
 
    	
DIGITAL   DOMAIN MEDIA GROUP, INC.
    
	
 
    	
 
    	
 
    
	
 
    	
By:
    	
/s/   John C. Textor
    
	
 
    	
 
    	
 
    
	
 
    	
Its:
    	
Chief   Executive Officer
    

 

Subordination and Intercreditor Agreement

 

 

Exhibit 1

 

A.            First Lien UCC-1 Financing Statements

 

	
Debtor
    	
 
    	
Secured Party
    	
 
    	
Jurisdiction
    	
 
    	
UCC-1 No.:
    
	
Digital   Domain Media Group, Inc.
    	
 
    	
Comvest   Capital II, L.P., as Administrative Agent
    	
 
    	
Florida
    	
 
    	
#200901338522   filed 10/12/2009
    
	
D2   Software, Inc.
    	
 
    	
Comvest   Capital II, L.P., as First Lien Administrative Agent
    	
 
    	
Delaware
    	
 
    	
#2012   0714826 filed 2/23/2012
    
	
 
    	
 
    	
Comvest   Capital II, L.P., as First Lien Administrative Agent
    	
 
    	
Delaware
    	
 
    	
#2012   0715278 filed 2/23/2012
    
	
 
    	
 
    	
Comvest   Capital II, L.P., as First Lien Administrative Agent
    	
 
    	
Delaware
    	
 
    	
#2012   0716417 filed 2/23/2012
    
	
DDH   Land Holdings, LLC
    	
 
    	
Comvest   Capital II, L.P., as Administrative Agent
    	
 
    	
Florida
    	
 
    	
#201003304603   filed 10/20/2010
    
	
DDH   Land Holdings II, LLC
    	
 
    	
Comvest   Capital II, L.P., as First Lien Administrative Agent
    	
 
    	
Florida
    	
 
    	
#201206234200   filed 2/23/2012
    
	
Digital   Domain 
    	
 
    	
Comvest   Capital II, L.P., as First Lien Administrative Agent
    	
 
    	
Delaware
    	
 
    	
#2012   0714669 filed 2/23/2012
    
	
Digital   Domain Institute, Inc.
    	
 
    	
Comvest   Capital II, L.P., as First Lien Administrative Agent
    	
 
    	
Florida
    	
 
    	
#201206234189   filed 2/23/2012
    
	
Digital   Domain International, Inc.
    	
 
    	
Comvest   Capital II, L.P., as First Lien Administrative Agent
    	
 
    	
Florida
    	
 
    	
#201206234197   filed 2/23/2012
    
	
Digital   Domain Productions, Inc.
    	
 
    	
Comvest   Capital II, L.P., as First Lien Administrative Agent
    	
 
    	
Delaware
    	
 
    	
#2012   0714743 filed 2/23/2012
    
	
Digital   Domain Stereo Group, Inc. 
    	
 
    	
Comvest   Capital II, L.P., as First Lien Administrative Agent
    	
 
    	
Florida
    	
 
    	
#201104902646   filed 7/5/2011
    
	
Mothership   Media, Inc.
    	
 
    	
Comvest   Capital II, L.P., as First Lien Administrative Agent
    	
 
    	
California
    	
 
    	
#12-7302137440   filed 2/23/2012
    
	
Tradition   Studios, Inc.
    	
 
    	
Comvest   Capital II, L.P., as First Lien Administrative Agent
    	
 
    	
Florida
    	
 
    	
#201206234227   filed 2/23/2012
    
	
DD   Entertainment Productions, Inc. — company has been dissolved
    	
 
    	
Comvest   Capital II, L.P., as First Lien Administrative Agent
    	
 
    	
California
    	
 
    	
#12-7302137682   filed 2/23/2012
    
	
Instant   Karma Films, LLC — company has been dissolved
    	
 
    	
Comvest   Capital II, L.P., as First Lien Administrative Agent
    	
 
    	
California
    	
 
    	
#12-7302137703   filed 2/23/2012
    

 

B.            Second Lien UCC-1 Financing Statements

 

	
Debtor
    	
 
    	
Secured Party
    	
 
    	
Jurisdiction
    	
 
    	
UCC-1 No.:
    
	
Digital   Domain Media Group, Inc.
    	
 
    	
Comvest   Capital II, L.P., as Administrative Agent
    	
 
    	
Florida
    	
 
    	
#201104906439   filed 7/6/2011
    
	
D2   Software, Inc.
    	
 
    	
Comvest   Capital II, L.P., as Second Lien Administrative Agent
    	
 
    	
Delaware
    	
 
    	
#2012   0716169 filed 2/23/2012
    

 

23

 

	
Debtor
    	
 
    	
Secured Party
    	
 
    	
Jurisdiction
    	
 
    	
UCC-1 No.:
    
	
DDH   Land Holdings, LLC
    	
 
    	
Comvest   Capital II, L.P., as Administrative Agent
    	
 
    	
Florida
    	
 
    	
#201104906447   filed 7/6/2011
    
	
DDH   Land Holdings II, LLC
    	
 
    	
Comvest   Capital II, L.P., as Second Lien Administrative Agent
    	
 
    	
Florida
    	
 
    	
#201206243641   filed 2/24/2012
    
	
Digital   Domain 
    	
 
    	
Comvest   Capital II, L.P., as Second Lien Administrative Agent
    	
 
    	
Delaware
    	
 
    	
#2012   0716052 filed 2/23/2012
    
	
Digital   Domain Institute, Inc.
    	
 
    	
Comvest   Capital II, L.P., as Second Lien Administrative Agent
    	
 
    	
Florida
    	
 
    	
#201206243633   filed 2/24/2012
    
	
Digital   Domain International, Inc.
    	
 
    	
Comvest   Capital II, L.P., as Second Lien Administrative Agent
    	
 
    	
Florida
    	
 
    	
#201206243625   filed 2/24/2012
    
	
Digital   Domain Productions, Inc.
    	
 
    	
Comvest   Capital II, L.P., as Second Lien Administrative Agent
    	
 
    	
Delaware
    	
 
    	
#2012   0716110 filed 2/23/2012
    
	
Digital   Domain Stereo Group, Inc. 
    	
 
    	
Comvest   Capital II, L.P., as Second Lien Administrative Agent
    	
 
    	
Florida
    	
 
    	
#201104906420   filed 7/6/2011
    
	
Mothership   Media, Inc.
    	
 
    	
Comvest   Capital II, L.P., as Second Lien Administrative Agent
    	
 
    	
California
    	
 
    	
#12-7302147340   filed 2/23/2012
    
	
Tradition   Studios, Inc.
    	
 
    	
Comvest   Capital II, L.P., as Second Lien Administrative Agent
    	
 
    	
Florida
    	
 
    	
#201206243617   filed 2/24/2012
    
	
DD   Entertainment Productions, Inc. - company has been dissolved
    	
 
    	
Comvest   Capital II, L.P., as Second Lien Administrative Agent
    	
 
    	
California
    	
 
    	
#12-7302147229   filed 2/23/2012
    
	
Instant   Karma Films, LLC - company has been dissolved
    	
 
    	
Comvest   Capital II, L.P., as Second Lien Administrative Agent
    	
 
    	
California
    	
 
    	
#12-7302147108   filed 2/23/2012
    

 

24

 

Exhibit 2

 

I.  Patents

 

	
 
    	
 
    	
Name
    	
 
    	
Serial Number
    	
 
    	
Registration
   Date
    	
 
    	
Country
    	
 
    	
Status
    
	
1.
    	
 
    	
FITTING   CURVES FROM ONE MODEL TO ANOTHER
    	
 
    	
12/179,507
    	
 
    	
7/24/2008
    	
 
    	
USA
    	
 
    	
Abandoned
    
	
2.
    	
 
    	
METHOD   AND SYSTEM FOR SCATTERED SPHERICAL HARMONIC APPROXIMATION
    	
 
    	
12/177,098
    	
 
    	
7/21/2008
    	
 
    	
USA
    	
 
    	
Pending
    
	
3.
    	
 
    	
SYSTEM   AND METHOD FOR SURFACING OF PARTICLE SYSTEMS
    	
 
    	
12/185,043
    	
 
    	
8/1/2008
    	
 
    	
USA
    	
 
    	
Pending
    
	
4.
    	
 
    	
SYSTEM   AND METHOD FOR MESH STABILIZATION OF FACIAL MOTION CAPTURE DATA
    	
 
    	
12/635,929
    	
 
    	
12/11/2009
    	
 
    	
USA
    	
 
    	
Pending
    
	
5.
    	
 
    	
SYSTEM   AND METHOD FOR IMPROVED GRID PROCESSING
    	
 
    	
12/265,683
    	
 
    	
11/5/2008
    	
 
    	
USA
    	
 
    	
Pending
    
	
6.
    	
 
    	
SYSTEM   AND METHOD OF IMAGE ZOOMING WITH INTENSITY PRESERVATION
    	
 
    	
08/031,975
    	
 
    	
1/17/2008
    	
 
    	
USA
    	
 
    	
Issued
    
	
7.
    	
 
    	
SYSTEM   AND METHOD FOR CONVERTING TWO-DIMENSIONAL IMAGES INTO THREE-DIMENSIONAL   IMAGES
    	
 
    	
09/085,746

 

Patent No.

6208348
    	
 
    	
5/27/1998

 

Issue Date:

3/27/2001
    	
 
    	
USA
    	
 
    	
Issued
    
	
8.
    	
 
    	
IMAGE   PROCESSING SYSTEM AND METHOD FOR CONVERTING TWO-DIMENSIONAL IMAGES INTO   THREE-DIMENSIONAL IMAGES
    	
 
    	
09/819,420

 

Patent No.

6686926
    	
 
    	
3/26/2001

 

Issue Date:

2/3/2004
    	
 
    	
USA
    	
 
    	
Issued
    
	
9.
    	
 
    	
METHOD   AND SYSTEM FOR CREATING REALISTIC SMOOTH THREE-DIMENSIONAL DEPTH CONTOURS   FROM TWO-DIMENSIONAL IMAGES
    	
 
    	
10/029,625

 

Patent No.

6515659
    	
 
    	
12/19/2001

 

Issue Date:

2/2/2003
    	
 
    	
USA
    	
 
    	
Issued
    

 

25

 

	
 
    	
 
    	
Name
    	
 
    	
Serial Number
    	
 
    	
Registration
   Date
    	
 
    	
Country
    	
 
    	
Status
    
	
10.
    	
 
    	
METHOD   FOR CONFORMING OBJECTS TO A COMMON DEPTH PERSPECTIVE FOR CONVERTING TWO   DIMENSIONAL IMAGES INTO THREE-DIMENSIONAL IMAGES
    	
 
    	
10/147,380

 

Patent No.

7102633
    	
 
    	
5/15/2002

 

Issue Date:

9/5/2006
    	
 
    	
USA
    	
 
    	
Issued
    
	
11.
    	
 
    	
METHOD   OF HIDDEN SURFACE RECONSTRUCTION FOR CREATING ACCURATE THREE-DIMENSIONAL   IMAGES CONVERTED FROM TWO-DIMENSIONAL IMAGES
    	
 
    	
10/316,672

 

Patent No.

7116323
    	
 
    	
12/10/2002

 

Issue Date:

10/3/2006
    	
 
    	
USA
    	
 
    	
Issued
    
	
12.
    	
 
    	
METHOD   FOR MINIMIZING VISUAL ARTIFACTS CONVERTING TWO-DIMENSIONAL MOTION PICTURES   INTO THREE-DIMENSIONAL MOTION PICTURE
    	
 
    	
10/674,688

 

Patent No.

7116324
    	
 
    	
9/30/2003

 

Issue Date:

10/3/2006
    	
 
    	
USA
    	
 
    	
Issued
    
	
13.
    	
 
    	
USER   GUIDED IMAGE PROCESSING SYSTEM AND METHOD FOR PENDING CONVERTING TWO   DIMENSIONAL IMAGES INTO THREE-DIMENSIONAL IMAGES
    	
 
    	
61/381,908
    	
 
    	
        
    	
 
    	
USA
    	
 
    	
Pending
    
	
14.
    	
 
    	
DISTRIBUTED   CONTROL OF AIN AND NON-AIN SWITCHES AND PENDING RESOURCES IN AN ADVANCED   INTELLIGENT NETWORK
    	
 
    	
61/381,894
    	
 
    	
        
    	
 
    	
USA
    	
 
    	
Pending
    

 

26

 

	
 
    	
 
    	
Name
    	
 
    	
Serial Number
    	
 
    	
Registration
   Date
    	
 
    	
Country
    	
 
    	
Status
    
	
15.
    	
 
    	
METHOD   FOR CREATING ARTIFACT FREE THREE-DIMENSIONAL IMAGES CONVERTED FROM   TWO-DIMENSIONAL IMAGES
    	
 
    	
2005260637
    	
 
    	
        
    	
 
    	
Australia
    	
 
    	
Filed
    
	
16.
    	
 
    	
METHOD   FOR CREATING ARTIFACT FREE THREE-DIMENSIONAL IMAGES CONVERTED FROM   TWO-DIMENSIONAL IMAGES
    	
 
    	
8011/

DELNP/2006
    	
 
    	
        
    	
 
    	
India
    	
 
    	
Filed
    
	
17.
    	
 
    	
METHOD   FOR CREATING ARTIFACT FREE THREE-DIMENSIONAL IMAGES CONVERTED FROM TWO   DIMENSIONAL IMAGES
    	
 
    	
P2007-519434
    	
 
    	
      
    	
 
    	
Japan
    	
 
    	
Filed

 
    

 

27

 

II.  Trademarks

 

	
 
    	
 
    	
Name
    	
 
    	
Serial Number/

Registration
   No.
    	
 
    	
Registration Date
    	
 
    	
Country
    	
 
    	
Status
    
	
1.
    	
 
    	
DIGITAL   DOMAIN MEDIA GROUP
    	
 
    	
85/254637
    	
 
    	
 
    	
 
    	
USA
    	
 
    	
Pending
    
	
2.
    	
 
    	
DIGITAL   DOMAIN INSTITUTE
    	
 
    	
85/254624
    	
 
    	
 
    	
 
    	
USA
    	
 
    	
Pending
    
	
3.
    	
 
    	
INTRIGUE
    	
 
    	
85/207088
    	
 
    	
 
    	
 
    	
USA
    	
 
    	
Pending
    
	
4.
    	
 
    	
DECOMP
    	
 
    	
85/207101
    	
 
    	
 
    	
 
    	
USA
    	
 
    	
Pending
    
	
5.
    	
 
    	
DECOMPOSITE
    	
 
    	
85/207108
    	
 
    	
 
    	
 
    	
USA
    	
 
    	
Pending
    
	
6.
    	
 
    	
QUICK   THREE
    	
 
    	
85/207121
    	
 
    	
 
    	
 
    	
USA
    	
 
    	
Pending
    
	
7.
    	
 
    	
QUICK3
    	
 
    	
85/207126
    	
 
    	
 
    	
 
    	
USA
    	
 
    	
Pending
    
	
8.
    	
 
    	
IN3GUE
    	
 
    	
85/207130
    	
 
    	
 
    	
 
    	
USA
    	
 
    	
Pending
    
	
9.
    	
 
    	
THE   DIMENSIONALISTS
    	
 
    	
77/754784
    	
 
    	
02/23/10
    	
 
    	
USA 
    	
 
    	
Registered
    
	
10.
    	
 
    	
IN-THREE
    	
 
    	
77/138308
    	
 
    	
03/02/10
    	
 
    	
USA
    	
 
    	
Registered
    
	
11.
    	
 
    	
DIMENSIONALIZED
    	
 
    	
76/536352
    	
 
    	
03/28/06
    	
 
    	
USA 
    	
 
    	
Registered
    
	
12.
    	
 
    	
DIMENSIONALIZATION
    	
 
    	
76/238556
    	
 
    	
10/29/02
    	
 
    	
USA 
    	
 
    	
Registered
    
	
13.
    	
 
    	
DIGITAL   DOMAIN
    	
 
    	
76/206509
    	
 
    	
12/10/2002
    	
 
    	
USA
    	
 
    	
Registered
    
	
14.
    	
 
    	
DIGITAL   DOMAIN
    	
 
    	
76/206510
    	
 
    	
9/10/2002
    	
 
    	
USA
    	
 
    	
Registered
    
	
15.
    	
 
    	
DREAM   WITH YOUR EYES WIDE OPEN
    	
 
    	
76/198200
    	
 
    	
10/04/2005
    	
 
    	
USA
    	
 
    	
Registered
    
	
16.
    	
 
    	
DREAM   WITH YOUR EYES WIDE OPEN
    	
 
    	
76/198201
    	
 
    	
03/26/02
    	
 
    	
USA
    	
 
    	
Registered
    
	
17.
    	
 
    	
DIGITAL   DOMAIN
    	
 
    	
76/204881
    	
 
    	
2/5/2002
    	
 
    	
USA
    	
 
    	
Registered
    
	
18.
    	
 
    	
DIGITAL   DOMAIN
    	
 
    	
76/204882
    	
 
    	
1/29/2002
    	
 
    	
USA
    	
 
    	
Registered
    
	
19.
    	
 
    	
DREAM   WITH YOUR EYES WIDE OPEN
    	
 
    	
76/198202
    	
 
    	
8/13/2002
    	
 
    	
USA
    	
 
    	
Registered
    
	
20.
    	
 
    	
DREAM   WITH YOUR EYES WIDE OPEN
    	
 
    	
76/198204
    	
 
    	
2/19/2002
    	
 
    	
USA
    	
 
    	
Registered
    
	
21.
    	
 
    	
DREAM   WITH YOUR EYES WIDE OPEN
    	
 
    	
76,198205
    	
 
    	
3/19/2002
    	
 
    	
USA
    	
 
    	
Registered
    
	
22.
    	
 
    	
DREAM   WITH YOUR EYES WIDE OPEN
    	
 
    	
76/198206
    	
 
    	
3/26/2002
    	
 
    	
USA
    	
 
    	
Registered
    
	
23.
    	
 
    	
DIGITAL   DOMAIN
    	
 
    	
76/202546
    	
 
    	
2/5/2002
    	
 
    	
USA
    	
 
    	
Registered
    
	
24.
    	
 
    	
DIGITAL   DOMAIN
    	
 
    	
76/202547
    	
 
    	
1/29/2002
    	
 
    	
USA
    	
 
    	
Registered
    
	
25.
    	
 
    	
DIGITAL   DOMAIN
    	
 
    	
76/202548
    	
 
    	
11/19/2002
    	
 
    	
USA
    	
 
    	
Registered
    
	
26.
    	
 
    	
MISCELLANEOUS   DESIGN (TED SHRED IMAGE)
    	
 
    	
76/159829
    	
 
    	
9/3/2002
    	
 
    	
USA
    	
 
    	
Registered
    
	
27.
    	
 
    	
DIGITAL   DOMAIN (TYPED DRAWING PAGE)
    	
 
    	
74/366293
    	
 
    	
11/12/1996
    	
 
    	
USA
    	
 
    	
Registered
    
	
28.
    	
 
    	
DIGITAL   DOMAIN

(TYPED   DRAWING PAGE)
    	
 
    	
74/365845
    	
 
    	
11/19/1996
    	
 
    	
USA
    	
 
    	
Registered
    

 

28

 

III.  Copyrights

 

	
 
    	
 
    	
Name
    	
 
    	
Registration No.
    	
 
    	
Registration Date
    	
 
    	
Country
    
	
1.
    	
 
    	
SOFTWARE   VERSION 4291
    	
 
    	
TX0007187226
    	
 
    	
8/5/2010
    	
 
    	
USA
    
	
2.
    	
 
    	
SOFTWARE   VERSION 4317
    	
 
    	
TX0007187244
    	
 
    	
8/5/2010
    	
 
    	
USA
    
	
3.
    	
 
    	
SOFTWARE   VERSION 4437
    	
 
    	
TX0007187256
    	
 
    	
8/5/2010
    	
 
    	
USA
    
	
4.
    	
 
    	
IN   THREE TRAINING GUIDE
    	
 
    	
TXu001708249
    	
 
    	
2/7/2011
    	
 
    	
USA
    
	
5.
    	
 
    	
INTRIGUE   USER MANUAL
    	
 
    	
TXu001708247
    	
 
    	
2/7/2011
    	
 
    	
USA
    
	
6.
    	
 
    	
DIGITAL   DOMAIN PRODUCTIONS IMAGE MUSIC DEMO
    	
 
    	
SRu000373975
    	
 
    	
9/16/1997
    	
 
    	
USA
    
	
7.
    	
 
    	
IMAGE   MUSIC DEMO BY T. LANE SCHEER MUSIC
    	
 
    	
SRu000387196
    	
 
    	
5/12/1998
    	
 
    	
USA
    
	
8.
    	
 
    	
FUTUROPOLIS   (MOTION PICCTURE)
    	
 
    	
PAu003404996
    	
 
    	
6/19/2009
    	
 
    	
USA
    
	
9.
    	
 
    	
MACSPIN   STATISTICAL AND DECISION SUPPORT SOFTWARE RELEASE NOTES FOR VERSION 2.0
    	
 
    	
TX0002529458
    	
 
    	
2/3/1989
    	
 
    	
USA
    

 

IV.  Licenses

 

	
 
    	
 
    	
Licensor
    	
 
    	
Licensee
    	
 
    	
License Material
    
	
1.
    	
 
    	
Digital   Domain Media Group, Inc. and Digital Domain Stereo Group, Inc.
    	
 
    	
Samsung Electronics Co. Ltd.
    	
 
    	
Patents:

09/085,746 - US 6,208,348

10/029,625 - US 6,515,659

09/819,420 - US 6,686,926

10/147,380 - US 7,102,633

10/316,672 - US 7,116,323

10/674,688 - US 7,116,324
    
	
2.
    	
 
    	
Various   Software
    	
 
    	
Digital Domain Media Group, Inc.
    	
 
    	
Various computer software programs for use in continuing operations
    

 

29EXHIBIT 10.16

 

REGISTRATION RIGHTS AGREEMENT

 

This REGISTRATION RIGHTS AGREEMENT (this “Agreement”), dated as of May 7, 2012, is by and between Digital Domain Media Group, Inc., a Florida corporation with offices located at 10250 SW Village Parkway, Port St. Lucie, Florida 34987 (the “Company”), and ComVest Capital II, L.P. (“Lender”).

 

RECITALS

 

A.            In connection with the Debt Exchange Agreement by and between the parties hereto, dated as of May 6, 2012 (the “Debt Exchange Agreement”), the Company has agreed, upon the terms and subject to the conditions of the Debt Exchange Agreement, to issue to Lender the Note (as defined in the Debt Exchange Agreement) which will be convertible into Conversion Shares (as defined in the Debt Exchange Agreement) in accordance with the terms of the Note.

 

B.            To induce Lender to consummate the transactions contemplated by the Debt Exchange Agreement, the Company has agreed to provide certain registration rights under the Securities Act of 1933, as amended, and the rules and regulations thereunder, or any similar successor statute (collectively, the “1933 Act”), and applicable state securities laws.

 

AGREEMENT

 

NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and Lender hereby agree as follows:

 

1.                                       Definitions.

 

Capitalized terms used herein and not otherwise defined herein shall have the respective meanings set forth in the Debt Exchange Agreement.  As used in this Agreement, the following terms shall have the following meanings:

 

(a)           “2011 Warrant Shares” means those shares of common stock of the Company received upon exercise of that certain Warrant issued by the Company to Lender on June 30, 2011.

 

(b)           “Business Day” means any day other than Saturday, Sunday or any other day on which commercial banks in New York, New York are authorized or required by law to remain closed.

 

(c)           “Closing Date” shall have the meaning set forth in the Debt Exchange Agreement.

 

(d)           “Effective Date” means the date that the applicable Registration Statement has been declared effective by the SEC.

 

(e)           “Effectiveness Deadline” means (i) with respect to the initial Registration

 

 

Statement required to be filed pursuant to Section 2(a), the earlier of the (A) 90th calendar day after the Closing Date and (B) 2nd Business Day after the date the Company is notified (orally or in writing, whichever is earlier) by the SEC that such Registration Statement will not be reviewed or will not be subject to further review and (ii) with respect to any additional Registration Statements that may be required to be filed by the Company pursuant to this Agreement, the earlier of the (A) 90th calendar day following the date on which the Company was required to file such additional Registration Statement and (B) 2nd Business Day after the date the Company is notified (orally or in writing, whichever is earlier) by the SEC that such Registration Statement will not be reviewed or will not be subject to further review.

 

(f)            “Filing Deadline” means (i) with respect to the initial Registration Statement required to be filed pursuant to Section 2(a), the 30th calendar day after the Closing Date and (ii) with respect to any additional Registration Statements that may be required to be filed by the Company pursuant to this Agreement, the date on which the Company was required to file such additional Registration Statement pursuant to the terms of this Agreement.

 

(g)           “Investor” means (i) Lender for so long as it owns Registrable Securities or any portion of the Note, (ii) any transferee or assignee of any Registrable Securities or any portion of the Note, as applicable, for so long as its owns the same, to whom Lender assigns its rights under this Agreement and who agrees to become bound by the provisions of this Agreement in accordance with Section 9 and any transferee or assignee thereof to whom a transferee or assignee of any Registrable Securities or any portion of the Note, as applicable, for so long as its owns the same, assigns its rights under this Agreement and who agrees to become bound by the provisions of this Agreement in accordance with Section 9.

 

(h)           “Majority Investors” means Investors holding a majority of the Registrable Securities, assuming for purposes of this definition that the Note was entirely converted into Conversion Shares pursuant to its terms immediately prior to the date of determination.

 

(i)            “Person” means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization or a government or any department or agency thereof.

 

(j)            “register,” “registered,” and “registration” refer to a registration effected by preparing and filing one or more Registration Statements in compliance with the 1933 Act and pursuant to Rule 415 and the declaration of effectiveness of such Registration Statement(s) by the SEC.

 

(k)           “Registrable Securities” means (i) the Conversion Shares, (ii) the 2011 Warrant Shares and (iii) any capital stock of the Company issued or issuable with respect to the Conversion Shares, the Note, or the 2011 Warrant Shares including, without limitation, (1) as a result of any stock split, stock dividend, recapitalization, exchange or similar event or otherwise and (2) shares of capital stock of the Company into which the shares of Common Stock are converted or exchanged and shares of capital stock of any successor entity into which the shares of Common Stock are converted or exchanged, in each case (as applicable), without regard to any limitations on conversion of the Note.

 

2

 

(l)            “Registration Statement” means a registration statement or registration statements of the Company filed under the 1933 Act covering Registrable Securities.

 

(m)          “Required Registration Amount” means the sum of (x) all 2011 Warrant Shares which have not been repurchased by the Company plus (y) 135% of the maximum number of Conversion Shares issued and issuable pursuant to the Note (assuming the accrual and conversion of interest from the Closing Date through the fifth anniversary of the Closing Date), in each case, as of the Trading Day (as defined in the Note) immediately preceding the applicable date of determination (without taking into account any limitations on the conversion of the Note set forth therein), all subject to adjustment as provided in Section 2(d).

 

(n)           “Rule 144” means Rule 144 promulgated by the SEC under the 1933 Act, as such rule may be amended from time to time, or any other similar or successor rule or regulation of the SEC that may at any time permit the Investors to sell securities of the Company to the public without registration.

 

(o)           “Rule 415” means Rule 415 promulgated by the SEC under the 1933 Act, as such rule may be amended from time to time, or any other similar or successor rule or regulation of the SEC providing for offering securities on a continuous or delayed basis.

 

(p)           “SEC” means the United States Securities and Exchange Commission or any successor thereto.

 

(q)           “Senior Notes Registration Rights Agreement” means that certain Registration Rights Agreement, dated as of the date hereof, entered into by the Company and the purchasers of the Senior Notes (as defined in the Debt Exchange Agreement).

 

2.                                       Registration.

 

(a)           Mandatory Registration.  The Company shall prepare and, as soon as practicable, but in no event later than the Filing Deadline, file with the SEC an initial Registration Statement on Form S-1 covering the resale of all of the Registrable Securities, provided that such initial Registration Statement shall register for resale at least the number of shares of Common Stock equal to the Required Registration Amount as of the date such Registration Statement is initially filed with the SEC. Such initial Registration Statement, and each other Registration Statement required to be filed pursuant to the terms of this Agreement, shall contain (except if otherwise directed by the Majority Investors) the “Selling Shareholders” and “Plan of Distribution” sections in substantially the form attached hereto as Exhibit B. The Company shall use its reasonable best efforts to have such initial Registration Statement, and each other Registration Statement required to be filed pursuant to the terms of this Agreement, declared effective by the SEC as soon as practicable, but in no event later than the applicable Effectiveness Deadline for such Registration Statement.

 

(b)           Legal Counsel. Subject to Section 5 hereof, Goldberg Kohn Ltd., counsel to Lender (“Legal Counsel”) shall review and oversee any registration, solely on behalf of the lead investor, pursuant to this Section 2.

 

(c)           Ineligibility to Use Form S-3. In the event that Form S-3 is not available for the

 

3

 

registration of the resale of Registrable Securities hereunder, the Company shall (i) register the resale of the Registrable Securities on another appropriate form reasonably acceptable to the Majority Investors and (ii) undertake to register the resale of the Registrable Securities on Form S-3 as soon as such form is available, provided that the Company shall maintain the effectiveness of all Registration Statements then in effect until such time as a Registration Statement on Form S-3 covering the resale of all the Registrable Securities has been declared effective by the SEC and the prospectus contained therein is available for use.

 

(d)           Sufficient Number of Shares Registered. In the event the number of shares available under any Registration Statement is insufficient to cover all of the Registrable Securities required to be covered by such Registration Statement or an Investor’s allocated portion of the Registrable Securities pursuant to Section 2(h), the Company shall amend such Registration Statement (if permissible), or file with the SEC a new Registration Statement (on the short form available therefor, if applicable), or both, so as to cover at least the Required Registration Amount as of the Trading Day immediately preceding the date of the filing of such amendment or new Registration Statement, in each case, as soon as practicable, but in any event not later than fifteen (15) days after the necessity therefor arises (but taking account of any Staff position with respect to the date on which the Staff will permit such amendment to the Registration Statement and/or such new Registration Statement (as the case may be) to be filed with the SEC). The Company shall use its reasonable best efforts to cause such amendment to such Registration Statement and/or such new Registration Statement (as the case may be) to become effective as soon as practicable following the filing thereof with the SEC, but in no event later than the applicable Effectiveness Deadline for such Registration Statement. For purposes of the foregoing provision, the number of shares available under a Registration Statement shall be deemed “insufficient to cover all of the Registrable Securities” if at any time the number of shares of Common Stock available for resale under the applicable Registration Statement is less than the product determined by multiplying (i) the Required Registration Amount as of such time by (ii) 0.90.  The calculation set forth in the foregoing sentence shall be made without regard to any limitations on conversion of the Note (and such calculation shall assume that the Note is then fully convertible into shares of Common Stock at the then-prevailing applicable Conversion Price (as defined in the Note)).

 

(e)           Effect of Failure to File and Obtain and Maintain Effectiveness of any Registration Statement. If (i) a Registration Statement covering the resale of all of the Registrable Securities required to be covered thereby (disregarding any reduction pursuant to Section 2(f)) and required to be filed by the Company pursuant to this Agreement is (A) not filed with the SEC on or before the Filing Deadline for such Registration Statement (a “Filing Failure”) (it being understood that if the Company files a Registration Statement without affording each Investor the opportunity to review and comment on the same as required by Section 3(c) hereof, the Company shall be deemed to not have satisfied this clause (i)(A) and such event shall be deemed to be a Filing Failure) or (B) not declared effective by the SEC on or before the Effectiveness Deadline for such Registration Statement (an “Effectiveness Failure”) (it being understood that if on the Business Day immediately following the Effective Date for such Registration Statement the Company shall not have filed a “final” prospectus for such Registration Statement with the SEC under Rule 424(b) in accordance with Section 3(b) (whether or not such a prospectus is technically required by such rule), the Company shall be deemed to not have satisfied this clause (i)(B) and such event shall be deemed to be an

 

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Effectiveness Failure), (ii) other than during an Allowable Grace Period (as defined below), on any day after the Effective Date of a Registration Statement sales of all of the Registrable Securities required to be included on such Registration Statement (disregarding any reduction pursuant to Section 2(f)) cannot be made pursuant to such Registration Statement (including, without limitation, because of a failure to keep such Registration Statement effective, a failure to disclose such information as is necessary for sales to be made pursuant to such Registration Statement, a suspension or delisting of (or a failure to timely list) the shares of Common Stock on the Principal Market (as defined in the Debt Exchange Agreement), or a failure to register a sufficient number of shares of Common Stock or by reason of a stop order) or the prospectus contained therein is not available for use for any reason (a “Maintenance Failure”), or (iii) if a Registration Statement is not effective for any reason or the prospectus contained therein is not available for use for any reason, the Company fails to file with the SEC any required reports under Section 13 or 15(d) of the 1934 Act such that it is not in compliance with Rule 144(c)(1) (or Rule 144(i)(2), if applicable) (a “Current Public Information Failure”) as a result of which any of the Investors are unable to sell Registrable Securities without restriction under Rule 144 (including, without limitation, volume restrictions), then, as partial relief for the damages to any holder by reason of any such delay in, or reduction of, its ability to sell the underlying shares of Common Stock (which remedy shall not be exclusive of any other remedies available at law or in equity), the Company shall pay to each holder of Registrable Securities relating to such Registration Statement an amount in cash equal to 2% of such Investor’s original principal amount stated in such Investor’s Note on the Closing Date (1) on the date of such Filing Failure, Effectiveness Failure, Maintenance Failure or Current Public Information Failure, as applicable, and (2) on every thirty (30) day anniversary of (I) a Filing Failure until such Filing Failure is cured; (II) an Effectiveness Failure until such Effectiveness Failure is cured; (III) a Maintenance Failure until such Maintenance Failure is cured; and (IV) a Current Public Information Failure until the earlier of (i) the date such Current Public Information Failure is cured and (ii) such time that such public information is no longer required pursuant to Rule 144 (in each case, pro rated for periods totaling less than thirty (30) days). The payments to which a holder of Registrable Securities shall be entitled pursuant to this Section 2(e) are referred to herein as “Registration Delay Payments.” Following the initial Registration Delay Payment for any particular event or failure (which shall be paid on the date of such event or failure, as set forth above), without limiting the foregoing, if an event or failure giving rise to the Registration Delay Payments is cured prior to any thirty (30) day anniversary of such event or failure, then such Registration Delay Payment shall be made on the third (3rd) Business Day after such cure. In the event the Company fails to make Registration Delay Payments in a timely manner in accordance with the foregoing, such Registration Delay Payments shall bear interest at the rate of 2% per month (prorated for partial months) until paid in full.  Notwithstanding the foregoing, no Registration Delay Payments shall be owed to an Investor (other than with respect to a Maintenance Failure resulting from a suspension or delisting of (or a failure to timely list) the shares of Common Stock on the Principal Market) with respect to any period during which all of such Investor’s Registrable Securities may be sold by such Investor without restriction under Rule 144 (including, without limitation, volume restrictions) and without the need for current public information required by Rule 144(c)(1) (or Rule 144(i)(2), if applicable), and provided further that Company’s counsel shall have provided an unqualified legal opinion to the Company’s transfer agent stating that such Registrable Securities can be issued without legend and sold under Rule 144.

 

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(f)            Offering. Notwithstanding anything to the contrary contained in this Agreement, but subject to the payment of the Registration Delay Payments pursuant to Section 2(e), in the event the staff of the SEC (the “Staff”) or the SEC seeks to characterize any offering pursuant to a Registration Statement filed pursuant to this Agreement as constituting an offering of securities by, or on behalf of, the Company, or in any other manner, such that the Staff or the SEC do not permit such Registration Statement to become effective and used for resales in a manner that does not constitute such an offering and that permits the continuous resale at the market by the Investors participating therein (or as otherwise may be acceptable to the Investors participating therein) without being named therein as an “underwriter,” then the Company shall reduce the number of shares to be included in such Registration Statement by all Investors participating therein until such time as the Staff and the SEC shall so permit such Registration Statement to become effective as aforesaid. In making such reduction, the Company shall reduce the number of shares to be included by all Investors on a pro rata basis (based upon the number of Registrable Securities otherwise required to be included for each Investor whose Registrable Securities are included in such Registration Statement) unless the inclusion of shares by a particular Investor or a particular set of Investors are resulting in the Staff or the SEC’s “by or on behalf of the Company” offering position, in which event the shares held by such Investor or set of Investors shall be the only shares subject to reduction (and if by a set of Investors on a pro rata basis by such Investors or on such other basis as would result in the exclusion of the least number of shares by all such Investors); provided, that, with respect to such pro rata portion allocated to any Investor, such Investor may elect the allocation of such pro rata portion among the Registrable Securities of such Investor.  In addition, in the event that the Staff or the SEC requires any Investor seeking to sell securities under a Registration Statement filed pursuant to this Agreement to be specifically identified as an “underwriter” in order to permit such Registration Statement to become effective, and such Investor does not consent to being so named as an underwriter in such Registration Statement, then, in each such case, the Company shall reduce the total number of Registrable Securities to be registered on behalf of such Investor, until such time as the Staff or the SEC does not require such identification or until such Investor accepts such identification and the manner thereof. Any reduction pursuant to this paragraph will first reduce all Registrable Securities other than those issued pursuant to the Debt Exchange Agreement.  In the event of any reduction in Registrable Securities pursuant to this paragraph, an affected Investor shall have the right to require, upon delivery of a written request to the Company signed by such Investor, the Company to file a Registration Statement within thirty (30) days of such request or as soon as practicable thereafter (subject to any restrictions imposed by Rule 415 or required by the Staff or the SEC) for resale by such Investor in a manner acceptable to such Investor, and the Company shall following such request cause to be and keep effective such Registration Statement in the same manner as otherwise contemplated in this Agreement for Registration Statements hereunder, in each case until such time as: (i) all Registrable Securities held by such Investor have been registered and sold pursuant to an effective Registration Statement in a manner acceptable to such Investor or (ii) all Registrable Securities may be resold by such Investor without restriction (including, without limitation, volume limitations) pursuant to Rule 144 (taking account of any Staff position with respect to “affiliate” status) and without the need for current public information required by Rule 144(c)(1) (or Rule 144(i)(2), if applicable) or (iii) such Investor agrees to be named as an underwriter in any such Registration Statement in a manner acceptable to such Investor as to all Registrable Securities held by such Investor and that have not theretofore been included in a

 

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Registration Statement under this Agreement (it being understood that the special demand right under this sentence may be reasonably exercised by an Investor multiple times and with respect to limited amounts of Registrable Securities in order to permit the resale thereof by such Investor as contemplated above).

 

(g)           Piggyback Registrations. Without limiting any obligation of the Company hereunder or under the Debt Exchange Agreement, if there is not an effective Registration Statement covering all of the Registrable Securities or the prospectus contained therein is not available for use and the Company shall determine to prepare and file with the SEC a registration statement relating to an offering for its own account or the account of others under the 1933 Act of any of its equity securities (other than on Form S-4 or Form S-8 (each as promulgated under the 1933 Act) or their then equivalents relating to equity securities to be issued solely in connection with any acquisition of any entity or business or equity securities issuable in connection with the Company’s stock option or other employee benefit plans), then the Company shall deliver to each Investor a written notice of such determination and, if within fifteen (15) days after the date of the delivery of such notice, any such Investor shall so request in writing, the Company shall include in such registration statement all or any part of such Registrable Securities such Investor requests to be registered; provided, however, the Company shall not be required to register any Registrable Securities pursuant to this Section 2(g) that are eligible for resale pursuant to Rule 144 without restriction (including, without limitation, volume restrictions) and without the need for current public information required by Rule 144(c)(1) (or Rule 144(i)(2), if applicable) (provided that an opinion of Company’s counsel described in the last sentence of Section 2(e) above has been provided) or that are the subject of a then-effective Registration Statement.

 

(h)           Allocation of Registrable Securities. The initial number of Registrable Securities included in any Registration Statement and any increase in the number of Registrable Securities included therein shall be allocated pro rata among the Investors participating in such Registration Statement based on the number of Registrable Securities held by each such Investor at the time such Registration Statement covering such initial number of Registrable Securities or increase thereof is declared effective by the SEC. In the event that an Investor sells or otherwise transfers any of such Investor’s Registrable Securities, each transferee or assignee (as the case may be) that becomes an Investor shall be allocated a pro rata portion of the then-remaining number of Registrable Securities included in such Registration Statement for such transferor or assignee (as the case may be). Any shares of Common Stock included in a Registration Statement and which remain allocated to any Person which ceases to hold any Registrable Securities covered by such Registration Statement shall be allocated to the remaining Investors, pro rata based on the number of Registrable Securities then held by such Investors which are covered by such Registration Statement.

 

(i)            No Inclusion of Other Securities. In no event shall the Company include any securities other than Registrable Securities on any Registration Statement without the prior written consent of the Majority Investors, provided that, for clarity, the foregoing limitation shall not apply to registration statements contemplated by Section 2(g) that include Registrable Securities. Until the Applicable Date (as defined in the Debt Exchange Agreement), the Company shall not enter into any agreement providing any registration rights to any of its security holders other than registration rights granted pursuant to the Senior Notes Registration

 

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Rights Agreement.

 

3.                                       Related Obligations.

 

The Company shall use its reasonable best efforts to effect the registration of the Registrable Securities in accordance with the intended method of disposition thereof, and, pursuant thereto, the Company shall have the following obligations:

 

(a)           The Company shall promptly prepare and file with the SEC a Registration Statement with respect to all the Registrable Securities (but in no event later than the applicable Filing Deadline) and use its reasonable best efforts to cause such Registration Statement to become effective as soon as practicable after such filing (but in no event later than the Effectiveness Deadline). Subject to Allowable Grace Periods, the Company shall keep each Registration Statement effective (and the prospectus contained therein available for use) pursuant to Rule 415 for resales by the Investors on a delayed or continuous basis at then-prevailing market prices (and not fixed prices) at all times until the earlier of (i) the date as of which all of the Investors may sell all of the Registrable Securities required to be covered by such Registration Statement (disregarding any reduction pursuant to Section 2(f)) without restriction pursuant to Rule 144 (including, without limitation, volume restrictions) and without the need for current public information required by Rule 144(c)(1) (or Rule 144(i)(2), if applicable) or (ii) the date on which the Investors shall have sold all of the Registrable Securities covered by such Registration Statement (the “Registration Period”). Notwithstanding anything to the contrary contained in this Agreement, the Company shall ensure that, when filed and at all times while effective, each Registration Statement (including, without limitation, all amendments and supplements thereto) and the prospectus (including, without limitation, all amendments and supplements thereto) used in connection with such Registration Statement (1) shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein, or necessary to make the statements therein (in the case of prospectuses, in the light of the circumstances in which they were made) not misleading and (2) will disclose (whether directly or through incorporation by reference to other SEC filings to the extent permitted) all material information regarding the Company and its securities. The Company shall submit to the SEC, within one (1) Business Day after the later of the date that (i) the Company learns that no review of a particular Registration Statement will be made by the Staff or that the Staff has no further comments on a particular Registration Statement (as the case may be) and (ii) the consent of Legal Counsel is obtained pursuant to Section 3(c) (which consent shall be promptly sought), a request for acceleration of effectiveness of such Registration Statement to a time and date not later than the later of (i) forty-eight (48) hours after the submission of such request and (ii) the close of the Principal Market on the next Business Day following the submission of the request.

 

(b)           Subject to Section 3(r) of this Agreement, the Company shall prepare and file with the SEC such amendments (including, without limitation, post-effective amendments) and supplements to each Registration Statement and the prospectus used in connection with each such Registration Statement, which prospectus is to be filed pursuant to Rule 424 promulgated under the 1933 Act, as may be necessary to keep each such Registration Statement effective at all times during the Registration Period for such Registration Statement, and, during such period, comply with the provisions of the 1933 Act with respect to the disposition of all Registrable Securities of the Company required to be covered by such Registration Statement until such time

 

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as all of such Registrable Securities shall have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof as set forth in such Registration Statement; provided, however, by 8:30 a.m. (New York time) on the Business Day immediately following each Effective Date, the Company shall file with the SEC in accordance with Rule 424(b) under the 1933 Act the final prospectus to be used in connection with sales pursuant to the applicable Registration Statement (whether or not such a prospectus is technically required by such rule). In the case of amendments and supplements to any Registration Statement which are required to be filed pursuant to this Agreement (including, without limitation, pursuant to this Section 3(b)) by reason of the Company filing a Quarterly Report on Form 10-Q, an Annual Report on Form 10-K or any successor report(s) thereto under the Securities Exchange Act of 1934, as amended (the “1934 Act”), the Company shall have incorporated such report by reference into such Registration Statement, if applicable, or shall file such amendments or supplements with the SEC on the same day on which the 1934 Act report is filed which created the requirement for the Company to amend or supplement such Registration Statement.

 

(c)           The Company shall (A) permit Legal Counsel and legal counsel for each other Investor to review and comment upon (i) each Registration Statement at least five (5) Business Days prior to its filing with the SEC and (ii) all amendments and supplements to each Registration Statement (including, without limitation, the prospectus contained therein) (except for Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any similar or successor reports) within a reasonable number of days prior to their filing with the SEC, and (B) not file any Registration Statement or amendment or supplement thereto in a form to which Legal Counsel or any legal counsel for any other Investor reasonably objects. The Company shall not submit a request for acceleration of the effectiveness of a Registration Statement or any amendment or supplement thereto or to any prospectus contained therein without the prior consent of Legal Counsel, which consent shall not be unreasonably withheld. The Company shall promptly furnish to Legal Counsel and legal counsel for each other Investor, without charge, (i) copies of any correspondence from the SEC or the Staff to the Company or its representatives relating to each Registration Statement, provided that the Company shall be permitted to redact any material, non-public information regarding the Company or any of its Subsidiaries (as defined in the Debt Exchange Agreement) contained in such correspondence, (ii) after the same is prepared and filed with the SEC, one (1) copy of each Registration Statement and any amendment(s) and supplement(s) thereto, including, without limitation, financial statements and schedules, all documents incorporated therein by reference, if requested by an Investor, and all exhibits and (iii) upon the effectiveness of each Registration Statement, one (1) copy of the prospectus included in such Registration Statement and all amendments and supplements thereto. The Company shall reasonably cooperate with Legal Counsel and legal counsel for each other Investor in performing the Company’s obligations pursuant to this Section 3.

 

(d)           The Company shall promptly furnish to each Investor whose Registrable Securities are included in any Registration Statement, without charge, (i) after the same is prepared and filed with the SEC, at least one (1) copy of each Registration Statement and any amendment(s) and supplement(s) thereto, including, without limitation, financial statements and schedules, all exhibits thereto and each preliminary prospectus relating thereto, (ii) upon the effectiveness of each Registration Statement, ten (10) copies of the prospectus included in such Registration Statement and all amendments and supplements thereto (or such other number of

 

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copies as such Investor may reasonably request from time to time) and (iii) such other documents, including, without limitation, copies of any preliminary or final prospectus, as such Investor may reasonably request from time to time in order to facilitate the disposition of the Registrable Securities owned by such Investor.

 

(e)           The Company shall use its reasonable best efforts to (i) register and qualify, unless an exemption from registration and qualification applies, the resale by Investors of the Registrable Securities covered by a Registration Statement under such other securities or “blue sky” laws of all applicable jurisdictions in the United States, (ii) prepare and file in those jurisdictions, such amendments (including, without limitation, post-effective amendments) and supplements to such registrations and qualifications as may be necessary to maintain the effectiveness thereof during the Registration Period, (iii) take such other actions as may be necessary to maintain such registrations and qualifications in effect at all times during the Registration Period, and (iv) take all other actions reasonably necessary or advisable to qualify the Registrable Securities for sale in such jurisdictions; provided, however, the Company shall not be required in connection therewith or as a condition thereto to (x) qualify to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(e), (y) subject itself to general taxation in any such jurisdiction, or (z) file a general consent to service of process in any such jurisdiction. The Company shall promptly notify Legal Counsel, legal counsel for each other Investor and each Investor who holds Registrable Securities of the receipt by the Company of any notification with respect to the suspension of the registration or qualification of any of the Registrable Securities for sale under the securities or “blue sky” laws of any jurisdiction in the United States or its receipt of actual notice of the initiation or threatening of any proceeding for such purpose.

 

(f)            The Company shall notify Legal Counsel, legal counsel for each other Investor and each Investor in writing of the happening of any event, as promptly as practicable after becoming aware of such event, as a result of which the prospectus included in a Registration Statement, as then in effect, includes an untrue statement of a material fact or omission to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading (provided that in no event shall the Company be required to disclose or shall disclose any material, non-public information regarding the Company or any of its Subsidiaries), and, subject to Section 3(r), promptly prepare a supplement or amendment to such Registration Statement and such prospectus contained therein to correct such untrue statement or omission and deliver ten (10) copies of such supplement or amendment to Legal Counsel, legal counsel for each other Investor and each Investor (or such other number of copies as Legal Counsel, legal counsel for each other Investor or such Investor may reasonably request). The Company shall also promptly notify Legal Counsel, legal counsel for each other Investor and each Investor in writing (i) when a prospectus or any prospectus supplement or post-effective amendment has been filed, when a Registration Statement or any post-effective amendment has become effective (notification of such effectiveness shall be delivered to Legal Counsel, legal counsel for each other Investor and each Investor by facsimile or e-mail on the same day of such effectiveness and by overnight mail), and when the Company receives written notice from the SEC that a Registration Statement or any post-effective amendment will be reviewed by the SEC, (ii) of any request by the SEC for amendments or supplements to a Registration Statement or related prospectus or related information, (iii) of the Company’s reasonable determination that a post-effective amendment to

 

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a Registration Statement would be appropriate; and (iv) of the receipt of any request by the SEC or any other federal or state governmental authority for any additional information relating to the Registration Statement or any amendment or supplement thereto or any related prospectus.  The Company shall respond as promptly as practicable to any comments received from the SEC with respect to each Registration Statement or any amendment thereto (it being understood and agreed that the Company’s response to any such comments shall be delivered to the SEC no later than fifteen (15) Business Days after the receipt thereof).

 

(g)           The Company shall (i) use its reasonable best efforts to prevent the issuance of any stop order or other suspension of effectiveness of each Registration Statement or the use of any prospectus contained therein, or the suspension of the qualification, or the loss of an exemption from qualification, of any of the Registrable Securities for sale in any jurisdiction and, if such an order or suspension is issued, to obtain the withdrawal of such order or suspension at the earliest possible moment and (ii) notify Legal Counsel, legal counsel for each other Investor and each Investor who holds Registrable Securities of the issuance of such order and the resolution thereof or its receipt of actual notice of the initiation or threat of any proceeding for such purpose.

 

(h)           If any Investor may be required under applicable securities law to be described in any Registration Statement as an underwriter and such Investor consents to so being named an underwriter in such Registration Statement, at the request of any Investor, the Company shall furnish to such Investor, on the date of the effectiveness of such Registration Statement and thereafter from time to time on such dates as an Investor may reasonably request (i) a letter, dated such date, from the Company’s independent certified public accountants in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to such Investor, and (ii) an opinion, dated as of such date, of counsel representing the Company for purposes of such Registration Statement, in form, scope and substance as is customarily given in an underwritten public offering, addressed to such Investor.

 

(i)            If any Investor may be required under applicable securities law to be described in any Registration Statement as an underwriter and such Investor consents to so being named an underwriter, upon the written request of such Investor, the Company shall make available for inspection by (i) such Investor, (ii) legal counsel for such Investor and (iii) one (1) firm of accountants or other agents retained by such Investor (collectively, the “Inspectors”), all pertinent financial and other records, and pertinent corporate documents and properties of the Company (collectively, the “Records”), as shall be reasonably deemed necessary by each Inspector, and cause the Company’s officers, directors and employees to supply all information which any Inspector may reasonably request; provided, however, each Inspector shall agree in writing to hold in strict confidence and not to make any disclosure (except to such Investor) or use of any Record or other information which the Company’s board of directors determines in good faith to be confidential, and of which determination the Inspectors are so notified, unless (1) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in any Registration Statement or is otherwise required under the 1933 Act, (2) the release of such Records is ordered pursuant to a final, non-appealable subpoena or order from a court or government body of competent jurisdiction, or (3) the information in such Records has been made generally available to the public other than by disclosure in violation of this Agreement or

 

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any other Transaction Document (as defined in the Debt Exchange Agreement). Such Investor agrees that it shall, upon learning that disclosure of such Records is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt notice to the Company and allow the Company, at its expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, the Records deemed confidential. Nothing herein (or in any other confidentiality agreement between the Company and such Investor, if any) shall be deemed to limit any Investor’s ability to sell Registrable Securities in a manner which is otherwise consistent with applicable laws and regulations.

 

(j)            The Company shall hold in confidence and not make any disclosure of information concerning an Investor provided to the Company unless (i) disclosure of such information is necessary to comply with federal or state securities laws, (ii) the disclosure of such information is necessary to avoid or correct a misstatement or omission in any Registration Statement or is otherwise required to be disclosed in such Registration Statement pursuant to the 1933 Act, (iii) the release of such information is ordered pursuant to a subpoena or other final, non-appealable order from a court or governmental body of competent jurisdiction, or (iv) such information has been made generally available to the public other than by disclosure in violation of this Agreement or any other Transaction Document. The Company agrees that it shall, upon learning that disclosure of such information concerning an Investor is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt written notice to such Investor and allow such Investor, at such Investor’s expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, such information.

 

(k)           Without limiting any obligation of the Company under the Debt Exchange Agreement, the Company shall use its reasonable best efforts either to (i) cause all of the Registrable Securities covered by each Registration Statement to be listed on each securities exchange on which securities of the same class or series issued by the Company are then listed, if any, if the listing of such Registrable Securities is then permitted under the rules of such exchange, (ii) secure designation and quotation of all of the Registrable Securities covered by each Registration Statement on an Eligible Market (as defined in the Debt Exchange Agreement), or (iii) if, despite the Company’s reasonable best efforts to satisfy the preceding clauses (i) or (ii) the Company is unsuccessful in satisfying the preceding clauses (i) or (ii), without limiting the generality of the foregoing, to use its reasonable best efforts to arrange for at least two market makers to register with the Financial Industry Regulatory Authority (“FINRA”) as such with respect to such Registrable Securities. In addition, the Company shall cooperate with each Investor and any broker or dealer through which any such Investor proposes to sell its Registrable Securities in effecting a filing with FINRA pursuant to FINRA Rule 5110 as requested by such Investor. The Company shall pay all fees and expenses in connection with satisfying its obligations under this Section 3(k).

 

(l)            The Company shall cooperate with the Investors who hold Registrable Securities being offered pursuant to a Registration Statement and, to the extent applicable, facilitate the timely preparation and delivery of certificates (not bearing any restrictive legend) representing such Registrable Securities and enable such certificates to be in such denominations or amounts (as the case may be) as such Investors may reasonably request from time to time and registered in such names as such Investors may request.

 

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(m)          If requested by an Investor, the Company shall as soon as practicable after receipt of notice from such Investor and subject to Section 3(r) hereof, (i) incorporate in a prospectus supplement or post-effective amendment such information as an Investor reasonably requests to be included therein relating to the sale and distribution of Registrable Securities, including, without limitation, information with respect to the number of Registrable Securities being offered or sold, the purchase price being paid therefor and any other terms of the offering of the Registrable Securities to be sold in such offering; (ii) make all required filings of such prospectus supplement or post-effective amendment after being notified of the matters to be incorporated in such prospectus supplement or post-effective amendment; and (iii) supplement or make amendments to any Registration Statement or prospectus contained therein if reasonably requested by an Investor holding any Registrable Securities.

 

(n)           The Company shall use its reasonable best efforts to cause the Registrable Securities covered by a Registration Statement to be registered with or approved by such other U.S. governmental agencies or authorities as may be necessary to consummate the disposition of such Registrable Securities.

 

(o)           The Company shall make generally available to its security holders as soon as practical, but not later than ninety (90) days after the close of the period covered thereby, an earnings statement (in form complying with, and in the manner provided by, the provisions of Rule 158 under the 1933 Act) covering a twelve-month period beginning not later than the first day of the Company’s fiscal quarter next following the applicable Effective Date of each Registration Statement.

 

(p)           The Company shall otherwise use its reasonable best efforts to comply with all applicable rules and regulations of the SEC in connection with any registration hereunder.

 

(q)           Within one (1) Business Day after a Registration Statement which covers Registrable Securities is declared effective by the SEC, the Company shall deliver, and shall cause legal counsel for the Company to deliver, to the transfer agent for such Registrable Securities (with copies to the Investors whose Registrable Securities are included in such Registration Statement) confirmation that such Registration Statement has been declared effective by the SEC substantially in the form attached hereto as Exhibit A.

 

(r)            Notwithstanding anything to the contrary herein (but subject to the last sentence of this Section 3(r)), at any time after the Effective Date of a particular Registration Statement, the Company may delay the disclosure of material, non-public information concerning the Company or any of its Subsidiaries the disclosure of which at the time is not, in the good faith opinion of the board of directors of the Company, in the best interest of the Company and, in the opinion of counsel to the Company, otherwise required (a “Grace Period”), provided that the Company shall promptly notify the Investors in writing of the (i) existence of material, non-public information giving rise to a Grace Period (provided that in each such notice the Company shall not disclose the content of such material, non-public information to any of the Investors) and the date on which such Grace Period will begin and (ii) date on which such Grace Period ends, provided further that (I) no Grace Period shall exceed ten (10) consecutive days and during any three hundred sixty five (365) day period all such Grace Periods shall not exceed an aggregate of thirty (30) days, (II) the first day of any Grace Period must be at least five (5)

 

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Trading Days after the last day of any prior Grace Period and (III) no Grace Period may exist during the sixty (60) Trading Day period immediately following the Effective Date of such Registration Statement (provided that such sixty (60) Trading Day period shall be extended by the number of Trading Days during such period and any extension thereof contemplated by this proviso during which such Registration Statement is not effective or the prospectus contained therein is not available for use) (each, an “Allowable Grace Period”). For purposes of determining the length of a Grace Period above, such Grace Period shall begin on and include the date the Investors receive the notice referred to in clause (i) above and shall end on and include the later of the date the Investors receive the notice referred to in clause (ii) above and the date referred to in such notice. The provisions of Section 3(g) hereof shall not be applicable during the period of any Allowable Grace Period. Upon expiration of each Grace Period, the Company shall again be bound by the first sentence of Section 3(f) with respect to the information giving rise thereto unless such material, non-public information is no longer applicable. Notwithstanding anything to the contrary contained in this Section 3(r), the Company shall cause its transfer agent to deliver unlegended shares of Common Stock to a transferee of an Investor in accordance with the terms of the Debt Exchange Agreement in connection with any sale of Registrable Securities with respect to which such Investor has entered into a contract for sale, and delivered a copy of the prospectus included as part of the particular Registration Statement to the extent applicable, prior to such Investor’s receipt of the notice of a Grace Period and for which the Investor has not yet settled.

 

(s)            The Company shall use reasonable best efforts to take all other reasonable actions necessary to expedite and facilitate disposition by each Investors of its Registrable Securities pursuant to each Registration Statement.

 

4.                                      Obligations of the Investors.

 

(a)           At least five (5) Business Days prior to the first anticipated filing date of each Registration Statement, the Company shall notify each Investor in writing of the information the Company requires from each such Investor with respect to such Registration Statement. It shall be a condition precedent to the obligations of the Company to complete the registration pursuant to this Agreement with respect to the Registrable Securities of a particular Investor that such Investor shall timely furnish to the Company such information regarding itself, the Registrable Securities held by it and the intended method of disposition of the Registrable Securities held by it, as shall be reasonably required to effect and maintain the effectiveness of the registration of such Registrable Securities and shall execute such documents in connection with such registration as the Company may reasonably request.

 

(b)           Each Investor, by such Investor’s acceptance of the Registrable Securities, agrees to cooperate with the Company as reasonably requested by the Company in connection with the preparation and filing of each Registration Statement hereunder, unless such Investor has notified the Company in writing of such Investor’s election to exclude all of such Investor’s Registrable Securities from such Registration Statement.

 

(c)           Each Investor agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 3(g) or the first sentence of 3(f), such Investor will immediately discontinue disposition of Registrable Securities pursuant to any

 

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Registration Statement(s) covering such Registrable Securities until such Investor’s receipt of the copies of the supplemented or amended prospectus contemplated by Section 3(g) or the first sentence of Section 3(f) or receipt of notice that no supplement or amendment is required. Notwithstanding anything to the contrary in this Section 4(c), the Company shall cause its transfer agent to deliver unlegended shares of Common Stock to a transferee of an Investor in accordance with the terms of the Debt Exchange Agreement in connection with any sale of Registrable Securities with respect to which such Investor has entered into a contract for sale prior to the Investor’s receipt of a notice from the Company of the happening of any event of the kind described in Section 3(g) or the first sentence of Section 3(f) and for which such Investor has not yet settled.

 

(d)           Each Investor covenants and agrees that it will comply with the prospectus delivery requirements of the 1933 Act as applicable to it in connection with sales of Registrable Securities pursuant to a Registration Statement.

 

5.                                      Expenses of Registration.

 

All reasonable expenses, other than underwriting discounts and commissions, incurred in connection with registrations, filings or qualifications pursuant to Sections 2 and 3, including, without limitation, all registration, listing and qualifications fees, printers and accounting fees, FINRA filing fees (if any) and fees and disbursements of counsel for the Company shall be paid by the Company.  The Company shall also reimburse Legal Counsel for its fees and disbursements in connection with registration, filing or qualification pursuant to Sections 2 and 3 of this Agreement which amount shall be limited to $10,000.

 

6.                                      Indemnification.

 

(a)           To the fullest extent permitted by law, the Company will, and hereby does, indemnify, hold harmless and defend each Investor and each of its directors, officers, shareholders, members, partners, employees, agents, advisors, representatives (and any other Persons with a functionally equivalent role of a Person holding such titles notwithstanding the lack of such title or any other title) and each Person, if any, who controls such Investor within the meaning of the 1933 Act or the 1934 Act and each of the directors, officers, shareholders, members, partners, employees, agents, advisors, representatives (and any other Persons with a functionally equivalent role of a Person holding such titles notwithstanding the lack of such title or any other title) of such controlling Persons (each, an “Indemnified Person”), against any losses, obligations, claims, damages, liabilities, contingencies, judgments, fines, penalties, charges, costs (including, without limitation, court costs, reasonable attorneys’ fees and costs of defense and investigation), amounts paid in settlement or expenses, joint or several, (collectively, “Claims”) incurred in investigating, preparing or defending any action, claim, suit, inquiry, proceeding, investigation or appeal taken from the foregoing by or before any court or governmental, administrative or other regulatory agency, body or the SEC, whether pending or threatened, whether or not an indemnified party is or may be a party thereto (“Indemnified Damages”), to which any of them may become subject insofar as such Claims (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon: (i) any untrue statement or alleged untrue statement of a material fact in a Registration Statement or any post-effective amendment thereto or in any filing made in connection with the

 

15

 

qualification of the offering under the securities or other “blue sky” laws of any jurisdiction in which Registrable Securities are offered (“Blue Sky Filing”), or the omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus if used prior to the effective date of such Registration Statement, or contained in the final prospectus (as amended or supplemented, if the Company files any amendment thereof or supplement thereto with the SEC) or the omission or alleged omission to state therein any material fact necessary to make the statements made therein, in light of the circumstances under which the statements therein were made, not misleading or (iii) any violation or alleged violation by the Company of the 1933 Act, the 1934 Act, any other law, including, without limitation, any state securities law, or any rule or regulation thereunder relating to the offer or sale of the Registrable Securities pursuant to a Registration Statement (the matters in the foregoing clauses (i) through (iii) being, collectively, “Violations”). Subject to Section 6(c), the Company shall reimburse the Indemnified Persons, promptly as such expenses are incurred and are due and payable, for any legal fees or other expenses reasonably incurred by them in connection with investigating or defending any such Claim. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(a): (i) shall not apply to a Claim by an Indemnified Person arising out of or based upon a Violation which occurs in reliance upon and in conformity with information furnished in writing to the Company by or on behalf of Legal Counsel or such Indemnified Person for such Indemnified Person expressly for use in connection with the preparation of such Registration Statement or any such amendment thereof or supplement thereto and (ii) shall not be available to a particular Investor to the extent such Claim is based on a failure of such Investor to deliver or to cause to be delivered the prospectus made available by the Company (to the extent applicable), including, without limitation, a corrected prospectus, if such prospectus or corrected prospectus was timely made available by the Company pursuant to Section 3(d) and then only if, and to the extent that, following the receipt of the corrected prospectus no grounds for such Claim would have existed; and (iii) shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Company, which consent shall not be unreasonably withheld or delayed. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Indemnified Person and shall survive the transfer of any of the Registrable Securities by any of the Investors pursuant to Section 9.

 

(b)           In connection with any Registration Statement in which an Investor is participating, such Investor agrees to severally and not jointly indemnify, hold harmless and defend, to the same extent and in the same manner as is set forth in Section 6(a), the Company, each of its directors, each of its officers who signs the Registration Statement and each Person, if any, who controls the Company within the meaning of the 1933 Act or the 1934 Act (each, an “Indemnified Party”), against any Claim or Indemnified Damages to which any of them may become subject, under the 1933 Act, the 1934 Act or otherwise, insofar as such Claim or Indemnified Damages arise out of or are based upon any Violation, in each case, to the extent, and only to the extent, that such Violation occurs in reliance upon and in conformity with written information furnished to the Company by such Investor expressly for use in connection with such Registration Statement; and, subject to Section 6(c) and the below provisos in this Section 6(b), such Investor will reimburse an Indemnified Party any legal fees or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any such Claim; provided, however, the indemnity agreement contained in this Section 6(b) and the

 

16

 

agreement with respect to contribution contained in Section 7 shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of such Investor, which consent shall not be unreasonably withheld or delayed, provided further that such Investor shall be liable under this Section 6(b) for only that amount of a Claim or Indemnified Damages as does not exceed the net proceeds to such Investor as a result of the applicable sale of Registrable Securities pursuant to such Registration Statement. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Indemnified Party and shall survive the transfer of any of the Registrable Securities by any of the Investors pursuant to Section 9.

 

(c)           Promptly after receipt by an Indemnified Person or Indemnified Party (as the case may be) under this Section 6 of notice of the commencement of any action or proceeding (including, without limitation, any governmental action or proceeding) involving a Claim, such Indemnified Person or Indemnified Party (as the case may be) shall, if a Claim in respect thereof is to be made against any indemnifying party under this Section 6, 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 control of the defense thereof with counsel mutually satisfactory to the indemnifying party and the Indemnified Person or the Indemnified Party (as the case may be); provided, however, an Indemnified Person or Indemnified Party (as the case may be) shall have the right to retain its own counsel with the reasonable fees and expenses of such counsel to be paid by the indemnifying party if: (i) the indemnifying party has agreed in writing to pay such fees and expenses; (ii) the indemnifying party shall have failed promptly to assume the defense of such Claim and to employ counsel reasonably satisfactory to such Indemnified Person or Indemnified Party (as the case may be) in any such Claim; or (iii) the named parties to any such Claim (including, without limitation, any impleaded parties) include both such Indemnified Person or Indemnified Party (as the case may be) and the indemnifying party, and such Indemnified Person or such Indemnified Party (as the case may be) shall have been advised by counsel that a conflict of interest is likely to exist if the same counsel were to represent such Indemnified Person or such Indemnified Party and the indemnifying party (in which case, if such Indemnified Person or such Indemnified Party (as the case may be) notifies the indemnifying party in writing that it elects to employ separate counsel at the expense of the indemnifying party, then the indemnifying party shall not have the right to assume the defense thereof and such counsel shall be at the expense of the Indemnifying Party, provided further that in the case of clause (iii) above the indemnifying party shall not be responsible for the reasonable fees and expenses of more than one (1) separate legal counsel for such Indemnified Person or Indemnified Party (as the case may be). The Indemnified Party or Indemnified Person (as the case may be) shall reasonably cooperate with the indemnifying party in connection with any negotiation or defense of any such action or Claim by the indemnifying party and shall furnish to the indemnifying party all information reasonably available to the Indemnified Party or Indemnified Person (as the case may be) which relates to such action or Claim. The indemnifying party shall keep the Indemnified Party or Indemnified Person (as the case may be) reasonably apprised at all times as to the status of the defense or any settlement negotiations with respect thereto. No indemnifying party shall be liable for any settlement of any action, claim or proceeding effected without its prior written consent; provided, however, the indemnifying party shall not unreasonably withhold, delay or condition its consent.  No indemnifying party shall, without the prior written consent of the Indemnified Party or Indemnified Person (as the case

 

17

 

may be), consent to entry of any judgment or enter into any settlement or other compromise which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party or Indemnified Person (as the case may be) of a release from all liability in respect to such Claim or litigation, and such settlement shall not include any admission as to fault on the part of the Indemnified Party. Following indemnification as provided for hereunder, the indemnifying party shall be subrogated to all rights of the Indemnified Party or Indemnified Person (as the case may be) with respect to all third parties, firms or corporations relating to the matter for which indemnification has been made. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve such indemnifying party of any liability to the Indemnified Person or Indemnified Party (as the case may be) under this Section 6, except to the extent that the indemnifying party is materially and adversely prejudiced in its ability to defend such action.

 

(d)           No Person involved in the sale of Registrable Securities who is guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) in connection with such sale shall be entitled to indemnification from any Person involved in such sale of Registrable Securities who is not guilty of fraudulent misrepresentation.

 

(e)           The indemnification required by this Section 6 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when applicable bills are received or Indemnified Damages are incurred.

 

(f)            The indemnity and contribution agreements contained herein shall be in addition to (i) any cause of action or similar right of the Indemnified Party or Indemnified Person against the indemnifying party or others, and (ii) any liabilities the indemnifying party may be subject to pursuant to the law.

 

7.                                      Contribution.

 

To the extent any indemnification by an indemnifying party is prohibited or limited by law, the indemnifying party agrees to make the maximum contribution with respect to any amounts for which it would otherwise be liable under Section 6 to the fullest extent permitted by law; provided, however: (i) no contribution shall be made under circumstances where the contributing party would not have been liable for indemnification under the fault standards set forth in Section 6 of this Agreement, (ii) no Person involved in the sale of Registrable Securities which Person is guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) in connection with such sale shall be entitled to contribution from any Person involved in such sale of Registrable Securities who was not guilty of fraudulent misrepresentation; and (iii) contribution by any seller of Registrable Securities shall be limited in amount to the amount of net proceeds received by such seller from the applicable sale of such Registrable Securities pursuant to such Registration Statement. Notwithstanding the provisions of this Section 7, no Investor shall be required to contribute, in the aggregate, any amount in excess of the amount by which the net proceeds actually received by such Investor from the applicable sale of the Registrable Securities subject to the Claim exceeds the amount of any damages that such Investor has otherwise been required to pay, or would otherwise be required to pay under Section 6(b), by reason of such untrue or alleged untrue statement or omission or alleged omission.

 

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8.                                      Reports Under the 1934 Act.

 

With a view to making available to the Investors the benefits of Rule 144, the Company agrees to use its reasonable best efforts to:

 

(a)           make and keep public information available, as those terms are understood and defined in Rule 144;

 

(b)           file with the SEC in a timely manner all reports and other documents required of the Company under the 1933 Act and the 1934 Act so long as the Company remains subject to such requirements (it being understood and agreed that nothing herein shall limit any obligations of the Company under the Debt Exchange Agreement) and the filing of such reports and other documents is required for the applicable provisions of Rule 144; and

 

(c)           furnish to each Investor so long as such Investor owns Registrable Securities, promptly upon request, (i) a written statement by the Company, if true, that it has complied with the reporting, submission and posting requirements of Rule 144 and the 1934 Act, (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company with the SEC if such reports are not publicly available via EDGAR, and (iii) such other information as may be reasonably requested to permit the Investors to sell such securities pursuant to Rule 144 without registration.

 

9.                                      Assignment of Registration Rights.

 

All or any portion of the rights under this Agreement shall be automatically assignable by each Investor to any transferee or assignee (as the case may be) of all or any portion of such Investor’s Registrable Securities, or any portion of the Note if: (i) such Investor agrees in writing with such transferee or assignee (as the case may be) to assign all or any portion of such rights, and a copy of such agreement is furnished to the Company within a reasonable time after such transfer or assignment (as the case may be); (ii) the Company is, within a reasonable time after such transfer or assignment (as the case may be), furnished with written notice of (a) the name and address of such transferee or assignee (as the case may be), and (b) the securities with respect to which such registration rights are being transferred or assigned (as the case may be); (iii) immediately following such transfer or assignment (as the case may be) the further disposition of such securities by such transferee or assignee (as the case may be) is restricted under the 1933 Act or applicable state securities laws if so required; (iv) at or before the time the Company receives the written notice contemplated by clause (ii) of this sentence such transferee or assignee (as the case may be) agrees in writing with the Company to be bound by all of the provisions contained herein; (v) such transfer or assignment (as the case may be) shall have been made in accordance with the applicable requirements of the Debt Exchange Agreement and the Note (as the case may be); and (vi) such transfer or assignment (as the case may be) shall have been conducted in accordance with all applicable federal and state securities laws.

 

10.                               Amendment of Registration Rights.

 

Provisions of this Agreement may be amended only with the written consent of the Company and the Majority Investors. Any amendment effected in accordance with this Section 10 shall be binding upon each Investor and the Company, provided that no such amendment shall

 

19

 

be effective to the extent that it (1) applies to less than all of the holders of the holders of Registrable Securities or (2) imposes any obligation or liability on any Investor without such Investor’s prior written consent (which may be granted or withheld in such Investor’s sole discretion). No waiver shall be effective unless it is in writing and signed by an authorized representative of the waiving party.  No consideration shall be offered or paid to any Person to amend or consent to a waiver or modification of any provision of this Agreement unless the same consideration also is offered to all of the parties to this Agreement.

 

11.                                 Miscellaneous.

 

(a)           Solely for purposes of this Agreement, a Person is deemed to be a holder of Registrable Securities whenever such Person owns, or is deemed to own, of record such Registrable Securities. If the Company receives conflicting instructions, notices or elections from two or more Persons with respect to the same Registrable Securities, the Company shall act upon the basis of instructions, notice or election received from such record owner of such Registrable Securities.

 

(b)           Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered: (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending party); (iii) with respect to Section 3(c), by electronic mail (provided confirmation of transmission is electronically generated and kept on file by the sending party); or (iv) one (1) Business Day after deposit with a nationally recognized overnight delivery service with next day delivery specified, in each case, properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be:

 

If to the Company:

 

Digital Domain Media Group, Inc.
 10250 SW Village Parkway
 Port St. Lucie, Florida 34987 
 Telephone:  (772) 345-8000
 Facsimile:  (772) 345-8114
 Attention:  Chief Executive Officer

 

With a copy (for informational purposes only) to:

 

Sullivan & Triggs, LLP

1230 Montana Ave., Suite #201

Santa Monica, California 90403

Telephone:  (310) 451-8300
 Facsimile:  (310) 451-8303
 Attention:  D. Thomas Triggs, Esq.

 

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If to the Transfer Agent:

 

American Stock Transfer and Trust Company

6201 15th Avenue

Brooklyn, NY 11219

Telephone:  (718) 921-8380
 Attention: Felix Orimuela

 

If to Legal Counsel:

 

Goldberg Kohn Ltd.
 55 East Monroe Street, Suite 3300
 Chicago, Illinois 60603
 Telephone:  (312) 201-3980
 Facsimile:  (212) 863-7480
 Attention:  Jonathan M. Cooper, Esq.

 

If to a an Investor, to its address and facsimile number set forth in the Debt Exchange Agreement, with copies to Legal Counsel (in the event of a notice sent to Lender) or to such other address and/or facsimile number and/or to the attention of such other Person as the recipient party has specified by written notice given to each other party five (5) days prior to the effectiveness of such change. Written confirmation of receipt (A) given by the recipient of such notice, consent, waiver or other communication, (B) mechanically or electronically generated by the sender’s facsimile machine or electronic mail transmission containing the time, date, recipient facsimile number or electronic mail address and an image of the first page of such transmission or (C) provided by a courier or overnight courier service shall be rebuttable evidence of personal service, receipt by facsimile or receipt from a nationally recognized overnight delivery service in accordance with clause (i), (ii) or (iii) above, respectively.

 

(c)           Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof. The Company and each Investor acknowledge and agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that each party hereto shall be entitled to an injunction or injunctions to prevent or cure breaches of the provisions of this Agreement by any other party hereto and to enforce specifically the terms and provisions hereof (without the necessity of showing economic loss and without any bond or other security being required), this being in addition to any other remedy to which any party may be entitled by law or equity.

 

(d)           All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by the internal laws of the State of New York, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of New York or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of New York. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in The City of New York, Borough of Manhattan, for the adjudication of any dispute hereunder or in connection herewith or with any

 

21

 

transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address for such notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE TO, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.

 

(e)           If any provision of this Agreement is prohibited by law or otherwise determined to be invalid or unenforceable by a court of competent jurisdiction, the provision that would otherwise be prohibited, invalid or unenforceable shall be deemed amended to apply to the broadest extent that it would be valid and enforceable, and the invalidity or unenforceability of such provision shall not affect the validity of the remaining provisions of this Agreement so long as this Agreement as so modified continues to express, without material change, the original intentions of the parties as to the subject matter hereof and the prohibited nature, invalidity or unenforceability of the provision(s) in question does not substantially impair the respective expectations or reciprocal obligations of the parties or the practical realization of the benefits that would otherwise be conferred upon the parties. The parties will endeavor in good faith negotiations to replace the prohibited, invalid or unenforceable provision(s) with a valid provision(s), the effect of which comes as close as possible to that of the prohibited, invalid or unenforceable provision(s).

 

(f)            This Agreement, the other Transaction Documents, the schedules and exhibits attached hereto and thereto and the instruments referenced herein and therein constitute the entire agreement among the parties hereto and thereto solely with respect to the subject matter hereof and thereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein. This Agreement, the other Transaction Documents, the schedules and exhibits attached hereto and thereto and the instruments referenced herein and therein supersede all prior agreements and understandings (other than the Restructuring Agreement (as defined in the Debt Exchange Agreement) and the agreements, or portions thereof, which expressly survive pursuant to the terms of the Restructuring Agreement) among the parties hereto solely with respect to the subject matter hereof and thereof, and this Agreement, the other Transaction Documents, the schedules and exhibits attached hereto and thereto and the instruments referenced herein and therein and in the Restructuring Agreement  contain the entire understanding of the parties solely with respect to the matters covered herein and therein.

 

(g)           Subject to compliance with Section 9 (if applicable), this Agreement shall inure to the benefit of and be binding upon the permitted successors and assigns of each of the parties hereto. This Agreement is not for the benefit of, nor may any provision hereof be enforced by, any Person, other than the parties hereto, their respective permitted successors and assigns and

 

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the Persons referred to in Sections 6 and 7 hereof.

 

(h)           The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. Unless the context clearly indicates otherwise, each pronoun herein shall be deemed to include the masculine, feminine, neuter, singular and plural forms thereof. The terms “including,” “includes,” “include” and words of like import shall be construed broadly as if followed by the words “without limitation.” The terms “herein,” “hereunder,” “hereof” and words of like import refer to this entire Agreement instead of just the provision in which they are found.

 

(i)            This Agreement may be executed in two or more identical counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party. In the event that any signature is delivered by facsimile transmission or by an e-mail which contains a portable document format (.pdf) file of an executed signature page, such signature page shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such signature page were an original thereof.

 

(j)            Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents as any other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.

 

(k)           The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent and no rules of strict construction will be applied against any party. Notwithstanding anything to the contrary set forth in Section 10, terms used in this Agreement but defined in the other Transaction Documents shall have the meanings ascribed to such terms on the Closing Date in such other Transaction Documents unless otherwise consented to in writing by each Investor.

 

(l)            All consents and other determinations required to be made by the Investors pursuant to this Agreement shall be made, unless otherwise specified in this Agreement, by the Majority Investors.

 

(m)          The obligations of each Investor under this Agreement and the other Transaction Documents are several and not joint with the obligations of any other Investor, and no Investor shall be responsible in any way for the performance of the obligations of any other Investor under this Agreement or any other Transaction Document. Nothing contained herein or in any other Transaction Document, and no action taken by any Investor pursuant hereto or thereto, shall be deemed to constitute the Investors as, and the Company acknowledges that the Investors do not so constitute, a partnership, an association, a joint venture or any other kind of group or entity, or create a presumption that the Investors are in any way acting in concert or as a group or entity with respect to such obligations or the transactions contemplated by the Transaction Documents or any matters, and the Company acknowledges that the Investors are not acting in concert or as a group, and the Company shall not assert any such claim, with respect to such obligations or the transactions contemplated by this Agreement or any of the other Transaction

 

23

 

Documents. Each Investor shall be entitled to independently protect and enforce its rights, including, without limitation, the rights arising out of this Agreement or out of any other Transaction Documents, and it shall not be necessary for any other Investor to be joined as an additional party in any proceeding for such purpose. The use of a single agreement with respect to the obligations of the Company contained herein was solely in the control of the Company, not the action or decision of any Investor, and was done solely for the convenience of the Company and not because it was required or requested to do so by any Investor. It is expressly understood and agreed that each provision contained in this Agreement and in each other Transaction Document is between the Company and an Investor, solely, and not between the Company and the Investors collectively and not between and among Investors.

 

[signature pages follow]

 

24

 

IN WITNESS WHEREOF, Lender and the Company have caused their respective signature page to this Registration Rights Agreement to be duly executed as of the date first written above.

 

 

	
 
    	
COMPANY:
    
	
 
    	
 
    	
 
    
	
  
    	
DIGITAL   DOMAIN MEDIA GROUP, INC.
    
	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    
	
 
    	
By:
    	
/s/   John C. Textor
    
	
 
    	
 
    	
Name:  John C. Textor
    
	
 
    	
 
    	
Title:   Chief Executive Officer
    
	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    
	
 
    	
LENDER:
    
	
 
    	
 
    
	
 
    	
COMVEST CAPITAL II, L.P.
    
	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    
	
 
    	
By:
    	
/s/   Robert O’Sullivan 
    	
 
    
	
 
    	
 
    	
Name:  Robert O’Sullivan
    
	
 
    	
 
    	
Title:    Managing Partner
    

 

(Signature Page to Registration Rights Agreement)

 

EXHIBIT A

 

FORM OF NOTICE OF EFFECTIVENESS
 OF REGISTRATION STATEMENT

 

                                            
                                             
                                             
 Attention:                           

 

Re:          Digital Domain Media Group, Inc.

 

Ladies and Gentlemen:

 

[We are][I am] counsel to Digital Domain Media Group, Inc., a Florida corporation (the “Company”), and have represented the Company in connection with that certain Debt Exchange Agreement (the “Debt Exchange Agreement”) entered into by and among the Company and ComVest Capital II, L.P. (“Lender”) pursuant to which the Company issued to the Lender a secured convertible note (the “Note”) convertible into the Company’s shares of common stock, $0.01 par value per share (the “Common Stock”). Pursuant to the Debt Exchange Agreement, the Company also has entered into a Registration Rights Agreement with the Lender (the “Registration Rights Agreement”) pursuant to which the Company agreed, among other things, to register the Registrable Securities (as defined in the Registration Rights Agreement), including the shares of Common Stock issuable upon conversion of the Notes under the Securities Act of 1933, as amended (the “1933 Act”). In connection with the Company’s obligations under the Registration Rights Agreement, on                                , 20    , the Company filed a Registration Statement on Form [S-1][S-3] (File No. 333-                          ) (the “Registration Statement”) with the Securities and Exchange Commission (the “SEC”) relating to the Registrable Securities which names each of the Investors (as defined in the Registration Rights Agreement) as a selling shareholder thereunder.

 

In connection with the foregoing, [we][I] advise you that a member of the SEC’s staff has advised [us][me] by telephone that the SEC has entered an order declaring the Registration Statement effective under the 1933 Act at [ENTER TIME OF EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and [we][I] have no knowledge, after telephonic inquiry of a member of the SEC’s staff, that any stop order suspending its effectiveness has been issued or that any proceedings for that purpose are pending before, or threatened by, the SEC and the Registrable Securities are available for resale under the 1933 Act pursuant to the Registration Statement.

 

This letter shall serve as our standing opinion to you that the shares of Common Stock underlying the Note are freely transferable by the Investors pursuant to the Registration Statement. You need not require further letters from us to effect any future legend-free issuance or reissuance of such shares of Common Stock to the Investors as contemplated by the Company’s Irrevocable Transfer Agent Instructions dated                        , 20    .

 

 

	
 
    	
Very   truly yours,
    
	
 
    	
 
    
	
 
    	
[ISSUER’S COUNSEL]
    
	
 
    	
 
    
	
 
    	
By:
    	
 
    

 

CC:          [LIST NAMES OF INVESTORS]

 

EXHIBIT B

 

SELLING SHAREHOLDERS

 

The shares of common stock being offered by the selling shareholders are those (x) issuable to the selling shareholders upon conversion of the note and (y) previously received upon exercise of warrants.  For additional information regarding the issuance of the notes see [“Private Placement of Notes”] above. We are registering the shares of common stock in order to permit the selling shareholders to offer the shares for resale from time to time. Except for the ownership of the note issued pursuant to the Debt Exchange Agreement, and prior lending and equity arrangements previously disclosed by the Company, the selling shareholders have not had any material relationship with us within the past three years.

 

The table below lists the selling shareholders and other information regarding the beneficial ownership (as determined under Section 13(d) of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder) of the shares of common stock held by each of the selling shareholders. The second column lists the number of shares of common stock beneficially owned by the selling shareholders, based on their respective ownership of shares of common stock and notes, as of                 , 2012, assuming conversion of the note held by each such selling shareholder on that date but taking account of any limitations on conversion and exercise set forth therein.

 

The third column lists the shares of common stock being offered by this prospectus by the selling shareholders and does not take in account any limitations on conversion of the note set forth therein.

 

In accordance with the terms of a registration rights agreement with the holders of the notes, this prospectus generally covers the resale of the sum of (x) the shares previously received upon exercise of warrants and (y) 135% of (i) the maximum number of shares of common stock issuable upon conversion of the notes and (ii) the maximum number of other shares of common stock issuable pursuant to the notes, in each case, determined as if the outstanding note was converted in full (without regard to any limitations on conversion or exercise contained therein) as of the trading day immediately preceding the date this registration statement was initially filed with the SEC. Because the conversion price of the note may be adjusted, the number of shares that will actually be issued may be more or less than the number of shares being offered by this prospectus. The fourth column assumes the sale of all of the shares offered by the selling shareholders pursuant to this prospectus.

 

Under the terms of the note a selling shareholder may not convert the note to the extent (but only to the extent) such selling shareholder or any of its affiliates would beneficially own a number of shares of our common stock which would exceed 9.99%. The number of shares in the second column reflects these limitations, as applicable. The selling shareholders may sell all, some or none of their shares in this offering.  See “Plan of Distribution.”

 

 

	
Name of Selling Shareholder
    	
 
    	
Number of Shares of
   Common Stock Owned
   Prior to Offering
    	
 
    	
Maximum Number of
   Shares of Common Stock to
   be Sold Pursuant to this
   Prospectus
    	
 
    	
Number of Shares of
   Common Stock of Owned
   After Offering
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    

 

 

PLAN OF DISTRIBUTION [TO BE DETERMINED]

 

We are registering the shares of common stock issuable upon conversion of the notes and exercise of the warrants to permit the resale of these shares of common stock by the holders of the notes and warrants from time to time after the date of this prospectus. We will not receive any of the proceeds from the sale by the selling shareholders of the shares of common stock.  We will bear all fees and expenses incident to our obligation to register the shares of common stock.

 

The selling shareholders may sell all or a portion of the shares of common stock held by them and offered hereby from time to time directly or through one or more underwriters, broker-dealers or agents. If the shares of common stock are sold through underwriters or broker-dealers, the selling shareholders will be responsible for underwriting discounts or commissions or agent’s commissions. The shares of common stock may be sold in one or more transactions at fixed prices, at prevailing market prices at the time of the sale, at varying prices determined at the time of sale or at negotiated prices. These sales may be effected in transactions, which may involve crosses or block transactions, pursuant to one or more of the following methods:

 

·                  on any national securities exchange or quotation service on which the securities may be listed or quoted at the time of sale;

 

·                  in the over-the-counter market;

 

·                  in transactions otherwise than on these exchanges or systems or in the over-the-counter market;

 

·                  through the writing or settlement of options, whether such options are listed on an options exchange or otherwise;

 

·                  ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;

 

·                  block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;

 

·                  purchases by a broker-dealer as principal and resale by the broker-dealer for its account;

 

·                  an exchange distribution in accordance with the rules of the applicable exchange;

 

·                  privately negotiated transactions;

 

·                  short sales made after the date the Registration Statement is declared effective by the SEC;

 

·                  broker-dealers may agree with a selling securityholder to sell a specified number of such shares at a stipulated price per share;

 

·                  a combination of any such methods of sale; and

 

 

·                  any other method permitted pursuant to applicable law.

 

The selling shareholders may also sell shares of common stock under Rule 144 promulgated under the Securities Act of 1933, as amended, if available, rather than under this prospectus. In addition, the selling shareholders may transfer the shares of common stock by other means not described in this prospectus. If the selling shareholders effect such transactions by selling shares of common stock to or through underwriters, broker-dealers or agents, such underwriters, broker-dealers or agents may receive commissions in the form of discounts, concessions or commissions from the selling shareholders or commissions from purchasers of the shares of common stock for whom they may act as agent or to whom they may sell as principal (which discounts, concessions or commissions as to particular underwriters, broker-dealers or agents may be in excess of those customary in the types of transactions involved). In connection with sales of the shares of common stock or otherwise, the selling shareholders may enter into hedging transactions with broker-dealers, which may in turn engage in short sales of the shares of common stock in the course of hedging in positions they assume. The selling shareholders may also sell shares of common stock short and deliver shares of common stock covered by this prospectus to close out short positions and to return borrowed shares in connection with such short sales. The selling shareholders may also loan or pledge shares of common stock to broker-dealers that in turn may sell such shares.

 

The selling shareholders may pledge or grant a security interest in some or all of the notes, warrants or shares of common stock owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock from time to time pursuant to this prospectus or any amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act amending, if necessary, the list of selling shareholders to include the pledgee, transferee or other successors in interest as selling shareholders under this prospectus. The selling shareholders also may transfer and donate the shares of common stock in other circumstances in which case the transferees, donees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus.

 

To the extent required by the Securities Act and the rules and regulations thereunder, the selling shareholders and any broker-dealer participating in the distribution of the shares of common stock may be deemed to be “underwriters” within the meaning of the Securities Act, and any commission paid, or any discounts or concessions allowed to, any such broker-dealer may be deemed to be underwriting commissions or discounts under the Securities Act. At the time a particular offering of the shares of common stock is made, a prospectus supplement, if required, will be distributed, which will set forth the aggregate amount of shares of common stock being offered and the terms of the offering, including the name or names of any broker-dealers or agents, any discounts, commissions and other terms constituting compensation from the selling shareholders and any discounts, commissions or concessions allowed or re-allowed or paid to broker-dealers.

 

Under the securities laws of some states, the shares of common stock may be sold in such states only through registered or licensed brokers or dealers. In addition, in some states the shares of common stock may not be sold unless such shares have been registered or qualified for sale in such state or an exemption from registration or qualification is available and is complied

 

 

with.

 

There can be no assurance that any selling shareholder will sell any or all of the shares of common stock registered pursuant to the registration statement, of which this prospectus forms a part.

 

The selling shareholders and any other person participating in such distribution will be subject to applicable provisions of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder, including, without limitation, to the extent applicable, Regulation M of the Exchange Act, which may limit the timing of purchases and sales of any of the shares of common stock by the selling shareholders and any other participating person. To the extent applicable, Regulation M may also restrict the ability of any person engaged in the distribution of the shares of common stock to engage in market-making activities with respect to the shares of common stock. All of the foregoing may affect the marketability of the shares of common stock and the ability of any person or entity to engage in market-making activities with respect to the shares of common stock.

 

We will pay all expenses of the registration of the shares of common stock pursuant to the registration rights agreement, estimated to be $[     ] in total, including, without limitation, Securities and Exchange Commission filing fees and expenses of compliance with state securities or “blue sky” laws; provided, however, a selling shareholder will pay all underwriting discounts and selling commissions, if any. We will indemnify the selling shareholders against liabilities, including some liabilities under the Securities Act in accordance with the registration rights agreements or the selling shareholders will be entitled to contribution. We may be indemnified by the selling shareholders against civil liabilities, including liabilities under the Securities Act that may arise from any written information furnished to us by the selling shareholder specifically for use in this prospectus, in accordance with the related registration rights agreements or we may be entitled to contribution.

 

Once sold under the registration statement, of which this prospectus forms a part, the shares of common stock will be freely tradable in the hands of persons other than our affiliates.

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